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AS FILED WITH THE SECURITIES AND EXCHANGE COMMISSION ON FEBRUARY 26, 1997
REGISTRATION NO. 333-21015
===============================================================================
SECURITIES AND EXCHANGE COMMISSION
WASHINGTON, D.C. 20549
---------------
AMENDMENT NO. 1
TO
FORM S-1
REGISTRATION STATEMENT
UNDER
THE SECURITIES ACT OF 1933
---------------
FIRST NATIONWIDE HOLDINGS INC.
(EXACT NAME OF REGISTRANT AS SPECIFIED IN ITS CHARTER)
DELAWARE 6035 13-3778552
(STATE OR OTHER (PRIMARY STANDARD (I.R.S. EMPLOYER
JURISDICTION OF INDUSTRIAL IDENTIFICATION NUMBER)
INCORPORATION OR CLASSIFICATION
ORGANIZATION) CODE NUMBER)
---------------
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)
----------------
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)
----------------------
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
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. [ ]
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.
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<PAGE>
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 MARCH 31, 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
<PAGE>
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.
-----------------------
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.
-----------------------
THESE SECURITIES HAVE NOT BEEN APPROVED OR DISAPPROVED BY THE SECURITIES AND
EXCHANGE COMMISSION OR ANY STATE SECURITIES COMMISSION NOR HAS THE SECURITIES
AND EXCHANGE COMMISSION OR ANY STATE SECURITIES COMMISSION PASSED UPON THE
ACCURACY OR ADEQUACY OF THIS PROSPECTUS. ANY REPRESENTATION TO THE CONTRARY
IS A CRIMINAL OFFENSE.
-----------------------
The date of this Prospectus is February 26, 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 and the Capital Contribution, at September 30, 1996, the Bank would
have had approximately $31.0 billion in assets, approximately $17.6 billion
in deposits, would have operated approximately 227 branches and would have
ranked at such date as the fourth largest thrift in the United States in
terms of assets, based on published sources. The Bank's principal business
consists of operating retail deposit branches and originating and/or
purchasing residential real estate loans and, to a lesser extent, certain
consumer loans, and is conducted primarily in California, Florida, Nevada and
Texas. The Bank also actively manages its portfolio of commercial real estate
loans acquired through acquisitions and is active in mortgage banking and
loan servicing. These operating activities are financed principally with
customer deposits, secured short-term and long-term borrowings, collections
on loans, asset sales and retained earnings. As of September 30, 1996, First
Nationwide had approximately $16.8 billion in assets and approximately $8.8
billion in deposits and operated 116 branches.
The Bank is chartered as a federal stock savings bank under the Home
Owners' Loan Act ("HOLA") and regulated by the Office of Thrift Supervision
(the "OTS") and the Federal Deposit Insurance Corporation ("FDIC"), which,
through the Savings Association Insurance Fund ("SAIF"), insures the deposit
accounts of the Bank, up to applicable limits. The Bank is also a member of
the Federal Home Loan Bank System ("FHLBS").
The Cal Fed Acquisition
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--Holdings--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
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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").
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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--Holdings--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%
First Nationwide (Parent) Holdings Inc.
("Parent Holdings")
80%*
Hunter's Glen/
Ford, Ltd.
("Hunter's Glen")
20%*
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 March 31, 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:
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
========
(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:
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
========
(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 7% and 9%,
respectively.
(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.
<PAGE>
(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 $22.2 billion in liabilities maturing
or repricing within one year. In addition, the lag in implementation
repricing terms on the Bank's adjustable rate assets may result in a decline
in net interest income in a rising interest rate environment. There can be no
assurance that the Bank's interest rate risk will be minimized or eliminated.
In addition, an increase in the general level of interest rates may adversely
affect the ability of certain borrowers to pay the interest on and prinicipal
of their 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--Holdings--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."
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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--Holdings--Other Activities--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 otherwise would have received fractional
interests were not entitled to receive fractional interests. Such
stockholders received their ratable share of the aggregate net cash proceeds
obtained (after deducting certain selling expenses) from aggregating the
fractional interests into the nearest whole number of Secondary Litigation
Interests and selling such Secondary Litigation Interests on the open market.
The aggregate cash consideration paid under the Merger Agreement was
approximately $1.2 billion.
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 $150 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
==========
Net proceeds will be used to reduce borrowings of the
Bank.
</TABLE>
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>
PRO FORMA SUPPLEMENTAL INFORMATION:
- -----------------------------------
<S> <C>
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:
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
==========
(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.
<PAGE>
(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).
(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
61,094
Borrowings .................................. 245,400 280,671 12,775 935,003
------------- -------------- --------------- ------------
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
2,857
Other ....................................... 158,283 (25,823) 800 387,359
------------- -------------- --------------- ------------
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:
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
==========
(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 7% and
9%, respectively.
(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 Holdings 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 INCREASE (DECREASE) DUE
TO TO
------------------------ -------------------------
VOLUME RATE NET VOLUME RATE NET
-------- ------ ------ -------- ------ -------
(IN MILLIONS)
<S> <C> <C> <C> <C> <C> <C>
Interest Income:
Securities (1) ..................... $ 18 $ 3 $ 21 $(38) $21 $(17)
Mortgage-backed securities ......... 160 10 170 36 1 37
Loans held for sale ................ 23 0 23 1 0 1
Loans receivable, net .............. 566 22 588 200 (4) 196
Covered assets, net (2) ............ (22) 3 (19) (19) 0 (19)
-------- ------ ------ -------- ------ -------
Total ............................. 745 38 783 180 18 198
-------- ------ ------ -------- ------ -------
Interest Expense:
Deposits ........................... 328 18 346 53 (7) 46
Securities sold under agreements to
repurchase ........................ 80 6 86 18 0 18
Borrowings ......................... 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
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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
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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
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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 stock of Affiliated Computer Systems ("ACS"), 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
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attributed to $25.6 million recognized in connection with the termination of
the Assistance Agreement, an increase of $3.5 million in dividends on FHLB
stock related to an increase in the volume of such stock owned by First
Nationwide and $2.3 million of interest received related to the favorable
outcome of an arbitration hearing.
Noninterest Expense. Total noninterest expense was $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.
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Amortization of intangible assets increased to $6.9 million for the nine
months ended September 30, 1996 from $.5 million for the corresponding period
in 1995, primarily due to the amortization of the $133.8 million intangible
asset recorded in connection with the SFFed and Home Federal Acquisitions.
Other noninterest expense was $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
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loan production from the Maryland Acquisition and the LMUSA 1995 Purchase
resulted in an increase in the average balance of loans held for sale to $304
million from $11 million for the years ended December 31, 1995 and 1994,
respectively. The weighted average yield on loans held for sale increased to
7.89% for 1995 from 5.22% during 1994.
Interest income on mortgage-backed securities was $213 million for the
year ended December 31, 1995, an increase of $170 million from the year ended
December 31, 1994. The mortgage-backed securities acquired in the FN
Acquisition, including $1.3 billion of qualifying single-family loans
securitized from First Nationwide's loan portfolio in late 1994 and an
additional $.4 billion securitized in 1995, resulted in the average portfolio
balances increasing from $711 million to $3.0 billion during the years ended
December 31, 1994 and 1995, respectively. The weighted average yield on
mortgage-backed securities increased to 7.14% for 1995 from 6.05% for 1994,
primarily due to the addition of higher-yielding securities from the FN
Acquisition, including loan securitizations, and the subsequent upward rate
adjustments of adjustable rate mortgage-backed securities related to an
overall increase in market interest rates.
Interest income from Covered Assets declined $19 million, to $11 million,
for the year ended December 31, 1995. This decline is due to a reduction in
the volume of Covered Assets, due to sales, repayments and other dispositions
of Covered Assets, including the purchase by the FDIC of substantially all of
the remaining Covered Assets at the fair market value of such assets (the
"FDIC Purchase"), offset in part by an increase in the effective rate earned
on such Covered Assets, which was 6.67% for 1995 compared to 6.11% for 1994.
The higher rate is due to the net effect of the increase in the TCOF (as
defined herein) between the two periods due to generally increasing interest
rates, partially offset by the reduction in the applicable margin over TCOF
prescribed in the Assistance Agreement.
Interest income from securities and interest-bearing deposits in banks was
$28 million for the year ended December 31, 1995, an increase of $21 million
from the year ended December 31, 1994. The average portfolio balances during
the years ended December 31, 1995 and 1994 increased to $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.
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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.
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
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expenses totalling $7 million related to employee severance and termination
costs for the relocation of First Nationwide's mortgage loan servicing
operations to Maryland, the closure of First Nationwide's retail mortgage
loan production offices, and a bank-wide cost reduction project.
Occupancy and equipment expense was $50 million for the year ended
December 31, 1995, an increase of $38 million from the year ended December
31, 1994. The increase is primarily due to the inclusion in 1995 of a full
year of such charges related to the operations acquired in the FN Acquisition
compared to only the fourth quarter of such expenses in 1994. In addition,
1995 includes expenses totalling $6 million related to space reductions and
lease termination charges for the relocation of First Nationwide's mortgage
loan servicing operations to Maryland, the closure of First Nationwide's
retail mortgage loan production offices, a bank-wide cost reduction project,
and retail branch consolidations due to duplicate facilities resulting from
the Branch Purchases.
Data processing expense increased to $10 million for the year ended
December 31, 1995 from $3 million for the same period in 1994. The increase
is primarily due to the inclusion in 1995 of a full year of such charges
related to the operations acquired in the FN Acquisition compared to only the
fourth quarter of such charges in 1994.
SAIF deposit insurance premiums increased to $22 million in 1995 compared
to $7 million for the year ended December 31, 1994. The increase is primarily
due to the inclusion in 1995 of a full year of such charges related to the
operations acquired in the FN Acquisition compared to only the fourth quarter
of such charges in 1994.
Marketing expense was $11 million for the year ended December 31, 1995, an
increase of $8 million from the year ended December 31, 1994. The increase is
primarily due to the inclusion in 1995 of a full year of such charges related
to the operations acquired in the FN Acquisition compared to only the fourth
quarter of such charges in 1994.
Loan expense was $12 million for the year ended December 31, 1995, an
increase of $11 million from the year ended December 31, 1994. The increase
is due to the inclusion in 1995 of a full year of the mortgage banking
operations acquired in the FN Acquisition compared to only the fourth quarter
in 1994, as well as increased expenses related to operations acquired in the
Maryland Acquisition and the LMUSA 1995 Purchase.
Other noninterest expense was $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.
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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.
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
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decreased to $138 million from $710 million, respectively, due to
restructuring of the balance sheet as a result of the FN Acquisition. The
weighted average yield on these assets increased to 4.95% for 1994 from 3.43%
for 1993, primarily due to the increase in market interest rates.
Interest Expense. Total interest expense was $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.
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.
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Management fees, which were recorded as other noninterest income, totalled
$13 million for the year ended December 31, 1994, an increase of $5 million
over 1993. This increase is due to a $3.5 million increase in disposition and
other fees for assets serviced by FGB Realty and $1.5 million in fees related
to the shared services and asset servicing contracts with Granite entered
into in conjunction with the FN Acquisition.
Noninterest Expense. Total noninterest expense was $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.
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
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have been entitled to utilize if it had filed a consolidated return on behalf
of itself and First Nationwide for each year since the formation of First
Nationwide. Accordingly, pursuant to the Tax Sharing Agreement, the benefits
of any net operating losses generated by First Nationwide since its formation
are retained by the Bank and Holdings.
First Nationwide had generated significant federal income tax net
operating losses since it was organized in December 1988. This was due, in
part, to the fact that under applicable federal income tax law, certain
financial assistance received by First Nationwide pursuant to the Assistance
Agreement was excluded from the taxable income of First Nationwide. In
addition to such tax-free financial assistance, the Bank had been entitled to
its normal operating deductions, including interest expense and certain
losses 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, the Bank and Holdings will be able to
eliminate a significant portion of the amounts that they otherwise would be
required to pay to Holdings and Mafco Holdings, respectively, 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
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banks, the Bank will generally be required to take into income the balance of
its post-1987 bad debt reserves over a six year period beginning in 1996.
Consequently, the Bank may be required to make payments to Holdings under the
Tax Sharing Agreement if the Bank has insufficient expenses and losses to
offset such income. As of December 31, 1995, First Nationwide had tax bad
debt reserves totaling $203 million, all of which had been provided for in
deferred tax liabilities. The Bank does not expect to generate substantial
amounts of federal taxable income (after taking into account its net
operating loss carryovers) from any recapture of the Bank's bad debt reserve.
Accordingly, the repeal of the section 593 reserve method of accounting for
bad debts by thrift institutions is not expected to have a material adverse
effect on the Bank.
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
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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 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:
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<TABLE>
<CAPTION>
MATURITY/RATE SENSITIVITY
---------------------------------------------------------
WITHIN 1-5 OVER 5 NONINTEREST
1 YEAR YEARS YEARS BEARING TOTAL
--------- ---------- -------- ------------- ---------
(DOLLARS IN MILLIONS)
<S> <C> <C> <C> <C> <C>
INTEREST-EARNING ASSETS:
Securities held to maturity,
interest-bearing deposits in other
banks and short-term investment
securities (1)(2) ...................... $ 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 $ 376
========= ========== ======== =========
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 $376 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--Holdings--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
- ----------------- ---------- ------- ---------- ------- ----------
(DOLLARS IN MILLIONS)
<S> <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 FIXED
- ----------------- ------- ------------- --------
$
<S> <C> <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>
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 FOR THE YEARS ENDED
SEPTEMBER 30, DECEMBER 31,
---------------- ---------------------------
1996 1995 1995 1994(A) 1993(B)
------- ------- ------- -------- --------
(DOLLARS IN MILLIONS)
<S> <C> <C> <C> <C> <C>
Real estate:
Residential 1-4 .................... $19.8 $15.6 $21.7 $ 18.6 $ 42.9
Income property
Multi-family ...................... 14.0 29.2 25.0 55.2 60.2
Hotels ............................ -- -- -- 11.6 15.7
Office buildings .................. 2.3 4.5 5.1 14.9 17.1
Shopping centers .................. -- -- 4.8 0.9 15.3
Other ............................. 0.4 5.7 1.6 5.8 3.2
------- ------- ------- -------- --------
Total income property .............. 16.7 39.4 36.5 88.4 111.5
------- ------- ------- -------- --------
Total real estate ................... 36.5 55.0 58.2 107.0 154.4
Commercial banking .................. -- -- -- 4.8 60.7
Consumer ............................ 5.2 3.5 4.2 5.8 11.0
------- ------- ------- -------- --------
$41.7 $58.5 $62.4 $117.6 $226.1
======= ======= ======= ======== ========
As a percentage of average net loans 0.58% 0.88% 0.69% 1.35 % 2.21 %
======= ======= ======= ======== ========
</TABLE>
- ------------
(A) Includes net charge-offs of $60.4 million on certain assets included in
the 1994 Bulk Sales. These allowances were established prior to the
designation of these assets as "Held for Accelerated Disposition."
(B) Includes net charge-offs of $80.0 million related to the 1993 Bulk Sale.
The table below presents certain key ratios for NPL's and the allowances
for loan losses at the dates presented:
<TABLE>
<CAPTION>
SEPTEMBER 30, SEPTEMBER 30, DECEMBER 31, DECEMBER 31, DECEMBER 31,
1996 1995 1995 1994 1993
--------------- --------------- -------------- -------------- --------------
<S> <C> <C> <C> <C> <C>
NPL's as a % of gross loans
receivable .......................... 1.49% 1.95% 2.21% 2.05% 5.42%
Total allowances for loan losses as a
% of NPL's .......................... 111.69 97.48 86.35 115.00 47.78
General allowances as a % of NPL's .. 101.97 89.13 74.76 96.25 36.87
General allowances as a % of gross
loans receivable .................... 1.52 1.73 1.65 1.98 2.00
Total allowances for loan losses as a
% of gross loans receivable ......... 1.66 1.90 1.91 2.36 2.59
Ratio of NPA's to total assets(A) ... 1.16 1.49 1.62 1.57 5.26
</TABLE>
- ------------
(A) NPA's consist of NPL's and REO.
OTHER INCOME
Other Income
For the nine months ended September 30, 1996 and 1995 total other income
was $61.9 million and $50.3 million, respectively. The increase in other
income for the nine months ended September 30, 1996 compared to the same
period of 1995 was primarily due to the $12.0 million gain recorded during
the second quarter of 1996 on the sale of six branches located in San Diego
County with deposits totaling approximately $380 million.
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 FOR THE YEARS ENDED
SEPTEMBER 30, DECEMBER 31,
---------------- -------------------------
SOURCE OF FEES 1996 1995 1995 1994 1993
- ------------------------------- ------- ------- ------- ------- -------
(DOLLARS IN MILLIONS)
<S> <C> <C> <C> <C> <C>
Savings deposits ............... $22.3 $18.4 $25.4 $25.2 $26.1
Loan servicing ................. 8.3 9.5 12.4 14.6 18.5
Sales of alternative investment
products ...................... 14.0 10.6 14.4 21.7 21.3
Other .......................... -- 1.8 2.3 0.9 (1.6)
------- ------- ------- ------- -------
$44.6 $40.3 $54.5 $62.4 $64.3
======= ======= ======= ======= =======
</TABLE>
The increase in savings deposit fees for the nine months ended September
30, 1996 compared to the same period of 1995 resulted from increases in rates
charged for depository services and improvements in effectiveness of the fee
collection process.
During 1995, fees from deposits increased slightly as compared to 1994 but
declined slightly from 1993. Fees from deposits result from the volume of
deposits, and the pricing associated with services relating to the deposits.
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.
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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 March 31, 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 February 26, 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.
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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.
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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.
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<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:
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<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: Arwen Gibbons New York, New York 10286
Attention: Arwen Gibbons
By Facsimile:
(212) 571-3080
Confirm by Telephone:
(212) 815-6333
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
$450,000.
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,
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<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.
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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 $16.8 billion in
assets, approximately $8.8 billion in deposits and operated 116 branches.
According to published sources, First Nationwide was ranked the seventh
largest thrift in the United States, in terms of assets, as of September 30,
1996.
The Bank is chartered as a federal stock savings bank under the HOLA and
regulated by the OTS and the FDIC, which, through the SAIF, insures the
deposit accounts of the Bank. The Bank is also a member of the FHLBS.
Revenues are derived from interest charged on loans, interest and
dividends received on securities and mortgage-backed securities, fees
received in connection with loan servicing, securities brokerage and other
customer service transactions, and asset management fees. Expenses primarily
consist of interest on customer deposit accounts, interest on short-term and
long-term borrowings, general and administrative expenses consisting of
compensation and benefits, data processing, occupancy and equipment,
communications, deposit insurance assessments, advertising and marketing,
professional fees and other general and administrative expenses.
BUSINESS STRATEGY
With the Cal Fed Acquisition, the Bank has substantially completed its
business strategy initiated in 1994 by investing in its California franchise
and divesting most of its non-California branches. In addition, the Bank has
significantly expanded its mortgage servicing operations to gain increased
economies of scale. The key elements of the Bank's business strategy
following the Cal Fed Acquisition are as follows.
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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 "--Holdings--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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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
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 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 COMMERCIAL
RESIDENTIAL RESIDENTIAL AND OTHER TOTAL REAL
------------------- ------------------- ------------------- ESTATE % OF
STATE VARIABLE FIXED VARIABLE FIXED VARIABLE FIXED LOANS TOTAL
- --------------- ---------- ------- ---------- ------- ---------- ------- ------------ --------
(DOLLARS IN MILLIONS)
<S> <C> <C> <C> <C> <C> <C> <C> <C>
California ..... $2,729 $238 $ 798 $ 91 $1,128 $141 $5,125 56.93%
New York ....... 404 73 215 115 48 40 895 9.94
Illinois ....... 160 76 41 7 40 18 342 3.80
Florida ........ 102 46 39 33 31 12 263 2.92
Ohio ........... 93 83 28 8 32 3 247 2.74
New Jersey ..... 115 28 62 9 8 4 226 2.51
Hawaii ......... 198 19 -- 1 4 -- 222 2.47
Washington ..... 78 8 52 8 25 1 172 1.91
Colorado ....... 97 53 1 4 -- -- 155 1.72
Texas .......... 75 48 2 18 1 5 149 1.66
Other states(1) 517 183 242 80 151 33 1,206 13.40
---------- ------- ---------- ------- ---------- ------- ------------ --------
Total ......... $4,568 $855 $1,480 $374 $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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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,
139
<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.
141
<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
142
<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.
145
<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
146
<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):
<TABLE>
<CAPTION>
AGGREGATE AGGREGATE
CARRYING VALUE MARKET VALUE
-------------- --------------
<S> <C> <C>
Residential Funding Mortgage Securities $69 $68
</TABLE>
First Nationwide held privately issued CMOs with an aggregate carrying
value of $240.6 million at September 30, 1996.
At September 30, 1996, the mortgage-backed securities acquired by 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>
<PAGE>
(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>
DECEMBER 31,
----------------------------------------------------------------------------
SEPTEMBER 30, 1996 1995 1994 1993
------------------------ ------------------------ ------------------------ ------------------------
ESTIMATED ESTIMATED ESTIMATED ESTIMATED
AMORTIZED FAIR AMORTIZED FAIR AMORTIZED FAIR AMORTIZED FAIR
COST VALUE COST VALUE COST VALUE COST VALUE
----------- ----------- ----------- ----------- ----------- ----------- ----------- -----------
(IN MILLIONS)
<S> <C> <C> <C> <C> <C> <C> <C> <C>
$ $ $ $ $ $
GNMA ..... -- -- -- -- $ 16 $ 16 -- --
FNMA ..... 1,270 1,283 533 548 1,078 1,060 -- --
FHLMC .... 428 442 988 1,016 1,660 1,647 -- --
CMOs ..... -- -- -- -- 397 370 341 340
Other .... 2 2 3 3 3 3 -- --
----------- ----------- ----------- ----------- ----------- ----------- ----------- -----------
Total ... $1,700 $1,727 $1,524 $1,567 $3,154 $3,096 $341 $340
=========== =========== =========== =========== =========== =========== =========== ===========
</TABLE>
The weighted average stated interest rate on First Nationwide's
mortgage-backed securities held to maturity was 7.11%, 7.46%, 6.30%, and
6.75% at September 30, 1996, December 31, 1995, 1994 and 1993, respectively.
At September 30, 1996 and December 31, 1995, First Nationwide's
mortgage-backed securities held to maturity included securities totalling
$1.7 billion and $1.5 billion, respectively, which resulted from the
securitization with FNMA and FHLMC of certain qualifying mortgage loans from
First Nationwide's or San Francisco Federal's loan portfolios with full
recourse to First Nationwide. There were $1.4 billion of such securities held
at December 31, 1994. At September 30, 1996, December 31, 1995 and December
31, 1994, respectively, First Nationwide had $1.7 billion, $1.5 billion and
$2.5 billion of variable rate mortgage-backed securities held to maturity. No
variable rate mortgage-backed securities were held at December 31, 1993.
For the years ended December 31, 1995, 1994 and 1993 and the nine months
ended September 30, 1996, First Nationwide did not sell any of its
mortgage-backed securities held to maturity.
Mortgage-backed securities held to maturity are carried at amortized cost
rather than the lower of cost or market, unless there is evidence of a
decline other than a temporary decline in value. Anything other than
temporary declines in value are charged to income in the periods in which the
declines are determined. Premiums and discounts on the purchase of
mortgage-backed securities are amortized or accreted as a yield adjustment
over the life of the securities using the interest method, with the
amortization or accretion effect of prepayment being adjusted based on
revised estimates of future repayments.
The following table summarizes the First Nationwide's mortgage-backed
securities held-to-maturity portfolio and the related weighted average coupon
rate at September 30, 1996, based upon contractual scheduled maturities
allocated to the appropriate maturity categories. This table does not reflect
the scheduled amortization or any anticipated prepayment of the underlying
loans collateralizing such securities in the portfolio.
<TABLE>
<CAPTION>
OVER ZERO OVER THREE OVER FIVE OVER TEN
BUT WITHIN WAC BUT WITHIN WAC BUT WITHIN WAC BUT WITHIN WAC OVER WAC
THREE YEARS (1) FIVE YEARS (1) TEN YEARS (1) FIFTEEN YEARS (1) FIFTEEN YEARS (1) TOTAL
----------- ----- ------------ ----- ------------ ----- --------------- ------- ------------- ------- --------
(DOLLARS IN MILLIONS)
<S> <C> <C> <C> <C> <C> <C> <C> <C> <C> <C> <C>
FNMA ... $-- --% $-- --% $-- --% $-- --% $1,270 6.97% $1,270
FHLMC . -- -- -- -- -- -- -- -- 428 7.99 428
Other . -- -- -- -- -- -- 1 10.00 1 7.72 2
----------- ----- ------------ ----- ------------ ----- --------------- ------- ------------- ------- --------
$-- $-- $-- $ 1 $1,699 $1,700
=========== ============ ============ ----- =============== ============= ========
</TABLE>
- ------------
(1) Weighted average coupon rate.
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 DECEMBER 31,
AT SEPTEMBER 30, --------------------------------------------------------------------------
1996 1995 1994 1993
----------------------- ------------------------ ----------------------- -----------------------
PERCENT PERCENT PERCENT PERCENT
AMOUNT OF DEPOSITS AMOUNT OF DEPOSITS AMOUNT OF DEPOSITS AMOUNT OF DEPOSITS
-------- ------------- --------- ------------- -------- ------------- -------- -------------
(DOLLARS IN MILLIONS)
<S> <C> <C> <C> <C> <C> <C> <C> <C>
Transaction accounts:
Passbook accounts ....... $ 857 9.8% $ 664 6.5% $ 685 7.5% $ 3 0.7%
Demand deposits:
Interest-bearing ....... 481 5.5 684 6.7 667 7.3 5 1.2
Noninterest-bearing ... 828 9.5 697 6.8 352 3.8 4 0.9
Money market deposit
accounts ............... 809 9.2 1,443 14.2 1,927 21.1 48 11.2
-------- ------------- --------- ------------- -------- ------------- -------- -------------
Total transaction
accounts ............. 2,975 34.0 3,488 34.2 3,631 39.7 60 14.0
Term accounts ............ 5,784 66.0 6,696 65.8 5,519 60.3 370 86.0
-------- ------------- --------- ------------- -------- ------------- -------- -------------
8,759 100.0% 10,184 100.0% 9,150 100.0% 430 100.0%
============= ============= ============= =============
Accrued interest payable 32 51 26 2
Purchase accounting
adjustments, net ........ 9 7 21 --
-------- --------- -------- --------
Total ................. $8,800 $10,242 $9,197 $432
======== ========= ======== ========
</TABLE>
Deposit balances, excluding purchase accounting adjustments, averaged $9.4
billion during the nine months ended September 30, 1996, with an average
stated interest rate of 4.68%. The weighted average stated interest rate on
deposits at September 30, 1996 was 4.55%.
Deposit balances averaged $9.9 billion, $2.6 billion and $1.2 billion
during 1995, 1994 and 1993, respectively, with average stated interest rates
of 4.67%, 3.86% and 4.64%, respectively. The weighted average stated interest
rates on deposits at December 31, 1995, 1994 and 1993 were 4.67%, 4.19% and
4.41%, respectively.
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>
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.
154
<PAGE>
FHLB Advances
The FHLB functions in a credit capacity for savings institutions and
certain other home financing institutions. A thrift institution may generally
borrow from its district FHLB through advances secured by its home mortgages
and other assets (principally securities which are obligations of, or
guaranteed by, the U.S. government). A thrift is required to hold a minimum
amount of capital stock of the FHLB based upon a percentage of its
outstanding home mortgage loans and similar obligations, a percentage of its
outstanding advances from the FHLB or a certain percentage of total assets.
Such advances may be made pursuant to several different credit programs made
available from time to time by the FHLB to meet seasonal and other
withdrawals of deposit accounts and to expand lending, each of which has its
own interest rate and range of maturities. The FHLB prescribes the acceptable
uses, as well as limitations on the size of such advances. Depending on the
program, such limitations are based either on a fixed percentage of the
institution's net worth or on the FHLB's assessment of the institution's
creditworthiness.
During 1995, First Nationwide prepaid $250 million in FHLB advances
resulting in a $2 million extraordinary gain on the early extinguishment of
debt, net of tax. During 1994, First Nationwide prepaid $95.2 million in FHLB
advances resulting in an extraordinary gain on the early extinguishment of
debt, net of tax, of approximately $1.4 million.
Interest Rate Swap Agreements
The Bank has used interest rate swap agreements to reduce its interest
rate risk exposure on fixed rate FHLB advances. First Nationwide had interest
rate swap agreements with a notional principal amount of $400 million
outstanding at September 30, 1996. The notional amount does not represent
amounts exchanged by the parties and thus, is not a measure of the Bank's
exposure. The Bank pays the variable rate and receives the fixed rate based
on LIBOR under these agreements. The differential between these two amounts
may change significantly in the future due to fluctuations in market interest
rates.
In order to reduce possible counterparty nonperformance risk, the Bank has
entered into interest rate swap agreements only with national investment
banking firms and the FHLB of San Francisco.
Old FNB Debentures
As part of the FN Acquisition, First Nationwide assumed subordinated
debentures, which bear interest at 10% per annum and mature on October 1,
2006 (the "Old FNB Debentures"). At September 30, 1996, the aggregate
principal amount of the Old FNB Debentures outstanding was $92.1 million.
Events of Default under the indenture governing the Old FNB Debentures
(the "Old FNB Indenture") include, among other things: (i) a default in the
payment of interest when due and such default continues for 30 days, (ii) a
default in the payment any principal when due, (iii) the failure to comply
with covenants in the Old FNB Indenture, provided that the trustee or holders
of at least 25% in principal amount of the outstanding Old FNB Debentures
notify the Bank of the default and the Bank does not cure the default within
60 days after receipt of such notice, (iv) certain events of bankruptcy,
insolvency or reorganization of the Bank, (v) the FSLIC/RF (or a comparable
entity) is appointed to act as conservator, liquidator, receiver or other
legal custodian for the Bank and (vi) a default under other indebtedness of
the Bank in excess of $10 million resulting in such indebtedness becoming due
and payable, and such default or acceleration has not been rescinded or
annulled within 60 days after the date on which written notice of such
failure has been given by the trustee to the Bank or by holders of at least
25% in principal amount of the outstanding Old FNB Debentures to the Bank and
the trustee.
SFFed Notes
As part of the SFFed Acquisition, First Nationwide assumed the SFFed
Notes, which bear interest at 11.20% per annum and mature on September 1,
2004. In connection with the assumption of the SFFed Notes, First Nationwide
and all of the holders of the SFFed Notes entered into an agreement amending
certain provisions of the note purchase pursuant to which the SFFed Notes
were sold (as amended, the "Note Purchase Agreement"). On September 12, 1996,
First Nationwide repurchased $44.0 million
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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.
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.
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
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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) 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.
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
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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 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
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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):
<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>
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See "Unaudited Pro Forma Financial Data."
The Bank will account for the Goodwill Litigation Asset at the lower of
cost or market. In the event of a cash or other settlement of California
Federal Litigation, the recorded asset and related valuation allowance (if
any), tax liabilities and liabilities recorded for obligations to holders of
the Secondary Litigation Interests and Litigation Interests will be
eliminated, with any difference being reflected in earnings of the
then-current period.
The initial allocation of the purchase price of the Goodwill Litigation
Asset will have no impact on stockholders' equity or regulatory capital. To
the extent that the actual recovery of the Goodwill Litigation Asset exceeds
the carrying value of the Goodwill Litigation Asset, such excess would (i)
increase the liability for income taxes and the liabilities to holders of the
Litigation Interests and the Secondary Litigation Interests, and (ii)
increase the net earnings, stockholders' equity and regulatory capital of the
Bank; and to the extent that the actual recovery of the Goodwill Litigation
Asset is less than the carrying value of the Goodwill Litigation Asset, such
deficit would (x) decrease the liability for income taxes and the liabilities
to holders of the Litigation Interests and the Secondary Litigation Interests
and (y) decrease the net earnings, stockholders' equity and regulatory
capital of the Bank.
The Put Agreement
In connection with the FN Acquisition, Granite and First Nationwide
entered into the Put Agreement. Pursuant to the Put Agreement, First
Nationwide has the right, on a quarterly basis (the "Put Option"), to require
Granite to purchase certain commercial real estate loans, commercial real
estate loans serviced by others and residential mortgage loans with an
original principal balance greater than $250,000, and to take certain actions
to protect First Nationwide from losses with respect to certain Letters of
Credit ("LOC") transactions, in each case, only if such asset was purchased
by the Bank from Old FNB pursuant to the Asset Purchase Agreement. The Put
Option expired on November 30, 1996, when the sum of (x) the total amount
paid by Granite to First Nationwide in connection with all purchases or other
payments made by Granite pursuant to the Put Agreement and (y) the aggregate
purchase price paid by Granite to Old FNB in connection with purchases made
prior to the closing date ("Closing Date") pursuant to the Mortgage Loan Sale
Agreement dated as of November 30, 1993 (the "Mortgage Loan Sale Agreement"),
between Granite and Old FNB, less the total amount paid by First Nationwide
to Granite in connection with purchases made by First Nationwide through
exercise of certain buyback rights, equalled $500 million (the "Maximum
Amount"). First Nationwide could not require Granite to purchase more than
$100 million of residential mortgage loans. Granite's obligations under the
Put Agreement were guaranteed by Ford Motor.
The Put Option was generally triggered in the event that any of the assets
subject to the Put Agreement become non-performing assets (i.e., payments of
interest or principal become 90 days or more contractually past due) at any
time prior to the expiration of the Put Option.
The purchase price paid by Granite for each mortgage loan purchased
pursuant to the Put Agreement was the sum of: (i) the outstanding principal
balance of the loan, (ii) any accrued but unpaid interest on the loan shown
on First Nationwide's books (not to exceed 90 days accrued but unpaid
interest), (iii) amounts owed to First Nationwide for real property taxes,
insurance premiums and similar charges and (iv) reasonable amounts (including
reasonable attorneys' fees and protective advances) expended by First
Nationwide in protecting its security interest or enforcing its rights with
respect to such loan. The amount to be paid by Granite to First Nationwide
with respect to each non-performing LOC for which First Nationwide required
such payment was the amount of any protective advances (the "Protective
Advances") made by First Nationwide in connection with such LOC (but in no
event did the Protective Advances include an amount greater than 90 days
accrued but unpaid interest). In addition, with respect to any such LOC which
had been included in the FNMA Pool (as defined in the Put Agreement), Granite
was required, if so requested by First Nationwide, to take all necessary or
appropriate steps to cause such LOC to be removed from the FNMA Pool and
thereafter Granite would bear all economic risk associated with such LOC (or,
if all required consents for such removal could not be obtained, Granite was
required to take such actions as are necessary to place First Nationwide in
the same economic position as it would have been in had the LOC been so
removed). With respect to certain
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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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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
163
<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-
166
<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
167
<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.
168
<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- 500K- 600K- % OF
ORIGINATION 0-99K 199K 299K 399K 499K 599K 999K 1,000K+ TOTAL TOTAL
- -------------- ---------- ---------- ---------- -------- -------- -------- -------- --------- ---------- --------
(DOLLARS IN MILLIONS)
<S> <C> <C> <C> <C> <C> <C> <C> <C> <C> <C>
1995 .......... $ 65.2 $ 371.2 $ 545.6 $335.1 $225.2 $108.7 $207.4 $ 41.9 $1,900.3 25.9 %
1994 .......... 100.3 389.6 433.7 252.2 148.4 91.5 239.9 67.9 1,723.5 23.5 %
1993 .......... 80.3 167.0 191.2 112.3 63.4 27.7 113.6 26.0 781.5 10.6 %
1992 .......... 30.6 68.3 52.7 30.8 22.8 7.8 67.2 16.5 296.7 4.0 %
1991 .......... 31.8 84.2 65.8 42.5 29.7 16.3 62.0 20.1 352.4 4.8 %
1990 .......... 63.8 150.6 112.1 63.9 41.7 26.2 70.0 44.2 572.5 7.8 %
1989 .......... 68.0 86.2 63.3 24.5 12.8 6.5 18.5 17.0 296.8 4.0 %
1988 .......... 124.7 204.9 130.5 48.6 24.4 11.3 50.0 17.1 611.5 8.3 %
1987 .......... 102.0 62.7 29.6 6.8 7.4 2.8 19.0 8.5 238.8 3.3 %
1986 .......... 63.0 43.0 19.6 11.2 5.2 1.1 -- -- 143.1 2.0 %
1985 .......... 60.2 45.0 15.8 3.1 2.6 2.3 2.8 1.1 132.9 1.8 %
1984 .......... 73.7 35.7 6.6 0.7 0.8 -- -- -- 117.5 1.6 %
1983 .......... 46.7 16.4 1.8 0.4 0.4 -- -- -- 65.7 0.9 %
1982 .......... 7.9 1.4 0.2 -- -- -- -- -- 9.5 0.1 %
1981 .......... 2.6 1.0 -- -- -- -- -- -- 3.6 0.1 %
Prior to 1981 90.5 3.9 1.0 -- -- -- -- -- 95.4 1.3 %
---------- ---------- ---------- -------- -------- -------- -------- --------- ---------- --------
Total ....... $1,011.3 $1,731.1 $1,669.5 $932.1 $584.8 $302.2 $850.4 $260.3 $7,341.7 100.0%
========== ========== ========== ======== ======== ======== ======== ========= ========== ========
% of Total .... 13.8% 23.6% 22.7% 12.7% 8.0% 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
-------------------------------------------------------------------------------------------------
GREATER
YEAR OF THAN
ORIGINATION 0-50% 51-60% 61-70% 71-80% 81-90% 91-95% 95% TOTAL % OF TOTAL
- -------------- -------- -------- ---------- ---------- -------- -------- ------- ---------- ------------
(DOLLARS IN MILLIONS)
<S> <C> <C> <C> <C> <C> <C> <C> <C> <C>
1995 .......... $132.8 $163.2 $ 300.8 $ 958.3 $208.9 $135.4 $0.9 $1,900.3 25.9 %
1994 .......... 143.3 144.5 328.9 843.6 173.1 89.7 0.4 1,723.5 23.5 %
1993 .......... 94.6 89.2 177.8 332.4 66.7 17.3 3.5 781.5 10.6 %
1992 .......... 31.4 22.8 82.3 140.0 17.5 2.7 -- 296.7 4.0 %
1991 .......... 23.0 28.3 86.1 185.8 27.4 0.5 1.3 352.4 4.8 %
1990 .......... 21.0 38.3 89.3 357.8 63.5 2.4 0.2 572.5 7.8 %
1989 .......... 11.3 12.1 32.9 171.0 65.0 3.8 0.7 296.8 4.0 %
1988 .......... 15.0 26.5 68.5 361.8 134.6 3.8 1.3 611.5 8.3 %
1987 .......... 9.6 13.2 43.5 130.6 33.8 5.8 2.3 238.8 3.3 %
1986 .......... 6.9 7.8 18.6 88.1 16.7 4.2 0.8 143.1 2.0 %
1985 .......... 7.8 7.0 18.6 83.4 9.5 6.3 0.3 132.9 1.8 %
1984 .......... 8.5 6.8 15.6 67.4 12.5 6.2 0.5 117.5 1.6 %
1983 .......... 3.6 3.5 8.5 36.7 9.1 3.6 0.7 65.7 0.9 %
1982 .......... 1.0 0.8 1.1 3.8 1.6 1.1 0.1 9.5 0.1 %
1981 .......... 0.6 0.2 0.4 2.0 0.3 0.1 -- 3.6 0.1 %
Prior to 1981 1.6 2.5 9.1 50.4 11.9 3.4 16.5 95.4 1.3 %
-------- -------- ---------- ---------- -------- -------- ------- ---------- ------------
Total ....... $512.0 $566.7 $1,282.0 $3,813.1 $852.1 $286.3 $29.5 $7,341.7 100.0%
======== ======== ========== ========== ======== ======== ======= ========== ============
% of Total .... 7.0% 7.7 % 17.5% 51.9% 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- 500K- 600K- % OF
ORIGINATION 0-99K 199K 299K 399K 499K 599K 999K 1,000K+ TOTAL TOTAL
- -------------- -------- -------- -------- ------- ------- ------- -------- --------- -------- --------
(DOLLARS IN MILLIONS)
<S> <C> <C> <C> <C> <C> <C> <C> <C> <C> <C>
1995 .......... $ 0.2 $ 1.7 $ 1.7 $ -- $ -- $ -- $ 0.6 $ -- $ 4.2 3.3%
1994 .......... 0.2 2.8 1.4 0.6 -- -- -- 2.2 7.2 5.7%
1993 .......... 0.7 1.3 3.2 0.7 2.3 0.5 2.3 1.2 12.2 9.6%
1992 .......... 0.9 1.0 0.7 0.7 1.0 0.6 3.4 -- 8.3 6.5%
1991 .......... 0.8 2.7 3.8 4.1 1.8 -- 3.1 1.1 17.4 13.7%
1990 .......... 1.4 6.2 4.7 3.6 2.6 2.9 5.5 5.7 32.6 25.6%
1989 .......... 2.4 4.4 3.1 0.3 0.4 -- -- -- 10.6 8.3%
1988 .......... 3.0 6.5 3.7 1.3 1.4 0.5 1.3 -- 17.7 13.9%
1987 .......... 1.7 1.0 1.2 -- 0.4 0.6 0.9 -- 5.8 4.5%
1986 .......... 1.1 0.7 0.5 -- 0.5 -- -- -- 2.8 2.2%
1985 .......... 1.0 0.3 -- -- -- -- 0.6 -- 1.9 1.5%
1984 .......... 1.2 0.9 0.2 -- -- -- -- -- 2.3 1.8%
1983 .......... 1.6 0.4 -- -- -- -- -- -- 2.0 1.6%
1982 .......... 0.5 -- -- -- -- -- -- -- 0.5 0.4%
1981 .......... 0.1 -- -- -- -- -- -- -- 0.1 0.1%
Prior to 1981 1.4 0.2 -- -- -- -- -- -- 1.6 1.3%
-------- -------- -------- ------- ------- ------- -------- --------- -------- --------
Total ....... $18.2 $30.1 $24.2 $11.3 $10.4 $5.1 $17.7 $10.2 $127.2 100.0%
======== ======== ======== ======= ======= ======= ======== ========= ======== ========
% of Total .... 14.3 % 23.7 % 19.0 % 8.9 % 8.2 % 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- 4,000K- 5,000K- % OF
ORIGINATION 0-749K 999K 1,999K 2,999K 3,999K 4,999K 5,999K 6,000K+ TOTAL TOTAL
- -------------- -------- -------- --------- --------- --------- --------- --------- --------- ---------- --------
(DOLLARS IN MILLIONS)
<S> <C> <C> <C> <C> <C> <C> <C> <C> <C> <C>
1995 .......... $ 17.1 $ 2.6 $ 4.9 $ -- $ -- $ -- $ -- $ -- $ 24.6 1.8%
1994 .......... 28.3 1.7 10.7 2.1 3.7 -- -- -- 46.5 3.5%
1993 .......... 69.2 24.5 26.9 4.7 -- -- -- -- 125.3 9.3%
1992 .......... 21.4 7.1 18.3 8.8 7.2 -- -- -- 62.8 4.7%
1991 .......... 15.5 8.9 12.4 -- -- -- -- -- 36.8 2.7%
1990 .......... 41.1 16.4 12.2 7.3 3.7 4.7 -- 6.4 91.8 6.8%
1989 .......... 17.8 3.4 4.5 -- 7.0 4.9 -- -- 37.6 2.8%
1988 .......... 140.5 15.2 22.4 6.7 7.2 4.6 5.3 -- 201.9 15.0%
1987 .......... 155.9 16.7 24.8 2.3 6.9 14.1 -- -- 220.7 16.4%
1986 .......... 177.6 15.3 12.9 11.3 10.6 8.1 5.4 -- 241.2 17.9%
1985 .......... 104.4 4.1 13.8 6.6 3.7 -- -- -- 132.6 9.9%
1984 .......... 41.8 1.0 1.9 -- -- -- -- -- 44.7 3.3%
1983 .......... 25.3 0.9 -- -- -- -- -- -- 26.2 2.0%
1982 .......... 1.1 0.9 -- -- -- -- -- -- 2.0 0.1%
1981 .......... 0.6 -- -- -- -- -- -- -- 0.6 --%
Prior to 1981 43.0 2.5 5.4 -- -- -- -- -- 50.9 3.8%
-------- -------- --------- --------- --------- --------- --------- --------- ---------- --------
Total ....... $900.6 $121.2 $171.1 $49.8 $50.0 $36.4 $10.7 $6.4 $1,346.2 100.0%
======== ======== ========= ========= ========= ========= ========= ========= ========== ========
% of Total .... 66.9 % 9.0% 12.7 % 3.7% 3.7% 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
----------------------------------------------------------------------------------------
GREATER
YEAR OF THAN % OF
ORIGINATION 0-50% 51-60% 61-70% 71-80% 81-90% 91-95% 95% TOTAL TOTAL
- -------------- ------- -------- -------- -------- -------- -------- ------- ---------- --------
(DOLLARS IN MILLIONS)
<S> <C> <C> <C> <C> <C> <C> <C> <C> <C>
1995 .......... $ 2.2 $ 2.1 $ 5.3 $ 9.3 $5.7 $ -- $ -- $ 24.6 1.8 %
1994 .......... 4.1 7.1 15.7 11.9 7.5 0.2 -- 46.5 3.5 %
1993 .......... 18.1 23.3 42.0 40.3 1.3 0.3 -- 125.3 9.3 %
1992 .......... 2.1 2.2 26.6 31.8 -- 0.1 -- 62.8 4.7 %
1991 .......... 4.9 2.5 16.3 12.7 0.2 0.2 -- 36.8 2.7 %
1990 .......... 1.9 5.8 37.1 47.0 -- -- -- 91.8 6.8 %
1989 .......... 0.5 0.9 11.8 23.8 0.6 -- -- 37.6 2.8 %
1988 .......... 7.3 11.7 39.9 141.3 1.7 -- -- 201.9 15.0 %
1987 .......... 7.7 8.0 52.2 150.9 0.8 -- 1.1 220.7 16.4 %
1986 .......... 5.8 9.0 47.7 175.3 2.4 1.0 -- 241.2 17.9 %
1985 .......... 6.3 8.4 27.8 89.7 0.4 -- -- 132.6 9.9 %
1984 .......... 2.6 2.4 18.5 20.9 0.2 0.1 -- 44.7 3.3 %
1983 .......... 1.8 2.8 11.2 10.4 -- -- -- 26.2 2.0 %
1982 .......... 0.5 1.2 0.2 0.1 -- -- -- 2.0 0.1 %
1981 .......... -- -- -- 0.6 -- -- -- 0.6 --%
Prior to 1981 1.0 1.6 12.5 35.8 -- -- -- 50.9 3.8 %
------- -------- -------- -------- -------- -------- ------- ---------- --------
Total ....... $66.8 $89.0 $364.8 $801.8 $20.8 $1.9 $1.1 $1,346.2 100.0%
======= ======== ======== ======== ======== ======== ======= ========== ========
% of Total .... 5.0 % 6.6 % 27.1 % 59.6 % 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- 4,000K- 5,000K- % OF
ORIGINATION 0-749K 999K 1,999K 2,999K 3,999K 4,999K 5,999K 6,000K+ TOTAL TOTAL
- -------------- -------- -------- --------- --------- --------- --------- --------- --------- ------- ---------
(DOLLARS IN MILLIONS)
<S> <C> <C> <C> <C> <C> <C> <C> <C> <C> <C>
1995 .......... $ -- $ -- $ -- $-- $-- $-- $-- $-- $ -- --%
1994 .......... 0.2 -- -- -- -- -- -- -- 0.2 1.0 %
1993 .......... 0.3 -- -- -- -- -- -- -- 0.3 1.6 %
1992 .......... 0.6 -- 1.6 -- -- -- -- -- 2.2 11.6 %
1991 .......... 2.0 -- -- -- -- -- -- -- 2.0 10.6 %
1990 .......... 1.5 0.8 -- -- -- -- -- -- 2.3 12.2 %
1989 .......... -- -- -- -- -- -- -- -- -- --%
1988 .......... 1.9 -- -- -- -- -- -- -- 1.9 10.1 %
1987 .......... 1.4 0.9 -- -- -- -- -- -- 2.3 12.2 %
1986 .......... 2.1 0.8 1.1 -- -- -- -- -- 4.0 21.2 %
1985 .......... 2.0 0.8 -- -- -- -- -- -- 2.8 14.8 %
1984 .......... 0.3 -- -- -- -- -- -- -- 0.3 1.6 %
1983 .......... 0.2 -- -- -- -- -- -- -- 0.2 1.0 %
1982 .......... -- -- -- -- -- -- -- -- -- --%
1981 .......... -- -- -- -- -- -- -- -- -- --%
Prior to 1981 0.4 -- -- -- -- -- -- -- 0.4 2.1 %
-------- -------- --------- --------- --------- --------- --------- --------- ------- ---------
Total ....... $12.9 $ 3.3 $ 2.7 $-- $-- $-- $-- $-- $ 18.9 100.0 %
======== ======== ========= ========= ========= ========= ========= ========= ======= =========
% of Total .... 68.2 % 17.5 % 14.3% --% --% --% --% --% 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- 4,000K- 5,000K- % OF
ORIGINATION 0-749K 999K 1,999K 2,999K 3,999K 4,999K 5,999K 6,000K+ TOTAL TOTAL
- -------------- -------- -------- --------- --------- --------- --------- --------- --------- -------- ---------
(DOLLARS IN MILLIONS)
<S> <C> <C> <C> <C> <C> <C> <C> <C> <C> <C>
1995 .......... $ 2.4 $ -- $ -- $ -- $ -- $ -- $ -- $ -- $ 2.4 0.4 %
1994 .......... 3.8 1.8 5.2 -- -- 5.0 -- 29.0 44.8 8.3 %
1993 .......... 3.2 0.9 -- -- -- -- -- -- 4.1 0.8 %
1992 .......... 1.5 1.0 1.3 -- 6.7 -- -- 7.6 18.1 3.3 %
1991 .......... 0.8 -- -- -- -- -- -- -- 0.8 0.1 %
1990 .......... 0.9 -- -- -- -- -- -- -- 0.9 0.2 %
1989 .......... 17.1 -- 1.0 4.2 -- -- -- 7.8 30.1 5.5 %
1988 .......... 65.3 18.8 26.5 2.2 7.1 9.1 -- -- 129.0 23.8 %
1987 .......... 59.7 14.9 33.6 7.4 13.3 -- 5.3 -- 134.2 24.8 %
1986 .......... 52.6 9.2 16.2 5.1 -- 4.7 -- -- 87.8 16.2 %
1985 .......... 25.9 9.4 12.8 4.7 -- -- -- -- 52.8 9.7 %
1984 .......... 4.7 -- 1.2 2.8 -- -- -- -- 8.7 1.6 %
1983 .......... 0.1 0.8 -- -- -- -- -- 10.8 11.7 2.2 %
1982 .......... -- -- -- -- -- -- -- -- -- --%
1981 .......... -- -- -- -- -- -- -- -- -- --%
Prior to 1981 15.8 0.8 -- -- -- -- -- -- 16.6 3.1 %
-------- -------- --------- --------- --------- --------- --------- --------- -------- ---------
Total ....... $253.8 $57.6 $97.8 $26.4 $27.1 $18.8 $5.3 $55.2 $542.0 100.0 %
======== ======== ========= ========= ========= ========= ========= ========= ======== =========
% of Total .... 46.8 % 10.6 % 18.0% 4.9% 5.0% 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
-------------------------------------------------------------------------------------
GREATER
YEAR OF THAN % OF
ORIGINATION 0-50% 51-60% 61-70% 71-80% 81-90% 91-95% 95% TOTAL TOTAL
- -------------- ------- -------- -------- -------- -------- -------- ------- -------- --------
(DOLLARS IN MILLIONS)
<S> <C> <C> <C> <C> <C> <C> <C> <C> <C>
1995 .......... $ 0.5 $ -- $ 0.4 $ 0.9 $0.6 $ -- $ -- $ 2.4 0.4 %
1994 .......... 1.1 2.9 2.6 36.4 -- 1.5 0.3 44.8 8.3 %
1993 .......... 1.2 1.6 -- 0.9 -- 0.4 -- 4.1 0.8 %
1992 .......... 4.7 9.0 0.4 1.0 3.0 -- -- 18.1 3.3 %
1991 .......... -- -- -- 0.1 0.5 0.2 -- 0.8 0.1 %
1990 .......... 0.1 -- -- 0.6 0.2 -- -- 0.9 0.2 %
1989 .......... 1.5 3.8 10.0 14.8 -- -- -- 30.1 5.5 %
1988 .......... 5.0 11.1 22.1 88.0 2.8 -- -- 129.0 23.8 %
1987 .......... 4.7 10.3 29.8 88.4 0.5 -- 0.5 134.2 24.8 %
1986 .......... 2.6 6.4 16.3 61.7 0.2 -- 0.6 87.8 16.2 %
1985 .......... 4.5 2.3 10.3 35.7 -- -- -- 52.8 9.7 %
1984 .......... 0.1 0.5 3.1 4.9 -- 0.1 -- 8.7 1.6 %
1983 .......... 10.9 -- 0.8 -- -- -- -- 11.7 2.2 %
1982 .......... -- -- -- -- -- -- -- -- --%
1981 .......... -- -- -- -- -- -- -- -- --%
Prior to 1981 0.3 0.8 5.4 10.0 0.1 -- -- 16.6 3.1 %
------- -------- -------- -------- -------- -------- ------- -------- --------
Total ....... $37.2 $48.7 $101.2 $343.4 $7.9 $2.2 $1.4 $542.0 100.0%
======= ======== ======== ======== ======== ======== ======= ======== ========
% of Total .... 6.9 % 9.0% 18.6 % 63.3% 1.5% 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.
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 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.
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<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
200
<PAGE>
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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<PAGE>
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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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>
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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 ("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 1993
to 1994. Mr. Ford previously served as Chairman of the Board, Chief Executive
Officer and a
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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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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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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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Generally, the Incentive Plan provides for the payment of Bonuses, on a
quarterly basis, to the Participants upon the occurrence of certain events.
Bonuses vest at 20% per year beginning October 1, 1995. The aggregate amount
of Bonuses payable under the Incentive Plan is subject to a cap of $50
million. During 1995, expense of $2 million was recorded relative to the
Incentive Plan. Additional expense of $33.6 million was recorded relative to
the Incentive Plan during the six months ended June 30, 1996.
The following table sets forth information concerning awards made during
1995 to each of the executive officers named in the preceding table under all
long-term incentive plans. There were no long-term incentive plan awards in
1994 or 1993.
LONG-TERM INCENTIVE PLAN AWARDS (1)
<TABLE>
<CAPTION>
NUMBER OF ESTIMATED FUTURE PAYOUTS
SHARES, PERFORMANCE OR UNDER NON-STOCK-PRICE-BASED PLANS
UNITS OR OTHER PERIOD UNTIL -------------------------------------------
OTHER MATURATION OR THRESHOLD TARGET MAXIMUM
NAME RIGHTS PAYOUT (2) ($) (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 manufacture and distribution of cigars and pipe
tobacco, and through its 36% ownership of PCT, in the processing of licorice
and other flavors. MacAndrews & Forbes is also in the financial services
business through the Bank. The principal executive offices of MacAndrews &
Forbes are located at 35 East 62nd Street, New York, New York 10021.
TAX SHARING AGREEMENT
For federal income tax purposes, Holdings and the Bank are included in the
Mafco Group, and accordingly their federal taxable income and loss will be
included in the consolidated federal income tax return filed by Mafco
Holdings. Holdings and the Bank also may be included in certain state and
local tax returns of Mafco Holdings or its subsidiaries. The Bank, Holdings
and Mafco Holdings are parties to the Tax Sharing Agreement, effective as of
January 1, 1994, pursuant to which: (i) the Bank will pay to Holdings amounts
equal to the taxes that the Bank would be required to pay if it were to file
a return separately from the Mafco Group, and (ii) Holdings will pay to Mafco
Holdings amounts equal to the taxes that Holdings would be required to pay if
it were to file a consolidated return on behalf of itself and the Bank
separately from the Mafco Group. The Tax Sharing Agreement allows the Bank to
take into account, in determining its liability to Holdings, any net
operating loss carryovers that it would have been entitled to utilize if it
had filed separate returns for each year since the formation of First
Nationwide. The Tax Sharing Agreement also allows Holdings to take into
account, in determining its liability to Mafco Holdings, any net operating
losses that it would have been entitled to utilize if it had filed a
consolidated return on behalf of itself and the Bank for each year since the
formation of First Nationwide.
First Nationwide generated significant federal income tax net operating
losses since its formation. This was due, in part, to the fact that under
applicable federal income tax law, the financial assistance received by First
Nationwide pursuant to the Assistance Agreement was excluded from the taxable
income of First Nationwide. In addition to such tax-free financial
assistance, First Nationwide had been entitled to its normal operating
deductions, including interest expense and certain losses relating to its
loan portfolio. As a result, First Nationwide generated significant net
operating losses for federal income tax purposes even though its operations
were profitable. Furthermore, under the reorganization provisions of the
Code, First Nationwide succeeded to certain net operating loss carryovers of
the Texas Closed Banks.
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<PAGE>
At December 31, 1995, if 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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<PAGE>
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
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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.
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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 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 United States 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
will 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 will not be considered to differ materially in kind or extent
from the Old Notes. Rather, the New Notes received by a holder will be
treated as a continuation of the Old Notes in the hands of such holder. As a
result, there will 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 will 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
249
<PAGE>
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, 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 May 27, 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 ................................ 66
Additional Holdings Preferred Stock 248
ALCO ............................... 79
AMT ................................ 21
Andrews Group ...................... 211
Applicable Premium ................. 223
ARM ................................ 77
ARMs ............................... 77
Asset Purchase Agreement ........... 7
Assistance Agreement ............... 6
Bank ............................... 1,3
Bank Junior Stock .................. 23,156
Bank Preferred Stock ............... 1
BankAmerica ........................ 6
bankruptcy provisions .............. 230
BIF ................................ 207
Book-Entry Confirmation ............ 123
Book-Entry Transfer Facility ...... 123
Bonuses ............................ 215
Branch Purchases ................... 5
Branch Sales ....................... 5
Brokered Deposits .................. 153
Business Banking Loans ............. 167
Cal Fed ............................ 3
Cal Fed Acquisition ................ 3
Cal Fed Credit ..................... 197
Cal Fed Senior Subordinated Notes . 32
Cal Fed 6 1/2% Convertible
Subordinated Debentures ........... 32
Cal Fed 10% Subordinated Debentures 32
California Federal ................. 3
California Federal Litigation ..... 158
California Federal Preferred Stock,
Series A .......................... 92
Capital Contribution ............... 4
Capital Corporation ................ 1
Capital Corporation Junior Stock .. 23
Capital Corporation Offering ...... 7
Capital Corporation Preferred Stock 1
Capital Loss Coverage .............. 162
Cash Payment ....................... 158
CCI ................................ 112
Cede ............................... 244
<PAGE>
CFE ................................ 197
CFIP ............................... 197
CFMC ............................... 197
Change of Control Put Event ....... 223
Closing Date ....................... 160
CMT ................................ 98
CMOs ............................... 66
Code ............................... 29
COFI ............................... 94
Coleman ............................ 211
Coleman Worldwide .................. 211
commercial banking loans ........... 167
condominium project ................ 186
Consolidated Cigar ................. 211
Consolidated Cigar Holdings ....... 211
Consulting Agreement ............... 219
consumer loans ..................... 147
Cost of Funds Rate ................. 248
Covered Assets ..................... 7
Covered Asset Recovery ............. 162
CRA ................................ 133
cross acceleration provision ...... 230
CTL ................................ 167
Default Amount ..................... 230
DTC ................................ 244
11 1/2% Bank Preferred Stock ...... 1
Eligible Institutions .............. 124
Excess ............................. 40, 87
excess servicing ................... 180
excess tax bad debt reserves ...... 198
Exchange Act ....................... 2
Exchange Agent ..................... 9
Exchange Agreement ................. 219
Exchange Offer ..................... 1
experience method .................. 198
Expiration Date .................... 123
Fair Lending Laws .................. 207
FASB ............................... 27
FDIC ............................... 3
FDIC Purchase ...................... 69
FDICIA ............................. 24
FGB Realty ......................... 70
FGMH ............................... 55
FHLB ............................... 55
FHLB advances ...................... 95
FHLBS .............................. 3
- ------------
* Does not include terms defined under "Description of the Notes--Certain
Definitions."
252
<PAGE>
PAGE
TERM NUMBER
- ---- --------
FHLMC .............................. 137
FICO ............................... 207
FIRREA ............................. 158
First Gibraltar .................... 6
First Gibraltar Holdings ........... 6
First Gibraltar Oklahoma Sale ..... 6
First Gibraltar Texas Sale ......... 6
First Madison ...................... 6
First Nationwide ................... 3
First Nationwide Management ....... 220
First United Bank Group ............ 212
FN Acquisition ..................... 7
FNB Acquired Business .............. 7
FN Escrow .......................... 1
FN Escrow Merger ................... 3
FN Escrow Preferred Stock .......... 218
FNIC ............................... 163
FNMA ............................... 137
FNMC ............................... 4
Ford Bank Group .................... 212
Ford Motor ......................... 7
Ford Obligation .................... 219
FRB ................................ 201
FSLIC .............................. 6
FSLIC/RF ........................... 6
FSLIC/RF Reimbursement ............. 162
Global Certificate ................. 244
GNMA ............................... 131
Goodwill Litigation Asset .......... 159
Granite ............................ 7
Guaranteed Yield ................... 162
HFFC ............................... 5
HOLA ............................... 3
Holdings ........................... 1
Holdings/FN Escrow Preferred Stock 219
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 ...................... 7
Illinois Sale ...................... 34
Incentive Plan ..................... 215
income property loans .............. 167
<PAGE>
indirect participants .............. 245
Initial Purchasers ................. 1
interest rate cap .................. 168
interest bearing liabilities ...... 93
interest earning assets ............ 92
interest rate spread ............... 93
interest rate sensitivity .......... 97
IRR ................................ 202
IRS ................................ 29
Indenture .......................... 2
Issuer ............................. 1
ITT Purchase ....................... 5
judgement default provision ....... 230
leverage capital ratio ............. 87
Litigation Interests ............... 158
LMP ................................ 142
LMUSA .............................. 6
LMUSA Purchases .................... 6
LMUSA 1995 Purchase ................ 6
LMUSA 1996 Purchase ................ 6
LOC ................................ 160
LTV ................................ 28
MacAndrews & Forbes ................ 7
MacAndrews Holdings ................ 6
Madison Financial .................. 219
Madison Realty ..................... 212
Mafco Consolidated ................. 211
Mafco Group ........................ 29
Mafco Holdings ..................... 7
market price ....................... 113
Marvel ............................. 211
Marvel Holdings .................... 211
Marvel III ......................... 211
Marvel Parent ...................... 211
Maryland Acquisition ............... 5
master servicing portfolio ......... 6
Maximum Amount ..................... 160
MBS's .............................. 95
Merger Agreement ................... 3
Meridian Sports .................... 211
Michigan Branch Sale ............... 5
Mortgage Loan Sale Agreement ...... 160
MSRs ............................... 6
NationsBank ........................ 219
negative amortization .............. 168
New Notes .......................... 1
1993 Bulk Sale ..................... 101
1994 Bulk Sales .................... 91
1986 Act ........................... 198
253
<PAGE>
PAGE
TERM NUMBER
- ---- --------
non-accrual loans .................. 102
Northeast Branch Sales ............. 5
Note Purchase Agreement ............ 155
Notes .............................. 1
NPA's .............................. 91
NPL's .............................. 92
NWCG Holdings ...................... 191
NYSE ............................... 126
Offering ........................... 1
OTS ................................ 3
Ohio Branch Sale ................... 5
Old FNB ............................ 7
Old FNB Debentures ................. 155
Old FNB Indenture .................. 155
Old Notes .......................... 1
one year gap ....................... 98
Original Holdings 9 1/8% Senior
Subordinated Notes ................ 247
Original Holdings Senior Notes .... 246
Originated ......................... 87
Parent Holdings .................... 7
Participants ....................... 215
participants ....................... 244
past due loans ..................... 181
Payment Blockage Period ............ 231
PCA Requirements ................... 118
PCT ................................ 211
periodic caps ...................... 95
Pneumo Abex ........................ 211
Promissory Note .................... 218
Protective Advances ................ 161
Purchased .......................... 87
Put Agreement ...................... 7
Put Option ......................... 160
Putable Assets ..................... 27
QIBs ............................... 219
QTL Test ........................... 206
qualifying institutions ............ 198
Recovery Payment ................... 158
Reduction Act ...................... 55
Registration Agreement ............. 1
Registration Statement ............. 2
REO ................................ 166
repurchase agreements .............. 95
reverse repurchase agreements ..... 95
restructured loans ................. 102
Restructuring ...................... 197
<PAGE>
retail lending ..................... 115
retail loan production ............. 168
retirement income plan ............. 197
reverse repurchase agreement ...... 95
Revlon ............................. 211
Revlon Products .................... 211
Revlon Worldwide ................... 211
SAIF ............................... 3
San Francisco Federal .............. 5
SEC ................................ 1
Secondary Litigation Interest ..... 159
Secondary Recovery Payment ......... 159
Securities Act ..................... 1
Securitized Loans .................. 190
Services Agreement ................. 220
SFAS ............................... 27
SFFed .............................. 5
SFFed Acquisition .................. 5
SFFed Notes ........................ 32
Shared Gains ....................... 133
Sonoma Purchase .................... 5
Southeast Division ................. 91
Special Purpose Corp. .............. 4
Special Report ..................... 27
Special SAIF Assessment ............ 55
StanFed ............................ 33
Stockholders Agreement ............. 219
Strategic Plan ..................... 166
subservicing portfolio ............. 32
Subsidiary Preferred Stock ......... 1
Tax Sharing Agreement .............. 28
10 5/8% Bank Preferred Stock ...... 1
Texas Closed Banks ................. 6
TCOF ............................... 72
TIA ................................ 127
Tiburon Purchase ................... 5
Tier 1 association ................. 205
Tier 2 association ................. 206
Tier 3 association ................. 206
TNIS ............................... 8
Toy Biz ............................ 211
Trustee ............................ 2
wholesale lending .................. 115
wholesale loan production .......... 168
Winstar Cases ...................... 159
</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>
<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
MATURITIES DURING THE YEARS BALANCES MATURING AVERAGE RATES
ENDING DECEMBER 31 ------------------------ ----------------
FHLB OTHER FHLB OTHER
------------ ---------- ------- -------
<S> <C> <C> <C> <C>
1996 ....................... $1,487,166 $ 55,236 6.12% 6.01%
1997 ....................... 240,000 213 8.61 8.10
1998 ....................... 310,000 200 7.34 8.20
1999 ....................... 250 171 7.75 8.19
2000 ....................... -- 121 -- 8.27
2001and thereafter ......... 2,395 294,914 7.71 11.51
------------ ---------- ------- -------
Total .................... $2,039,811 $350,855 6.60% 10.65%
============ ========== ======= =======
</TABLE>
Interest expense on borrowings for the years ended December 31, 1995, 1994
and 1993,are as follows (in thousands):
<TABLE>
<CAPTION>
1995 1994 1993
---------- --------- ---------
<S> <C> <C> <C>
FHLB advances .................. $139,051 $71,662 $15,895
Interest rate swap agreements . (15,177) (8,797) --
Subordinated debentures ........ 9,210 2,303 --
Senior Notes ................... 24,500 6,150 --
Federal funds purchased ........ 2,268 438 --
Revolving warehouse line ...... -- - 1,924
Other .......................... 1,403 332 694
Purchase accounting adjustments 21,244 7,937 --
---------- --------- ---------
Total ........................ $182,499 $80,025 $18,513
========== ========= =========
</TABLE>
The following is a summary of the carrying value of assets pledged as
collateral for FHLB advances at December 31, 1995 (in thousands):
<TABLE>
<CAPTION>
<S> <C>
Real estate loans (primarily residential) $1,643,971
Mortgage-backed securities ................ 905,823
FHLB stock ................................ 109,943
------------
Total ................................... $2,659,737
============
</TABLE>
In connection with the FN Acquisition, the Company issued $200 million
principal amount of 12 1/4% Senior Notes, including $5.5 million principal
amount of Senior Notes to certain directors and officers of the Bank. The
notes will mature on May 15, 2001 with interest payable semiannually on May
15 and November 15. Deferred issuance costs associated with the Senior Notes'
issuance totalling $9.6 million were recorded in other assets in the 1994
consolidated statement of financial condition and are being amortized over
the term of the Senior Notes.
The notes are redeemable at the option of the Company, in whole or in
part, during the 12-month period beginning May 15, 1999, at a redemption
price of 106.125% plus accrued interest to the date of redemption, and
thereafter at 100% plus accrued interest. The notes are subordinated to all
existing and future liabilities, including deposits and other borrowings of
the Bank, and to the Preferred Stock. The terms and conditions of the
Indenture impose restrictions that affect, among other things, the ability of
FN Holdings to incur debt, pay dividends, make acquisitions, create liens,
sell assets and make certain investments. The Company was in compliance with
these covenants at December 31, 1995.
F-30
<PAGE>
FIRST NATIONWIDE HOLDINGS INC. AND SUBSIDIARIES
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS (CONTINUED)
(20) INTEREST RATE SWAP AGREEMENTS
Interest rate swap agreements outstanding at December 31, 1995 are as
follows (dollars in thousands):
<TABLE>
<CAPTION>
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)
1995 1996
----------- -----------
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 COMMERCIAL TOTAL
MILLIONS) 1-4 UNIT RESIDENTIAL 5+ UNIT RESIDENTIAL AND OTHER REAL
-------------------- ------------------- ------------------- CONSTRUCTION ESTATE
STATE VARIABLE FIXED VARIABLE FIXED VARIABLE FIXED VARIABLE LOANS(2) % OF TOTAL
- ------------------- ---------- -------- ---------- ------- ---------- ------- -------------- --------- ------------
<S> <C> <C> <C> <C> <C> <C> <C> <C> <C>
California ......... $3,151 $ 439 $ 932 $159 $1,336 $298 $ 3 $ 6,318 55%
New York ........... 538 119 194 210 47 49 -- 1,157 10
Florida ............ 138 67 50 72 75 37 -- 439 4
Illinois ........... 125 105 55 16 51 30 -- 382 3
Hawaii ............. 311 41 -- -- 4 -- -- 356 3
Ohio ............... 145 125 29 12 31 10 -- 352 3
New Jersey ......... 170 47 58 28 16 11 -- 330 3
Colorado ........... 35 155 2 3 -- -- -- 195 2
Texas .............. 68 57 3 40 1 5 -- 174 2
Nevada ............. 14 4 79 26 37 1 -- 161 1
Other states (1) .. 565 260 243 186 163 110 15 1,542 14
---------- -------- ---------- ------- ---------- ------- -------------- --------- ------------
Total .............. $5,260 $1,419 $1,645 $752 $1,761 $551 $18 $11,406 100%
========== ======== ========== ======= ========== ======= ============== ========= ============
</TABLE>
- ------------
(1)There are 40 states, of which no one state has real estate loans in
excess of 1.3% of the total.
(2)The table balances exclude accrued interest receivable, amounts
advanced to borrowers for taxes and insurance, discounts and premiums,
and loss reserves, and include $145 million of loans held for sale.
NOTE 6--LOANS AND INVESTMENT SECURITIES HELD FOR SALE
Assets held for sale at the lower of aggregate amortized cost or estimated
market value, are summarized as follows:
<TABLE>
<CAPTION>
DECEMBER 31, 1993
---------------------------
AMORTIZED ESTIMATED
(DOLLARS IN THOUSANDS) COST MARKET VALUE
----------- --------------
<S> <C> <C>
1-4 unit residential real estate loans ............. $145,316 $145,316
Investment securities .............................. 10,000 10,000
Consumer loans ..................................... -- --
----------- --------------
Total loans and investment securities held for sale $155,316 $155,316
=========== ==============
</TABLE>
F-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>
(DOLLARS IN
YEAR ENDED THOUSANDS)
- ------------------- --------------------
<S> <C>
1994 ............... $14,834
1995 ............... 12,058
1996 ............... 10,541
1997 ............... 9,872
1998 ............... 8,744
1999 and thereafter 26,025
--------------------
Total ............ $82,074
====================
</TABLE>
At December 31, 1993, future minimum lease payments under all capital
leases together with the present value of the minimum lease payments were as
follows:
<TABLE>
<CAPTION>
(DOLLARS IN
YEAR ENDED THOUSANDS)
- ------------------------------------- --------------------
<S> <C>
1994 ................................. $ 937
1995 ................................. 894
1996 ................................. 894
1997 ................................. 223
--------------------
Total minimum lease payments ......... 2,948
Less interest portion ................ (1,777)
--------------------
Total capitalized lease obligations $ 1,171
====================
</TABLE>
F-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 WEIGHTED AVERAGE
THOUSANDS) AMOUNT DUE MATURITY (DAYS)
------------ ----------------
<S> <C> <C>
First Boston ........ $250,035 27
Goldman Sachs ....... 205,877 8
Merrill Lynch ....... 98,145 10
Morgan Stanley ...... 279,842 125
------------ ----------------
Total ............. $833,899 53
============ ================
</TABLE>
NOTE 14--OTHER BORROWINGS
Other borrowings consist of the following:
<TABLE>
<CAPTION>
DECEMBER 31, 1993
----------------------------
(DOLLARS IN THOUSANDS) BALANCE AVERAGE RATE
------------ --------------
<S> <C> <C>
Fixed rate borrowings from the FHLB $2,350,110 8.52%
Subordinated debentures:
10.00%, due October, 2006 .......... 92,100 10.00
Multi-family housing revenue bonds 20,099 3.79
Capitalized lease obligations ..... 1,171 15.77
Other borrowings ................... 5,665 8.14
------------ --------------
2,469,145 8.54%
Accrued interest payable ............ 19,024
Net discount ........................ (10,554)
------------
Total long-term borrowings .......... $2,477,615
============
</TABLE>
Maturities of other borrowings at December 31, 1993 are as follows:
<TABLE>
<CAPTION>
WEIGHTED
MATURITIES DURING THE BALANCES MATURING AVERAGE RATES
------------------------ ----------------
YEARS ENDING DECEMBER 31 FHLB OTHER FHLB OTHER
- ------------------------ ------------ ---------- ------- -------
(DOLLARS IN THOUSANDS)
<S> <C> <C> <C> <C>
1994 .................... $ 680,787 $ 1,258 9.60% 6.63%
1995 .................... 485,710 81 8.74 8.20
1996 .................... 865,968 321 7.30 8.38
1997 .................... 215,000 8,325 8.92 13.49
1998 .................... 100,000 -- 9.85 --
1999 and thereafter .... 2,645 109,050 7.71 8.96
------------ ---------- ------- -------
Total ................. $2,350,110 $119,035 8.52% 9.25%
============ ========== ======= =======
</TABLE>
Short-term borrowings averaged $12 million during 1993, with a weighted
average rate of 3.09%. There were no outstanding short-term borrowings as of
December 31, 1993. Long-term borrowings averaged $2.7 billion during 1993
with a weighted average rate, adjusted for interest income recognized
F-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
(DOLLARS IN THOUSANDS) PRINCIPAL RATE
MATURITY DATE AMOUNT PAID RECEIVED VARIABLE RATE INDEX
- ----------------------------- ----------- ------- ---------- -------------------
<S> <C> <C> <C> <C>
Paid Variable/Received Fixed:
April 1994 .................. $500,000 3.38% 7.73% 3 Month LIBOR
April 1995 .................. 500,000 3.38 7.97 3 Month LIBOR
April 1996 .................. 500,000 3.38 8.19 3 Month LIBOR
September 1996 .............. 250,000 3.33 4.19 1 Month LIBOR
April 1998 .................. 400,000 3.38 8.38 3 Month LIBOR
</TABLE>
As of December 31, 1993, interest rate exchange agreements totalling $1.35
billion of notional principal are collateralized by a $30 million third party
letter of credit issued. If terminated at December 31, 1993, the interest
rate exchange agreements would generate a pre-tax gain of approximately $133
million. There were no interest rate cap, collar and floor agreements
outstanding at December 31, 1993.
The net decrease in interest expense on customer deposits and borrowings
from interest rate exchange agreements is as follows:
<TABLE>
<CAPTION>
YEAR ENDED DECEMBER
31,
--------------------
(DOLLARS IN THOUSANDS) 1993 1992
--------- ---------
<S> <C> <C>
Interest rate exchanges ................. $87,369 $76,280
Amortization of deferred gains and fees 1,985 2,934
Interest rate caps, collars and floors . -- (750)
--------- ---------
$89,354 $78,464
========= =========
</TABLE>
F-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 projects
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,
------------------------
(DOLLARS IN
THOUSANDS) 1993 1992
---------- ------------
<S> <C> <C>
Interest paid ....... $612,397 $1,008,821
Income taxes paid .. 1,956 2,413
Income tax refunds . 17,708 114,573
</TABLE>
Non-Cash Investing and Financing Activities:
<TABLE>
<CAPTION>
YEAR ENDED DECEMBER
31,
----------------------
(DOLLARS IN THOUSANDS) 1993 1992
---------- ----------
<S> <C> <C>
Additions to property acquired in settlement of loans $135,251 $226,320
Loans securitized into mortgage-backed securities ... -- 17,827
</TABLE>
F-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
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
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
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
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
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
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
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
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
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
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
<TABLE>
<CAPTION>
1995 1994 1993
--------- --------- ---------
(IN THOUSANDS)
<S> <C> <C> <C>
Balance at beginning of year ............................. $ 2,803 $ 3,424 $ 5,361
Additions to gain on sale of loans ....................... 12 175 364
Amortization charged to loan servicing income:
Regular ................................................. (1,447) (1,696) (1,826)
(Increase) decrease due to changes in actual and
estimated prepayments ................................... 980 900 (475)
--------- --------- ---------
Balance at end of year ................................... $ 2,348 $ 2,803 $ 3,424
========= ========= =========
</TABLE>
NOTE 7 -- PREMISES AND EQUIPMENT
Premises and equipment are summarized as follows:
<TABLE>
<CAPTION>
DECEMBER 31, ESTIMATED
-------------------- USEFUL LIVES
1995 1994
---------- --------
(IN THOUSANDS)
<S> <C> <C> <C>
Land ........................................... $ 4,811 $ 4,811 --
Buildings ...................................... 10,170 10,064 40 years
Leasehold improvements ......................... 14,717 13,754 Life of lease
Furniture and equipment ........................ 22,347 23,447 5-20 years
Construction in progress ....................... 57 131 --
---------- --------
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
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
A tabulation of interest expense on customer deposits follows:
<TABLE>
<CAPTION>
YEAR ENDED DECEMBER 31,
---------------------------------
1995 1994 1993
---------- ---------- ---------
(IN THOUSANDS)
<S> <C> <C> <C>
Demand deposits ...... $ 29,580 $ 14,592 $19,590
Certificate accounts 105,719 86,819 75,213
---------- ---------- ---------
$135,299 $101,411 $94,803
========== ========== =========
</TABLE>
NOTE 10 -- BORROWINGS
SECURITIES SOLD UNDER AGREEMENTS TO REPURCHASE
SFFed enters into agreements with broker-dealers and other financial
institutions to repurchase securities previously sold. These agreements are
effectively short-term borrowings secured by MBS (see Note 4). Securities
sold under the terms of these agreements are held by the securities dealers
who arrange the transactions.
Information related to securities sold under agreements to repurchase is
summarized as follows:
<TABLE>
<CAPTION>
DECEMBER 31,
----------------------
1995 1994
---------- ----------
(DOLLARS IN THOUSANDS)
<S> <C> <C>
Balance at end of period ......... $713,362 $347,679
========== ==========
Average balance during each year $658,953 $261,368
Maximum balance at any month end 871,722 347,679
Weighted average interest rate .. 6.14% 5.74%
</TABLE>
At December 31, 1995, $659,442,000 of SFFed's agreements mature in one
year or less, and $53,920,000 mature in 1998.
ADVANCES FROM THE FEDERAL HOME LOAN BANK OF SAN FRANCISCO
Each Federal Home Loan Bank ("FHLB") is authorized to make advances to its
member associations, subject to such regulations and limitations that the
Federal Housing Finance Board may prescribe. SFFed's borrowings from the FHLB
consist of notes payable with interest rates ranging from 4.11% to 9.10%. The
maturity and weighted average interest rate of the advances outstanding at
December 31, 1995 are as follows:
<TABLE>
<CAPTION>
(DOLLARS IN
YEAR ENDING DECEMBER 31: THOUSANDS)
- -------------------------------
<S> <C>
1996 ........................... $266,969
1997 ........................... 7,500
1998 ........................... --
1999 ........................... --
2000 ........................... --
Thereafter ..................... 483
--------------------
$274,952
====================
Weighted average interest rate 6.90%
====================
</TABLE>
F-110
<PAGE>
SFFED CORP. AND SUBSIDIARIES
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
YEARS ENDED DECEMBER 31, 1995, 1994 AND 1993
At December 31, 1995 and 1994, SFFed had pledged certain real estate
loans (see Note 5), mortgage-backed securities (see Note 4) and SFFed's
investment in stock of the FHLB of San Francisco (see Note 3) to secure FHLB
advances.
MORTGAGE-BACKED BONDS
In September 1994, SFFed retired the collateralized mortgage obligation at
face value and incurred a loss of $347,000.
SENIOR NOTES
In September 1994, SFFed issued $50,000,000 of its senior notes due
September 1, 2004. The notes are reported net of unamortized issuance costs.
The notes bear interest at the rate of 11.20% payable semi-annually on March
1 and September 1. Under the terms of the notes, SFFed may not make any
prepayments of principal, except that in the event of a change in control of
SFFed, SFFed shall offer to prepay the notes in full. SFFed may contribute up
to $34,000,000 from the proceeds of the note sale to the Association in the
form of equity capital and by December 31, 1995 SFFed had so contributed
$30,000,000.
The note agreement contains certain restrictive covenants which, among
other things, (1) require SFFed to maintain certain capital levels, (2)
restrict the amount of funds available for payment of dividends on SFFed's
stock or for the repurchase of its stock and (3) establish a maximum ratio of
non-performing assets (as defined) to consolidated total assets. If an event
of default occurs, including failure to comply with any restrictive covenant,
the notes may become immediately payable in full. SFFed was in compliance
with all terms of the note agreement at December 31, 1995.
NOTE 11 -- TAXES ON INCOME
The provision (benefit) for taxes on income in the accompanying
Consolidated Statements of Operations is comprised of the following items:
<TABLE>
<CAPTION>
YEAR ENDED DECEMBER 31,
-------------------------------
1995 1994 1993
-------- ---------- ---------
(IN THOUSANDS)
<S> <C> <C> <C>
Current:
Federal income tax ....... $ (760) $ (357) $ 9,338
California franchise tax (15) (383) 3,617
-------- ---------- ---------
Total ................. (775) (740) 12,955
-------- ---------- ---------
Deferred:
Federal income tax ....... 873 (1,748) (3,453)
California franchise tax 1,470 (912) (1,597)
-------- ---------- ---------
Total ................. 2,343 (2,660) (5,050)
-------- ---------- ---------
Total:
Federal income tax ....... 113 (2,105) 5,885
California franchise tax 1,455 (1,295) 2,020
-------- ---------- ---------
Total ................. $1,568 $(3,400) $ 7,905
======== ========== =========
</TABLE>
F-111
<PAGE>
SFFED CORP. AND SUBSIDIARIES
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
YEARS ENDED DECEMBER 31, 1995, 1994 AND 1993
The liability for taxes on income at December 31, 1995 and 1994 in the
accompanying Consolidated Statements of Financial Condition includes a net
deferred tax liability totalling $1.9 million for 1995 and a net deferred tax
asset totalling $2.3 million for 1994, that have been provided for the
temporary differences between the tax bases and financial statement carrying
amounts of assets and liabilities. Tax benefits attributable to temporary
differences are recognized to the extent that realization of such benefits is
more likely than not. The major sources of these temporary differences
comprising SFFed's net deferred tax liability and net deferred tax (asset) at
December 31, 1995 and 1994, respectively, are as follows:
<TABLE>
<CAPTION>
DECEMBER 31,
----------------------
1995 1994
---------- ----------
(IN THOUSANDS)
<S> <C> <C>
DEFERRED TAX LIABILITIES:
Loan fee income and discounts deferred for tax
purposes ..................................... $ 18,508 $ 17,243
FHLB stock dividends ........................... 3,244 2,311
Deferred servicing-related premiums on loans ... 933 999
Tax basis versus financial statement basis
depreciation expense ......................... 2,701 2,846
Investments in partnerships .................... 54 179
Other .......................................... -- 682
---------- ----------
Gross deferred tax liabilities .................. 25,440 24,260
---------- ----------
GROSS DEFERRED TAX ASSETS:
Federal tax basis loss carryovers .............. (12) (648)
Deferred interest on restructured loans ........ (605) (692)
Accrued pension plan contributions ............. (6,160) (4,380)
Book basis loss reserves ....................... (13,349) (17,052)
Minimum pension liability adjustment ........... (241) (376)
CMO investment trust ........................... (972) (887)
Unrealized loss on securities available for sale (709) (2,507)
Contract accruals .............................. (1,373) --
Other .......................................... (106) --
---------- ----------
Gross deferred tax assets ....................... (23,527) (26,542)
---------- ----------
Net deferred tax liability (asset) .............. $ 1,913 $ (2,282)
========== ==========
</TABLE>
F-112
<PAGE>
SFFED CORP. AND SUBSIDIARIES
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
YEARS ENDED DECEMBER 31, 1995, 1994 AND 1993
The differences between the federal statutory income tax rate and the
effective rate of SFFed's tax provision (benefit) are as follows:
<TABLE>
<CAPTION>
YEAR ENDED DECEMBER 31,
----------------------------
1995 1994 1993
-------- --------- -------
<S> <C> <C> <C>
Federal statutory tax rate ...................... 35.0% (35.0)% 35.0%
Increase (reduction) in tax rate resulting from:
California franchise tax, net of federal
benefit ..................................... 7.5 (7.5) 7.4
Amortization and write-down of intangible asset 20.9 3.1 1.4
Change in base year tax bad debt reserve ...... -- (5.0) (3.4)
Deferred tax adjustment resulting from tax rate
change ...................................... -- -- 1.1
Capitalized merger costs ...................... 84.9 -- --
Interest on officer's life insurance .......... (14.6) -- --
California enterprise zone deduction .......... (9.0) -- --
Other ......................................... (10.1) 2.6 2.9
-------- --------- -------
Effective tax rate .............................. 114.6% (41.8)% 44.4%
======== ========= =======
</TABLE>
Under the Internal Revenue Code, the Association in determining taxable
income is allowed a special bad debt deduction based on a percentage of
taxable income (8% for 1995, 1994 and 1993) or on specific experience
formulas. The Association used the experience method in 1995, 1994 and 1993
in determining the federal income tax bad debt deduction for tax return
purposes for each respective year.
A deferred tax liability has not been recognized for the amount of the
Association's tax bad debt reserves that arose in tax years beginning before
December 31, 1987. These reserves amounted to approximately $15.9 million at
both December 31, 1995 and 1994. The amount of the unrecognized deferred tax
liability on such reserves at both December 31, 1995 and 1994 was
approximately $5.6 million. This deferred tax liability could be recognized
if, in the future, (1) that portion of the Association's retained earnings
represented by these reserves is used for purposes other than to absorb
losses from bad debts, including dividends or distributions in liquidation,
(2) the Association fails to meet the definition of a "qualified savings
institution," or (3) there is a change in the federal tax law.
During 1994 the Internal Revenue Service (IRS) completed its examination
of SFFed's tax returns for the years 1989 and 1990. The IRS had previously
completed its examination of SFFed's tax returns for 1987 and 1988. As a
result of these examinations the IRS has proposed adjustments, primarily
related to timing differences as to the recognition of income and expense for
tax return purposes. The most significant proposed adjustment relates to
deferred loan fee income. SFFed filed a formal protest with the IRS in 1994
contesting the results of the audit of 1989 and 1990 (SFFed had previously
filed a protest with regards to the results of 1987 and 1988 examinations).
Taxes associated with the proposed adjustments which are being protested
amount to approximately $23.5 million. SFFed believes that the income tax
returns are substantially correct as originally filed. SFFed has established
a deferred tax liability in prior periods for substantially all the items
included in the IRS proposed adjustments. Accordingly, SFFed's exposure is
limited to interest on any tax deficiency that may finally be assessed. SFFed
believes that any additional tax and interest thereon which may be due will
not have a materially adverse effect on the consolidated financial position
or results of operations of SFFed.
F-113
<PAGE>
SFFED CORP. AND SUBSIDIARIES
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
YEARS ENDED DECEMBER 31, 1995, 1994 AND 1993
NOTE 12 -- STOCKHOLDERS' EQUITY AND REGULATORY CAPITAL REQUIREMENTS
Office of Thrift Supervision (OTS) regulations issued pursuant to the
Financial Institutions Reform Recovery and Enforcement Act of 1989 (FIRREA)
specify minimum tangible, core and risk-based capital requirements for thrift
institutions. The amount of the Association's net worth included in its
minimum regulatory capital requirements is not available for the payment of
dividends and may only be used to cover any future losses. Various
adjustments are required to be made to stockholder's equity and total assets
for computing these capital ratios, depending on an institution's capital and
asset structure (see the following table). For purposes of computing the
risk-based capital requirement, the regulations assign a degree of credit
risk to each of a thrift's assets and off-balance sheet liabilities, ranging
from zero to 100%.
Under Section 38 of the Federal Deposit Insurance Corporation Improvement
Act of 1991 (FDICIA), federal banking authorities are required to take prompt
corrective action against undercapitalized financial institutions, imposing a
series of increasing constraints on the operations of such institutions,
depending on the level of their undercapitalization. There are five capital
levels specified by FDICIA, ranging from well capitalized to critically
undercapitalized. OTS regulations set forth the minimum capital ratios for
each of these levels. Based upon qualitative judgments made during its most
recent examination of an institution, the OTS may downgrade an institution's
capital level by one step (e.g., a well capitalized institution can be
reclassified as adequately capitalized). Under these regulations, the
Association is deemed to be well capitalized at December 31, 1995.
The Association's regulatory capital position at December 31, 1995 and
1994 is summarized as follows:
<TABLE>
<CAPTION>
DECEMBER 31, 1995 DECEMBER 31, 1994
-------------------------- --------------------------
TANGIBLE, TANGIBLE,
CORE, CORE,
TIER 1 TOTAL TIER 1 TOTAL
RISK-BASED RISK-BASED RISK-BASED RISK-BASED
CAPITAL (1) CAPITAL CAPITAL (1) CAPITAL
------------ ------------ ------------ ------------
(IN THOUSANDS)
<S> <C> <C> <C> <C>
Capital per Association financial statements ..... $231,966 $231,966 $219,225 $219,225
Adjustments for regulatory capital purposes:
Goodwill (2) ..................................... (8,054) (8,054) (8,722) (8,722)
Investment in nonincludable subsidiaries (2) .... (8,924) (8,924) (8,205) (8,205)
Unrealized loss on securities available for sale,
net of tax ...................................... 1,128 1,128 3,449 3,449
General valuation allowances ...................... -- 27,829 -- 26,771
------------ ------------ ------------ ------------
Regulatory capital .............................. $216,116 $243,945 $205,747 $232,518
============ ============ ============ ============
</TABLE>
- ------------
(1) For the Association, there are no differences in these regulatory
capital computations.
(2) Also deducted from total assets for regulatory test purposes.
F-114
<PAGE>
SFFED CORP. AND SUBSIDIARIES
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
YEARS ENDED DECEMBER 31, 1995, 1994 AND 1993
<TABLE>
<CAPTION>
ACTUAL MINIMUM
DECEMBER 31, 1995 REQUIREMENT
------------------- -------------------
CAPITAL RATIO CAPITAL RATIO
---------- ------- ---------- -------
(DOLLARS IN THOUSANDS)
<S> <C> <C> <C> <C>
FIRREA Capital Standards:
Tangible ................................... $216,116 5.43% $ 59,717 1.50%
Core (leverage) ............................ 216,116 5.43 199,433 3.00
Risk-based ................................. 243,945 10.92 178,720 8.00
FDICIA Capital Standards (well capitalized):
Leverage ................................... $216,116 5.43% $199,056 5.00%
Tier 1 risk-based .......................... 216,116 9.67 134,041 6.00
Total risk-based ........................... 243,945 10.92 223,401 10.00
</TABLE>
<TABLE>
<CAPTION>
ACTUAL MINIMUM
DECEMBER 31, 1994 REQUIREMENT
------------------- -------------------
CAPITAL RATIO CAPITAL RATIO
---------- ------- ---------- -------
(DOLLARS IN THOUSANDS)
<S> <C> <C> <C> <C>
FIRREA Capital Standards:
Tangible .................................. $205,747 5.54% $ 55,666 1.50%
Core (leverage) ........................... 205,747 5.54 111,332 3.00
Risk-based ................................ 232,518 10.84 171,662 8.00
FDICIA Capital Standards (well
capitalized):
Leverage .................................. $205,747 5.54 $185,552 5.00
Tier 1 risk-based ......................... 205,747 9.59 128,746 6.00
Total risk-based .......................... 232,518 10.84 214,577 10.00
</TABLE>
During 1995, SFFed contributed $5,000,000 from the senior note proceeds to
the Association as equity capital. During 1994, SFFed contributed $30,000,000
to the Association as equity capital, including $25,000,000 of the proceeds
from the sale of its senior notes. See Note 10 concerning certain covenants
included in the senior note agreement.
In August 1994, the OTS issued a regulation adding an interest rate risk
component to the risk-based capital requirement for thrifts. Those thrifts
that have an above normal interest rate risk exposure will be subject to take
a deduction from the total capital available in computing their risk-based
capital requirement. The regulation, which was to become effective as of
December 31, 1994, has been postponed indefinitely, pending the testing of an
OTS appeals process at certain institutions and the impositions of similar
requirements by federal banking agencies. Based upon its December 31, 1995
computations, SFFed does not currently have an above normal interest rate
risk.
At periodic intervals, both the OTS and the FDIC routinely examine the
Association's financial statements as part of their legally prescribed
oversight of the savings and loan industry. Based on these examinations, the
regulators can direct that the Association's financial statements be adjusted
in accordance with their findings. No such adjustments were required by the
regulators as a result of their most recent examination of the Association
which was completed in March 1995.
Pursuant to a quarterly dividend policy initiated in 1993, SFFed paid cash
dividends totalling $2,042,000 or $0.26 per share on its common stock during
1995 compared with $0.28 per share in 1994 and $0.15 per share in 1993.
F-115
<PAGE>
SFFED CORP. AND SUBSIDIARIES
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
YEARS ENDED DECEMBER 31, 1995, 1994 AND 1993
NOTE 13 -- PARENT COMPANY FINANCIAL INFORMATION
SFFed and its subsidiary file a consolidated federal income tax return in
which the taxable income or loss of SFFed is combined with that of its
subsidiary. SFFed's share of income tax expense is based on the amount which
would be payable if separate returns were filed. Accordingly, SFFed's equity
in the net income or loss of its subsidiary is excluded from the computation
of the provision for income taxes for financial statement purposes.
SFFed's statements of financial condition and related statements of
operations and cash flows are as follows:
STATEMENTS OF FINANCIAL CONDITION
<TABLE>
<CAPTION>
DECEMBER 31,
----------------------
1995 1994
---------- ----------
(IN THOUSANDS)
<S> <C> <C>
ASSETS
Cash ..................................................................... $ 234 $ 169
Note receivable from subsidiary .......................................... 11,770 24,170
Tax benefit .............................................................. 3,613 893
Other assets ............................................................. 2,022 1,018
Investment in subsidiary ................................................. 231,966 219,225
---------- ----------
Total ................................................................ $249,605 $245,475
========== ==========
LIABILITIES AND STOCKHOLDERS' EQUITY
Accrued expenses ......................................................... $ 4,970 $ 1,773
Senior notes (Note 10) ................................................... 49,245 49,158
Stockholders' equity (see Consolidated Statements of Financial Condition) 195,390 194,544
---------- ----------
Total ................................................................ $249,605 $245,475
========== ==========
</TABLE>
STATEMENTS OF OPERATIONS
<TABLE>
<CAPTION>
YEAR ENDED DECEMBER 31,
-------------------------------
1995 1994 1993
--------- ---------- --------
(IN THOUSANDS)
<S> <C> <C> <C>
INCOME
Dividend from subsidiary .......................................... $ -- $ -- $1,000
Interest on investments ........................................... 1,151 835 238
--------- ---------- --------
1,151 835 1,238
--------- ---------- --------
EXPENSES
General and administrative ........................................ 3,464 576 395
Interest on senior notes .......................................... 5,703 1,756 --
Federal and state income tax benefit .............................. (2,577) (605) (79)
--------- ---------- --------
6,590 1,727 316
--------- ---------- --------
Income (loss) before undistributed net income (loss) of subsidiary (5,439) (892) 922
Undistributed net income (loss) of subsidiary ..................... 5,239 (3,836) 8,972
--------- ---------- --------
Net income (loss) ................................................. $ (200) $(4,728) $9,894
========= ========== ========
</TABLE>
F-116
<PAGE>
SFFED CORP. AND SUBSIDIARIES
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
YEARS ENDED DECEMBER 31, 1995, 1994 AND 1993
STATEMENTS OF CASH FLOWS
<TABLE>
<CAPTION>
YEAR ENDED DECEMBER 31,
--------------------------------
1995 1994 1993
--------- ---------- ---------
(IN THOUSANDS)
<S> <C> <C> <C>
Cash flows from operating activities:
Net income (loss) ............................................. $ (200) $ (4,728) $ 9,894
Adjustments to reconcile net income (loss) to net cash
provided by (used in) operating activities:
Undistributed net (income) loss of subsidiary ................ (5,239) 3,836 (8,972)
Amortization of organization expense ......................... -- -- 42
Income tax benefit ........................................... (2,577) (605) (79)
Net change in other assets/liabilities ....................... 2,401 705 378
--------- ---------- ---------
Net cash provided by (used in) operating activities ........... (5,615) (792) 1,263
--------- ---------- ---------
Cash flows from investing activities:
Maturities of investment securities ........................... -- -- 13,270
Purchases of investment securities ............................ -- -- (6,040)
Note receivable from subsidiary ............................... 12,400 (16,800) (7,370)
Capital contributions to subsidiary ........................... (5,000) (30,000) --
Other, net .................................................... (54) -- (106)
--------- ---------- ---------
Net cash provided by (used in) investing activities ........... 7,346 (46,800) (246)
--------- ---------- ---------
Cash flows from financing activities:
Proceeds from issuance of common stock ........................ 376 404 488
Proceeds from issuance of senior notes ........................ -- 49,158 --
Payment of dividends .......................................... (2,042) (2,192) (1,166)
--------- ---------- ---------
Net cash provided by (used in) financing activities ........... (1,666) 47,370 (678)
--------- ---------- ---------
Net increase (decrease) in cash and cash equivalents .......... 65 (222) 339
Cash and cash equivalents at Beginning of Year ................. 169 391 52
--------- ---------- ---------
Cash and cash equivalents at End of Year ....................... $ 234 $ 169 $ 391
========= ========== =========
</TABLE>
NOTE 14 -- PENSION PLANS AND OTHER RETIREMENT BENEFITS
PENSION PLANS
The Association has five noncontributory pension plans: A qualifying
defined benefit plan covering substantially all employees over the age of 21
who meet minimum service requirements, and four nonqualifying supplemental
plans to provide eligible plan members benefits, based on compensation and
length of service, greater than permitted by the terms of the qualified plan.
Assets of the qualified plan are maintained by a trustee and administered by
the Association's advisory committee. Such assets consist primarily of money
market funds, government securities, corporate bonds and common stocks. The
nonqualifying plans have no assets. The Association has voluntary agreed to
make contributions to each Plan sufficient to provide for the payment of
pension benefits to Plan participants.
During the third quarter of 1995, SFFed recorded an approximate $1.7
million reduction of retirement plan expenses reflecting a net curtailment
gain arising from the suspension of SFFed's defined benefit retirement plan.
The gain is net of the costs of enhancing certain retirement benefits under
that plan immediately before it was suspended and net of certain other costs
associated primarily with enhancing benefits provided under SFFed's defined
contribution (401(k)) plan. During the fourth quarter
F-117
<PAGE>
SFFED CORP. AND SUBSIDIARIES
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
YEARS ENDED DECEMBER 31, 1995, 1994 AND 1993
of 1995, SFFed recorded an approximate $1.4 million increase in retirement
plan expenses arising from the suspension of SFFed's nonqualified
supplemental retirement plans related to the anticipated acquisition of SFFed
as discussed in Note 2.
Net periodic pension cost and its components are as follows:
<TABLE>
<CAPTION>
YEAR ENDED DECEMBER 31,
-------------------------------
1995 1994 1993
--------- --------- ---------
(IN THOUSANDS)
<S> <C> <C> <C>
Service cost -benefits earned ........ $ 875 $ 1,897 $ 1,810
Interest on projected benefit obligation 2,814 2,756 2,410
Return on plan assets ................... (1,887) (1,531) (1,640)
Other components -net ................. 280 819 602
Curtailment gain -qualified plan ..... (1,689) -- --
Curtailment loss -unqualified plans .. 1,406 -- --
--------- --------- ---------
Net periodic pension cost ............... $ 1,799 $ 3,941 $ 3,182
========= ========= =========
</TABLE>
Assumptions used were as follows:
<TABLE>
<CAPTION>
<S> <C> <C> <C>
Discount rate .................................. 7.25% 8.00% 6.50%
Rate of increase in compensation levels ....... 5.00 5.00 5.00
Expected long-term rate of return on assets (1) 8.00 8.00 8.50
</TABLE>
F-118
<PAGE>
SFFED CORP. AND SUBSIDIARIES
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
YEARS ENDED DECEMBER 31, 1995, 1994 AND 1993
The following table shows the funded status and amounts recognized in the
Consolidated Statements of Financial Condition:
<TABLE>
<CAPTION>
DECEMBER 31,
----------------------
1995 1994
----------
(IN THOUSANDS)
<S> <C> <C>
QUALIFIED PLAN -- ASSETS LESS THAN ACCUMULATED BENEFITS
Actuarial present value of benefit obligations:
Vested benefits ........................................ $ 31,022 $ 23,257
Nonvested benefits ..................................... 543 734
---------- ----------
Accumulated benefit obligation ........................ $ 31,565 $ 23,991
========== ==========
Projected benefit obligation for service rendered to
date ................................................... $ 31,565 $ 28,627
Plan assets at fair value ............................... (28,098) (21,787)
---------- ----------
Plan assets less than projected benefit obligation ..... 3,467 6,840
Unrecognized net loss from past experience different
from that assumed ...................................... (928) (1,520)
Unrecognized net asset being recognized over 13 years .. 437 546
Unrecognized prior service cost ......................... -- (680)
Adjustment required to recognize minimum liability ..... 491 --
---------- ----------
Accrued pension cost (included in "Other Liabilities") . $ 3,467 $ 5,186
========== ==========
NONQUALIFIED PLANS -- ACCUMULATED BENEFITS EXCEED ASSETS
Actuarial present value of benefit obligations:
Vested benefits ........................................ $ 7,171 $ 5,847
Nonvested benefits ..................................... -- 7
---------- ----------
Accumulated benefit obligation ........................ $ 7,171 $ 5,854
==========
Projected benefit obligation for service rendered to
date ................................................... $ 7,171 $ 7,678
Plan assets at fair value ............................... -- --
---------- ----------
Plan assets less than projected benefit obligation ..... 7,171 7,678
Unrecognized net loss from past experience different
from that assumed ...................................... (1,069) (1,668)
Unrecognized net obligation being recognized over 15
years .................................................. (202)
Unrecognized prior service cost ......................... (667)
Adjustment required to recognize minimum liability ..... 1,069 916
---------- ----------
Accrued pension cost (included in "Other Liabilities") . $ 7,171 $ 6,057
========== ==========
</TABLE>
In accordance with the provisions of Statement of Financial Accounting
Standards No. 87 (SFAS 87), Employer's Accounting for Pensions, SFFed has
recognized an additional pension liability of $570,000 and $885,000 in 1995
and 1994, respectively, representing the excess of the accumulated benefit
obligation over the fair value of pension plan assets and accrued pension
liability. As required by SFAS 87, in 1995, this liability, net of an income
tax benefit of $242,000, has been reflected as a $328,000 reduction of
stockholders' equity and in 1994, this liability, net of an income tax
benefit of $376,000, has been
F-119
<PAGE>
SFFED CORP. AND SUBSIDIARIES
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
YEARS ENDED DECEMBER 31, 1995, 1994 AND 1993
established by a $509,000 reduction of stockholders' equity. This additional
liability is a result of a change in the discount rate used in the
measurement of pension plan benefits and a reduction in the expected
long-term rate of return on pension plan assets.
OTHER POSTRETIREMENT BENEFITS
Effective January 1, 1993, SFFed adopted the Financial Accounting
Standards Board's Statement of Financial Accounting Standards No. 106 ("SFAS
106") Employers' Accounting for Postretirement Benefits Other than Pensions.
Under SFAS 106, the cost of postretirement benefits other than pensions (e.g.
health care) must be recognized on an accrual basis as employees perform
services to earn the benefits. Many of the provisions and concepts of SFAS
106 are similar to current standards on accounting for pensions. Based on the
transition provisions of SFAS 106, the accumulated postretirement benefit
obligation at the date of adoption (the transition obligation) may be
recognized in income as the cumulative effect of an accounting change in the
period of adoption or delayed and amortized over future periods as a
component of net periodic postretirements cost. The transition obligation at
January 1, 1993 has been estimated at $4.0 million, which SFFed is amortizing
to expense over 20 years as permitted by SFAS 106. SFFed has estimated that
accounting for covered benefits on an accrual basis, as required by SFAS 106,
rather than the pay-as-you-go method previously used by SFFed, increased
expense for 1993 by approximately $0.4 million. During the fourth quarter of
1995, SFFed recorded an approximate $1.9 million increase in retirement
medical benefits expenses resulting from the curtailment of the plan due to
the anticipated acquisition of SFFed, as discussed in Note 2.
NOTE 15 -- EMPLOYEE INCENTIVE AND COMPENSATION PLANS
SFFed's Stock Incentive Plan, which was amended in 1994 to increase the
number of shares reserved thereunder for issuance by 500,000 shares, provides
for up to 1,271,500 shares of common stock to be issued to directors and key
employees of SFFed and its subsidiaries. Directors of SFFed are granted
options for 10,000 shares of common stock upon their initial election to the
Board of Directors. The Plan provides that stock options may be either
incentive stock options ("ISO"), as defined by Section 422 of the Internal
Revenue Code, or nonstatutory options which do not satisfy the provisions of
Code Section 422. The Plan also provides for the issuance of stock
appreciation rights ("SAR") and restricted stock.
ISOs may be granted at an option price not less than fair market value as
of the date of grant and nonstatutory options at a price determined by the
Stock Option Committee provided for in the Plan. Stock options may be
exercised with cash, shares of SFFed's common stock, or a combination of cash
and common stock equal to the option price.
In 1990 a stock option plan for non-employee directors (Directors' Plan)
was established to allow those directors the choice of receiving nonstatutory
options in lieu of their annual retainer fees. In 1994 the Directors' Plan
was amended permitting participants to elect to receive nonstatutory options
in lieu of their attendance fees as well as retainer fees. In addition, the
Directors' Plan was further amended to provide an option pricing model
generally accepted by the financial community as reflective of the fair
market value of the interest received by the Directors in exchange for the
cash compensation. The exercise price of options granted under this plan is
$1.00 per share. The maximum number of shares of common stock which may be
issued under the Directors' Plan is 200,000 shares, provided that the
aggregate number of shares of common stock issuable under this plan and
SFFed's Stock Incentive Plan shall not exceed 1,271,500 shares.
SARs are only granted in conjunction with all or any part of any stock
option granted under the Plan. A SAR entitles the holder to receive cash,
shares of SFFed's common stock or a combination thereof, at the discretion of
SFFed, equal to the excess of the fair market value at the date of exercise
over the option price of the related stock option. Exercise of a SAR cancels
the related stock option.
F-120
<PAGE>
SFFED CORP. AND SUBSIDIARIES
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
YEARS ENDED DECEMBER 31, 1995, 1994 AND 1993
During 1992 certain key employees agreed to convert their existing SARs
for limited stock appreciation rights ("LSAR"). LSARs are subject to the same
terms and conditions as SARs but are exercisable only if there is a change of
control of SFFed.
Restricted stock is subject to such restrictions against sale, transfer or
other disposition, as may be determined at the time of making the award.
Employees forfeit all shares of restricted stock if they leave the employ of
SFFed and its subsidiaries prior to the lapse of restrictions.
All nonstatutory options and related SARs granted may be exercised prior
to a dissolution or liquidation of SFFed or a sale of substantially all the
assets of SFFed or a merger or consolidation in which SFFed is not the
surviving entity.
No ISOs have been granted through December 31, 1995. Nonstatutory options,
restricted stock, SARs and LSARs granted, exercised or terminated are
summarized as follows:
<TABLE>
<CAPTION>
TOTAL RESTRICTED
SHARES STOCK OPTIONS
---------- ------------ ----------
<S> <C> <C> <C>
Outstanding at December 31, 1992 ... 594,453 6,603 587,850
Granted ............................ 6,096 -- 6,096
Exercised .......................... (49,915) -- (49,915)
Restrictions lapsed ................ (2,996) (2,996) --
Terminated/cancelled ............... (44,780) -- (44,780)
---------- ------------ ----------
Outstanding at December 31, 1993 ... 502,858 3,607 499,251
Granted ............................ 103,146 -- 103,146
Exercised .......................... (33,379) -- (33,379)
Restrictions lapsed ................ (2,691) (2,691) --
Terminated/cancelled ............... (6,118) -- (6,118)
---------- ------------ ----------
Outstanding at December 31, 1994 (2) 563,816 916 562,900
Granted ............................ 117,508 20,000 97,508
Exercised .......................... (29,965) -- (29,965)
Restrictions lapsed ................ (916) (916) --
Terminated/cancelled ............... (1,264) -- (1,264)
---------- ------------ ----------
Outstanding at December 31, 1995 (2) 649,179 20,000 629,179
========== ============ ==========
</TABLE>
(RESTUBBED TABLE CONTINUED FROM ABOVE)
<TABLE>
<CAPTION>
PRICE
SARS (1) LSARS PER SHARE
---------- ---------- -------------
<S> <C> <C> <C>
Outstanding at December 31, 1992 ... 61,143 272,536
Granted ............................ -- -- $ 1.00
Exercised .......................... (24,826) -- 6.38-17.00
Restrictions lapsed ................ -- -- 11.25-14.13
Terminated/cancelled ............... (18,037) -- 6.38-17.00
---------- ----------
Outstanding at December 31, 1993 ... 18,280 272,536
Granted ............................ -- 86,550 1.00-18.88
Exercised .......................... (5,918) -- 6.38-17.00
Restrictions lapsed ................ -- -- 11.25-14.13
Terminated/cancelled ............... (1,124) (20,682) 6.38-17.00
---------- ----------
Outstanding at December 31, 1994 (2) 11,238 338,404
Granted ............................ -- 87,600 1.00-20.25
Exercised .......................... (1,264) -- 6.38-17.00
Restrictions lapsed ................ -- -- 11.25
Terminated/cancelled ............... (511) (9,000) 6.38-17.00
---------- ----------
Outstanding at December 31, 1995 (2) 9,463 417,004
========== ==========
</TABLE>
- ------------
(1)All SARs are related to options. The exercise of SARs results in a
surrender of the related option.
(2)Options and SARs exercisable at December 31, 1995 were 444,177 and
9,463, respectively.
The number of shares available for future options was 393,045 and 510,533
at December 31, 1995 and 1994, respectively. See Note 2 regarding the
treatment of options in connection with the acquisition of SFFed by First
Nationwide.
Incentive Plans are maintained to provide a means of awarding incentive
compensation to most officers and employees, including loan agents. The Plans
are nonqualified plans and all disbursements are paid from the general assets
of SFFed. For the years ended December 31, 1995, 1994 and 1993 SFFed's
expense under these plans amounted to approximately $183,000, $422,000 and
$1,726,000, respectively. SFFed maintains a savings plan for its employees
and the employees of its subsidiaries. The plan allows participants to make
contributions by salary deductions equal to 15% or less of their salary
pursuant to Section 401(k) of the Internal Revenue Code. Employee
contributions are matched by SFFed at the rate
F-121
<PAGE>
SFFED CORP. AND SUBSIDIARIES
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
YEARS ENDED DECEMBER 31, 1995, 1994 AND 1993
of 50% of such contributions up to 2% of the employee's salary. SFFed's
matching contributions, under the terms of the plan, must be used to purchase
SFFed's common stock. SFFed contributions to the plan amounted to $413,000,
$347,000 and $316,000 for the years ended December 31, 1995, 1994 and 1993,
respectively.
NOTE 16 -- ESTIMATED FAIR VALUES OF FINANCIAL INSTRUMENTS
The following disclosure of the estimated fair value of SFFed's financial
instruments is in accordance with the provisions of Statement of Financial
Accounting Standards No. 107 ("SFAS 107") Disclosures about Fair Value of
Financial Instruments. The valuation methods used by SFFed are set forth
below.
The accuracy and usefulness of the fair value information disclosed herein
is limited by the following factors.
o Because no market exists for a significant portion of SFFed's
financial instruments, fair value estimates are based on judgments
regarding future expected loss experience, current economic
conditions, risk characteristics of various financial instruments,
and other factors. These estimates are subjective in nature and
involve uncertainties and matters of significant judgment and
therefore cannot be determined with precision. Changes in these
assumptions could significantly affect the estimates.
o These estimates do not reflect any premium or discount that could
result from offering for sale at one time SFFed's entire holding of
a particular financial asset.
o SFAS 107 excludes from its disclosure requirements certain financial
instruments and various significant assets and liabilities that are
not considered to be financial instruments.
Because of these and other limitations, the aggregate fair value amounts
presented in the following table do not represent the underlying value of
SFFed.
F-122
<PAGE>
SFFED CORP. AND SUBSIDIARIES
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
YEARS ENDED DECEMBER 31, 1995, 1994 AND 1993
The carrying amounts and the estimated fair values of SFFed's financial
instruments at December 31, 1995 and 1994 are as follows:
<TABLE>
<CAPTION>
DECEMBER 31, 1995 DECEMBER 31, 1994
------------------------- -------------------------
CARRYING ESTIMATED CARRYING ESTIMATED
AMOUNT FAIR VALUE AMOUNT FAIR VALUE
----------- ------------ ----------- ------------
(IN THOUSANDS)
<S> <C> <C> <C> <C>
ASSETS
Cash and cash equivalents .............. $ 195,251 $ 195,251 $ 165,206 $ 165,206
Federal Home Loan Bank stock ........... 31,579 31,579 30,049 30,049
Mortgage-backed securities ............. 932,398 945,319 408,036 400,715
Loans held for sale .................... 4,393 4,393 3,627 3,627
Loans receivable held for investment .. 2,714,988 2,708,195 3,011,504 2,942,263
Excess servicing ....................... 2,348 25,825 2,803 14,175
LIABILITIES
Demand deposits ........................ 852,715 852,715 566,403 566,403
Certificate accounts ................... 1,840,528 1,852,308 1,915,585 1,899,119
Borrowings ............................. 1,041,559 1,049,860 1,012,820 1,006,902
OFF BALANCE SHEET FINANCIAL INSTRUMENTS
Commitments to originate loans and
related hedging program (unrealized
gain) ................................. -- 46 -- 371
</TABLE>
The following methods and assumptions were used by SFFed in computing the
estimated fair values in the above table:
Cash and Cash Equivalents and Federal Home Loan Bank Stock and Demand
Deposits: The carrying amounts of these financial instruments approximate
their fair values.
Mortgage-Backed Securities: Fair values of these securities are based on
year-end quoted market prices.
Loans Held for Sale: The fair value of these loans has been based on
market prices of similar loans traded in the secondary market.
Loans Receivable Held for Investment: For fair value estimation purposes,
these loans have been categorized by type of loan (e.g., one-to-four unit
residential) and then further segmented between adjustable or fixed rates and
performing or nonperforming. Where possible, the fair value of these groups
of loans has been based on secondary market prices for loans with similar
characteristics. The fair value of the remaining loans has been estimated by
discounting the future cash flows using current interest rates being offered
for loans with similar terms to borrowers of similar credit quality.
Excess Servicing (Deferred Premium on Sales and Securitization of
Loans): Fair value of this asset has been estimated by reference to market
loan prepayment assumptions and interest rates for similar pools of loans.
Certificate Accounts and Borrowings: Fair values have been estimated using
projected cash flows discounted at replacement rates offered at each year end
for instruments of similar remaining maturities.
Commitments to Originate Loans and Related Hedging Program: The fair value
of the amount of commitments to originate loans considered likely to fund has
been estimated based on current secondary market prices for similar loans. No
loans were being originated for sale at December 31, 1995 and 1994.
F-123
<PAGE>
SFFED CORP. AND SUBSIDIARIES
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
YEARS ENDED DECEMBER 31, 1995, 1994 AND 1993
The fair value estimates disclosed above were based on market prices and
other available information at year-end 1995 and 1994, respectively. No
detailed valuation has been performed since December 31, 1995 and, although
SFFed is not aware of any changes that could significantly impact these
estimates, current fair value estimates could be materially different from
the year-end 1995 amounts presented above.
NOTE 17 -- COMMITMENTS AND CONTINGENCIES
Outstanding commitments relating to loans and MBS are as follows:
<TABLE>
<CAPTION>
DECEMBER 31,
--------------------
1995 1994
--------- ---------
(IN THOUSANDS)
<S> <C> <C>
Commitments to originate loans ..... $31,341 $ 76,928
Commitments to sell loans ........... 1,014 1,423
Commitments to convert loans to MBS -- 199,784
Commitments to purchase MBS ......... -- 100,000
Forward commitments to sell loans .. 4,500 --
</TABLE>
At December 31, 1995 SFFed's commitments to originate loans included
$10,977,000 of fixed-rate loans at interest rates ranging from 6.38% to
7.88%, and were outstanding for no more than 30 days.
SFFed on occasion has securitized (received MBS for loans) and sold loans
with recourse provisions. In 1995, SFFed did not have any sales of loans or
MBS with recourse. The principal balance of loans that have been securitized
or sold with recourse at December 31, 1995 and 1994 were $478,348,000 and
$11,796,000, respectively.
As part of the normal course of business, SFFed has entered into forward
transactions in order to reduce its exposure to fluctuations in interest
rates associated with originating loans for sale. At December 31, 1995
forward commitments to sell loans was $4,500,000.
LITIGATION
SFFed is involved in various claims and legal actions arising in the
ordinary course of business. In the opinion of management, after
consultations with counsel, the ultimate disposition of these matters will
not have a materially adverse effect on SFFed's consolidated financial
position or results of operations.
LEASE COMMITMENTS
Certain branches and offices are leased by SFFed under the terms of
operating leases expiring at various dates through the year 2029. Lease
rental expense amounted to $7,223,000, $7,173,000 and $8,009,000 for the
years ended December 31, 1995, 1994 and 1993, respectively. Future
approximate minimum lease payments under the terms of the existing operating
leases are as follows:
F-124
<PAGE>
SFFED CORP. AND SUBSIDIARIES
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
YEARS ENDED DECEMBER 31, 1995, 1994 AND 1993
<TABLE>
<CAPTION>
OFFICE AND
NET SUBLEASES EQUIPMENT
--------- ----------- ------------
(IN THOUSANDS)
<S> <C> <C> <C>
Year ending December 31:
1996 ................... $ 6,966 $ 514 $ 7,480
1997 ................... 6,778 414 7,192
1998 ................... 5,677 382 6,059
1999 ................... 5,287 240 5,527
2000 ................... 5,032 99 5,131
Thereafter ............. 6,067 297 6,364
--------- ----------- ------------
$35,807 $1,946 $37,753
========= =========== ============
</TABLE>
Legislation is currently pending in Congress which would recapitalize the
Savings Association Insurance Fund ("SAIF") in order to bring it into parity
with the FDIC's other insurance fund, the Bank Insurance Fund ("BIF"). The
legislation would require an assessment of all 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.
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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
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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
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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
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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
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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.
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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.
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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.
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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 AVG. MATURITY
VALUE RATE (DAYS) VALUE RATE (DAYS)
--------------- --------------- --------------- ------------------- --------------- ---------------
(DOLLARS IN (DOLLARS IN
MILLIONS) MILLIONS)
<S> <C> <C> <C> <C> <C> <C>
Federal funds
sold .......... $70.0 5.80% 2 $330.0 6.28% 3
Certificates of
deposit ....... 4.1 5.19 27 3.8 3.18 32
------------------- -------------------
$74.1 5.77 $333.8 6.25
=================== ===================
</TABLE>
At both December 31, 1995 and 1994 accrued interest and dividends
receivable related to short-term liquid investments held to maturity was $0.2
million.
NOTE 4: SECURITIES PURCHASED UNDER AGREEMENTS TO RESELL
Securities purchased under agreements to resell are collateralized by
mortgage-backed securities at December 31, 1995 and by U.S. Treasury
securities at December 31, 1994. The following table provides additional
information on the agreements:
<TABLE>
<CAPTION>
DECEMBER 31,
-------------------
1995 1994
-------- --------
(DOLLARS IN MILLIONS)
<S> <C> <C>
Carrying value of agreements to resell .................... $1,674.6 $ 48.2
Market value of collateral ................................ 1,704.4 48.3
Maximum amounts of outstanding agreements to resell at any
month-end ................................................ 1,704.2 48.2
Average amounts of outstanding agreements to resell for
the year ................................................. 1,144.5 1,032.9
Weighted average interest rate for the year ............... 5.99% 4.26%
Weighted average interest rate on year-end balances ...... 6.01% 5.70%
Weighted average maturity of outstanding agreements to
resell (days) ............................................ 11 3
</TABLE>
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>
<PAGE>
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
</TABLE>
liabilities
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>
CALGZ CLOSING PRICE AT SEPTEMBER 30, 1996 $ 11.375
<S> <C>
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
============ =============== =============== =============
</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's operations with
Holdings' and (iii) income taxes relative to the Cal Fed Acquisition.
See further discussion at Notes (3) and (4).
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
$5,600 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
<PAGE>
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:
<PAGE>
<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 .......................... 249
Plan of Distribution ..................... 250
Legal Matters ............................ 250
Experts .................................. 251
Index of Defined Terms ................... 252
Index to Financial Statements ............ F-1
</TABLE>
UNTIL MAY 27, 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
----------
FEBRUARY 26, 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 5,000
Legal fees and expenses ......... 125,000
Transfer agent fees and expenses 15,000
Accounting fees and expenses ... 100,000
Miscellaneous ................... 30,757
----------
Total ......................... $450,000
==========
</TABLE>
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.
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.
II-1
<PAGE>
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.
On September 27, 1996, the Registrant sold $150,000,000 aggregate
liquidation value of its Cumulative Perpetual Preferred Stock to DROF
Holdings Inc. for $145,000,000. 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.
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>
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>
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 Agreement Regarding Contingent Litigation Recovery Participation
Interests, dated as of June 30, 1995, between California Federal
Bank, A Federal Savings Bank, and Chemical Trust Company of
California, as Interest Agent.
4.18 Agreement Regarding Secondary Contingent Litigation Interests,
dated as of December 2, 1996, between California Federal Bank, A
Federal Savings Bank, and ChaseMellon Shareholder Services,
L.L.C., as Interest Agent.
4.19 Note Agreement regarding $50,000,000 aggregate principal amount of
10.668% Senior Subordinated Notes Due 1998 of California Federal
Bank, A Federal Savings Bank.
4.20 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).
II-4
<PAGE>
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).
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).
II-5
<PAGE>
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).
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).
II-6
<PAGE>
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).
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.
II-7
<PAGE>
*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.
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>
- ------------
* Previously filed.
(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 Amendment No. 1 to the Registration Statement to be
signed on its behalf by the undersigned, thereunto duly authorized, in the
City of New York, State of New York, on February 26, 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 Amendment
No. 1 to the Registration Statement has been signed by the following persons
in the capacities and on the dates indicated.
<TABLE>
<CAPTION>
SIGNATURE TITLE DATE
- ---------------------- ---------------------------------- --------------------
<S> <C> <C>
* Chairman of the Board, Chief February 26, 1997
- ---------------------- Executive Officer and Director
Ronald O. Perelman (Principal Executive Officer)
* Vice Chairman and Director February 26, 1997
- ----------------------
Howard Gittis
* Executive Vice President and Chief February 26, 1997
- ---------------------- Financial Officer
Irwin Engelman (Principal Financial Officer)
* Vice President and Controller February 26, 1997
- ---------------------- (Principal Accounting Officer)
Laurence Winoker
</TABLE>
*Joram C. Salig, by signing his name hereto, does hereby execute this
Amendment No. 1 to the Registration Statement on behalf of the directors and
officers of the Registrant indicated above by asterisks, pursuant to powers
of attorney duly executed by such directors and officers and filed as
exhibits to the Registration Statement.
By /s/ Joram C. Salig
-----------------------------------
Joram C. Salig
Attorney-in-Fact
II-10
<PAGE>
FIFTH RESTATED
CERTIFICATE OF INCORPORATION
OF
FIRST NATIONWIDE HOLDINGS INC.
------------------------------
Pursuant to Sections 242 and 245
of the General Corporation Law
of the State of Delaware
------------------------------
First Nationwide Holdings Inc., a corporation organized and existing
under the laws of the State of Delaware (the "Corporation"), hereby certifies
as follows:
1. The name of the Corporation is First Nationwide Holdings Inc. The
date of filing of the original Certificate of Incorporation of the Corporation
with the Secretary of State of the State of Delaware was June 30, 1994. The
original Certificate of Incorporation of the Corporation was amended and
restated pursuant to the Restated Certificate of Incorporation of the
Corporation (the "Restated Certificate of Incorporation") which was filed with
the Secretary of State of the State of Delaware on September 30, 1994. The
Restated Certificate of Incorporation was amended and restated pursuant to the
Second Restated Certificate of Incorporation of the Corporation (the "Second
Restated Certificate of Incorporation") which was filed with the Secretary of
State of the State of Delaware on June 29, 1995. The Second Amended and
Restated Certificate of Incorporation was amended and restated pursuant to the
Third Restated Certificate of Incorporation of the Corporation which was filed
with the Secretary of State of the State of Delaware on January 31, 1996. The
Third Restated Certificate of Incorporation was amended pursuant to a
Certificate of Amendment to the Third Restated Certificate of Incorporation
filed with the Secretary of State of the State of Delaware on April 10, 1996
(as so amended, the "Third Restated Certificate of Incorporation"). The Third
Restated Certificate of Incorporation was amended and restated pursuant to a
Fourth Restated Certificate of Incorporation of the Corporation which was
filed with the Secretary of State of the State of Delaware on April 17, 1996.
2. This Fifth Restated Certificate of Incorporation, which both
restates and amends the provisions of the Fourth Restated Certificate of
Incorporation, was duly adopted in accordance with the provisions of Sections
242 and 245 of the General Corporation Law of the State of Delaware (the
"GCL") and by the written consent of its stockholders entitled to vote thereon
in accordance with Section 228 of the GCL and is as follows:
<PAGE>
FIRST: The name of the Corporation is First Nationwide Holdings Inc.
(hereinafter the "Corporation").
SECOND: The address of the registered office of the Corporation in
the State of Delaware is 1013 Centre Road, Wilmington, DE 19805, in the City
of Wilmington, County of New Castle. The name of its registered agent at that
address is The Prentice-Hall Corporation System, Inc.
THIRD: The purpose of the Corporation is to engage in any lawful act
or activity for which a corporation may be organized under the GCL.
FOURTH: The total number of shares of stock which the Corporation
shall have the authority to issue is 25,000 shares consisting of 800 shares of
Class A Common Stock, each having a par value of one dollar ($1.00) (the
"Class A Common Stock"), 200 shares of Class B Common Stock, each having a par
value of one dollar ($1.00) (the "Class B Common Stock" and, together with the
Class A Common Stock, the "Common Stock"), and 24,000 shares of Preferred
Stock, each having a par value of one dollar ($1.00) (the "Preferred Stock").
1. General. The designation, relative rights, preferences and
limitations of the shares of each class are as follows:
(i) The shares of Preferred Stock may be issued from time to time in
one or more series of any number of shares, provided that the aggregate number
of shares issued and not cancelled of any and all such series shall not exceed
the total number of shares of Preferred Stock hereinabove authorized, and with
distinctive serial designations, all as shall hereafter be stated and
expressed in the resolution or resolutions providing for the issue of such
shares of Preferred Stock from time to time adopted by the Board of Directors
of the Corporation (the "Board of Directors") pursuant to authority so to do
which is hereby vested in the Board of Directors. Each series of shares of
Preferred Stock (A) may have such voting powers, full or limited, or may be
without voting powers; (B) may be subject to redemption at such time or times
and at such prices; (C) may be entitled to receive dividends (which may be
cumulative or non-cumulative) at such rate or rates, on such conditions and at
such times, and payable in preference to, or in such relation to, the
dividends payable on any other class or classes or series of stock; (D) may
have such rights upon the dissolution of, or upon any distribution of the
assets of, the Corporation; (E) may be made convertible into or exchangeable
for, shares of any other class or classes or of any other series of the same
or any other class or classes of shares of the Corporation at such price or
prices or at such rates of exchange and with such adjustments; (F) may be
entitled to the benefit of a sinking fund to be applied to the purchase or
redemption of shares of such series in such amount or amounts; (G) may be
entitled to the benefit of conditions and restrictions upon the creation of
indebtedness of the Corporation or any subsidiary, upon the issue of any
additional shares (including additional shares of such series or of any other
series) and upon the payment of dividends or the making of other
distributions on, and the purchase, redemption or other
<PAGE>
acquisition by the Corporation or any subsidiary of, any outstanding shares of
the Corporation and (H) may have such other relative, participating, optional
or other special rights, qualifications, limitations or restrictions thereof;
all as shall be stated in said resolution or resolutions providing for the
issue of such shares of Preferred Stock. Any of the voting powers,
designations, preferences, rights and qualifications, limitations or
restrictions of any such series of Preferred Stock may be made dependent upon
facts ascertainable outside of the resolution or resolutions providing for the
issue of such Preferred Stock adopted by the Board of Directors pursuant to
the authority vested in it by this Section (1)(i) of this Article FOURTH,
provided that the manner in which such facts shall operate upon the voting
powers, designations, preferences, rights and qualifications, limitations or
restrictions of such series of Preferred Stock is clearly and expressly set
forth in the resolution or resolutions providing for the issue of such
Preferred Stock. The term "facts" as used in the next preceding sentence shall
have the meaning given to it in Section 151(a) of the GCL. Shares of Preferred
Stock of any series that have been redeemed (whether through the operation of
a sinking fund or otherwise) or that if convertible or exchangeable, have been
converted into or exchanged for shares of any other class or classes shall
have the status of authorized and unissued shares of Preferred Stock of the
same series and may be reissued as a part of the series of which they were
originally a part or may be reclassified and reissued as part of a new series
of shares of Preferred Stock to be created by resolution or resolutions of the
Board of Directors or as part of any other series of shares of Preferred
Stock, all subject to the conditions or restrictions on issuance set forth in
the resolution or resolutions adopted by the Board of Directors providing for
the issue of any series of shares of Preferred Stock.
(ii) Subject to the provisions of any applicable law or of the
By-Laws of the Corporation, as from time to time amended, with respect to the
closing of the transfer books or the fixing of a record date for the
determination of stockholders entitled to vote and except as otherwise
provided by law or by the resolution or resolutions providing for the issue of
any series of shares of Preferred Stock, the holders of outstanding shares of
Common Stock shall exclusively possess voting power for the election of
directors and for all other purposes. Except as otherwise provided by the
resolution or resolutions providing for the issue of any series of shares of
Preferred Stock and subject to Section 2 of this Article FOURTH, the holders
of shares of Common Stock shall be entitled to the exclusion of the holders of
shares of Preferred Stock of any and all series, to receive such dividends as
from time to time may be declared by the Board of Directors. In the event of
any liquidation, dissolution or winding up of the Corporation, whether
voluntary or involuntary, after payment shall have been made to the holders of
shares of Preferred Stock of the full amount to which they shall be entitled
pursuant to the resolution or resolutions providing for the issue of any
series of shares of Preferred Stock, the holders of shares of Common Stock
shall be entitled to the exclusion of the holders of shares of Preferred Stock
of any and all series, to share in all remaining assets of the Corporation
available for distribution to its stockholders as provided in Section 5 of
this Article FOURTH.
<PAGE>
2. Dividends on Common Stock
(a) Dividend Rights. Dividends may be paid in cash or otherwise upon
the Class A Common Stock and Class B Common Stock out of the assets of the
Corporation in the relationship and upon the terms provided for below with
respect to each such class:
(i) Class A Common Stock. The holders of record of the Class A
Common Stock shall be entitled to receive dividends (such dividends shall
hereinafter be referred to as "Class A Dividends"), when and as declared
by the Board of Directors out of funds legally available therefor, subject
to the rights, if any, of the Preferred Stock and the rights of the Class
B Common Stock described in Section (2)(a)(ii) of this Article FOURTH.
(ii) Class B Common Stock. The holders of record of the Class B
Common Stock shall be entitled to receive dividends (such dividends shall
hereinafter be referred to as "Class B Dividends"), at the time of the
declaration and payment, respectively, of Class A Dividends, out of funds
legally available therefor, in the amounts per share paid on the Class A
Common Stock.
(b) Priority as to Dividends. No Class A Dividends may be
declared and paid unless an equivalent per share Class B Dividend shall be
contemporaneously declared and paid in accordance with Sections (2)(a)(i) and
(2)(a)(ii) above.
(c) Restrictions on Purchase. The Corporation shall not purchase
or otherwise acquire for value shares of Class A Common Stock or shares of
Class B Common Stock unless a proportional number of shares of Class A Common
Stock and shares of Class B Common Stock are simultaneously so purchased or
otherwise acquired on substantially the same terms.
3. No Redemption. The shares of Class A Common Stock and Class B
Common Stock shall not be subject to redemption.
4. Voting Rights. (i) The Class A Common Stock and the Class B Common
Stock shall vote together as a single class on all matters which are to be put
to a vote of shareholders. Each share of the Class A Common Stock shall
entitle the holder thereof to one vote. Each share of the Class B Common Stock
shall entitle the holder thereof to a vote equal to the product of one and a
fraction, the numerator of which is 3 and the denominator of which is 4.
(ii) Notwithstanding Section 4(i) above, without the affirmative vote
or consent of the holders of 50% of the voting power of the outstanding
Class B
<PAGE>
Common Stock, voting or consenting, as the case may be, separately as one
class, the Corporation may not consolidate or merge with or into, or sell,
assign, transfer, lease, convey or otherwise dispose of all or substantially
all of its assets to, any person or entity unless each share of Class B Common
Stock shall be converted into or exchanged for and shall become a share of
such successor, transferee or resulting corporation or a parent corporation of
such corporation, having in respect of such successor, transferee or resulting
corporation or parent corporation substantially the same powers, preferences
and special rights, and the qualifications, limitations or restrictions
thereon, that the Class B Common Stock had immediately prior to such
transaction. Notwithstanding the foregoing, the Corporation may consolidate or
merge with or into, or sell, assign, transfer, lease, convey or otherwise
dispose of all or substantially all of its assets to, any person or entity if
such merger, consolidation or sale has been approved by the affirmative vote
or consent of the holders of 50% of the voting power of the outstanding Class
B Common Stock, voting or consenting, as the case may be, separately as one
class.
5. Liquidation Rights; Priority.
(a) In the event of any liquidation, dissolution or winding up
of the affairs of the Corporation, whether voluntary or involuntary, after
payment or provision for payment of the debts and other liabilities of the
Corporation, and subject to Section (1)(ii) of this Article FOURTH, the
holders of the shares of the Class A Common Stock and the Class B Common Stock
shall be entitled to receive the assets of the Corporation remaining for
distribution pro rata.
(b) Neither the merger nor consolidation of the Corporation into
or with any other corporation or entity, nor the merger or consolidation of
any other corporation or entity, into or with the Corporation, nor a sale,
transfer or lease of all or any part of the assets of the Corporation, shall
be deemed to be a liquidation, dissolution or winding up of the Corporation
within the meaning hereof.
FIFTH: The following provisions are inserted for the management of
the business and the conduct of the affairs of the Corporation, and for
further definition, limitation and regulation of the powers of the Corporation
and of its directors and stockholders:
(1) The business and affairs of the Corporation shall be managed by
or under the direction of the Board of Directors.
(2) The directors shall have concurrent power with the stockholders
to make, alter, amend, change, add to or repeal the By-Laws of the
Corporation.
(3) Election of directors need not be by written ballot unless the
By-Laws so provide.
<PAGE>
(4) No director shall be personally liable to the Corporation or any
of its stockholders for monetary damages for breach of fiduciary duty as a
director, except for liability (i) for any breach of the director's duty
of loyalty to the Corporation or its stockholders, (ii) for acts or
omissions not in good faith or which involve intentional misconduct or a
knowing violation of law, (iii) pursuant to Section 174 of the GCL or (iv)
for any transaction from which the director derived an improper personal
benefit. Any repeal or modification of this Article FIFTH by the
stockholders of the Corporation shall not adversely affect any right or
protection of a director of the Corporation existing at the time of such
repeal or modification with respect to acts or omissions occurring prior
to such repeal or modification.
(5) In addition to the powers and authority hereinbefore or by
statute expressly conferred upon them, the directors are hereby empowered
to exercise all such powers and do all such acts and things as may be
exercised or done by the Corporation, subject, nevertheless, to the
provisions of the GCL, this Fifth Restated Certificate of Incorporation,
and any By-Laws adopted by the stockholders; provided, however, that no
By-Laws hereafter adopted by the stockholders shall invalidate any prior
act of the directors which would have been valid if such By-Laws had not
been adopted.
SIXTH: Meetings of stockholders may be held within or without the
State of Delaware, as the By-Laws may provide. The books of the Corporation
may be kept (subject to any provision contained in the GCL) outside the State
of Delaware at such place or places as may be designated from time to time by
the Board of Directors or in the By-Laws of the Corporation.
SEVENTH: The Corporation reserves the right to amend, alter, change
or repeal any provision contained in this Fifth Restated Certificate of
Incorporation, in the manner now or hereafter prescribed by statute, and all
rights conferred upon stockholders herein are granted subject to this
reservation; provided, however, that the Corporation shall not amend, alter,
change or repeal any provision of Article FOURTH hereof without the
affirmative vote or consent of the holders of 50% of the voting power of the
outstanding Class B Common Stock of the Corporation; and provided, further,
that the Corporation shall not adopt, amend or change any Article so as to be
inconsistent with Article FOURTH without complying with the foregoing
provision.
EIGHTH: The Corporation is to have perpetual existence.
<PAGE>
IN WITNESS WHEREOF, this Fifth Restated Certificate of Incorporation
has been executed by and on behalf of First Nationwide Holdings Inc. by its
Vice President this 27th day of September, 1996.
FIRST NATIONWIDE HOLDINGS INC.
By: /S/ Glenn P. Dickes
-----------------------------------
Name: Glenn P. Dickes
Title: Vice President
<PAGE>
CERTIFICATE OF DESIGNATIONS,
RIGHTS AND PREFERENCES
OF THE
CUMULATIVE PERPETUAL PREFERRED STOCK
OF
FIRST NATIONWIDE HOLDINGS INC.
---------------------------------
Pursuant to Section 151 of the General
Corporation Law of the State of Delaware
---------------------------------
FIRST NATIONWIDE HOLDINGS INC. (the "Corporation), a corporation
organized and existing under and by virtue of the provisions of the General
Corporation Law of the State of Delaware, certifies as follows:
FIRST: The Fifth Restated Certificate of Incorporation of the
Corporation authorizes the issuance of 24,000 shares of Preferred Stock,
par value $1.00 per share (the "Preferred Stock"), and further authorizes
the Board of Directors of the Corporation, by resolution or resolutions,
to provide for the issuance of the Preferred Stock in series and, among
other things, to establish the number of shares to be included in each
such series
<PAGE>
and to fix the voting power and the designations, preferences and
relative, participating, optional or other special rights, and the
qualifications, limitations or restrictions of each such series.
SECOND: The Board of Directors of the Corporation, acting by
unanimous written consent dated as of January 3, 1997, did duly adopt the
following resolution authorizing the creation and issuance of a series of
said Preferred Stock to be known as Cumulative Perpetual Preferred Stock:
RESOLVED, that pursuant to authority vested by the provisions of the
Fifth Restated Certificate of Incorporation of the Corporation, the
Board of Directors hereby creates and authorizes the issuance of a
series of the Corporation's Preferred Stock, par value $1.00 per
share, and hereby fixes the number, designation, preferences, rights
and limitations thereof, in addition to those set forth in said Fifth
Restated Certificate of Incorporation, as follows:
1. Designation and Rank.
The series (this "Series") of shares of Preferred Stock shall be
designated as "Cumulative Perpetual Preferred Stock" (the "Cumulative
Preferred Stock"). The authorized number of shares of Cumulative Preferred
Stock shall be 1,000 and each such share shall have a stated liquidation value
of $100,000 per share, plus an amount per share equal to all accumulated
arrears and accruals of unpaid dividends (whether or not declared) (the
"Liquidation Value").
The Cumulative Preferred Stock shall rank prior to common stock of all
classes (collectively, the "Common
2
<PAGE>
Stock") of the Corporation and to all other classes and series of equity
securities of the Corporation now or hereafter authorized, issued or
outstanding (the Common Stock and such other classes and series of equity
securities of the Corporation are collectively referred to herein as the
"Junior Stock"), other than any class or series of equity securities of the
Corporation expressly designated as ranking on a parity with (the "Parity
Stock") the Cumulative Preferred Stock as to dividend rights and rights upon
liquidation, winding up or dissolution of the Corporation. The Cumulative
Preferred Stock shall be junior to the creditors of the Corporation. The
Cumulative Preferred Stock shall permit the Parity Stock and Junior Stock to
the extent not expressly prohibited by the Fifth Restated Certificate of
Incorporation of the Corporation. Each of the two series of shares of
Preferred Stock designated as "Series A Cumulative Perpetual Preferred Stock"
and "Series B Cumulative Perpetual Preferred Stock" shall be Parity Stock.
2. Dividends.
(a) Payment of Cumulative Dividends. Holders of shares of Cumulative
Preferred Stock shall be entitled to receive, if, when and as declared by the
Board of Directors, out of funds legally available therefor, cash dividends at
an annual rate of 7.288432193% of the $100,000 stated liquidation value per
share ($7,288.432193 per share per annum). Such dividends shall be cumulative,
accrue from September 19, 1996, and shall be payable, if declared, quarterly
on January 1, April 1, July 1 and October 1 in each year, or, if such day is
not a Business Day, on the next Business Day (each such date, a "Dividend
Payment Date"), commencing on April 1, 1997. "Business Day" means any day
other than a Saturday, Sunday or a day on which banking institutions are not
required to be open in the State of New York. Each such dividend shall be
payable to holders of record of the Cumulative Preferred Stock as they appear
on the stock books of the Corporation at the close of business on such record
dates, not more than forty-five (45) calendar days preceding the Dividend
Payment Date therefor, as determined by the Board of Directors (each such
date, a "Record Date"). Dividends in arrears may be declared and paid at any
time, without reference to any regular Dividend Payment Date, to holders of
record on such record date, not more than forty-five (45) calendar days
preceding the
3
<PAGE>
payment date thereof, as determined by the Board of Directors.
The amount of dividends payable on each share outstanding on a Record Date
of the Cumulative Preferred Stock for each full quarterly dividend period
(each, a "Dividend Period") shall be $1,822.108048. The amount of dividends
payable for any Dividend Period which, as to a share of Cumulative Preferred
Stock (determined by reference to the issuance date and the redemption or
retirement date thereof), is other than a full three (3) months shall be
computed on the basis of the actual number of days elapsed in the period using
a 360-day year.
Holders of the Cumulative Preferred Stock shall not be entitled to any
interest, or any sum of money in lieu of interest, in respect of any accrued
dividends on the Cumulative Preferred Stock which may be undeclared and
unpaid.
(b) Priority as to Dividends. No full dividends shall be declared or paid
or set apart for payment on any Parity Stock (other than dividends in Parity
Stock or Junior Stock) for any Dividend Period unless full cumulative
dividends have been or contemporaneously are declared and paid (or declared
and a sum sufficient for the payment thereof set apart for such payment on the
next scheduled Dividend Payment Date) on the Cumulative Preferred Stock
through the immediately preceding Dividend Period. When dividends are not paid
in full (or declared and a sum sufficient for such full payment is not so set
apart) for any Dividend Period on the Cumulative Preferred Stock and any
Parity Stock, dividends declared on the Cumulative Preferred Stock and Parity
Stock shall only be declared pro rata based upon the respective amounts that
would have been paid on the Cumulative Preferred Stock and such Parity Stock
had dividends been declared in full.
In addition to the foregoing restriction, the Corporation shall not
declare, pay or set apart funds for any dividends or other distributions
(other than in Common Stock or other Junior Stock) with respect to any Common
Stock or other Junior Stock of the Corporation or repurchase, redeem or
otherwise acquire or set apart funds for repurchase, redemption or other
acquisition of, any Common Stock or other Junior Stock through a sinking fund
4
<PAGE>
or otherwise, unless and until full cumulative dividends have been or
contemporaneously are declared and paid (or declared and a sum sufficient for
the payment thereof set apart for such payment on the next scheduled Dividend
Payment Date) on the Cumulative Preferred Stock through the immediately
preceding Dividend Period.
(c) Any reference to "dividends" or "distributions" in this Section 2
shall not be deemed to include any distribution made in connection with any
voluntary or involuntary dissolution, liquidation or winding up of the
Corporation.
3. Redemption.
(a) Optional Redemption. The shares of Cumulative Preferred Stock may be
redeemed, in whole or in part, at the election of the Corporation by
resolution of its Board of Directors, at any time or from time to time after
the shares of Cumulative Preferred Stock are issued at the redemption price
per share equal to the Liquidation Value, including all arrears and accruals
of unpaid dividends to the date fixed for redemption, on such notice to each
holder of record of the Cumulative Preferred Stock to be redeemed as may be
specified by the resolution of the Board of Directors authorizing the
redemption.
In the event that at any time less than all of the Cumulative Preferred
Stock outstanding is to be redeemed, the shares to be redeemed will be
selected pro rata or by lot.
(b) No Reissuance. Shares of Cumulative Preferred Stock redeemed,
purchased or otherwise acquired for value by the Corporation shall be retired
and restored to the status of authorized but unissued shares of Preferred
Stock, undesignated as to series, and shall not be reissued as shares of
Cumulative Preferred Stock.
4. Liquidation Value.
(a) Liquidating Distributions. In the event of any liquidation,
dissolution or winding up of the Corporation, whether voluntary or
involuntary, the holders of shares of Cumulative Preferred Stock shall be
entitled to receive for each share thereof, out of the assets of the
5
<PAGE>
Corporation legally available for distribution to shareholders under applicable
law, or the proceeds thereof, before any payment or distribution of the assets
shall be made to holders of shares of Common Stock or any other Junior Stock
(subject to the rights of the Corporation's general creditors), liquidating
distributions in the amount of the Liquidation Value, without interest.
If the amounts available for distribution in respect of shares of
Cumulative Preferred Stock and any outstanding Parity Stock are not sufficient
to satisfy the full liquidation rights of all of the outstanding shares of
Cumulative Preferred Stock and such Parity Stock, then the holders of such
outstanding shares shall share ratably in any such distribution of assets in
proportion to the full respective preferential amounts to which they are
entitled. After payment of the full amount of the liquidating distribution to
which they are entitled, the holders of shares of Cumulative Preferred Stock
will not be entitled to any further participation in any liquidating
distribution of assets by the Corporation. All distributions made in respect
of Cumulative Preferred Stock in connection with such a liquidation,
dissolution or winding up of the Corporation shall be made pro rata to the
holders entitled thereto.
(b) Consolidation, Merger or Certain Other Actions. Neither the
consolidation, merger or other business combination of the Corporation with or
into any other person, nor the sale of all or substantially all of the assets
of the Corporation shall be deemed to be a liquidation, dissolution or winding
up of the Corporation for purposes of this Section 4.
5. Voting Rights.
Except as otherwise provided by law or this Certificate of Designations,
holders of shares of Cumulative Preferred Stock shall not be entitled to vote
on any matters submitted for a vote of the holders of the Corporation's Common
Stock or any other class of capital stock.
6
<PAGE>
6. Fractional Shares.
The Cumulative Preferred Stock may be issued in fractions of a share which
shall entitle the holder, in proportion to such holder's fractional shares, to
exercise voting rights, receive dividends, participate in distributions and to
have the benefit of all other rights of holders of Cumulative Preferred Stock.
7. Action by Committee of Board of Directors.
To the extent permitted by the rules and regulations of the General
Corporation Law of the State of Delaware or any other applicable law, any
action specified herein as being authorized or required to be taken by the
Board of Directors may be taken by a duly authorized committee thereof.
7
<PAGE>
IN WITNESS WHEREOF, the Corporation has caused this Certificate to be
signed in its name and on its behalf this 3rd day of January, 1997 by a duly
authorized officer of the Corporation.
FIRST NATIONWIDE HOLDINGS INC.
By: /s/ Glenn P. Dickes
--------------------------------
Name: Glenn P. Dickes
Title: Vice President
8
<PAGE>
FIRST NATIONWIDE HOLDINGS INC.
AMENDED CERTIFICATE OF DESIGNATION OF
THE CUMULATIVE PERPETUAL PREFERRED STOCK,
SERIES A AND B, SETTING FORTH THE POWERS,
PREFERENCES, RIGHTS, QUALIFICATIONS, LIMITATIONS
AND RESTRICTIONS OF SUCH TWO SERIES OF PREFERRED STOCK
Pursuant to Sections 151 and 242 of the General Corporation Law
of the State of Delaware
First Nationwide Holdings Inc., a corporation organized and existing
under and by virtue of the provisions of the General Corporation Law of the
State of Delaware (the "Corporation"), DOES HEREBY CERTIFY:
FIRST: The name of the Corporation is First Nationwide Holdings Inc.
The date of filing of the Corporation's original Certificate of
Designation of the Cumulative Perpetual Preferred Stock, Series A and B
(the "Original Certificate of Designation"), with the Secretary of State
of the State of Delaware was September 27, 1996.
SECOND: The Fifth Restated Certificate of Incorporation of the
Corporation (the "Fifth Restated Certificate of Incorporation") authorizes
the issuance of 24,000 shares of Preferred Stock, par value $1.00 per
share (the "Preferred Stock"), and further authorizes the Board of
Directors of the Corporation (the "Board of Directors"), by resolution or
resolutions, to provide for the issuance of the Preferred Stock in series
and, among other things, to establish the number of shares to be included
in each such series and to fix the voting power and the designations,
preferences and relative,
<PAGE>
2
participating, optional or other special rights, and the qualifications,
limitations or restrictions of each such series.
THIRD: Pursuant to the provisions of Section 141(c)(2) of the General
Corporation Law of the State of Delaware (the "GCL"), the Board of
Directors, acting by unanimous written consent dated as of September 11,
1996, established a Pricing Committee thereof and conferred upon such
Pricing Committee the same power and authority conferred upon the Board of
Directors by the Fifth Restated Certificate of Incorporation to provide,
by resolution, for the issuance of the Preferred Stock.
FOURTH: The Pricing Committee of the Board of Directors, acting by
unanimous written consent dated as of September 27, 1996, did duly adopt
the following resolution authorizing the creation and issuance of two
series of Preferred Stock to be known as Series A Cumulative Perpetual
Preferred Stock and Series B Cumulative Perpetual Preferred Stock:
RESOLVED, that the Pricing Committee of the Board of Directors,
pursuant to authority vested in it by the Board of Directors and the
provisions of the Fifth Restated Certificate of Incorporation of the
Corporation, hereby creates and authorizes the issuance of two series
of the Corporation's Preferred Stock, par value $1.00 per share, and
hereby fixes the number, designation, preferences, rights and
limitations thereof, in addition to those set forth in said Fifth
Restated Certificate of Incorporation, as set forth in the Original
Certificate of Designation.
FIFTH: This Amended Certificate of Designation of the Cumulative
Perpetual Preferred Stock, Series A and B, which amends the provisions of
the Original Certificate of Designation, was duly adopted in accordance
with the
<PAGE>
3
provisions of Sections 151 and 242 of the GCL and by the written consent
of its stockholders entitled to vote thereon in accordance with Section
228 of the GCL and is as follows:
ARTICLE I
Cumulative Perpetual Preferred Stock
1. Designation and Rank.
(a) There shall be hereby established two series of Preferred
Stock designated as (x) "Series A Cumulative Perpetual Preferred Stock" (the
"Series A Preferred Stock"), to consist of 10,000 shares, par value $1.00 per
share, and (y) "Series B Cumulative Perpetual Preferred Stock" (the "Series B
Preferred Stock" and, together with the Series A Preferred Stock, the
"Cumulative Preferred Stock"), to consist of 2,000 shares, par value $1.00 per
share. Each share of Cumulative Preferred Stock shall have a stated
liquidation value of $15,000 per share, plus an amount per share equal to all
accumulated arrears and accruals of unpaid dividends (whether or not declared)
(the "Liquidation Value").
(b) The Cumulative Preferred Stock shall rank pari passu with a
series of Preferred Stock that shall be issued by the Corporation in
connection with the consummation of the merger of First Nationwide Escrow
Corp., a Delaware corporation, with and into the Corporation (such Preferred
Stock being hereinafter referred to as the "Parity Stock") as to dividend
rights and rights upon liquidation, winding up or dissolution. The Cumulative
Preferred Stock shall rank prior to common stock of all classes of the
Corporation (collectively, the "Common Stock")
<PAGE>
4
and to all other classes and series of equity securities of the Corporation
now or hereafter authorized, issued or outstanding other than the Parity Stock
(the Common Stock and such other classes and series of equity securities of
the Corporation are collectively referred to herein as the "Junior Stock") as
to dividend rights and rights upon liquidation, winding up or dissolution of
the Corporation. The Cumulative Preferred Stock shall be junior to the
creditors of the Corporation. The Cumulative Preferred Stock shall permit the
creation of Parity Stock and Junior Stock to the extent not expressly
prohibited by the Fifth Restated Certificate of Incorporation. Notwithstanding
that a lesser or no vote may be required by law or the Fifth Restated
Certificate of Incorporation, and in addition to any vote required by law or
the Fifth Restated Certificate of Incorporation, for so long as any shares of
the Cumulative Preferred Stock are outstanding, the Corporation shall not,
directly or indirectly, without the affirmative vote, or written consent
pursuant to Section 228 of the GCL (or any successor provision), of the holder
of two thirds of the outstanding shares of the Series A Preferred Stock and
the Series B Preferred Stock, voting together as a class, separately from any
other class, authorize or issue any class or series of equity securities of
the Corporation expressly designated as ranking senior to the Cumulative
Preferred Stock as to dividend rights and rights upon liquidation, winding up
or dissolution of the Corporation.
(c) Except as otherwise set forth in Sections 2 and 5, the
Series A Preferred Stock and the Series B Preferred Stock shall in all
respects have the same powers, preferences, rights, qualifications,
limitations and restrictions (including voting powers, preferences, relative,
participating, optional and other
<PAGE>
5
special rights, dividend rights and rights on liquidation, dissolution or
winding up) and shall rank pari passu with each other.
(d) Capitalized terms used herein and not otherwise defined
shall have the meanings set forth in Article II below.
2. Dividends.
(a) Holders of shares of Series A Preferred Stock shall be
entitled to receive, if, when and as declared by the Board of Directors, out
of funds legally available therefor, dividends payable in cash, at the rate
per share determined as follows. The amount of cash dividends payable in
respect of each share of Series A Preferred Stock shall be computed assuming
(x) a stated liquidation value per share of $15,000 and (y) an annual rate
equal to the Cost of Funds Rate from time to time in effect, computed on the
basis of the actual number of days elapsed in a 360-day year.
(b) In addition to the cash dividends payable on shares of
Series A Preferred Stock pursuant to Section 2(a) above, holders of shares of
Series A Preferred Stock shall be entitled to receive, if, when and as
declared by the Board of Directors, out of funds legally available therefor,
dividends at an annual rate of 2% of the $15,000 stated liquidation value per
share, computed on the basis of the actual number of days elapsed in a 360-day
year. Dividends payable pursuant to this Section 2(b) shall be payable, (x) if
in respect of any Dividend Period ending on or prior to the Relevant Date in
cash or, at the sole discretion of the Corporation, through the issuance of
fully paid and non-assessable shares of Series B Preferred Stock at the rate
of one fifteen thousandth (1/15,000th) of a share for each $1.00 of
<PAGE>
6
such dividend payable (rounded down to the nearest one-thousandth of a share)
and (y) if in respect of any Dividend Period thereafter, solely in cash.
Fractional shares of Series B Preferred Stock may be issued as a dividend on
the Series A Preferred Stock; provided, that dividends of less than
one-thousandth of a share shall not be paid and shall not accrue. Each
issuance of shares (or any fractional part thereof) of Series B Preferred
Stock as a dividend as provided in this Section 2(b) shall constitute the full
payment of such dividend.
(c) Holders of shares of Series B Preferred Stock shall be
entitled to receive, if, when and as declared by the Board of Directors, out
of funds legally available therefor, dividends at the rate per share
determined as follows. The amount of dividends payable in respect of each
share of Series B Preferred Stock shall be computed assuming (x) a stated
liquidation value per share of $15,000 and (y) an annual rate equal to the
Cost of Funds Rate plus 2%, computed on the basis of the actual number of days
elapsed in a 360-day year. Dividends payable pursuant to this Section 2(c)
shall be payable, (x) if in respect of any Dividend Period ending on or prior
to the Relevant Date, through the issuance of additional fully paid and
non-assessable shares of Series B Preferred Stock at the rate of one fifteen
thousandth (1/15,000th) of a share for each $1.00 of such dividend payable
(rounded down to the nearest one-thousandth of a share) and (y) if in respect
of any Dividend Period thereafter, solely in cash. Fractional shares of Series
B Preferred Stock may be issued as a dividend on the Series B Preferred Stock;
provided, that dividends of less than one-thousandth of a share shall not be
paid and shall not accrue. Each issuance
<PAGE>
7
of shares of Series B Preferred Stock as a dividend as provided in this
Section 2(c) shall constitute the full payment of such dividend.
(d) All dividends payable on the Cumulative Preferred Stock
shall be cumulative, calculated from, in the case of the Series A Preferred
Stock, the date of original issuance of the Series A Preferred Stock (the
"Original Issue Date"), and, in the case of the Series B Preferred Stock, the
date of issuance of such Series B Preferred Stock, and payable, if declared,
quarterly on January 1, April 1, July 1 and October 1 in each year, or, if
such day is not a Business Day, on the next Business Day (each such date, a
"Dividend Payment Date"). The first such Dividend Payment Date shall be
January 1, 1997. Each such dividend shall be payable to holders of record of
the Cumulative Preferred Stock as they appear on the stock books of the
Corporation at the close of business on such record dates, not more than
forty-five (45) calendar days preceding the Dividend Payment Date therefor, as
determined by the Board of Directors (each such date, a "Record Date"). In
addition to the foregoing, accrued and unpaid dividends may be declared and
paid at any time, without reference to any scheduled Dividend Payment Date, to
holders of record on such record date, not more than forty-five (45) calendar
days preceding the payment date thereof, as determined by the Board of
Directors, in which case such dividends shall be calculated from the
immediately preceding scheduled Dividend Payment Date or any other dividend
payment date, as the case may be, on which dividends were paid to (but
excluding) the date of payment therefor.
(e) All dividends paid with respect to (x) shares of Series A
Preferred Stock pursuant to Sections 2(a) and 2(b) above and (y) shares of
Series B
<PAGE>
8
Preferred Stock pursuant to Section 2(c) above shall be paid pro rata and in
like manner to all of the holders entitled thereto.
(f) Nothing contained herein shall in any way or under any
circumstances be construed or deemed to require the Board of Directors to
declare, or the Corporation to pay or set apart for payment, any dividends on
shares of the Cumulative Preferred Stock at any time.
(g) Holders of the Cumulative Preferred Stock shall not be
entitled to any interest, or any sum of money in lieu of interest, in respect
of any accrued dividends on the Cumulative Preferred Stock which may be
undeclared and unpaid.
3. Priority as to Dividends.
(a) For so long as any shares of Cumulative Preferred Stock are
outstanding, no full dividends shall be declared or paid or set apart for
payment on any Parity Stock (other than dividends in Parity Stock or Junior
Stock) for any Dividend Period unless full cumulative dividends have been or
contemporaneously are declared and paid (or declared and a sum sufficient for
the payment thereof set apart for such payment on the next scheduled Dividend
Payment Date) on the Cumulative Preferred Stock through the immediately
preceding Dividend Period. When dividends are not paid in full (or declared
and a sum sufficient for such full payment is not so set apart) for any
Dividend Period on the Cumulative Preferred Stock and any Parity Stock,
dividends declared on the Cumulative Preferred Stock and Parity Stock shall
only be declared pro rata based upon the respective amounts that would have
been
<PAGE>
9
paid on the Cumulative Preferred Stock and such Parity Stock had dividends
been declared in full.
(b) In addition to the foregoing restriction, for so long as any
shares of the Cumulative Preferred Stock are outstanding, the Corporation
shall not declare, pay or set apart funds for any dividends or other
distributions (other than in Common Stock or other Junior Stock) with respect
to any Common Stock or other Junior Stock of the Corporation unless and until
full cumulative dividends have been or contemporaneously are declared and paid
(or declared and a sum sufficient for the payment thereof set apart for such
payment on the next scheduled Dividend Payment Date) on the Cumulative
Preferred Stock through the immediately preceding Dividend Period.
(c) Notwithstanding that a lesser or no vote may be required by
law or the Fifth Restated Certificate of Incorporation, and in addition to any
vote required by law or the Fifth Restated Certificate of Incorporation, the
Corporation shall not, directly or indirectly, without the affirmative vote,
or the written consent pursuant to Section 228 of the GCL (or any successor
provision), of the holders of two-thirds of the outstanding shares of the
Series A Preferred Stock and Series B Preferred Stock, voting together as a
class, separately from any other class, repurchase, redeem or otherwise
acquire or set apart funds for the repurchase, redemption or other acquisition
of, any shares of Junior Stock or options, warrants or other rights to acquire
Junior Stock. Notwithstanding the foregoing, the Corporation shall be entitled
at any time and from time to time to redeem in full all or any portion of the
outstanding shares of the Parity Stock.
<PAGE>
10
(d) Any reference to "dividends" or "distributions" in Section 2
or this Section 3 shall not be deemed to include any distribution made in
connection with any voluntary or involuntary dissolution, liquidation or
winding up of the Corporation.
4. Liquidation.
(a) In the event of any liquidation, dissolution or winding up
of the Corporation, whether voluntary or involuntary, the holders of shares of
the Cumulative Preferred Stock shall be entitled to receive for each share
thereof, out of the assets of the Corporation legally available for
distribution to shareholders under applicable law, or the proceeds thereof,
before any payment or distribution of the assets shall be made to holders of
shares of Common Stock or any other Junior Stock (subject to the rights of the
Corporation's general creditors), liquidating distributions in the amount of
the Liquidation Value, without interest. All accumulated arrears and accruals
of unpaid dividends (whether or not declared) paid by the Corporation pursuant
to this Section 4(a) shall be paid by the Corporation in cash.
(b) If the amounts available for distribution in respect of
shares of the Cumulative Preferred Stock and any outstanding Parity Stock are
not sufficient to satisfy the full liquidation rights of all of the
outstanding shares of the Cumulative Preferred Stock and such Parity Stock,
then the holders of such outstanding shares shall share ratably in any such
distribution of assets in proportion to the full respective preferential
amounts to which they are entitled. After payment of the full amount of the
liquidating distribution to which they are entitled, the holders of shares of
the Cumulative Preferred Stock will not be entitled to any further
<PAGE>
11
participation in any liquidating distribution of assets by the Corporation.
All distributions made in respect of the Cumulative Preferred Stock in
connection with such a liquidation, dissolution or winding up of the
Corporation shall be made pro rata to the holders entitled thereto.
(c) Neither the consolidation, merger or other business
combination of the Corporation with or into any other person, nor the sale of
all or substantially all of the assets of the Corporation shall be deemed to
be a liquidation, dissolution or winding up of the Corporation for purposes of
this Section 4.
5. Optional Redemption.
(a) The Corporation may redeem, at its option, (x) at any time,
so long as DROF Holdings or the Pledgee is the sole holder of the Series A
Preferred Stock, or (y) at any time after the fifth anniversary of the
Original Issue Date, if DROF Holdings or the Pledgee is not the sole holder of
the Series A Preferred Stock, in the manner provided in Section 5(e), from any
source of funds legally available therefor, any or all of the shares of the
Series A Preferred Stock, at a redemption price (the "Series A Redemption
Price") equal to the Liquidation Value, including an amount equal to all
arrears and accruals of unpaid dividends, payable in accordance with the
following sentence, to the date fixed by the Corporation for redemption
thereof (the "Series A Redemption Date"). With respect to any shares of Series
A Preferred Stock being redeemed on any Series A Redemption Date occurring on
or before the Relevant Date, (x) the portion of the Series A Redemption Price
equal to any accrued and unpaid dividends payable thereon pursuant to Section
2(a) shall be paid by the Corporation in cash and (y) the portion of the
Series A Redemption Price
<PAGE>
12
equal to any accrued and unpaid dividends payable thereon pursuant to Section
2(b) shall be paid by the Corporation in shares of Series B Preferred Stock.
With respect to any shares of Series A Preferred Stock being redeemed on any
Series A Redemption Date occurring on or after the Relevant Date, the portion
of the Series A Redemption Price equal to any accrued and unpaid dividends
payable thereon pursuant to Sections 2(a) and 2(b) shall be paid by the
Corporation in cash.
(b) On each Series A Redemption Date, immediately following the
redemption of the Series A Preferred Stock on such Series A Redemption Date, a
number of shares of Series B Preferred Stock equal to the Contributed Amount
shall be deemed contributed to the capital of the Corporation, without further
action by the Corporation or any holder of the Cumulative Preferred Stock or
any payment therefor, and such shares of Series B Preferred Stock shall be
retired and cancelled. Shares of Series B Preferred Stock deemed contributed
to the capital of the Corporation pursuant to this Section 5(b) shall be
deemed so contributed pro rata among all holders of Series B Preferred Stock.
(c) If the Full Redemption Date occurs or the Payment
Obligations have been Fully Satisfied, in either case, on or before the
Relevant Date, all outstanding shares of Series B Preferred Stock shall be
deemed contributed to the capital of the Corporation, without further action
by the Corporation or any holder of the Cumulative Preferred Stock or any
payment therefor, and such shares of Series B Preferred Stock shall be retired
and canceled.
(d) The Corporation may redeem, at its option, (x) at any time,
so long as DROF Holdings or the Pledgee is the sole holder of the Series B
<PAGE>
13
Preferred Stock, or (y) at any time after the fifth anniversary of the
Original Issue Date, if DROF Holdings or the Pledgee is not the sole holder of
the Series B Preferred Stock, in the manner provided in Section 5(f), from any
source of funds legally available therefor, any or all of the shares of the
Series B Preferred Stock, at a redemption price (the "Series B Redemption
Price") equal to the Liquidation Value, including an amount equal to all
arrears and accruals of unpaid dividends, payable in cash, to the date fixed
by the Corporation for redemption thereof (the "Series B Redemption Date").
(e) At least (x) three Business Days before a Series A
Redemption Date, if DROF Holdings or the Pledgee is the sole holder of the
Series A Preferred Stock, and (y) thirty (30) Business Days before a Series A
Redemption Date, if DROF Holdings or the Pledgee is not the sole holder of the
Series A Preferred Stock, and, in each case, not more than sixty (60) days
before a Series A Redemption Date, the Corporation shall deliver (by first
class mail, postage prepaid, or telecopy) a notice of redemption (the "Series
A Redemption Notice") to the holders of record of shares so to be redeemed at
each such holder's address as it appears on the stock register of the
Corporation (with a copy to the Pledgee and to each holder of Series B
Preferred Stock whose shares are being deemed contributed to capital at such
holder's address as it appears on the stock register of the Corporation);
provided, that no failure to give such notice nor any defect therein shall
affect the validity of the procedures for the redemption of any shares of the
Series A Preferred Stock to be redeemed or the shares of the Series B
Preferred Stock to be deemed contributed except as to the holder or holders to
whom the Corporation has failed to give said
<PAGE>
14
notice or except as to the holder or holders whose notice was defective. Each
Series A Redemption Notice shall state:
(i) that the Corporation is exercising its option to redeem
the Series A Preferred Stock;
(ii) the Series A Redemption Price;
(iii) whether all or less than all of the then outstanding
shares of the Series A Preferred Stock are to be redeemed and the total number
of shares of the Series A Preferred Stock being redeemed;
(iv) the number of shares of Series A Preferred Stock held
by such holder that the Corporation intends to redeem;
(v) the Series A Redemption Date;
(vi) the number of shares of Series B Preferred Stock held
by such holder that will be deemed contributed to the capital of the
Corporation pursuant to Section 5(b) or 5(c) on such Series A Redemption Date;
and
(vii) the place or places where certificates representing
the shares of Series A Preferred Stock to be redeemed are to be surrendered
for payment of the Series A Redemption Price and where certificates
representing the shares of Series B Preferred Stock to be deemed contributed
to the capital of the Corporation are to be surrendered for cancellation.
(f) At least (x) three Business Days before a Series B
Redemption Date, if DROF Holdings or the Pledgee is the sole holder of the
Series B Preferred Stock, and (y) thirty (30) Business Days before a Series B
Redemption Date, if DROF Holdings or the Pledgee is not the sole holder of the
Series B
<PAGE>
15
Preferred Stock, and, in each case, not more than sixty (60) days before a
Series B Redemption Date, the Corporation shall deliver (by first class mail,
postage prepaid, or telecopy) a notice of redemption (the "Series B Redemption
Notice") to the holders of record of shares so to be redeemed at each such
holder's address as it appears on the stock register of the Corporation (with
a copy to the Pledgee); provided, that no failure to give such notice nor any
defect therein shall affect the validity of the procedures for the redemption
of any shares of the Series B Preferred Stock to be redeemed except as to the
holder or holders to whom the Corporation has failed to give said notice or
except as to the holder or holders whose notice was defective.
Each Series B Redemption Notice shall state:
(i) that the Corporation is exercising its option to redeem
the Series B Preferred Stock;
(ii) the Series B Redemption Price;
(iii) whether all or less than all of the then outstanding
shares of the Series B Preferred Stock are to be redeemed and the total number
of shares of the Series B Preferred Stock being redeemed;
(iv) the number of shares of Series B Preferred Stock held
by such holder that the Corporation intends to redeem;
(v) the Series B Redemption Date; and
(vi) the place or places where certificates representing the
shares of Series B Preferred Stock to be redeemed are to be surrendered for
payment of the Series B Redemption Price.
<PAGE>
16
(g) If the Payment Obligations shall be Fully Satisfied on or
before the Relevant Date, the Corporation shall deliver (by first class mail,
postage prepaid, or telecopy) notice thereof (the "Payment Notice") to all of
the holders of record of shares of the Series B Preferred Stock at each such
holder's address as it appears on the stock register of the Corporation, which
Payment Notice shall state (i) that the Payment Obligations have been Fully
Satisfied and (ii) the date when, and the place or places where, certificates
representing the shares of Series B Preferred Stock to be deemed contributed
to the capital of the Corporation in accordance with Section 5(c) are to be
surrendered for cancellation and retirement.
(h) In the event of a redemption pursuant to Section 5(a) or
5(d) of less than all of the outstanding shares of the Series A Preferred
Stock or the Series B Preferred Stock, as the case may be, the shares to be
redeemed will be selected pro rata or by lot.
(i) Each holder of shares of the Cumulative Preferred Stock
called for redemption shall surrender the certificate or certificates
representing such shares of Cumulative Preferred Stock to the Corporation,
duly endorsed, in the manner and at the place designated in the Redemption
Notice delivered with respect thereto. On each Redemption Date, the full
Redemption Price for the shares called for redemption shall be payable in cash
(or, to the extent provided in Sections 5(a) and 5(d) above, in shares of
Series B Preferred Stock) to the person whose name appears on such certificate
or certificates as the owner thereof, and each surrendered certificate shall
be canceled and retired. In the event that less than all of the shares
represented by any such certificate are redeemed, a new certificate shall be
issued by
<PAGE>
17
the Corporation, at its expense, representing the unredeemed shares. If any
certificate or certificates representing shares of the Cumulative Preferred
Stock held by DROF Holdings or the Pledgee called for redemption pursuant to
this Section 5 are not surrendered by the holder thereof to the Corporation as
required by this Section 5(i), then, so long as the full Redemption Price for
such shares has been paid to the holder thereof, such certificate or
certificates shall be deemed to have been surrendered and such shares shall,
as of the Redemption Date therefor, be cancelled and retired on the books of
the Corporation.
(j) Each holder of shares of the Series B Preferred Stock deemed
contributed to the capital of the Corporation pursuant to Section 5(b) or
Section 5(c) shall surrender the certificate or certificates representing such
shares of Series B Preferred Stock to the Corporation in the manner and at the
place designated in each Series A Redemption Notice or Payment Notice, as
applicable. On the Series A Redemption Date specified in such Series A
Redemption Notice, or on the date specified in the Payment Notice, as
applicable, each surrendered certificate representing such shares of Series B
Preferred Stock shall be canceled and retired. In the event that less than all
of the shares represented by any such certificate are deemed contributed to
the capital of the Corporation pursuant to Section 5(b), a new certificate
shall be issued by the Corporation, at its expense, representing the shares
that are not deemed contributed to the capital of the Corporation. If any
certificate or certificates representing shares of the Series B Preferred
Stock held by DROF Holdings or the Pledgee deemed contributed to the capital
of the Corporation pursuant to Section 5(b) or 5(c) are not surrendered by the
holder thereof to the Corporation as
<PAGE>
18
required by this Section 5(j), then, so long as either (x) the full Series A
Redemption Price is paid to the holder (or holders) of the Series A Preferred
Stock on or prior to the Series A Redemption Date on which the Series B
Preferred Stock is being deemed contributed to the capital of the Corporation
or (y) the Payment Obligations have been Fully Satisfied, such certificate or
certificates shall be deemed to have been surrendered and such shares shall,
as of the Series A Redemption Date or the date set forth in the Payment
Notice, as applicable, be cancelled and retired on the books of the
Corporation.
(k) Unless the Corporation defaults in the payment of the
Redemption Price, dividends on the shares of the Cumulative Preferred Stock
called for redemption and on shares of the Series B Preferred Stock deemed
contributed to the capital of the Corporation pursuant to this Section 5 in
connection with any redemption of Series A Preferred Stock or as a result of
the Payment Obligations being Fully Satisfied, as the case may be, shall cease
to accrue on the Redemption Date, or on the date specified in the Payment
Notice, as applicable, and the holders of such redeemed shares and contributed
shares shall cease to have any further rights as stockholders of the
Corporation on the Redemption Date, or on the date specified in the Payment
Notice, as applicable, other than, in the case of any such shares called for
redemption, the right to receive the Redemption Price therefor. If there is
any such default in payment, then such dividends shall continue to accrue and
the holders of such shares shall continue to have all rights as stockholders
of the Corporation (in each case as though no such redemption or attempted
redemption or contribution had been made).
<PAGE>
19
6. Voting Rights.
(a) The holders of record of shares of the Cumulative Preferred
Stock shall not be entitled to any voting rights except (x) as expressly set
forth in this Certificate of Designation and (y) as required by the GCL. In
any vote by the holders of the Cumulative Preferred Stock acting as a class,
every holder of Cumulative Preferred Stock shall be entitled to one vote for
each full share, and a fraction of a vote equal to the fraction of a share for
each fractional share, of the Cumulative Preferred Stock held by such holder.
(b) (i) If (x) at any time or times dividends payable on the
Series A Preferred Stock and the Series B Preferred Stock shall be in arrears
and shall not be paid in full for four Dividend Periods, whether or not
consecutive, or (y) a Bankruptcy Event shall have occurred and be continuing,
then the number of directors constituting the Board of Directors, without
further action, shall be increased by two and the holders of the Series A
Preferred Stock and the Series B Preferred Stock shall have the exclusive
right, voting together as a class, separately from any other class, at any
annual meeting of stockholders, or special meeting called as hereinafter
provided, or by action taken by written consent pursuant to Section 228 of the
GCL (or any successor provision) to elect two directors of the Corporation.
Such voting rights shall terminate (A) when all arrears in dividends on shares
of the Series A Preferred Stock and the Series B Preferred Stock, then
outstanding shall have been paid and dividends thereon for the then current
Dividend Period shall have been paid or declared and set apart for payment on
the next scheduled Dividend Payment Date or (B) in the case of a Bankruptcy
Event, when such Bankruptcy Event shall no longer
<PAGE>
20
be continuing; subject, however, to revesting of such voting rights in the
event of each and every subsequent failure of the Corporation to pay dividends
for the requisite number of periods as described above or the occurrence and
continuance of a Bankruptcy Event.
(ii) In addition to the voting rights provided in Section
6(b)(i) above, if any shares of the Cumulative Preferred Stock are outstanding
on or after the tenth anniversary of the Original Issue Date, then the number
of directors constituting the Board of Directors, without further action,
shall be increased by two and the holders of the Series A Preferred Stock and
the Series B Preferred Stock shall have the exclusive right, voting together
as a class, separately from any other class, at any annual meeting of
stockholders, or special meeting called as hereinafter provided, or by action
taken by written consent pursuant to Section 228 of the GCL (or any successor
provision) to elect two directors of the Corporation. Such voting rights shall
terminate when no shares of Cumulative Preferred Stock are outstanding.
(iii) At any time after such voting rights shall have vested in
the holders of the Cumulative Preferred Stock, the Secretary of the
Corporation may, and upon the written request of any holder of record of the
Cumulative Preferred Stock then outstanding shall, call a special meeting of
holders of the Cumulative Preferred Stock for the election of the directors to
be elected by such holders as hereinabove provided, such call to be made by
notice similar to that provided in the by-laws of the Corporation for a
special meeting of the stockholders or as required by law. Such meeting shall
be held at the earliest practicable date, at
<PAGE>
21
the place specified in the by-laws of the Corporation for holding annual
meetings of stockholders of the Corporation, or, if none is so specified, at
such place as shall be specified in the notice of the meeting.
(iv) At any meeting held for the purpose of electing directors
at which the holders of the Cumulative Preferred Stock shall have the right to
elect directors as provided in this Section 6(b), the presence, in person or
by proxy, of the holders of at least a majority of the then outstanding shares
of the Cumulative Preferred Stock shall be required and shall be sufficient to
constitute a quorum of such class for the election of directors by such
shares.
(v) During any period that the holders of the Series A Preferred
Stock and the Series B Preferred Stock have the right to vote together as a
class, separately from any other class, for directors as provided in this
Section 6(b), (I) the directors so elected by the holders of the Cumulative
Preferred Stock shall continue in office until the earliest of the next
succeeding annual meeting, the election and qualification of such directors'
successors and the termination of the right of the holders of the Cumulative
Preferred Stock to vote separately as a class for directors as provided in
this Section 6(b), and (II) in the event of any vacancy occurring with respect
to the directors so elected, the holders of the Cumulative Preferred Stock
then outstanding may, at a special meeting called as provided in Section
6(b)(iii) above, elect a successor to hold office for the unexpired term of
the director whose place shall be vacant. Whenever the special voting power
vested in the holders of the Cumulative Preferred Stock shall have been
terminated, the term of office of the directors so elected by the holders of
the Cumulative Preferred Stock shall terminate
<PAGE>
22
forthwith and the number of directors shall be such number provided pursuant
to the by-laws of the Corporation irrespective of any increase made pursuant
to the provisions of Section 6(b)(i) or 6(b)(ii) above.
7. No Reissuance of Cumulative Preferred Stock. Shares of Cumulative
Preferred Stock redeemed, purchased or otherwise acquired by the Corporation
or deemed contributed to the capital of the Corporation shall be retired and
restored to the status of authorized but unissued shares of Preferred Stock,
undesignated as to series, and shall not be reissued as shares of Cumulative
Preferred Stock.
8. Informational Requirements. For so long as any shares of the
Cumulative Preferred Stock remain outstanding, the Corporation shall deliver
to each record holder of the Cumulative Preferred Stock copies of all
documents and reports specified in Section 13 or 15(d) of the Securities
Exchange Act of 1934, as amended, as being required of issuers subject to such
reporting requirements (whether or not the Corporation would be required to
file such reports with the Securities and Exchange Commission (the "SEC") in
the absence of the requirements of this Section 8) within 15 days after it
files (or would have been required to file) such information, documents or
reports with the SEC.
9. Action by Committee of Board of Directors. To the extent permitted
by the rules and regulations of the GCL or any other applicable law, any
action specified herein as being authorized or required to be taken by the
Board of Directors may be taken by a duly authorized committee thereof.
<PAGE>
23
ARTICLE II
Definitions
As used in this Certificate of Designation, the following terms shall
have the following meanings (with terms defined in the singular having
comparable meanings when used in the plural and vice versa), unless the
context otherwise requires:
"Bankruptcy Event" means the occurrence of any of the following
events: the Corporation shall generally not pay its debts as such debts become
due as determined by the Board of Directors, or shall admit in writing its
inability to pay its debts generally, or shall make a general assignment for
the benefit of creditors; or any proceeding shall be instituted by or against
the Corporation seeking to adjudicate it bankrupt or insolvent, or seeking
liquidation, winding up, reorganization, arrangement, adjustment, protection,
relief, or composition of it or its debts under any law relating to
bankruptcy, insolvency or reorganization or relief of debtors, or seeking the
entry of an order for relief or the appointment of a receiver, trustee,
custodian or other similar official for it or for any substantial part of its
property and, in the case of such proceeding instituted against it (but not
instituted by it), either such proceeding shall remain undismissed or unstayed
for a period of 45 days, or any of the actions sought in such proceeding
(including, without limitation, the entry of an order for relief against, or
the appointment of a receiver, trustee, custodian or other similar official
for, it or for any substantial part of its property) shall occur; or the
Corporation shall take any corporate action to authorize any of the actions
set forth above in this definition.
<PAGE>
24
"Business Day" means a day of the year on which banks are not
required or authorized by law to close in Charlotte, North Carolina or New
York, New York.
"Contributed Amount" means, with respect to any redemption of any
Series A Preferred Stock on any Series A Redemption Date, the difference
between (x) the aggregate number of shares of Series B Preferred Stock
outstanding after giving effect to such redemption (including any Series B
Preferred Stock issued in payment of a portion of the Redemption Price with
respect thereto) and (y) the product of (A) the aggregate number of shares of
Series A Preferred Stock outstanding after giving effect to such redemption
and (B) the Dividend Amount.
"Cost of Funds Rate" means (x) until such time as the Payment
Obligations have been Fully Satisfied, the daily weighted average cost of
funds to DROF Holdings under the Credit Agreement, dated as of September 27,
1996, between DROF Holdings and First Gibraltar Holdings Inc. (as it may be
amended from time to time in accordance with the terms thereof, the "DROF
Credit Agreement"), excluding any additional interest that may be due and
payable under the DROF Credit Agreement solely as a result of any default
thereunder and (y) after the date on which the Payment Obligations have been
Fully Satisfied (the "Repayment Date"), the Ninety Day LIBO Rate from time to
time in effect plus 4 1/2%.
"Dividend Amount" means, as of any Series A Redemption Date, the sum
of (x) the aggregate number of shares of Series B Preferred Stock that accrued
as dividends in respect of one share of Series A Preferred Stock in accordance
with Section 2(b) (assuming that the Corporation had elected to pay such
dividends in
<PAGE>
25
shares of Series B Preferred Stock) during the period (the "Measurement
Period") from the Original Issue Date to and including such Series A
Redemption Date (such aggregate number of shares of Series B Preferred Stock,
the "Initial B Shares") plus (y) the aggregate number of shares of Series B
Preferred Stock that accrued as dividends in respect of the Initial B Shares
outstanding during the Measurement Period.
"Dividend Period" means the period from the Original Issue Date to
the first Dividend Payment Date, and each quarterly period between consecutive
Dividend Payment Dates.
"DROF Holdings" means DROF Holdings Inc., a Delaware corporation.
"First Gibraltar Credit Agreement" means the Credit Agreement, dated
as of September 27, 1996, among First Gibraltar Holdings Inc., a Delaware
corporation, First Gibraltar Guarantor Corp., a Delaware corporation, the
banks, financial and other institutional lenders named therein (the
"Lenders"), NationsBank, N.A., as administrative agent for the Lenders (in
such capacity and, including any successor administrative agent under the
First Gibraltar Credit Agreement, the "Administrative Agent"), NationsBanc
Capital Markets, Inc., as syndication agent for the Lenders, and Citibank,
N.A., as documentation agent for the Lenders, as it may be amended from time
to time in accordance with the terms thereof.
"Full Redemption Date" means the Redemption Date on which the
Corporation, in accordance with Section 5 hereof, redeems shares of the Series
A Preferred Stock having (together with any shares of Series A Preferred Stock
<PAGE>
26
previously redeemed in accordance with such Section 5) an aggregate stated
liquidation value of $150,000,000.
"Fully Satisfied" shall have the meaning set forth in the First
Gibraltar Credit Agreement.
"Guaranty and Pledge" means the Non-Recourse Guaranty and Pledge
Agreement, dated as of September 27, 1996, from DROF Holdings to the
Administrative Agent, as it may be amended from time to time in accordance
with the terms thereof.
"Initial Ninety Day Period" means the initial ninety (90) day period
commencing on the Repayment Date.
"Ninety Day LIBO Rate" means, with respect to (x) the Initial Ninety
Day Period and (y) each succeeding ninety (90) day period, the arithmetic mean
of the respective rates per annum (rounded upwards if necessary to the nearest
1/16 of 1%) of the offered rate of dollar deposits which appear on the Reuters
Screen LIBO Page as of 11:00 a.m. London time, two Business Days prior to the
first day of such ninety (90) day period for a period comparable to such
ninety (90) day period. The term "Reuters Screen LIBO Page" means the display
screen designated "LIBO Page" on the Reuters Monitor Money Rates Services (or
such other page as may replace such page on such service for the purpose of
displaying comparable rates).
"Payment Obligations" shall have the meaning set forth in the First
Gibraltar Credit Agreement.
"Pledgee" means the Administrative Agent so long as the pledge and
security interest granted by DROF Holdings to the Administrative Agent under
the
<PAGE>
27
Guaranty and Pledge shall not have been terminated. All notices to be
delivered to the Pledgee under this Certificate of Designation shall be sent
to the Administrative Agent at its address set forth in the First Gibraltar
Credit Agreement or such other address as may from time to time be provided to
the Corporation by or on behalf of the Pledgee.
"Redemption Date" means the Series A Redemption Date or the Series B
Redemption Date, as the case may be.
"Redemption Notice" means the Series A Redemption Notice or the
Series B Redemption Notice, as the case may be.
"Redemption Price" means the Series A Redemption Price or the Series
B Redemption Price, as the case may be.
"Relevant Date" means,
(i) for purposes of Sections 2(b) and 2(c) and the last sentence
of Section 5(a), January 1, 2000; and
(ii) for purposes of the second sentence of Section 5(a) and
Sections 5(c) and 5(g), December 31, 1999
; provided, however, that in the event California Federal Bank (f/k/a First
Nationwide Bank), A Federal Savings Bank, or any of its Subsidiaries (as
defined in the First Gibraltar Credit Agreement), shall at any time issue or
sell any "REIT Preferred" capital stock, then from and after such date of
issuance or sale, the date set forth in clause (i) above shall be changed to
"January 1, 1999" and the date set forth in clause (ii) above shall be changed
to "December 31, 1998."
<PAGE>
28
IN WITNESS WHEREOF, First Nationwide Holdings Inc. has caused this
Amended Certificate of Designation to be signed in its name and on its behalf
this 17th day of January, 1997 by its duly authorized officer.
FIRST NATIONWIDE HOLDINGS INC.
By: /s/ Glenn P. Dickes
---------------------------
Name: Glenn P. Dickes
Title: Vice President
<PAGE>
BY-LAWS
OF
FIRST NATIONWIDE HOLDINGS INC.
(hereinafter called the "Corporation")
ARTICLE I
OFFICES
-------
Section 1. Registered Office. The registered office of the Corporation
shall be in the City of Dover, County of Kent, State of Delaware.
Section 2. Other Offices. The Corporation may also have offices at such
other places both within and without the State of Delaware as the Board of
Directors may from time to time determine.
ARTICLE II
MEETINGS OF STOCKHOLDERS
------------------------
Section 1. Place of Meetings. Meetings of the stockholders for the
election of directors or for any other purpose shall be held at such time and
place, either within or without the State of Delaware as shall be designated
from time to time by the Board of Directors and stated in the notice of the
meeting or in a duly executed waiver of notice thereof.
<PAGE>
Section 2. Annual Meetings. The Annual Meetings of Stockholders shall be
held on such date and at such time as shall be designated from time to time by
the Board of Directors and stated in the notice of the meeting, at which
meetings the stockholders shall elect by a plurality vote a Board of
Directors, and transact such other business as may properly be brought before
the meeting. Written notice of the Annual Meeting stating the place, date and
hour of the meeting shall be given to each stockholder entitled to vote at
such meeting not less than ten nor more than sixty days before the date of the
meeting.
Section 3. Special Meetings. Unless otherwise prescribed by law or by the
Certificate of Incorporation, Special Meetings of Stockholders, for any
purpose or purposes, may be called by either (i) the Chairman, if there be
one, or (ii) the President, (iii) any Vice President, if there be one, (iv)
the Secretary or (v) any Assistant Secretary, if there be one, and shall be
called by any such officer at the request in writing of a majority of the
Board of Directors or at the request in writing of stockholders owning a
majority of the capital stock of the Corporation issued and outstanding and
entitled to vote. Such request shall state the purpose
2
<PAGE>
or purposes of the proposed meeting. Written notice of a Special Meeting
stating the place, date and hour of the meeting and the purpose or purposes
for which the meeting is called shall be given not less than ten nor more than
sixty days before the date of the meeting to each stockholder entitled to vote
at such meeting.
Section 4. Quorum. Except as otherwise provided by law or by the
Certificate of Incorporation, the holders of a majority of the capital stock
issued and outstanding and entitled to vote thereat, present in person or
represented by proxy, shall constitute a quorum at all meetings of the
stockholders for the transaction of business. If, however, such quorum shall
not be present or represented at any meeting of the stockholders, the
stockholders entitled to vote thereat, present in person or represented by
proxy, shall have power to adjourn the meeting from time to time, without
notice other than announcement at the meeting, until a quorum shall be present
or represented. At such adjourned meeting at which a quorum shall be present
or represented, any business may be transacted which might have been
transacted at the meeting as originally noticed. If the adjournment is for
more than thirty days, or if after the adjournment a new record date is fixed
for the adjourned
3
<PAGE>
meeting, a notice of the adjourned meeting shall be given to each stockholder
entitled to vote at the meeting.
Section 5. Voting. Unless otherwise required by law, the Certificate of
Incorporation or these ByLaws, any question brought before any meeting of
stockholders shall be decided by the vote of the holders of a majority of the
stock represented and entitled to vote thereat. Each stockholder represented
at a meeting of stockholders shall be entitled to cast one vote for each share
of the capital stock entitled to vote thereat held by such stockholder. Such
votes may be cast in person or by proxy but no proxy shall be voted on or
after three years from its date, unless such proxy provides for a longer
period. The Board of Directors, in its discretion, or the officer of the
Corporation presiding at a meeting of stockholders, in his discretion, may
require that any votes cast at such meeting shall be cast by written ballot.
Section 6. Consent of Stockholders in Lieu of Meeting. Unless otherwise
provided in the Certificate of Incorporation, any action required or permitted
to be taken at any Annual or Special Meeting of Stockholders of the
Corporation, may be taken without a meeting, without
4
<PAGE>
prior notice and without a vote, if a consent in writing, setting forth the
action so taken, shall be signed by the holders of outstanding stock having
not less than the minimum number of votes that would be necessary to authorize
or take such action at a meeting at which all shares entitled to vote thereon
were present and voted. Prompt notice of the taking of the corporate action
without a meeting by less than unanimous written consent shall be given to
those stockholders who have not consented in writing.
Section 7. List of Stockholders Entitled to Vote. The officer of the
Corporation who has charge of the stock ledger of the Corporation shall
prepare and make, at least ten days before every meeting of stockholders, a
complete list of the stockholders entitled to vote at the meeting, arranged in
alphabetical order, and showing the address of each stockholder and the number
of shares registered in the name of each stockholder. Such list shall be open
to the examination of any stockholder, for any purpose germane to the meeting,
during ordinary business hours, for a period of at least ten days prior to the
meeting, either at a place within the city where the meeting is to be held,
which place shall be specified in the notice of the meeting, or, if not so
specified, at
5
<PAGE>
the place where the meeting is to be held. The list shall also be produced and
kept at the time and place of the meeting during the whole time thereof, and
may be inspected by any stockholder of the Corporation who is present.
Section 8. Stock Ledger. The stock ledger of the Corporation shall be the
only evidence as to who are the stockholders entitled to examine the stock
ledger, the list required by Section 7 of this Article II or the books of the
Corporation, or to vote in person or by proxy at any meeting of stockholders.
ARTICLE III
DIRECTORS
---------
Section 1. Number and Election of Directors. The Board of
Directors shall consist of not less than one nor more than fifteen members,
the exact number of which shall initially be fixed by the Incorporator and
thereafter from time to time by the Board of Directors. Except as provided in
Section 2 of this Article, directors shall be elected by a plurality of the
votes cast at Annual Meetings of Stockholders, and each director so elected
shall hold office until the next Annual Meeting and until his successor is
duly elected and qualified, or until his
6
<PAGE>
earlier resignation or removal. Any director may resign at any time upon
notice to the Corporation. Directors need not be stockholders.
Section 2. Vacancies. Vacancies and newly created directorships resulting
from any increase in the authorized number of directors may be filled by a
majority of the directors then in office, though less than a quorum, or by a
sole remaining director, and the directors so chosen shall hold office until
the next annual election and until their successors are duly elected and
qualified, or until their earlier resignation or removal.
Section 3. Duties and Powers. The business of the Corporation shall be
managed by or under the direction of the Board of Directors which may exercise
all such powers of the Corporation and do all such lawful acts and things as
are not by statute or by the Certificate of Incorporation or by these By-Laws
directed or required to be exercised or done by the stockholders.
Section 4. Meetings. The Board of Directors of the Corporation may hold
meetings, both regular and special, either within or without the State of
Delaware. Regular meetings of the Board of Directors may be held without
notice at such time and at such place as may from time to time be determined
by the Board of Directors.
7
<PAGE>
Special meetings of the Board of Directors may be called by the Chairman, if
there be one, the President, or any directors. Notice thereof stating the
place, date and hour of the meeting shall be given to each director either by
mail not less than forty-eight (48) hours before the date of the meeting, by
telephone or telegram on twenty-four (24) hours' notice, or on such shorter
notice as the person or persons calling such meeting may deem necessary or
appropriate in the circumstances.
Section 5. Quorum. Except as may be otherwise specifically provided by
law, the Certificate of Incorporation or these By-Laws, at all meetings of the
Board of Directors, a majority of the entire Board of Directors shall
constitute a quorum for the transaction of business and the act of a majority
of the directors present at any meeting at which there is a quorum shall be
the act of the Board of Directors. If a quorum shall not be present at any
meeting of the Board of Directors, the directors present thereat may adjourn
the meeting from time to time, without notice other than announcement at the
meeting, until a quorum shall be present.
8
<PAGE>
Section 6. Actions of Board. Unless otherwise provided by the Certificate
of Incorporation or these ByLaws, any action required or permitted to be taken
at any meeting of the Board of Directors or of any committee thereof may be
taken without a meeting, if all the members of the Board of Directors or
committee, as the case may be, consent thereto in writing, and the writing or
writings are filed with the minutes of proceedings of the Board of Directors
or committee.
Section 7. Meetings by Means of Conference Telephone. Unless otherwise
provided by the Certificate of Incorporation or these By-Laws, members of the
Board of Directors of the Corporation, or any committee designated by the
Board of Directors, may participate in a meeting of the Board of Directors or
such committee by means of a conference telephone or similar communications
equipment by means of which all persons participating in the meeting can hear
each other, and participation in a meeting pursuant to this Section 7 shall
constitute presence in person at such meeting.
Section 8. Committees. The Board of Directors may designate one or more
committees, each committee to consist of one or more of the directors of the
Corpora- tion. The Board of Directors may designate one or more
9
<PAGE>
directors as alternate members of any committee, who may replace any absent or
disqualified member at any meeting of any such committee. In the absence or
disqualification of a member of a committee, and in the absence of a
designation by the Board of Directors of an alternate member to replace the
absent or disqualified member, the member or members thereof present at any
meeting and not disqualified from voting, whether or not he or they constitute
a quorum, may unanimously appoint another member of the Board of Directors to
act at the meeting in the place of any absent or disqualified member. Any
committee, to the extent allowed by law and provided in the resolution
establishing such committee, shall have and may exercise all the powers and
authority of the Board of Directors in the management of the business and
affairs of the Corporation. Each committee shall keep regular minutes and
report to the Board of Directors when required.
Section 9. Compensation. The directors may be paid their expenses, if
any, of attendance at each meet- ing of the Board of Directors and may be paid
a fixed sum for attendance at each meeting of the Board of Directors or a
stated salary as director. No such payment shall preclude any director from
serving the Corporation in any
10
<PAGE>
other capacity and receiving compensation therefor. Members of special or
standing committees may be allowed like compensation for attending committee
meetings.
Section 10. Interested Directors. No contract or transaction between the
Corporation and one or more of its directors or officers, or between the
Corporation and any other corporation, partnership, association, or other
organization in which one or more of its directors or officers are directors
or officers, or have a financial interest, shall be void or voidable solely
for this reason, or solely because the director or officer is present at or
participates in the meeting of the Board of Directors or committee thereof
which authorizes the contract or transaction, or solely because his or their
votes are counted for such purpose if (i) the material facts as to his or
their relationship or interest and as to the contract or transaction are
disclosed or are known to the Board of Directors or the committee, and the
Board of Directors or committee in good faith authorizes the contract or
transaction by the affirmative votes of a majority of the disinterested
directors, even though the disinterested directors be less than a quorum; or
(ii) the material facts as to his or their relationship or interest and as to
the contract or transaction are dis-
11
<PAGE>
closed or are known to the stockholders entitled to vote thereon, and the
contract or transaction is specifically approved in good faith by vote of the
stockholders; or (iii) the contract or transaction is fair as to the
Corporation as of the time it is authorized, approved or ratified, by the
Board of Directors, a committee thereof or the stockholders. Common or
interested directors may be counted in determining the presence of a quorum at
a meeting of the Board of Directors or of a committee which authorizes the
contract or transaction.
ARTICLE IV
OFFICERS
--------
Section 1. General. The officers of the Corporation shall be chosen by
the Board of Directors and shall be a President, a Secretary and a Treasurer.
The Board of Directors, in its discretion, may also choose a Chairman of the
Board of Directors (who must be a director) or one more Vice Presidents,
Assistant Secretaries, Assistant Treasurers and other officers. Any number of
offices may be held by the same person, unless otherwise prohibited by law,
the Certificate of Incorporation or these By-Laws. The officers of the
Corporation need not be stockholders of the Corporation nor, except in the
12
<PAGE>
case of the Chairman of the Board of Directors, need such officers be
directors of the Corporation.
Section 2. Election. The Board of Directors at its first meeting held
after each Annual Meeting of Stockholders shall elect the officers of the
Corporation who shall hold their offices for such terms and shall exercise
such powers and perform such duties as shall be determined from time to time
by the Board of Directors; and all officers of the Corporation shall hold
office until their successors are chosen and qualified, or until their earlier
resignation or removal. Any officer elected by the Board of Directors may be
removed at any time by the affirmative vote of a majority of the Board of
Directors. Any vacancy occurring in any office of the Corporation shall be
filled by the Board of Directors. The salaries of all officers of the
Corporation shall be fixed by the Board of Directors.
Section 3. Voting Securities Owned by the Corporation. Powers of
attorney, proxies, waivers of notice of meeting, consents and other
instruments relating to securities owned by the Corporation may be executed in
the name of and on behalf of the Corporation by the President or any Vice
President and any such officer may, in the name of and on behalf of the
Corporation, take all
13
<PAGE>
such action as any such officer may deem advisable to vote in person or by
proxy at any meeting of security holders of any corporation in which the
Corporation may own securities and at any such meeting shall possess and may
exercise any and all rights and power incident to the ownership of such
securities and which, as the owner thereof, the Corporation might have
exercised and possessed if present. The Board of Directors may, by resolution,
from time to time confer like powers upon any other person or persons.
Section 4. Chairman of the Board of Directors. The Chairman of the Board
of Directors, if there be one, shall preside at all meetings of the
stockholders and of the Board of Directors. He shall be the Chief Executive
Officer of the Corporation, and except where by law the signature of the
President is required, the Chairman of the Board of Directors shall possess
the same power as the President to sign all contracts, certificates and other
instruments of the Corporation which may be authorized by the Board of
Directors. During the absence or disability of the President, the Chairman of
the Board of Directors shall exercise all the powers and discharge all the
duties of the President. The Chairman of the Board of Directors shall also
perform such other duties and may
14
<PAGE>
exercise such other powers as from time to time may be assigned to him by
these By-Laws or by the Board of Directors.
Section 5. President. The President shall, subject to the control of the
Board of Directors and, if there be one, the Chairman of the Board of
Directors, have general supervision of the business of the Corporation and
shall see that all orders and resolutions of the Board of Directors are
carried into effect. He shall execute all bonds, mortgages, contracts and
other instruments of the Corporation requiring a seal, under the seal of the
Corporation, except where required or permitted by law to be otherwise signed
and executed and except that the other officers of the Corporation may sign
and execute documents when so authorized by these By-Laws, the Board of
Directors or the President. In the absence or disability of the Chairman of
the Board of Directors, or if there be none, the President shall preside at
all meetings of the stockholders and the Board of Directors. If there be no
Chairman of the Board of Directors, the President shall be the Chief Executive
Officer of the Corporation. The President shall also perform such other duties
and may exercise such other powers as from time to
15
<PAGE>
time may be assigned to him by these By-Laws or by the Board of Directors.
Section 6. Vice Presidents. At the request of the President or in his
absence or in the event of his inability or refusal to act (and if there be no
Chairman of the Board of Directors), the Vice President or the Vice Presidents
if there is more than one (in the order designated by the Board of Directors)
shall perform the duties of the President, and when so acting, shall have all
the powers of and be subject to all the restrictions upon the President. Each
Vice President shall perform such other duties and have such other powers as
the Board of Directors from time to time may prescribe. If there be no
Chairman of the Board of Directors or any Vice Chairmen of the Board of
Directors and no Vice President, the Board of Directors shall designate the
officer of the Corporation who, in the absence of the President or in the
event of the inability or refusal of the President to act, shall perform the
duties of the President, and when so acting, shall have all the powers of and
be subject to all the restrictions upon the President.
Section 7. Secretary. The Secretary shall attend all meetings of the
Board of Directors and all meetings of stockholders and record all the
proceedings
16
<PAGE>
thereat in a book or books to be kept for that purpose; the Secretary shall
also perform like duties for the standing committees when required. The
Secretary shall give, or cause to be given, notice of all meetings of the
stockholders and special meetings of the Board of Directors, and shall perform
such other duties as may be prescribed by the Board of Directors or President,
under whose supervision he shall be. If the Secretary shall be unable or shall
refuse to cause to be given notice of all meetings of the stockholders and
special meetings of the Board of Directors, and if there be no Assistant
Secretary, then either the Board of Directors or the President may choose
another officer to cause such notice to be given. The Secretary shall have
custody of the seal of the Corporation and the Secretary or any Assistant
Secretary, if there be one, shall have authority to affix the same to any
instrument requiring it and when so affixed, it may be attested by the
signature of the Secretary or by the signature of any such Assistant
Secretary. The Board of Directors may give general authority to any other
officer to affix the seal of the Corporation and to attest the affixing by his
signature. The Secretary shall see that all books, reports, statements,
certificates and other documents and records required by law to
17
<PAGE>
be kept or filed are properly kept or filed, as the case may be.
Section 8. Treasurer. The Treasurer shall have the custody of the
corporate funds and securities and shall keep full and accurate accounts of
receipts and disbursements in books belonging to the Corporation and shall
deposit all moneys and other valuable effects in the name and to the credit of
the Corporation in such depositories as may be designated by the Board of
Directors. The Treasurer shall disburse the funds of the Corporation as may be
ordered by the Board of Directors, taking proper vouchers for such
disbursements, and shall render to the President and the Board of Directors,
at its regular meetings, or when the Board of Directors so requires, an
account of all his transactions as Treasurer and of the financial condition of
the Corporation. If required by the Board of Directors, the Treasurer shall
give the Corporation a bond in such sum and with such surety or sureties as
shall be satisfactory to the Board of Directors for the faithful performance
of the duties of his office and for the restoration to the Corporation, in
case of his death, resignation, retirement or removal from office, of all
books, papers, vouchers, money and
18
<PAGE>
other property of whatever kind in his possession or under his control
belonging to the Corporation.
Section 9. Assistant Secretaries. Except as may be otherwise provided in
these By-Laws, Assistant Secretaries, if there be any, shall perform such
duties and have such powers as from time to time may be assigned to them by
the Board of Directors, the President, any Vice President, if there be one, or
the Secretary, and in the absence of the Secretary or in the event of his
disability or refusal to act, shall perform the duties of the Secretary, and
when so acting, shall have all the powers of and be subject to all the
restrictions upon the Secretary.
Section 10. Assistant Treasurers. Assistant Treasurers, if there be any,
shall perform such duties and have such powers as from time to time may be
assigned to them by the Board of Directors, the President, any Vice President,
if there be one, or the Treasurer, and in the absence of the Treasurer or in
the event of his disability or refusal to act, shall perform the duties of the
Treasurer, and when so acting, shall have all the powers of and be subject to
all the restrictions upon the Treasurer. If required by the Board of
Directors, an Assistant Treasurer shall give the Corporation a bond in
19
<PAGE>
such sum and with such surety or sureties as shall be satisfactory to the
Board of Directors for the faithful performance of the duties of his office
and for the restoration to the Corporation, in case of his death, resignation,
retirement or removal from office, of all books, papers, vouchers, money and
other property of whatever kind in his possession or under his control
belonging to the Corporation.
Section 11. Other Officers. Such other officers as the Board of Directors
may choose shall perform such duties and have such powers as from time to time
may be assigned to them by the Board of Directors. The Board of Directors may
delegate to any other officer of the Corporation the power to choose such
other officers and to prescribe their respective duties and powers.
ARTICLE V
STOCK
-----
Section 1. Form of Certificates. Every holder of stock in the Corporation
shall be entitled to have a certificate signed, in the name of the Corporation
(i) by the Chairman of the Board of Directors, the President or a Vice
President and (ii) by the Treasurer or an Assistant Treasurer, or the
Secretary or an Assistant Secre-
20
<PAGE>
tary of the Corporation, certifying the number of shares owned by him in the
Corporation.
Section 2. Signatures. Any or all of the signatures on a certificate may
be a facsimile. In case any officer, transfer agent or registrar who has
signed or whose facsimile signature has been placed upon a certificate shall
have ceased to be such officer, transfer agent or registrar before such
certificate is issued, it may be issued by the Corporation with the same
effect as if he were such officer, transfer agent or registrar at the date of
issue.
Section 3. Lost Certificates. The Board of Directors may direct a new
certificate to be issued in place of any certificate theretofore issued by the
Corporation alleged to have been lost, stolen or destroyed, upon the making of
an affidavit of that fact by the person claiming the certificate of stock to
be lost, stolen or destroyed. When authorizing such issue of a new
certificate, the Board of Directors may, in its discretion and as a condition
precedent to the issuance thereof, require the owner of such lost, stolen or
destroyed certificate, or his legal representative, to advertise the same in
such manner as the Board of Directors shall require and/or to give the
Corporation a bond
21
<PAGE>
in such sum as it may direct as indemnity against any claim that may be made
against the Corporation with respect to the certificate alleged to have been
lost, stolen or destroyed.
Section 4. Transfers. Stock of the Corporation shall be transferable in
the manner prescribed by law and in these By-Laws. Transfers of stock shall be
made on the books of the Corporation only by the person named in the
certificate or by his attorney lawfully constituted in writing and upon the
surrender of the certificate therefor, which shall be cancelled before a new
certificate shall be issued.
Section 5. Record Date. In order that the Corporation may determine the
stockholders entitled to notice of or to vote at any meeting of stockholders
or any adjournment thereof, or entitled to express consent to corporate action
in writing without a meeting, or entitled to receive payment of any dividend
or other distribution or allotment of any rights, or entitled to exercise any
rights in respect of any change, conversion or exchange of stock, or for the
purpose of any other lawful action, the Board of Directors may fix, in
advance, a record date, which shall not be more than sixty days nor less than
ten days before the date of such
22
<PAGE>
meeting, nor more than sixty days prior to any other action. A determination
of stockholders of record entitled to notice of or to vote at a meeting of
stockholders shall apply to any adjournment of the meeting; provided, however,
that the Board of Directors may fix a new record date for the adjourned
meeting.
Section 6. Beneficial Owners. The Corporation shall be entitled to
recognize the exclusive right of a person registered on its books as the owner
of shares to receive dividends, and to vote as such owner, and to hold liable
for calls and assessments a person registered on its books as the owner of
shares, and shall not be bound to recognize any equitable or other claim to or
interest in such share or shares on the part of any other person, whether or
not it shall have express or other notice thereof, except as otherwise
provided by law.
Section 7. Subchapter S Corporation Election. Until such time as holders
of a majority of the capital stock of the Corporation shall vote to terminate
the election to be treated as a Subchapter S corporation (the "Subchapter S
Election") pursuant to Section 1362 of the Internal Revenue Code of 1986, as
amended (the "Code"), the following restrictions shall apply to the
Corporation and to holders of its capital stock:
23
<PAGE>
(a) The Corporation shall not have, nor amend its Certificate of
Incorporation to authorize the issuance of, more than one class of stock. The
Corporation will not issue warrants, options, or other instruments, including
debt instruments, which could be classified as a second class of stock under
applicable treasury regulations.
(b) The Corporation shall not purchase or own stock in any other
corporation which constitutes 80% or more of the outstanding voting stock of
such other corporation or which has the ability to elect 80% or more of the
board of directors of such other corporation.
(c) The taxable year of the Corporation will be a calendar year.
(d) No stockholder may transfer, and no person may acquire, beneficial
ownership of any stock of the Corporation if such transfer or acquisition
would cause the Subchapter S Election of the Corporation to terminate.
Specifically, no transfer may be made to, and no acquisition may be made by,
any person who would cause the Corporation to have more than the maximum
number of Stockholders permitted under the provisions of Section 1361 of the
Code (which maximum is presently 35 stockholders, with spouses treated as one
stockholder for
24
<PAGE>
these purposes), or to any person that is not an eligible shareholder under
the provisions of the Code as in effect at the time of the purported transfer
(presently including non-resident aliens and any persons other than
individuals, estates and certain trusts).
(e) Any purported transfer or acquisition in violation of the provisions
of paragraph (d) of this Section 7 shall be null and void. The purported
transferee shall have no interest in any stock purported to be transferred.
Any such purported transfer shall have no effect upon the beneficial ownership
of such stock, and the Stockholder making such purported transfer shall retain
all rights relating to the stock, including the right to vote and the right to
receive dividends. In addition, the Stockholder purporting to make such
transfer shall continue to report the portion of income or loss allocated by
the Corporation in accordance with the provisions of the Code as then in
effect.
(f) Subject to any limitations on distributions imposed by statute, the
Corporation shall make pro-rata distributions of money, based upon ownership
of stock in the Corporation, sufficient to pay the stockholders' federal and
state income taxes on the income (net of any tax benefit produced for the
Stockholders by
25
<PAGE>
the Corporation's losses, deductions and credits) that passes through to the
Stockholders from the Corporation under the applicable provisions of the Code.
The Corporation shall make such payments in a timely manner to allow the tax
(including, without limitation, any estimated tax payments) attributable to
income passed through to the Stockholders from the Corporation to be paid when
due. This provision shall not be deemed to cause the total dividend to be paid
with respect to any share of stock in the Corporation to differ from the
amount paid with respect to any other outstanding share of stock of the
Corporation, nor shall it be deemed to limit the ability of the Corporation to
declare and pay additional dividends with respect to the outstanding stock.
(g) If the Corporation's S Corporation Election is terminated
inadvertently and the Corporation wishes to obtain a ruling under Section
1362(f) of the Code, each Stockholder will make any adjustments required
pursuant to Section 1362(f)(4) of the Code and approved by the Corporation's
board of directors. A Stockholder's obligation to make such adjustments shall
continue after such Stockholder has ceased to own stock in the Corporation.
26
<PAGE>
ARTICLE VI
NOTICES
-------
Section 1. Notices. Whenever written notice is required by law, the
Certificate of Incorporation or these By-Laws, to be given to any director,
member of a committee or stockholder, such notice may be given by mail,
addressed to such director, member of a committee or stockholder, at his
address as it appears on the records of the Corporation, with postage thereon
prepaid, and such notice shall be deemed to be given at the time when the same
shall be deposited in the United States mail. Written notice may also be given
personally or by telegram, telex or cable.
Section 2. Waivers of Notice. Whenever any notice is required by law, the
Certificate of Incorporation or these By-Laws, to be given to any director,
member of a committee or stockholder, a waiver thereof in writing, signed, by
the person or persons entitled to said notice, whether before or after the
time stated therein, shall be deemed equivalent thereto.
27
<PAGE>
ARTICLE VII
GENERAL PROVISIONS
------------------
Section 1. Dividends. Dividends upon the capital stock of the
Corporation, subject to the provisions of the Certificate of Incorporation, if
any, may be declared by the Board of Directors at any regular or special
meeting, and may be paid in cash, in property, or in shares of the capital
stock. Before payment of any dividend, there may be set aside out of any funds
of the Corporation available for dividends such sum or sums as the Board of
Directors from time to time, in its absolute discretion, deems proper as a
reserve or reserves to meet contingencies, or for equalizing dividends, or for
repairing or maintaining any property of the Corporation, or for any proper
purpose, and the Board of Directors may modify or abolish any such reserve.
Section 2. Disbursements. All checks or demands for money and notes of
the Corporation shall be signed by such officer or officers or such other
person or persons as the Board of Directors may from time to time designate.
Section 3. Fiscal Year. The fiscal year of the Corporation shall be fixed
by resolution of the Board of Directors.
28
<PAGE>
Section 4. Corporate Seal. The corporate seal shall have inscribed
thereon the name of the Corporation, the year of its organization and the
words "Corporate Seal, Delaware". The seal may be used by causing it or a
facsimile thereof to be impressed or affixed or reproduced or otherwise.
ARTICLE VIII
INDEMNIFICATION
---------------
Section 1. Indemnification. The Corporation shall indemnify its directors
and officers to the fullest extent authorized or permitted by law, as now or
hereafter in effect, and such right to indemnification shall continue as to a
person who has ceased to be a director or officer of the Corporation and shall
inure to the benefit of his or her heirs, executors and personal and legal
representatives; provided, however, that, except for proceedings to enforce
rights to indemnification, the Corporation shall not be obligated to indemnify
any director or officer (or his or her heirs, executors or personal or legal
representatives) in connection with a proceeding (or part thereof) initiated
by such person unless such proceeding (or part thereof) was authorized or
consented to by the Board of Directors of the Corpora-
29
<PAGE>
tion. The right to indemnification conferred by this Article XIII shall
include the right to be paid by the Corporation the expenses incurred in
defending or otherwise participating in any proceeding in advance of its final
disposition.
Section 2. Expenses Payable in Advance. The Corporation may, to the
extent authorized from time to time by the Board of Directors, provide rights
to indemnification and to the advancement of expenses to employees and agents
of the Corporation similar to those conferred in this Article VIII to
directors and officers of the Corporation.
Section 3. Nonexclusivity of Indemnification and Advancement of Expenses.
The rights to Indemnification and to the advancement of expenses conferred in
this Article VIII shall not be exclusive of any other right which any person
may have or hereafter acquire under this Certificate of Incorporation, the
By-laws, any statute, agreement, vote of stockholders or disinterested
directors or otherwise.
Section 4. Survival of Indemnification and Advancement of Expenses. Any
appeal or modification of this Article VIII shall not adversely affect any
rights to indemnification and to the advancement of expenses of
30
<PAGE>
a director or officer of the Corporation existing at the time of such repeal
or modification with respect to any acts or omissions occurring prior to such
repeal or modification.
Section 5. Limitation on Indemnification. Notwithstanding anything
contained in this Article VIII to the contrary, except for proceedings to
enforce rights to indemnification (which shall be governed by Section 5
hereof), the Corporation shall not be obligated to indemnify any director or
officer in connection with a proceeding (or part thereof) initiated by such
person unless such proceeding (or part thereof) was authorized or consented to
by the Board of Directors of the Corporation.
Section 6. Insurance. The Corporation may purchase and maintain insurance
on behalf of any person who is or was a director or officer of the
Corporation, or is or was a director or officer of the Corporation serving at
the request of the Corporation as a director, officer, employee or agent of
another corporation, partnership, joint venture, trust, employee benefit plan
or other enterprise against any liability asserted against him and incurred by
him in any such capacity, or arising out of his status as such, whether or not
the Corporation
31
<PAGE>
would have the power or the obligation to indemnify him against such liability
under the provisions of this Article VIII.
ARTICLE IX
AMENDMENTS
----------
Section 1. Amendments. These By-Laws may be altered, amended or repealed,
in whole or in part, or new By-Laws may be adopted by the stockholders or by
the Board of Directors, provided, however, that notice of such alteration,
amendment, repeal or adoption of new ByLaws be contained in the notice of such
meeting of stockholders or Board of Directors as the case may be. All such
amendments must be approved by either the holders of a majority of the
outstanding capital stock entitled to vote thereon or by a majority of the
entire Board of Directors then in office.
Section 2. Entire Board of Directors. As used in this Article IX and in
these By-Laws generally, the term "entire Board of Directors" means the total
number of directors which the Corporation would have if there were no
vacancies.
32
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EXECUTION COPY
==============================================================================
FIRST NATIONWIDE ESCROW CORP.
10 5/8% Senior Subordinated Notes Due 2003
and
10 5/8% Senior Subordinated Exchange Notes Due 2003
-------------------------
INDENTURE
Dated as of September 19, 1996
-------------------------
THE BANK OF NEW YORK
TRUSTEE
==============================================================================
<PAGE>
TABLE OF CONTENTS
<TABLE>
<CAPTION>
Page
----
ARTICLE I
Definitions and Incorporation by Reference
<S> <C> <C>
SECTION 1.01. Definitions...................................................................1
SECTION 1.02. Other Definitions............................................................21
SECTION 1.03. Incorporation by Reference of Trust
Indenture Act................................................................21
SECTION 1.04. Rules of Construction........................................................22
ARTICLE II
The Securities
SECTION 2.01. Form and Dating..............................................................23
SECTION 2.02. Execution and Authentication.................................................23
SECTION 2.03. Registrar and Paying Agent...................................................24
SECTION 2.04. Paying Agent To Hold Money in Trust..........................................25
SECTION 2.05. Holder Lists.................................................................25
SECTION 2.06. Transfer and Exchange........................................................25
SECTION 2.07. Replacement Securities.......................................................27
SECTION 2.08. Outstanding Securities.......................................................27
SECTION 2.09. Temporary Securities.........................................................28
SECTION 2.10. Cancellation.................................................................28
SECTION 2.11. Defaulted Interest...........................................................28
SECTION 2.12. CUSIP Numbers................................................................28
ARTICLE III
Redemption
SECTION 3.01. Notices to Trustee...........................................................29
SECTION 3.02. Selection of Securities To Be Redeemed.......................................29
SECTION 3.03. Notice of Redemption.........................................................30
SECTION 3.04. Effect of Notice of Redemption...............................................31
SECTION 3.05. Deposit of Redemption Price..................................................31
SECTION 3.06. Securities Redeemed in Part..................................................31
ARTICLE IV
Covenants
SECTION 4.01. Payment of Securities........................................................31
SECTION 4.02. SEC Reports..................................................................31
SECTION 4.03. Limitation on Debt...........................................................32
i
<PAGE>
Page
----
SECTION 4.04. Limitation on Restricted Payments............................................33
SECTION 4.05. Limitation on Transactions with
Affiliates...................................................................35
SECTION 4.06. Change of Control Put Event..................................................37
SECTION 4.07. Limitation on Other Business Activities......................................39
SECTION 4.08. Limitations on Restrictions on
Distributions by Subsidiaries................................................39
SECTION 4.09. Limitation on Issuance of Other
Subordinated Debt............................................................40
SECTION 4.10. Limitation on Liens..........................................................41
SECTION 4.11. Amendment of Tax Sharing Agreement...........................................41
SECTION 4.12. Maintenance of Status of Subsidiaries as
Insured Depository Institutions; Capital
Maintenance..................................................................41
SECTION 4.13. Compliance Certificates......................................................42
SECTION 4.14. Further Instruments and Acts.................................................42
ARTICLE V
Successor Company
SECTION 5.01. When Holdings and FN Escrow May Merge or
Transfer Assets..............................................................42
ARTICLE VI
Defaults and Remedies
SECTION 6.01. Events of Default............................................................44
SECTION 6.02. Acceleration.................................................................46
SECTION 6.03. Other Remedies...............................................................46
SECTION 6.04. Waiver of Past Defaults......................................................47
SECTION 6.05. Control by Majority..........................................................47
SECTION 6.06. Limitation on Suits..........................................................47
SECTION 6.07. Rights of Holder To Receive Payment..........................................48
SECTION 6.08. Collection Suit by Trustee...................................................48
SECTION 6.09. Trustee May File Proofs of Claim.............................................48
SECTION 6.10. Priorities...................................................................48
SECTION 6.11. Undertaking for Costs........................................................49
SECTION 6.12. Waiver of Stay or Extension Laws.............................................49
ARTICLE VII
The Trustee
ii
<PAGE>
Page
----
SECTION 7.01. Duties of Trustee............................................................49
SECTION 7.02. Rights of Trustee............................................................51
SECTION 7.03. Individual Rights of Trustee.................................................51
SECTION 7.04. Trustee's Disclaimer.........................................................52
SECTION 7.05. Notice of Defaults...........................................................52
SECTION 7.06. Reports by Trustee to Holders................................................52
SECTION 7.07. Compensation and Indemnity...................................................52
SECTION 7.08. Replacement of Trustee.......................................................53
SECTION 7.09. Successor Trustee by Merger..................................................54
SECTION 7.10. Eligibility; Disqualification................................................54
SECTION 7.11. Preferential Collection of Claims
Against the Issuer...........................................................55
SECTION 7.12. Money Held in Trust..........................................................55
ARTICLE VIII
Subordination of Securities
SECTION 8.01. Securities Subordinate to Senior
Indebtedness.................................................................55
SECTION 8.02. Payment Over of Proceeds Upon
Dissolution, Etc.............................................................55
SECTION 8.03. No Payment When Senior Indebtedness in
Default......................................................................56
SECTION 8.04. Payment Permitted If No Default..............................................58
SECTION 8.05. Acceleration of Payment of Securities........................................58
SECTION 8.06. Subrogation to Rights of Holders of
Senior Indebtedness..........................................................58
SECTION 8.07. Provisions Solely to Define Relative
Rights.......................................................................59
SECTION 8.08. Trustee to Effectuate Subordination..........................................59
SECTION 8.09. No Waiver of Subordination Provisions........................................60
SECTION 8.10. Notice to Trustee............................................................60
SECTION 8.11. Reliance on Judicial Order or
Certificate of Liquidating Agent.............................................61
SECTION 8.12. Trustee Not Fiduciary for Holders of
Senior Indebtedness..........................................................61
SECTION 8.13. Rights of Trustee as Holder of Senior
Indebtedness; Preservation of Trustee's
Rights.......................................................................62
SECTION 8.14. Article Applicable to Paying Agents..........................................62
SECTION 8.15. Trust Moneys Not Subordinated................................................62
SECTION 8.16. Reliance by Holders of Senior Debt on
Subordination Provisions.....................................................62
ARTICLE IX
Discharge of Indenture; Defeasance
iii
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Page
----
SECTION 9.01. Discharge of Liability on Securities;
Defeasance...................................................................63
SECTION 9.02. Conditions to Defeasance.....................................................64
SECTION 9.03. Application of Trust Money...................................................65
SECTION 9.04. Repayment to the Issuer......................................................65
SECTION 9.05. Indemnity for Government Obligations.........................................66
SECTION 9.06. Reinstatement................................................................66
ARTICLE X
Amendments
SECTION 10.01. Without Consent of Holders...................................................66
SECTION 10.02. With Consent of Holders......................................................67
SECTION 10.03. Compliance with Trust Indenture Act..........................................68
SECTION 10.04. Revocation and Effect of Consents and
Waivers......................................................................68
SECTION 10.05. Notation on or Exchange of Securities........................................69
SECTION 10.06. Trustee To Sign Amendments...................................................69
SECTION 10.07. Payment for Consent..........................................................69
ARTICLE XI
Miscellaneous
SECTION 11.01. Trust Indenture Act Controls.................................................69
SECTION 11.02. Notices......................................................................70
SECTION 11.03. Communication by Holders with other
Holders......................................................................70
SECTION 11.04. Certificate and Opinion as to Conditions
Precedent....................................................................71
SECTION 11.05. Statements Required in Certificate or
Opinion......................................................................71
SECTION 11.06. When Securities Disregarded..................................................71
SECTION 11.07. Rules by Trustee, Paying Agent and
Registrar....................................................................72
SECTION 11.08. Legal Holidays...............................................................72
SECTION 11.09. Governing Law................................................................72
SECTION 11.10. No Recourse Against Others...................................................72
SECTION 11.11. Successors...................................................................72
SECTION 11.12. Multiple Originals...........................................................72
SECTION 11.13. Table of Contents; Headings..................................................73
EXHIBIT A - FORM OF INITIAL NOTE
EXHIBIT B - FORM OF EXCHANGE NOTE
</TABLE>
iv
<PAGE>
INDENTURE, dated as of September 19, 1996,
between FIRST NATIONWIDE ESCROW CORP., a Delaware
corporation (the "Issuer"), and THE BANK OF NEW
YORK, a New York banking corporation (the
"Trustee").
Each party agrees as follows for the benefit of the other
party and for the equal and ratable benefit of the Holders of the Issuer's 10
5/8% Senior Subordinated Notes Due 2003 (the "Initial Notes") and the Issuer's
10 5/8% Senior Subordinated Exchange Notes Due 2003 (the "Exchange Notes" and,
together with the Initial Notes, the "Securities").
ARTICLE I
Definitions and Incorporation by Reference
------------------------------------------
SECTION 1.01. Definitions.
"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.
"Applicable Premium" means, with respect to a Security at
any time of determination, the greater of: (i) the product of (x) 5.313% and
(y) the outstanding principal amount of such Security 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 Security may be redeemed at the option
of the Issuer including the premium on the Security payable on the first date
on which such Security 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 Security.
"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
<PAGE>
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.
"California Federal" means California Federal
Bank, a Federal Savings Bank.
"Cal Fed" means Cal Fed Bancorp Inc., a savings and loan
holding company.
"Cal Fed Acquisition" means the acquisition by Holdings of
Cal Fed and its wholly owned Subsidiary California Federal pursuant to the
Merger Agreement.
"Cal Fed Preferred Stock" means the 105/8% Noncumulative
Perpetual Preferred Stock issued by California Federal, 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.
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<PAGE>
"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.
"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
(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.
"Change of Control Put Event" means the occurrence
of any of the following events:
(i) any Person other than a Permitted Holder shall be the
"beneficial owner" (as defined in Rules 13d-3 and 13d-5 under the
Exchange Act), directly or indirectly, of a majority in the aggregate
of the total voting power of the Voting Stock of 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;
-3-
<PAGE>
(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 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.
"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 91/8% Senior Subordinated Notes, and (iii) from and
after the date of the FN Escrow Merger, the amount of the net proceeds to the
Issuer from the issuance of the Securities.
"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:
-4-
<PAGE>
(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
-5-
<PAGE>
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 or assumed as
the deferred purchase price of property, all conditional sale
obligations of such Person and all obligations of such Person under
any title retention agreement (but excluding trade accounts payable
and other accrued current liabilities arising in the ordinary course
of business);
(iv) all obligations of such Person for the reimbursement of
any obligor on any letter of credit, banker's acceptance or similar
credit transaction (other than obligations with respect to letters of
credit securing obligations (other than obligations described in (i)
through (iii) above) entered into in the ordinary course of business
of such Person to the extent such letters of credit are not drawn
upon or, if and to the extent drawn upon, such drawing is reimbursed
no later than the third Business Day following receipt by such Person
of a demand for reimbursement following payment on the letter of
credit);
(v) the amount of all obligations of such Person with
respect to the redemption, repayment or other repurchase of any
Redeemable Stock (but excluding in each case any accrued dividends);
(vi) all obligations of the type referred to in
clauses (i) through (v) of other Persons and all
-6-
<PAGE>
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.
"Depositary" means, with respect to any Global Securities,
The Depository Trust Company or any successor clearing agency registered under
the Exchange Act and designated to act as Depositary for such Global
Securities by the Trustee.
"Depository Institution" shall have the meaning attributed
thereto in Section 3(c)(1) of the Federal Deposit Insurance Act, 12 U.S.C. ss.
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).
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"Exchange Offer Registration Statement" has the
meaning ascribed thereto in the Registration Agreement.
"FN Escrow" means First Nationwide Escrow Corp.
not including Holdings or any other successors thereof.
"FN Escrow Merger" means the merger of FN Escrow with and
into Holdings pursuant to the FN Escrow Merger Agreement.
"FN Escrow Merger Agreement" means the Merger Agreement,
between Holdings and FN Escrow, as amended from time to time.
"FN Escrow Preferred Stock" means the Cumulative
Perpetual Preferred Stock of FN Escrow.
"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 91/8% Senior Subordinated Notes
Indenture.
"Global Security" means the certificate(s) representing the
Securities initially sold to Qualified Institutional Buyers (as defined in
Rule 144A under the Securities Act) in reliance on the exemption from the
registration requirements of the Securities Act provided by Rule 144A, which
certificate(s) will be deposited with, or on behalf of, the Depositary.
"Guarantee" means any obligation, contingent or otherwise,
of any Person directly or indirectly guaranteeing any Debt or other obligation
of any Person and any obligation, direct or indirect, contingent or otherwise,
of such Person (i) to purchase or pay (or advance or supply funds for the
purchase or payment of) such Debt or other obligation of such Person (whether
arising by virtue of partnership arrangements, or by agreement to keep well,
to purchase assets, goods, securities or services, to take-or pay, or to
maintain financial statement conditions or otherwise) or (ii) entered into for
purposes of assuring in any other manner the obligee of such Debt or other
obligation of the payment thereof or to protect such obligee against loss in
respect thereof (in whole or in part); provided, however, that the term
"Guarantee" shall not include endorsements for collection or deposit in the
ordinary course of business. The term "Guarantee" used as a verb has a
corresponding meaning.
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"Holder" means the Person in whose name a Security
is registered on the Registrar's books.
"Holdings" means First Nationwide Holdings Inc.
and its successors.
"Holdings 91/8% Senior Subordinated Notes" means Holdings'
91/8% Senior Subordinated Notes Due 2003 and the Holdings 91/8% Senior
Subordinated Exchange Notes Due 2003, issued by Holdings pursuant to the
Holdings 91/8% Senior Subordinated Notes Indenture.
"Holdings 91/8% 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 91/8% 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 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 acqui sition 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 Initial Notes.
"Issuer" means the party named as such in this Indenture
until a successor replaces it and, thereafter, means the successor and, for
purposes of any provision contained herein and required by the TIA, each other
obligor on the indenture securities.
"Legal Holiday" means a Saturday, a Sunday or a day on which
banking institutions are not required to be open in the State of New York or
in the state where the principal office of the Trustee is located.
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"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.
"Merger Agreement" means the Agreement and Plan of Merger,
dated as of July 27, 1996, among Holdings, Cal Fed and California Federal, as
amended from time to time.
"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 Section 4.13 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 Securities 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
Securities as to payments of principal and interest. The Holdings 91/8% Senior
Subordinated Notes shall be deemed to be Parity Obligations of Holdings.
"Permitted Affiliate" means any individual that 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 Home Owners' Loan Act (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,
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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 Home Owners' Loan Act (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.
"Pledge and Escrow Agreement" means the Pledge and Escrow
Agreement, dated as of September 19, 1996, between FN Escrow and The Bank of
New York, as Escrow Agent, as amended from time to time.
"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 Security means the principal of the
Security plus the premium, if any, payable on the Security which is due or
overdue or is to become due at the relevant time.
"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).
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"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 Securities;
(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
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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 by Section
4.08 (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.
"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
Securities 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 Securities.
"Refinance" means, in respect of any Debt or Preferred Stock,
to refinance, extend, renew, refund, repay,
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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 19, 1996 among the Issuer, 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.
"SEC" means the Securities and Exchange Commission.
"Securities" means the Initial Notes and the Exchange Notes,
treated as a single class of securities.
"Securities Act" means the Securities Act of 1933.
"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 Holdings being subordinated to the payment
of the Securities), which may be payable or deliverable in respect of the
Securities in any
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case, proceeding, dissolution, liquidation or other winding up or event
referred to in Section 8.02, or otherwise on account of any Principal or
interest on the Securities (except as provided in Section 8.15), (ii) any
payment on account of the purchase or other acquisition of the Securities, or
(iii) any deposit made pursuant to Section 9.02.
"Senior Indebtedness" means the following obligations,
whether outstanding on the date of this 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 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
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(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
Securities; 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 this Indenture; provided, however, that in the case of this clause (7), (A)
any Debt Issued to any Person who has no actual knowledge that the Issuance of
such Debt was not permitted under this 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 this 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 91/8% Senior Subordinated Notes, or (9) the
Initial Notes or the Exchange Notes.
"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.
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"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,
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 Section 6.01(5), 6.01(6), 6.01(7) or 6.01(8) 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 Securities.
"Subsidiary" means as to any Person any corporation,
association, partnership or other business entity of which more than 50% of
the total voting power of shares of Capital Stock or other interests
(including partnership interests) entitled (without regard to the occurrence
of any contingency) to vote in the election of directors, managers or trustees
thereof is at the time owned, directly or indirectly, by (i) such Person, (ii)
such Person and one or more Subsidiaries of such Person or (iii) one or more
Subsidiaries of such Person.
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"Tax Sharing Agreement" means (i) that certain agreement
dated as of January 1, 1994 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 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
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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.
ss.ss.77aaa-77bbbb) as in effect on the Issue Date; provided, however, that in
the event the TIA 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.
"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 Securities
are subject to optional redemption by the Issuer; provided, however, that, if
the Average Life of the Securities to the first date on which Securities 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 Securities to the first date on which
Securities 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.
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"Trustee" means the party named as such in this 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.
"Uniform Commercial Code" means the New York Uniform
Commercial Code as in effect from time to time.
"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.
SECTION 1.02. Other Definitions.
<TABLE>
<CAPTION>
Defined in
Term Section
---- ------------
<S> <C>
"Bankruptcy Law"....................................................... 6.01
"covenant defeasance option"........................................... 9.01(b)
"Custodian"............................................................ 6.01
"Default Amount"....................................................... 6.02
"Event of Default...................................................... 6.01
"legal defeasance option".............................................. 9.01(b)
"Outstanding".......................................................... 2.08
"Paying Agent"......................................................... 2.03
"Registrar"............................................................ 2.03
</TABLE>
SECTION 1.03. Incorporation by Reference of Trust
Indenture Act. Whenever this Indenture refers to a provision of the
TIA, the provision is incorporated by reference
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in and made a part of this Indenture. The following TIA terms used in this
Indenture have the following meanings:
"Commission" means the SEC.
"default" means any Default or Event of Default.
"indenture securities" means the Securities.
"indenture security holder" means a Holder.
"indenture to be qualified" means this Indenture.
"indenture trustee" or "institutional trustee"
means the Trustee.
"obligor" on the indenture securities means the
Issuer and any other obligor on the indenture securities.
All other TIA terms used in this Indenture that are defined
by the TIA, defined by TIA reference to another statute or defined by SEC rule
have the meanings assigned to them by such definitions.
SECTION 1.04. Rules of Construction. Unless the
context otherwise requires:
(1) a term has the meaning assigned to it;
(2) an accounting term not otherwise defined has the meaning
assigned to it in accordance with GAAP and all accounting
calculations will be determined in accordance with such principles;
(3) "or" is not exclusive;
(4) "including" means including without limitation;
(5) words in the singular include the plural and
words in the plural include the singular;
(6) unsecured debt shall not be deemed to be subordinate or
junior to secured debt merely by virtue of its nature as unsecured
debt;
(7) the principal amount of any noninterestbearing or other
discount security at any date of issuance shall be the principal
amount thereof that would be shown on a balance sheet of the issuer
dated such date prepared in accordance with GAAP and accretion of
principal on such security shall be deemed to be the issuance of Debt;
provided, however, that the accretion of principal on such security
shall not be
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deemed to be the issuance of Debt if the issuer elects, at the time
of original issuance of such security, to treat such accretion as if,
on such date of original issuance, there were an additional issuance
of Debt in an aggregate principal amount equal to the excess of the
principal amount at maturity of such security over the principal
amount thereof that would be shown on a balance sheet of the issuer
dated such date prepared in accordance with GAAP and, unless repaid
or redeemed, the amount of such additional issuance of Debt shall be
treated as being outstanding for all purposes under this Indenture
until such security is paid in full; and
(8) the principal amount of any Preferred Stock shall be (i)
the maximum liquidation value of such Preferred Stock or (ii) the
maximum mandatory redemption or mandatory repurchase price with
respect to such Preferred Stock, whichever is greater.
ARTICLE II
The Securities
--------------
SECTION 2.01. Form and Dating. The Initial Notes and the
Trustee's certificate of authentication thereof shall be substantially in the
form of Exhibit A, which is hereby incorporated in and expressly made a part
of this Indenture. The Exchange Notes and the Trustee's certificate of
authentication thereof shall be substantially in the form of Exhibit B, which
is hereby incorporated in and expressly made part of this Indenture. The
Securities may have notations, legends or endorsements required by law, stock
exchange rule, agreements to which the Issuer is subject, if any, or usage
(provided that any such notation, legend or endorsement is in a form
acceptable to the Issuer). Each Security shall be dated the date of its
authentication. The terms of the Securities set forth in Exhibit A and Exhibit
B are part of the terms of this Indenture.
SECTION 2.02. Execution and Authentication. Two
Officers shall sign the Securities for the Issuer by manual or facsimile
signature. The Issuer's seal shall be impressed, affixed, imprinted or
reproduced on the Securities and may be in facsimile form.
If an Officer whose signature is on a Security no longer
holds that office at the time the Trustee authenticates the Security, the
Security shall be valid nevertheless.
A Security shall not be valid until an authorized signatory
of the Trustee manually signs the certificate of authentication on the
Security. The signature shall be con-
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clusive evidence that the Security has been authenticated under this
Indenture.
The Trustee shall authenticate and make available for
delivery (i) Initial Notes for original issue in an aggregate principal amount
of $575,000,000 and (ii) Exchange Notes from time to time for issue only in
exchange for a like Principal amount of Initial Notes, in each case upon a
written order of the Issuer signed by two Officers or by an Officer and either
an Assistant Treasurer or an Assistant Secretary of the Issuer. Such order
shall specify the amount of the Securities to be authenticated and the date on
which the Securities are to be authenticated. The aggregate principal amount
of Securities outstanding at any time may not exceed $575,000,000 except as
provided in Section 2.07.
The Trustee may appoint an authenticating agent reasonably
acceptable to the Issuer to authenticate the Securities. Unless limited by the
terms of such appointment, an authenticating agent may authenticate Securities
whenever the Trustee may do so. Each reference in this Indenture to
authentication by the Trustee includes authentication by such agent. An
authenticating agent has the same rights as any Registrar, Paying Agent or
agent for service of notices and demands. The Issuer agrees to pay to any
authenticating agent compensation for its services hereunder.
SECTION 2.03. Registrar and Paying Agent. The
Issuer shall maintain an office or agency where securities may be
presented for registration of transfer or for exchange (the "Registrar") and
an office or agency where Securities may be presented for payment (the "Paying
Agent"). The Registrar shall keep a register of the Securities and of their
transfer and exchange. The Issuer may have one or more co-registrars and one
or more additional paying agents. The term "Paying Agent" shall include any
additional paying agent.
The Issuer shall enter into an appropriate agency agreement
with any Registrar, Paying Agent or co-registrar not a party to this
Indenture, which shall incorporate the terms of the TIA. The agreement shall
implement the provisions of this Indenture that relate to such agent. The
Issuer shall notify the Trustee of the name and address of any such agent. If
the Issuer fails to maintain a Registrar or Paying Agent, the Trustee shall
act as such and shall be entitled to appropriate compensation therefor
pursuant to Section 7.07. The Issuer or any of its domestically incorporated
Wholly Owned Subsidiaries may act as Paying Agent, Registrar, co-registrar or
transfer agent.
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The Issuer hereby initially appoints the Trustee as
Registrar and Paying Agent in connection with the Securities.
SECTION 2.04. Paying Agent To Hold Money in Trust. On or
prior to each due date of the Principal and interest on any Security, the
Issuer shall deposit with the Paying Agent a sum sufficient to pay such
Principal and interest when so becoming due. The Issuer shall require each
Paying Agent (other than the Trustee) to agree in writing that the Paying
Agent shall hold in trust for the benefit of Holders or the Trustee all money
held by the Paying Agent for the payment of Principal of or interest on the
Securities and shall notify the Trustee of any default by the Issuer in making
any such payment. If the Issuer or a Subsidiary acts as Paying Agent, it shall
segregate the money held by it as Paying Agent and hold it as a separate trust
fund. The Issuer at any time may require a Paying Agent to pay all money held
by it to the Trustee and to account for any funds disbursed by the Paying
Agent. Upon complying with this Section, the Paying Agent shall have no
further liability for the money delivered to the Trustee.
SECTION 2.05. Holder Lists. The Trustee shall preserve in as
current a form as is reasonably practicable the most recent list available to
it of the names and addresses of Holders. If the Trustee is not the Registrar,
the Issuer shall furnish to the Trustee, in writing at least five Business
Days before each interest payment date and at such other times as the Trustee
may request in writing, a list in such form and as of such date as the Trustee
may reasonably require of the names and addresses of Holders.
SECTION 2.06. Transfer and Exchange. The Securities shall be
issued in registered form and shall be transferable only upon the surrender of
a Security for registration of transfer. When a Security is presented to the
Registrar or a co-registrar with a request to register a transfer, the
Registrar shall register the transfer as requested if the requirements of
Section 8-401(1) of the Uniform Commercial Code (or any successor provisions,
as applicable) are met. When Securities are presented to the Registrar or a
co-registrar with a request to exchange them for an equal Principal amount of
Securities of other denominations, the Registrar shall make the exchange as
requested if the same requirements are met. To permit registration of
transfers and exchanges, the Issuer shall execute and the Trustee shall
authenticate Securities at the Registrar's or co-registrar's request. The
Issuer may require payment of a sum sufficient to pay all taxes, assessments
or other governmental charges in connection with any transfer or exchange
pursuant to this Section. The Issuer shall not be required to make and the
Registrar need not register transfers or exchanges of Securities selected for
redemption (except, in the case of Securities to be
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redeemed in part, the portion thereof not to be redeemed) or any Securities
for a period of 15 days before a selection of Securities to be redeemed.
Prior to the due presentation for registration of transfer
of any Security, the Issuer, the Trustee, the Paying Agent, the Registrar or
any co-registrar may deem and treat the Person in whose name a Security is
registered as the absolute owner of such Security for the purpose of receiving
payment of Principal of and interest on such Security and for all other
purposes whatsoever, whether or not such Security is overdue, and none of the
Issuer, the Trustee, the Paying Agent, the Registrar or any co-registrar shall
be affected by notice to the contrary.
All Securities issued upon any transfer or exchange pursuant
to this Section 2.06 will evidence the same debt and shall be entitled to the
same benefits under this Indenture as the Securities surrendered upon such
transfer or exchange.
The provisions of clauses (1), (2), (3) and (4) below shall
apply only to Global Securities:
(1) Each Global Security authenticated under this Indenture
shall be registered in the name of the Depositary designated for such
Global Security or a nominee thereof and delivered to such Depositary
or a nominee thereof or custodian therefor, and each such Global
Security shall constitute a single Security for all purposes of this
Indenture.
(2) Notwithstanding any other provision in this Indenture,
no Global Security may be exchanged in whole or in part for
Securities registered, and no transfer of a Global Security in whole
or in part may be registered, in the name of any Person other than
the Depositary for such Global Security or a nominee thereof unless
(A) such Depositary (i) has notified the Issuer that it is unwilling
or unable to continue as Depositary for such Global Security and is
not replaced by a successor Depositary approved by the Trustee or
(ii) has ceased to be a clearing agency registered under the Exchange
Act, (B) there shall have occurred and be continuing an Event of
Default with respect to such Global Security or (C) a request for
certificates is made by a holder of a beneficial interest in the
Global Security in connection with a transfer of such interest to an
institutional "accredited investor" (within the meaning of
subparagraph (a)(1), (2), (3) or (7) of Rule 501 under the Securities
Act) pursuant to and in compliance with the terms of this Indenture
and the Securities.
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(3) Subject to clause (2) above, any exchange of a Global
Security for other Securities may be made in whole or in part, and
all Securities issued in exchange for a Global Security or any
portion thereof shall be registered in such names as the Depositary
for such Global Security shall direct.
(4) Every Security authenticated and delivered upon
registration of transfer of, or in exchange for or in lieu of, a
Global Security or any portion thereof, pursuant to this Indenture,
shall be authenticated and delivered in the form of, and shall be, a
Global Security, unless such Security is registered in the name of a
Person other than the Depositary for such Global Security or a
nominee thereof.
SECTION 2.07. Replacement Securities. If a mutilated
Security is surrendered to the Registrar or if the Holder of a Security claims
that the Security has been lost, destroyed or wrongfully taken, the Issuer
shall issue and the Trustee shall authenticate a replacement Security if the
requirements of Section 8-405 of the Uniform Commercial Code (or any successor
provisions, as applicable) are met and the Holder satisfies any other
reasonable requirements of the Trustee. If required by the Trustee or the
Issuer, such Holder shall furnish an indemnity bond sufficient in the judgment
of the Issuer and the Trustee to protect the Issuer, the Trustee, the Paying
Agent, the Registrar and any co-registrar from any loss which any of them may
suffer if a Security is replaced. The Issuer and the Trustee may charge the
Holder for their expenses in replacing a Security.
In case any such mutilated, destroyed, lost or stolen
Security has become due and payable, the Issuer, in its discretion, may,
instead of issuing a new Security, pay such Security.
Every replacement Security is an additional obligation of
the Issuer.
SECTION 2.08. Outstanding Securities. Securities outstanding
("Outstanding") at any time are all Securities authenticated and delivered by
the Trustee except for those canceled by it, those delivered to it for
cancellation and those described in this Section as not Outstanding. A
Security does not cease to be Outstanding because the Issuer or an Affiliate
of the Issuer holds the Security.
If a Security is paid or replaced pursuant to Section 2.07,
it shall cease to be Outstanding unless the Trustee and the Issuer receive
proof satisfactory to them that the replaced Security is held by a bona fide
purchaser.
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If the Paying Agent segregates and holds in trust, in
accordance with this Indenture, on a redemption date or maturity date money
sufficient to pay all Principal and interest payable on that date with respect
to the Securities (or portions thereof) to be redeemed or maturing, as the
case may be, then on and after that date such Securities (or portions thereof)
cease to be Outstanding and interest on them ceases to accrue.
SECTION 2.09. Temporary Securities. Until definitive
Securities are ready for delivery, the Issuer may execute and the Trustee
shall authenticate temporary Securities. Temporary Securities shall be
substantially in the form of definitive Securities but may have variations
that the Issuer considers appropriate for temporary Securities. Without
unreasonable delay, the Issuer shall execute and the Trustee shall
authenticate definitive Securities and deliver them in exchange for temporary
Securities upon surrender of such temporary Securities at the office or agency
of the Issuer, without charge to the Holder.
SECTION 2.10. Cancellation. The Issuer at any time may
deliver Securities to the Trustee for cancellation. The Registrar and the
Paying Agent shall forward to the Trustee any Securities surrendered to them
for registration of transfer, exchange or payment. The Trustee and no one else
shall cancel Securities surrendered for registration of transfer, exchange,
payment or cancellation and deliver such canceled Securities to the Issuer
upon the Issuer's written request. The Issuer may not Issue new Securities to
replace Securities it has redeemed, paid or delivered to the Trustee for
cancellation (except for the Issuance of Exchange Notes in exchange for
Initial Notes).
SECTION 2.11. Defaulted Interest. If the Issuer defaults in
a payment of interest on the Securities, the Issuer shall pay defaulted
interest (plus interest on such defaulted interest to the extent lawful) in
any lawful manner. The Issuer may pay the defaulted interest to the Persons
who are Holders on a subsequent special record date, which date shall be at
least five Business Days prior to the payment date. The Issuer shall fix or
cause to be fixed any such special record date and payment date, and, at least
15 days before any such special record date, the Issuer shall mail to each
Holder a notice that states the special record date, the payment date and the
amount of defaulted interest to be paid.
SECTION 2.12. CUSIP Numbers. The Issuer in issuing the
Securities may use "CUSIP" numbers (if then generally in use) and, if so, the
Trustee shall use "CUSIP" numbers in notices of redemption as a convenience to
Holders; provided, however, that any such notice may state
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that no representation is made as to the correctness of such numbers either as
printed on the Securities or as contained in any notice of a redemption and
that reliance may be placed only on the other identification numbers printed
on the Securities, and any such redemption shall not be affected by any defect
in or omission of such numbers.
ARTICLE III
Redemption
----------
SECTION 3.01. Notices to Trustee. If the Issuer elects to
redeem Securities pursuant to paragraph 5 of the Securities or is required to
redeem Securities pursuant to paragraph 6 of the Securities, it shall notify
the Trustee in writing of such election, the redemption date, the Principal
amount of Securities to be redeemed and the paragraph of the Securities
pursuant to which the redemption will occur.
The Issuer shall give each notice to the Trustee provided
for in this Section at least 60 days before the redemption date unless the
Trustee consents to a shorter period. Such notice shall be accompanied by an
Officers' Certificate to the effect that such redemption will comply with the
conditions herein. If fewer than all the Securities are to be redeemed, the
record date relating to such redemption for determining the Holders to whom
notice of redemption will be sent pursuant to Section 3.03 shall be selected
by the Issuer and given to the Trustee, which record date shall be not less
than 15 days after the date of notice to the Trustee unless the Trustee
consents to a shorter period.
SECTION 3.02. Selection of Securities To Be Redeemed. If
fewer than all the Securities are to be redeemed, the Trustee in its
discretion shall select the Securities to be redeemed pro rata or by lot or by
a method that complies with applicable legal and securities exchange
requirements, if any, and that the Trustee considers fair and appropriate and
in accordance with methods generally used at the time of selection by
fiduciaries in similar circumstances. The Trustee shall make the selection
from Outstanding Securities not previously called for redemption. The Trustee
may select for redemption portions of the Principal amount of Securities that
have denominations larger than $1,000. Securities, and portions thereof, that
the Trustee selects for redemption shall be in original Principal amounts of
$1,000 or a whole multiple of $1,000. Provisions of this Indenture that apply
to Securities called for redemption also apply to portions of Securities
called for redemption. The Trustee shall notify the Issuer
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promptly of the Securities or portions of Securities to be redeemed.
SECTION 3.03. Notice of Redemption. At least 30 days but not
more than 60 days before a date for redemption of Securities, the Issuer
shall mail a notice of redemption by first-class mail to each Holder of
Securities to be redeemed.
The notice shall identify the Securities to be redeemed and
shall state:
(1) the redemption date;
(2) the redemption price;
(3) the name and address of the Paying Agent;
(4) that Securities called for redemption must be
surrendered to the Paying Agent to collect the redemption
price;
(5) if fewer than all the Outstanding Securities are to be
redeemed, the identification of the particular Securities to be
redeemed as well as the aggregate Principal amount of Securities to
be redeemed and, if any Security is being redeemed in part, the
portion of the Principal amount of such Security to be redeemed and
that after the redemption date and upon surrender of such Security a
new Security or Securities will be issued having a Principal amount
equal to the Principal amount of the Security surrendered less the
Principal amount of the portion of the Security redeemed;
(6) that, unless the Issuer defaults in making such
redemption payment, interest on the Securities (or portion thereof)
called for redemption ceases to accrue on and after the redemption
date;
(7) the paragraph of the Securities pursuant to
which the Securities called for redemption are being
redeemed;
(8) the CUSIP number, if any, printed on the
Securities being redeemed; and
(9) that no representation is made as to the correctness or
accuracy of the CUSIP number, if any, listed in such notice or
printed on the Securities.
At the Issuer's request, the Trustee shall give
the notice of redemption in the Issuer's name and at the
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Issuer's expense. In such event, the Issuer shall provide the Trustee with the
information required by this Section.
SECTION 3.04. Effect of Notice of Redemption. Once notice of
redemption is mailed, Securities called for redemption become due and payable
on the redemption date and at the redemption price stated in the notice and
from and after such date (unless the Issuer shall default in the payment of
all or part of the redemption price) cease to bear interest. Upon surrender to
the Paying Agent, such Securities shall be paid at the redemption price stated
in the notice, plus accrued and unpaid interest, if any, to the redemption
date. Failure to give notice or any defect in the notice to any Holder shall
not affect the validity of the notice to any other Holder.
SECTION 3.05. Deposit of Redemption Price. On or
prior to the redemption date, the Issuer shall deposit with the Paying
Agent (or, if the Issuer or a Subsidiary is the Paying Agent, shall segregate
and hold in trust) money sufficient to pay the redemption price of and accrued
and unpaid interest on all Securities to be redeemed on the redemption date,
other than Securities or portions of Securities called for redemption which
have been delivered by the Issuer to the Trustee for cancellation.
SECTION 3.06. Securities Redeemed in Part. Upon surrender of
a Security that is redeemed in part, the Issuer shall execute and the Trustee
shall authenticate for the Holder (at the Issuer's expense) a new Security
having a Principal amount equal to the Principal amount of the Security
surrendered less the Principal amount of the portion of the Security so
redeemed.
ARTICLE IV
Covenants
---------
SECTION 4.01. Payment of Securities. The Issuer shall
promptly pay the Principal of and interest on the Securities on the dates and
in the manner provided in the Securities and in this Indenture. Principal and
interest shall be considered paid on the date due if on such date the Trustee
or the Paying Agent holds in accordance with this Indenture money sufficient
to pay all Principal and interest then due. The Issuer shall pay interest on
overdue Principal and, to the extent lawful, interest on overdue installments
of interest, at the rate specified therefor in the Securities.
SECTION 4.02. SEC Reports. Notwithstanding that
Holdings may not be required to be subject to the reporting
requirements of Section 13 or 15(d) of the Exchange Act,
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Holdings shall file or cause to be filed with the SEC and provide the Trustee
and Holders 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 shall comply with the other provisions of TIA ss. 314(a).
SECTION 4.03. Limitation on Debt. FN Escrow shall not Issue
any Debt other than the Securities. Holdings shall not Issue any Debt and
Holdings shall 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 Securities and Debt of Holdings Issued by Holdings
in exchange for, or the proceeds of which are used to Refinance, the
Senior Notes, the Holdings 91/8% 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 Securities)
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 Securities,
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 91/8% 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 91/8% Senior Subordinated Notes, the Senior Notes and Debt
outstanding pursuant
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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
Securities 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 Securities;
(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.
SECTION 4.04. Limitation on Restricted Payments. (a) FN
Escrow shall not, directly or indirectly, make any Restricted Payment;
provided, that FN Escrow may make Restricted Payments following the redemption
of the Securities pursuant to paragraph 6 of the Securities. Holdings shall
not, and shall 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 shall have occurred or be continuing
(or would result therefrom);
(2) any Subsidiary of Holdings that is a Depository
Institution shall not qualify as "well capitalized" under Section 28
of the Federal Deposit Insurance Act (the "FDI Act") (or any
successor provision) and the regulations of the Office of Thrift
Supervision ("OTS") thereunder;
(3) the Consolidated Common Shareholders' Equity of the Bank
as of the end of the most recent fiscal quarter ending at least 45
days prior to the date of such Restricted Payment would have been
less than the Minimum Common Equity Amount as of the end of such
fiscal quarter; or
(4) the aggregate amount of such Restricted Payment and all
other Restricted Payments 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)
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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;
(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) Section 4.04(a) shall not prohibit the following (none
of which shall 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 Section; 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
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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 Section 4.04(a)(4)(ii);
(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 Securities 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 Securities 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 Securities; or
(v) redemption of the FN Escrow Preferred Stock and payment
of any accrued dividends thereon (or the redemption of the Preferred
Stock of Holdings into which such stock is converted together with
accrued dividends thereon) concurrently with or immediately after the
consummation of the FN Escrow Merger.
(c) Holdings or any Subsidiary of Holdings may take actions
to make a Restricted Payment in anticipation of the occurrence of any of the
events described in Sections 4.04(b); provided, however, that the making of
such Restricted Payment shall be conditioned upon the occurrence of such
event.
SECTION 4.05. Limitation on Transactions with Affiliates.
(a) FN Escrow shall not 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 FN Escrow or any legal or beneficial owner of 10% or more of the Voting
Stock of FN Escrow or with an Affiliate of any such owner, except for
transactions entered into pursuant to the FN Escrow Merger Agreement and
except that FN Escrow may issue the FN Escrow Preferred Stock to TNIS.
(b) Holdings shall not, and shall 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
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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
(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.
(c) The provisions of Section 4.05(b) shall not prohibit:
(i) any Restricted Payment permitted to be paid pursuant to
Section 4.04;
(ii) any transaction between Holdings and any of its
Subsidiaries or between Subsidiaries of Holdings
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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;
(v) any transactions pursuant to the Tax Sharing
Agreement; and
(vi) any transactions pursuant to the FN Escrow
Merger Agreement.
SECTION 4.06. Change of Control Put Event. (a) Upon a Change
of Control Put Event, each Holder shall have the right to require that the
Issuer repurchase all or any part of such Holder's Securities 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 on
the relevant record date to receive interest due on the relevant interest
payment date), in accordance with the terms contemplated in Section 4.06(b).
(b) Within (x) 45 days following any Change of Control Put
Event described in clauses (i) and (ii) of the definition thereof (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 in clause (ii) of the definition thereof to any
Affiliate of Holdings other than a Subsidiary of Holdings or (B) any Change of
Control Put Event described in clause (iii) of the definition
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thereof, the Issuer shall mail a notice to each Holder with a copy to the
Trustee stating:
(1) 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 Securities 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
on the relevant record date to receive interest due on the relevant
interest payment date);
(2) the circumstances and relevant facts regarding
such Change of Control Put Event;
(3) the repurchase date (which shall be no earlier than 30
days nor later than 60 days from the date such notice is mailed); and
(4) the instructions, determined by the Issuer consistent
with this Section, that a Holder must follow in order to have its
Securities repurchased.
(c) Holders electing to have a Security repurchased will be
required to surrender the Security, with an appropriate form duly completed,
to the Issuer at the address specified in the notice at least 10 Business Days
prior to the repurchase date. Holders will be entitled to withdraw their
election if the Trustee or the Issuer receives not later than three Business
Days prior to the repurchase date, a facsimile transmission or letter setting
forth the name of the Holder, the Principal amount of the Security which was
delivered for purchase by the Holder and a statement that such Holder is
withdrawing his election to have such Security purchased.
(d) On the repurchase date, all Securities repurchased by
the Issuer under this Section shall be delivered to the Trustee for
cancellation, and the Issuer shall pay the repurchase price to the Holders
entitled thereto. Upon surrender of a Security that is repurchased under this
Section in part, the Issuer shall execute and the Trustee shall authenticate
for the Holder thereof (at the Issuer's expense) a new Security having a
Principal amount equal to the Principal amount of the Security surrendered
less the portion of the Principal amount of the Security repurchased.
(e) The Issuer shall 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 Securities
pursuant to this Section. To the extent that the provisions of any securities
laws or regulations conflict with
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provisions of this Section, the Issuer shall comply with the applicable
securities laws and regulations and shall not be deemed to have breached its
obligation under this Section by virtue thereof.
SECTION 4.07. Limitation on Other Business Activities. FN
Escrow shall not engage in any trade or business other than the original
issuance of the Securities under this Indenture and any such activities as are
specifically required pursuant to this Indenture, the Securities, the Pledge
and Escrow Agreement, the Registration Agreement and the FN Escrow Merger
Agreement and any activities directly related thereto and will not own Capital
Stock of any other Person. Holdings shall 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 Home Owners' Loan Act (or any successor
provision), (iii) the holding of Permitted Investments, and (iv) Permitted
Business Activities.
SECTION 4.08. 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;
(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
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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 of Holdings not
otherwise prohibited by this 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 of Holdings 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 of
Holdings 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 of Holdings 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.
SECTION 4.09. Limitation on Issuance of Other Subordinated
Debt. So long as any of the Securities are Outstanding, Holdings shall not
issue, assume, guarantee, incur or otherwise become liable for, directly or
indirectly, any Debt (other than the Securities) subordinate or junior in
ranking in any respect to any Senior Indebtedness unless such Debt is a Parity
Obligation or is
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expressly subordinated in right of payment to the Securities.
SECTION 4.10. Limitation on Liens. FN Escrow shall not
create or permit to exist any Lien on any of its property or assets (including
Capital Stock), whether owned on the date of this Indenture or thereafter
acquired, securing any obligation of FN Escrow other than the Lien created
pursuant to the Pledge and Escrow Agreement. Holdings shall not create or
permit to exist any Lien (other than the Lien granted to the trustee under the
Senior Notes Indenture pursuant to Section 7.07 thereof) on any of its
property or assets (including Capital Stock), whether owned on the date of
this 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 Securities 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.
SECTION 4.11. Amendment of Tax Sharing Agreement. (a)
Holdings shall 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 Section 4.11
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 Section 4.11 shall 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.
SECTION 4.12. 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
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of each such Subsidiary are insured by the Federal Deposit Insurance
Corporation or any successor organization up to the maximum amount permitted
by 12 U.S.C. ss. 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. ss.
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 FDI Act
and OTS regulations.
SECTION 4.13. Compliance Certificates. (a) The
Issuer shall deliver to the Trustee within 120 days after the end of each
fiscal year of the Issuer, commencing with the fiscal year ended December 31,
1996, an Officers' Certificate stating that in the course of the performance by
the signers of their duties as Officers of the Issuer they would normally have
knowledge of any Default by the Issuer and whether or not the signers know of
any Default or Event of Default that occurred during such period. If they do,
the certificate shall describe the Default, its status and what action the
Issuer is taking or proposes to take with respect thereto. The Issuer also
shall comply with TIA ss. 314(a)(4).
(b) The Issuer shall deliver to the Trustee, as soon as
possible and in any event within 30 days after the Officers of the Issuer
become aware of the occurrence of a Default or Event of Default, an Officers'
Certificate setting forth the details of such Default or Event of Default and
the action that the Issuer proposes to take with respect thereto.
SECTION 4.14. Further Instruments and Acts. Upon request of
the Trustee, the Issuer will execute and deliver such further instruments and
do such further acts as may be reasonably necessary or proper to carry out
more effectively the purpose of this Indenture.
ARTICLE V
Successor Company
-----------------
SECTION 5.01. When Holdings and FN Escrow May
Merge or Transfer Assets. (a) Holdings shall 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) shall be a Person organized and
existing under the laws of the United States of
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America, any State thereof or the District of Columbia and, in the
case of the FN Escrow Merger or any other transaction covered by this
Section 5.01(a) occurring after the FN Escrow Merger in which
Holdings is not the resulting, suriving or transferee Person , such
Person shall expressly assume, by an indenture supplemental hereto,
executed and delivered to the Trustee, in form satisfactory to the
Trustee, all the obligations of Holdings under the Securities and
this Indenture;
(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 shall have
occurred and be continuing;
(iii) immediately after giving effect to such transaction,
the resulting, surviving or transferee Person shall have 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 shall have delivered to the Trustee an
Officers' Certificate and an Opinion of Counsel, each stating that
such consolidation, merger or transfer comply with this Indenture and
such supplemental indenture (if any) complies with this Indenture and
the TIA.
In the case of the FN Escrow Merger or any other transaction
covered by this Section 5.01(a) occurring after the FN Escrow Merger, the
resulting, surviving or transferee Person shall be the successor company and
shall succeed to, and be substituted for, and may exercise every right and
power of, the Issuer under this Indenture, and thereafter, except in the case
of a lease, the Issuer shall be discharged from all obligations and covenants
under this Indenture and the Securities.
(b) FN Escrow shall not consolidate with or merge with or
into, or convey, transfer or lease any of its assets to, any Person, other
than in connection with the FN Escrow Merger pursuant to the FN Escrow Merger
Agreement. After the consummation of the FN Escrow Merger, Holdings will
succeed to, and be substituted for, and will exercise every right and power of
FN Escrow, as Issuer, hereunder.
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ARTICLE VI
Defaults and Remedies
---------------------
SECTION 6.01. Events of Default. An "Event of Default"
occurs if:
(1) the Issuer (i) defaults in the payment of the Principal
of any Security when the same becomes due and payable at its Stated
Maturity, upon redemption, upon required purchase, upon declaration
or otherwise, (ii) defaults in any payment of interest on any
Security when the same becomes due and payable and such default
continues for a period of 30 days or (iii) fails to purchase or
redeem Securities when required pursuant to this Indenture or the
Securities;
(2) the Issuer fails to comply with Section 5.01;
(3) the Issuer fails to comply with its obligations under
Section 4.02, 4.03, 4.04, 4.05, 4.06 (other than a failure to
purchase Securities), 4.07, 4.08, 4.09, 4.10, 4.11 or 4.12 or
paragraph 6 of the Securities (other than a failure to redeem
Securities), or the requirements of such Sections with respect to
Holdings or its Subsidiaries prior to the FN Escrow Merger are not
met, and in any such case such failure continues for 30 days after
the notice specified below;
(4) the Issuer fails to comply with any of its agreements in
the Securities or this Indenture (other than those referred to in
(1), (2) or (3) above) or the requirements of such Sections with
respect to Holdings or its Subsidiaries prior to the FN Escrow Merger
are not met, and in any such case such failure continues for 60 days
after the notice specified below;
(5) Debt of the Issuer, Holdings or any Significant
Subsidiary of Holdings is not paid within any applicable grace period
after final maturity or is accelerated by the holders thereof because
of a default, the total principal amount of the portion of such Debt
that is unpaid or accelerated exceeds $25,000,000 or its foreign
currency equivalent and such default continues for 5 days after the
notice specified below;
(6) Any of the Issuer, Holdings or any Significant
Subsidiary of Holdings, pursuant to or within the meaning of any
Bankruptcy Law:
(A) commences a voluntary case;
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(B) consents to the entry of an order for
relief against it in an involuntary case;
(C) consents to the appointment of a
Custodian of it or for any substantial part of its
property; or
(D) makes a general assignment for the
benefit of its creditors;
or takes any comparable action under any foreign laws
relating to insolvency;
(7) a court of competent jurisdiction shall enter an order
or decree under any Bankruptcy Law that:
(A) is for relief against the Issuer,
Holdings or any Significant Subsidiary of Holdings
in an involuntary case;
(B) appoints a Custodian of the Issuer,
Holdings or any Significant Subsidiary of Holdings
or for any substantial part of its property; or
(C) orders the winding up or liquidation of
the Issuer, Holdings or any Significant Subsidiary
of Holdings;
or any similar relief is granted under any foreign laws
and the order or decree remains unstayed and in effect
for 60 days; or
(8) any judgment or decree for the payment of money in
excess of $25,000,000 is entered against the Issuer, Holdings or any
Significant Subsidiary of Holdings 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
such default continues for 10 days after the notice specified below.
The foregoing will constitute Events of Default whatever the
reason for any such Event of Default and whether it is voluntary or
involuntary or is effected by operation of law or pursuant to any judgment,
decree or order of any court or any order, rule or regulation of any
administrative or governmental body.
The term "Bankruptcy Law" means Title 11, United States
Code, or any similar Federal or state law for the relief of debtors or, with
respect to any Depositary
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Institution, Sections 11-13 of the Federal Deposit Insurance Act, 12 U.S.C.
ss.ss. 1821-23, or any similar Federal or state law relating to
conservatorships or receiverships of Depositary Institutions. The term
"Custodian" means any receiver, conservator, trustee, assignee, liquidator,
custodian or similar official under any Bankruptcy Law.
A Default under clause (3), (4), (5) or (8)(B) is not an
Event of Default until the Trustee or the Holders of at least 25% in Principal
amount of the Securities notify the Issuer of the Default and the Issuer does
not cure such Default within the time specified after receipt of such Notice.
Such Notice must specify the Default, demand that it be remedied and state
that such notice is a "Notice of Default."
SECTION 6.02. Acceleration. If an Event of Default (other
than an Event of Default specified in Section 6.01(6) or (7) with respect to
the Issuer) occurs and is continuing, the Trustee by notice to the Issuer or
the Holders of at least 25% in Principal amount of the Securities by notice to
the Issuer and the Trustee may declare the Principal amount of and accrued
interest on all the Securities as of the date of such declaration
(collectively, the "Default Amount") to be due and payable immediately. If an
Event of Default specified in Section 6.01(6) or (7) with respect to the
Issuer occurs, the Default Amount on all the Securities as of the date of such
Event of Default shall ipso facto become and be immediately due and payable
without any declaration or other act on the part of the Trustee or any
Holders. The Holders of a majority in Principal amount of the Securities by
notice to the Trustee may rescind an acceleration and its consequences if the
rescission would not conflict with any judgment or decree and if all existing
Events of Default have been cured or waived except nonpayment of Principal or
interest that has become due solely because of such acceleration. No such
rescission shall affect any subsequent Default or impair any right consequent
thereto.
SECTION 6.03. Other Remedies. If an Event of Default
occurs and is continuing, the Trustee may pursue any available remedy to
collect the payment of Principal of or interest on the Securities or to enforce
the performance of any provision of the Securities or this Indenture.
The Trustee may maintain a proceeding even if it does not
possess any of the Securities or does not produce any of them in the
proceeding. A delay or omission by the Trustee or any Holder in exercising any
right or remedy accruing upon an Event of Default shall not impair the right
or remedy or constitute a waiver of or acquiescence in the Event of Default.
No remedy is exclusive of any other remedy. All available remedies are
cumulative.
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SECTION 6.04. Waiver of Past Defaults. The Holders of
a majority in Principal amount of the Securities by notice to the Trustee
and the Issuer may waive an existing Default and its consequences except (i) a
Default in the payment of the Principal of or interest on a Security or (ii) a
Default in respect of a provision that under Section 9.02 cannot be amended
without the consent of each Holder affected. When a Default is waived, it is
deemed cured, but no such waiver shall extend to any subsequent or other
Default or impair any consequent right.
SECTION 6.05. Control by Majority. The Holders of a majority
in Principal amount of the Securities may 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 under this Indenture.
However, the Trustee may refuse to follow any direction that conflicts with
law or this Indenture or, subject to Section 7.01, that the Trustee determines
is unduly prejudicial to the rights of other Holders or would involve the
Trustee in personal liability; provided, however, that the Trustee may take
any other action deemed proper by the Trustee that is not inconsistent with
such direction. Prior to taking any action hereunder, the Trustee shall be
entitled to indemnification satisfactory to it in its sole discretion against
all losses and expenses caused by taking or not taking such action.
SECTION 6.06. Limitation on Suits. A Holder may
not pursue any remedy with respect to this Indenture or the
Securities unless:
(1) the Holder gives to the Trustee written notice
stating that an Event of Default is continuing;
(2) the Holders of at least 25% in Principal
amount of the Securities make a written request to the
Trustee to pursue the remedy;
(3) such Holder or Holders offer to the Trustee
reasonable security or indemnity against any loss,
liability or expense;
(4) the Trustee does not comply with the request within 60
days after receipt of the request and the offer of security or
indemnity; and
(5) the Holders of a majority in Principal amount of the
Securities do not give the Trustee a direction inconsistent with the
request during such 60-day period.
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A Holder may not use this Indenture to prejudice the rights
of another Holder or to obtain a preference or priority over another Holder.
SECTION 6.07. Rights of Holder To Receive Payment.
Notwithstanding any other provision of this Indenture, the right of any Holder
to receive payment of Principal of and interest on the Securities held by such
Holder, on or after the respective due dates expressed in the Securities, or to
bring suit for the enforcement of any such payment on or after such respective
dates, shall not be impaired or affected without the consent of such Holder.
SECTION 6.08. Collection Suit by Trustee. If an Event of
Default in payment of interest or Principal specified in Section 6.01(1) occurs
and is continuing, the Trustee may recover judgment in its own name and as
trustee of an express trust against the Issuer for the whole amount of
Principal and interest remaining unpaid (together with interest on such unpaid
interest to the extent lawful) and the amounts provided for in Section 7.07.
SECTION 6.09. Trustee May File Proofs of Claim. The Trustee
may, but shall have no obligation to, file such proofs of claim and other
papers or documents as may be necessary or advisable in order to have the
claims of the Trustee and the Holders allowed in any judicial proceedings
relative to the Issuer, its creditors or its property and, unless prohibited by
law or applicable regulations, may, but shall have no obligation to, vote on
behalf of the Holders in any election of a trustee in bankruptcy or other
Person performing similar functions, and any Custodian in any such judicial
proceeding is hereby authorized by each Holder to make payments to the Trustee
and, in the event that the Trustee shall consent to the making of such
payments directly to the Holders, to pay to the Trustee any amount due it for
the reasonable compensation, expenses, disbursements and advances of the
Trustee, its agents and its counsel, and any other amounts due the Trustee
under Section 7.07.
SECTION 6.10. Priorities. Subject to Article
VIII of this Indenture, if the Trustee collects any money or
property pursuant to this Article VI, it shall pay out the
money or property in the following order:
FIRST: to the Trustee for amounts due under
Section 7.07;
SECOND: to Holders for amounts due and unpaid on
the Securities for Principal and interest, ratably,
without preference or priority of any kind, according
to the amounts due and payable on the Securities for
Principal and interest, if any, respectively; and
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THIRD: to the Issuer.
The Trustee may fix a record date and payment date for any
payment to Holders pursuant to this Section. At least 15 days before such
record date, the Issuer shall mail to each Holder and the Trustee a notice
that states the record date, the payment date (which shall be not less than
one Business Day following the record date) and amount to be paid.
SECTION 6.11. Undertaking for Costs. In any suit for the
enforcement of any right or remedy under this Indenture or in any suit against
the Trustee for any action taken or omitted by it as Trustee, a court in its
discretion may require the filing by any party litigant in the suit of an
undertaking to pay the costs of the suit, and the court in its discretion may
assess reasonable costs, including reasonable attorneys' fees, against any
party litigant in the suit, having due regard to the merits and good faith of
the claims or defenses made by the party litigant. This Section does not apply
to a suit by the Trustee, a suit by a Holder for the enforcement of the payment
of the Principal of, or interest on, any Security on or after the respective
due dates expressed in such Security or a suit by Holders of more than 10% in
Principal amount of the Securities.
SECTION 6.12. Waiver of Stay or Extension Laws. The Issuer
(to the extent it may lawfully do so) shall not at any time insist upon, or
plead, or in any manner whatsoever claim or take the benefit or advantage of,
any stay or extension law wherever enacted, now or at any time hereafter in
force, which may affect the covenants or the performance of this Indenture;
and the Issuer (to the extent that it may lawfully do so) hereby expressly
waives all benefit or advantage of any such law, and shall not hinder, delay
or impede the execution of any power herein granted to the Trustee, but shall
suffer and permit the execution of every such power as though no such law had
been enacted.
ARTICLE VII
The Trustee
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SECTION 7.01. Duties of Trustee. (a) If an Event of Default
has occurred and is continuing, the Trustee shall exercise the rights and
powers vested in it by this Indenture and use the same degree of care and
skill in its exercise as a prudent man would exercise or use under the
circumstances in the conduct of such man's own affairs.
(b) Except during the continuance of an Event of
Default:
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(1) the Trustee undertakes to perform such duties and only
such duties as are specifically set forth in this Indenture and no
implied covenants or obligations shall be read into this Indenture
against the Trustee; and
(2) in the absence of bad faith on its part, the Trustee may
conclusively rely, as to the truth of the statements and the
correctness of the opinions expressed therein, upon certificates or
opinions furnished to the Trustee and conforming to the requirements
of this Indenture. However, in the case of any such opinions or
certificates which by any provision hereof are specifically required
to be furnished to the Trustee, the Trustee shall examine the
certificates and opinions to determine whether or not they conform to
the requirements of this Indenture.
(c) No provision of this Indenture shall be construed to
relieve the Trustee from liability for its own negligent action, its own
negligent failure to act or its own willful misconduct, except that:
(1) this paragraph does not limit the effect of
paragraph (b) of this Section;
(2) the Trustee shall not be liable for any error of
judgment made in good faith by a Trust Officer unless it is proved
that the Trustee was negligent in ascertaining the pertinent facts;
and
(3) the Trustee shall not be liable with respect to any
action it takes or omits to take in good faith in accordance with a
direction received by it pursuant to Section 6.05.
(d) The Trustee shall not be liable for interest on any
money received by it except as the Trustee may agree in writing with the
Issuer.
(e) Money held in trust by the Trustee need not be
segregated from other funds except to the extent required by law.
(f) No provision of this Indenture shall require the Trustee
to expend or risk its own funds or otherwise incur financial liability in the
performance of any of its duties hereunder or in the exercise of any of its
rights or powers, if it shall have reasonable grounds to believe that
repayment of such funds or adequate indemnity against such risk or liability
is not reasonably assured to it.
(g) Every provision of this Indenture relating in
any way to the Trustee or its conduct or affecting the
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liability of or affording protection to the Trustee shall be subject to the
provisions of each paragraph of this Section and Section 7.02 (unless
expressly not applicable) and to the provisions of the TIA.
SECTION 7.02. Rights of Trustee. (a) The Trustee may rely on
and shall be protected in acting or refraining from acting in accordance with
any document believed by it to be genuine and to have been signed or presented
by the proper Person. The Trustee need not investigate any fact or matter
stated in the document.
(b) Before the Trustee acts or refrains from acting, it may
require an Officers' Certificate or an Opinion of Counsel. The Trustee shall
not be liable for any action it takes or omits to take in good faith in
reliance on the Officers' Certificate or Opinion of Counsel.
(c) The Trustee may act through agents and shall
not be responsible for the misconduct or negligence of any agent appointed
with due care.
(d) The Trustee shall not be liable for any action it takes
or omits to take in good faith which it believes to be authorized or within
its rights or powers, provided that the Trustee's conduct does not constitute
willful misconduct, negligence or bad faith.
(e) The Trustee may consult with counsel of its selection,
and the advice or opinion of counsel with respect to legal matters relating to
this Indenture and the Securities shall be full and complete authorization and
protection from liability in respect of any action taken, omitted or suffered
by it hereunder in good faith and in accordance with the advice or opinion of
such counsel.
(f) The Trustee shall be under no obligation to exercise any
of the rights or powers vested in it by this Indenture at the request or
direction of any of the Holders pursuant to this Indenture, unless such
Holders shall have offered to the Trustee reasonable security or indemnity
against the costs, expenses and liabilities which might be incurred by it in
acting in accordance with such request or direction.
SECTION 7.03. Individual Rights of Trustee. The
Trustee in its individual or any other capacity may become the owner or
pledgee of Securities and may otherwise deal with the Issuer or its Affiliates
with the same rights it would have if it were not Trustee. Any Paying Agent,
Registrar, co-registrar or co-paying agent may do the same with like rights.
However, the Trustee must comply with Sections 7.10 and 7.11.
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SECTION 7.04. Trustee's Disclaimer. The Trustee shall not be
responsible for and makes no representation as to the validity or adequacy of
this Indenture or the Securities, it shall not be accountable for the Issuer's
use of the Securities or of the proceeds from the Securities, and it shall not
be responsible for any statement in the Indenture or in any document issued in
connection with the sale of the Securities or in the Securities other than the
Trustee's certificate of authentication.
SECTION 7.05. Notice of Defaults. If a Default occurs and is
continuing and if it is known to the Trustee, the Trustee shall mail to each
Holder notice of the Default within 90 days after it occurs. Except in the
case of a Default in payment of Principal of or interest, if any, on any
Security, the Trustee may withhold the notice if and so long as a committee of
its Trust Officers in good faith determines that withholding the notice is in
the interests of Holders.
SECTION 7.06. Reports by Trustee to Holders. The
Trustee shall transmit to Holders such reports concerning the Trustee and
its actions under this Indenture as may be required pursuant to the TIA at the
times and in the manner provided pursuant thereto. To the extent that any such
report is required by the TIA with respect to any 12-month period, such report
shall cover the 12-month period ending each January 15 and shall be
transmitted by the next succeeding April 15. The Trustee also shall comply
with TIA ss. 313(b).
A copy of each report at the time of its mailing to Holders
shall be filed with the SEC and each stock exchange (if any) on which the
Securities are listed. The Issuer agrees to notify promptly the Trustee
whenever the Securities become listed on any stock exchange and of any
delisting thereof.
SECTION 7.07. Compensation and Indemnity. The
Issuer shall pay to the Trustee from time to time such compensation as
shall be agreed to in writing from time to time by the Issuer and the Trustee
for its services. The Trustee's compensation shall not be limited by any law
on compensation of a trustee of an express trust. The Issuer shall reimburse
the Trustee upon request for all reasonable out-of-pocket expenses incurred or
made by it, including costs of collection, in addition to the compensation for
its services. Such expenses shall include the reasonable compensation and
expenses, disbursements and advances of the Trustee's agents, counsel,
accountants and experts. The Issuer shall indemnify each of the Trustee or any
predecessor Trustee and each of the Trustee's agents, officers, directors,
employees and stockholders (each an "indemnitee") against any and all loss,
liability, damage,
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claim or expense (including attorneys' fees and expenses) incurred by each
indemnitee in connection with the acceptance or administration of this trust
and the performance of its duties hereunder. Each indemnitee shall notify the
Issuer promptly of any claim for which it may seek indemnity. Failure by the
Trustee to so notify the Issuer shall not relieve the Issuer of its
obligations hereunder. The Issuer shall defend the claim and any or all
indemnitees may have separate counsel and the Issuer shall pay the fees and
expenses of any such counsel. The Issuer need not reimburse any expense or
indemnify against any loss, liability or expense incurred by any indemnitee
through its own willful misconduct, negligence or bad faith.
The Issuer's payment obligations pursuant to this Section
shall survive the discharge of this Indenture. When the Trustee incurs
expenses after the occurrence of a Default specified in Section 6.01(6) or (7)
with respect to the Issuer, the expenses are intended to constitute expenses
of administration under the Bankruptcy Law.
SECTION 7.08. Replacement of Trustee. The
Trustee may resign at any time by so notifying the Issuer.
The Holders of a majority in Principal amount of the
Securities may remove the Trustee by so notifying the
Trustee and may appoint a successor Trustee. The Issuer
shall remove the Trustee if:
(1) the Trustee fails to comply with Section 7.10;
(2) the Trustee is adjudged bankrupt or insolvent;
(3) a receiver or other public officer takes
charge of the Trustee or its property; or
(4) the Trustee otherwise becomes incapable of
acting.
If the Trustee resigns, is removed by the Issuer, is removed
by Holders of a majority in Principal amount of the Securities and they do not
promptly appoint a successor Trustee, or if a vacancy exists in the office of
Trustee for any reason (the Trustee in such event being referred to herein as
the retiring Trustee), the Issuer shall promptly appoint a successor Trustee.
A successor Trustee shall deliver a written acceptance of
its appointment to the retiring Trustee and to the Issuer. Thereupon the
resignation or removal of the retiring Trustee shall become effective, and the
successor Trustee shall have all the rights, powers and duties of the Trustee
under this Indenture. The successor Trustee shall mail a notice of its
succession to Holders. The retiring Trustee shall promptly transfer all
property held by it as
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Trustee to the successor Trustee, subject to the lien provided for in Section
7.07.
If a successor Trustee does not accept appointment within 60
days after the retiring Trustee tenders its resignation or is removed, the
retiring Trustee, the Issuer or the Holders of a majority in Principal amount
of the Securities may petition any court of competent jurisdiction for the
appointment of a successor Trustee.
If the Trustee fails to comply with Section 7.10, any Holder
may petition any court of competent jurisdiction for the removal of the
Trustee and the appointment of a successor Trustee.
Notwithstanding the replacement of the Trustee pursuant to
this Section, the Issuer's obligations under Section 7.07 shall continue for
the benefit of the retiring Trustee.
SECTION 7.09. Successor Trustee by Merger. If the Trustee
consolidates with, merges or converts into, or transfers all or substantially
all its corporate trust business or assets to, another corporation or banking
association, the resulting, surviving or transferee corporation without any
further act shall be the successor Trustee.
In case at the time such successor or successors by merger,
conversion or consolidation to the Trustee shall succeed to the trusts created
by this Indenture any of the Securities shall have been authenticated but not
delivered, any such successor to the Trustee may adopt the certificate of
authentication of any predecessor Trustee, and deliver such Securities so
authenticated; and in case at that time any of the Securities shall not have
been authenticated, any successor to the Trustee may authenticate such
Securities either in the name of any predecessor hereunder or in the name of
the successor to the Trustee; and in all such cases such certificates shall
have the full force which it is anywhere in the Securities or in this
Indenture provided that the certificate of the Trustee shall have.
SECTION 7.10. Eligibility; Disqualification. The
Trustee shall at all times satisfy the requirements of TIA ss. 310(a).
The Trustee shall have a combined capital and surplus of at least $50,000,000
as set forth in its most recent published annual report of condition. The
Trustee shall comply with TIAss. 310(b); provided, however, that there shall
be excluded from the operation of TIA ss. 310(b)(1) any indenture or indentures
under which other securities or certificates of interest or participation in
other securities of the Issuer are outstanding if the
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requirements for such exclusion set forth in TIA ss. 310(b)(1)
are met.
SECTION 7.11. Preferential Collection of Claims Against the
Issuer. The Trustee shall comply with TIA ss. 311(a), excluding any creditor
relationship listed in TIA ss. 311(b). A Trustee who has resigned or been
removed shall be subject to TIA ss. 311(a) to the extent indicated therein.
SECTION 7.12. Money Held in Trust. Money held by the Trustee
in trust hereunder need not be segregated from other funds except to the
extent required by law. The Trustee shall be under no liability for interest
on any money received by it hereunder except as otherwise agreed in writing
with the Issuer.
ARTICLE VIII
Subordination of Securities
---------------------------
SECTION 8.01. Securities Subordinate to Senior Indebtedness.
The Issuer covenants and agrees, and each Holder of a Security, by his
acceptance thereof, likewise covenants and agrees, that, to the extent and in
the manner hereinafter set forth in this Article (subject to the provisions of
Section 8.15), upon the consummation of the FN Escrow Merger, the indebtedness
represented by the Securities and the payment of the Principal of and interest
on each and all of the Securities are hereby expressly made subordinate and
subject in right of payment to the prior payment in full of all Senior
Indebtedness and that the subordination is for the benefit of and enforceable
by the holders of Senior Indebtedness. The Securities are pari passu with, and
are not superior in right of payment to, the Holdings 91/8% Senior
Subordinated Notes. None of the provisions of this Article shall apply prior
to the consummation of the FN Escrow Merger.
SECTION 8.02. Payment Over of Proceeds Upon Dissolution,
Etc. In the event of (a) any insolvency or bankruptcy case or proceeding, or
any receivership, liquidation, reorganization or other similar case or
proceeding in connection therewith, relative to Holdings or to its creditors,
as such, or to its assets, or (b) any liquidation, dissolution or other
winding up of Holdings whether voluntary or involuntary and whether or not
involving insolvency or bankruptcy, or (c) any assignment for the benefit of
creditors or any other marshaling of assets and liabilities of Holdings, then
and in any such event the holders of Senior Indebtedness shall be entitled to
receive payment in full of all amounts due or to become due on or in respect
of all Senior Indebtedness before the Holders of the Securities are entitled
to receive any
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payment on account of Principal of or interest on the Securities, and to that
end the holders of Senior Indebtedness shall be entitled to receive, for
application to the payment thereof, any Securities Payment.
In the event that, notwithstanding the foregoing provisions
of this Section, the Trustee or the Holder of any Security shall have received
any Securities Payment before all Senior Indebtedness is paid in full, and if
such fact shall, at or prior to the time of such payment or distribution, have
been made known to the Trustee or, as the case may be, such Holder, then and
in such event such payment or distribution shall be paid over or delivered
forthwith to the trustee in bankruptcy, receiver, liquidating trustee,
custodian, assignee, agent or other Person making payment or distribution of
assets of Holdings for application to the payment of all Senior Indebtedness
remaining unpaid, to the extent necessary to pay all Senior Indebtedness in
full, after giving effect to any concurrent payment or distribution to or for
the holders of Senior Indebtedness.
For purposes of this Article only, the words "cash, property
or securities" shall not be deemed to include shares of stock of Holdings as
reorganized or readjusted, or securities of Holdings or any other corporation
provided for by a plan of reorganization or readjustment which are
subordinated in right of payment to all Senior Indebtedness which may at the
time be outstanding to the same extent as, or to a greater extent than, the
Securities are so subordinated as provided in this Article. The consolidation
of Holdings with, or the merger of Holdings into, another Person or the
liquidation or dissolution of Holdings following the conveyance or transfer of
its properties and assets substantially as an entirety to another Person upon
the terms and conditions set forth in Article Five shall not be deemed a
dissolution, winding up, liquidation, reorganization, assignment for the
benefit of creditors or marshaling of assets and liabilities of Holdings for
the purposes of this Section if the Person formed by such consolidation or
into which Holdings is merged or which acquires by conveyance or transfer such
properties and assets substantially as an entirety, as the case may be, shall,
as a part of such consolidation, merger, conveyance or transfer, comply with
the conditions set forth in Article Five.
SECTION 8.03. No Payment When Senior Indebtedness
in Default. In the event that either (i) any default in the
payment of principal of or interest on any Senior Indebtedness has occurred
and is continuing or (ii) any other default on Senior Indebtedness occurs
resulting in the acceleration of the maturity of such Senior Indebtedness in
accordance with its terms (either such event being referred
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to as a "Senior Payment Default or Acceleration"), then unless and until such
event of default shall have been 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 shall be made;
provided, however, that 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 that any Senior Nonmonetary Default (as defined
below) shall have occurred and be continuing, then, 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 Securities, the date of such
acceleration, no Securities Payment shall 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 shall have been cured or waived or shall have ceased to exist and any
acceleration of Designated Senior Indebtedness shall have been rescinded or
annulled or the Designated Senior Indebtedness to which such Senior
Nonmonetary Default relates shall have 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 shall have 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 shall resume making any and all required payments in respect of the
Securities, including any missed payments. No more than one Payment Blockage
Period may be commenced with respect to the Securities during any 365-day
period and there shall 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 shall
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 shall have been cured or waived for a
period of not less than 90 consecutive days.
"Senior Nonmonetary Default" means the occurrence
or existence and continuance of any event of default, or of
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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.
In the event that, notwithstanding the foregoing, Holdings
shall make any payment to the Trustee or the Holder of any Security prohibited
by the foregoing provisions of this Section, and if such fact shall, at or
prior to the time of such payment, have been made known to the Trustee or, as
the case may be, such Holder, then and in such event such payment shall be
paid over and delivered forthwith to the holders of Senior Indebtedness as
their interests may appear.
SECTION 8.04. Payment Permitted If No Default. Nothing
contained in this Article or elsewhere in this Indenture or in any of the
Securities shall prevent (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 marshaling of assets and
liabilities of Holdings referred to in Section 8.02 or under the conditions
described in Section 8.03, from making payments at any time of Principal of or
interest on the Securities, 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 Securities 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 provisions of
this Article.
SECTION 8.05. Acceleration of Payment of Securities. If an
Event of Default shall have occurred and be continuing, the Trustee or the
Holders of the Securities electing to accelerate the Securities pursuant to
Section 6.02 shall give the Designated Senior Indebtedness Representatives
five Business Days' prior written notice before accelerating the Securities,
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
Securities without such notice if at such time payment of any Designated
Senior Indebtedness shall have been accelerated.
SECTION 8.06. Subrogation to Rights of Holders of
Senior Indebtedness. Subject to the payment in full of all Senior
Indebtedness, the Holders of the Securities shall be
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subrogated to the rights of the holders of such Senior Indebtedness to receive
payments and distributions of cash, property and securities applicable to the
Senior Indebtedness until the Principal of and interest on the Securities
shall be paid in full. For purposes of such subrogation, no payments or
distributions to the holders of the Senior Indebtedness of any cash, property
or securities to which the Holders of the Securities or the Trustee would be
entitled except for the provisions of this Article, and no payments over
pursuant to the provisions of this Article to the holders of Senior
Indebtedness by Holders of the Securities or the Trustee, shall, as among
Holdings, its creditors other than holders of Senior Indebtedness and the
Holders of the Securities, be deemed to be a payment or distribution by
Holdings to or on account of the Senior Indebtedness.
SECTION 8.07. Provisions Solely to Define Relative Rights.
The provisions of this Article are and are intended solely for the purpose of
defining the relative rights of the Holders of the Securities on the one hand
and the holders of Senior Indebtedness on the other hand. Nothing contained in
this Article or elsewhere in this Indenture or in the Securities is intended
to or shall (a) impair, as among Holdings, its creditors other than holders of
Senior Indebtedness and the Holders of the Securities, the obligation of
Holdings, which is absolute and unconditional (and which, subject to the
rights under this Article of the holders of Senior Indebtedness, is intended
to rank equally with all other general obligations of Holdings), to pay to the
Holders of the Securities the Principal of and interest on the Securities as
and when the same shall become due and payable in accordance with their terms;
or (b) affect the relative rights against Holdings of the Holders of the
Securities and creditors of Holdings other than the holders of Senior
Indebtedness; or (c) prevent the Trustee or the Holder of any Security from
exercising all remedies otherwise permitted by applicable law upon default
under this Indenture, subject to the rights, if any, under this Article of the
holders of Senior Indebtedness to receive cash, property and securities
otherwise payable or deliverable to the Trustee or such Holder.
SECTION 8.08. Trustee to Effectuate Subordination. Each
Holder of a Security by his acceptance thereof authorizes and directs the
Trustee on his behalf to take such action as may be necessary or appropriate
to effectuate the subordination provided in this Article and appoints the
Trustee his attorney-in-fact for any and all such purposes.
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SECTION 8.09. No Waiver of Subordination Provisions. No
right of any present or future holder of any Senior Indebtedness to enforce
subordination as herein provided shall at any time in any way be prejudiced or
impaired by any act or failure to act on the part of Holdings or by any act or
failure to act, in good faith, by any such holder, or by any non-compliance by
Holdings with the terms, provisions and covenants of this Indenture,
regardless of any knowledge thereof any such holder may have or be otherwise
charged with.
Without in any way limiting the generality of the foregoing
paragraph, the holders of Senior Indebtedness may, at any time and from time
to time, without the consent of or notice to the Trustee or the Holders of the
Securities, without incurring responsibility to the Holders of the Securities
and without impairing or releasing the subordination provided in this Article
or the obligations hereunder of the Holders of the Securities to the holders
of Senior Indebtedness, do any one or more of the following: (i) change the
manner, place or terms of payment or extend the time of payment of, or renew
or alter, Senior Indebtedness, or otherwise amend or supplement in any manner
Senior Indebtedness or any instrument evidencing the same or any agreement
under which Senior Indebtedness is outstanding; (ii) sell, exchange, release
or otherwise deal with any property pledged, mortgaged or otherwise securing
Senior Indebtedness; (iii) release any Person liable in any manner for the
collection of Senior Indebtedness; and (iv) exercise or refrain from
exercising any rights against Holdings and any other Person.
SECTION 8.10. Notice to Trustee. Holdings shall give prompt
written notice to the Trustee of any fact known to Holdings which would
prohibit the making of any payment to or by the Trustee in respect of the
Securities. Notwithstanding the provisions of this Article or any other
provision of this Indenture, the Trustee shall not be charged with knowledge
of the existence of any facts which would prohibit the making of any payment
to or by the Trustee in respect of the Securities, unless and until the
Trustee shall have received written notice thereof from Holdings or a holder
of Senior Indebtedness or from any trustee therefor; and, prior to the receipt
of any such written notice, the Trustee, subject to the provisions of Article
VII, shall be entitled in all respects to assume that no such facts exist.
Subject to the provisions of Article VII, the Trustee shall
be entitled to rely on the delivery to it of a written notice by a Person
representing himself to be a holder of Senior Indebtedness (or a trustee
therefor) to establish that such notice has been given by a holder of Senior
Indebtedness (or a trustee therefor). In the event
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that the Trustee determines in good faith that further evidence is required
with respect to the right of any Person as a holder of Senior Indebtedness to
participate in any payment or distribution pursuant to this Article, the
Trustee may request such Person to furnish evidence to the reasonable
satisfaction of the Trustee as to the amount of Senior Indebtedness held by
such Person, the extent to which such Person is entitled to participate in
such payment or distribution and any other facts pertinent to the rights of
such Person under this Article, and if such evidence is not furnished, the
Trustee may defer any payment to such Person pending judicial determination as
to the right of such Person to receive such payment.
SECTION 8.11. Reliance on Judicial Order or Certificate of
Liquidating Agent. Upon any payment or distribution of assets of Holdings
referred to in this Article, the Trustee, subject to the provisions of Article
VII, and the Holders of the Securities shall be entitled to rely upon any
order or decree entered by any court of competent jurisdiction in which such
insolvency, bankruptcy, receivership, liquidation, reorganization,
dissolution, winding up or similar case or proceeding is pending, or a
certificate of the trustee in bankruptcy, receiver, liquidating trustee,
custodian, assignee for the benefit of creditors, agent or other Person making
such payment or distribution, delivered to the Trustee or to the Holders of
Securities, for the purpose of ascertaining the Persons entitled to
participate in such payment or distribution, the holders of the Senior
Indebtedness and other Debt of Holdings, the amount thereof or payable
thereon, the amount or amounts paid or distributed thereon and all other facts
pertinent thereto or to this Article.
The Trustee shall not be charged with knowledge of the
existence of Senior Indebtedness (other than the Senior Notes) or of any facts
that would prohibit any payment hereunder unless a Trust Officer of the
Trustee shall have received notice to that effect at the address of the
Trustee. With respect to the holders of Senior Indebtedness, the Trustee
undertakes to perform or to observe only such of its covenants or obligations
as are specifically set forth in this Article VIII and no implied covenants or
obligations with respect to holders of Senior Indebtedness shall be read into
this Indenture against the Trustee.
SECTION 8.12. Trustee Not Fiduciary for Holders of Senior
Indebtedness. The Trustee shall not be deemed to owe any fiduciary duty to the
holders of Senior Indebtedness and shall not be liable to any such holders if
it shall in good faith mistakenly pay over or distribute to Holders of
Securities or to Holdings or to any other Person cash, property or securities
to which any holders of Senior
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Indebtedness shall be entitled by virtue of this Article or otherwise.
SECTION 8.13. Rights of Trustee as Holder of Senior
Indebtedness; Preservation of Trustee's Rights. The Trustee in its individual
capacity shall be entitled to all the rights set forth in this Article with
respect to any Senior Indebtedness which may at any time be held by it, to the
same extent as any other holder of Senior Indebtedness, and nothing in this
Indenture shall deprive the Trustee of any of its rights as such holder.
Nothing in this Article shall apply to claims of, or
payments to, the Trustee under or pursuant to Section 7.07.
SECTION 8.14. Article Applicable to Paying Agents. In case
at any time any Paying Agent other than the Trustee shall have been appointed
by Holdings and be then acting hereunder, the term "Trustee" as used in this
Article shall in such case (unless the context otherwise requires) be
construed as extending to and including such Paying Agent within its meaning
as fully for all intents and purposes as if such Paying Agent were named in
this Article in addition to or in place of the Trustee; provided, however,
that Section 8.13 shall not apply to Holdings or any Affiliate of Holdings if
it or such Affiliate acts as Paying Agent.
SECTION 8.15. Trust Moneys Not Subordinated. Notwithstanding
anything contained herein to the contrary, payments from money or the proceeds
of U.S. Government Obligations held in trust under Article IX by the Trustee
for the payment of Principal of and interest on the Securities shall not be
subordinated to the prior payment of any Senior Indebtedness or subject to the
restrictions set forth in this Article VIII, and none of the Holders of the
Securities shall be obligated to pay over any such amount to Holdings or any
holder of Senior Indebtedness of Holdings or any other creditor of Holdings.
SECTION 8.16. Reliance by Holders of Senior Debt on
Subordination Provisions. Each Holder of a Security by his acceptance thereof
acknowledges and agrees that the foregoing subordination provisions are, and
are intended to be, an inducement and a consideration to each holder of any
Senior Indebtedness, whether such Senior Indebtedness was created or acquired
before or after the issuance of the Securities, to acquire and continue to
hold, or to continue to hold, such Senior Indebtedness and such holder of
Senior Indebtedness shall be deemed conclusively to have relied on such
subordination provisions in acquiring and continuing to hold, or in continuing
to hold, such Senior Indebtedness.
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ARTICLE IX
Discharge of Indenture; Defeasance
----------------------------------
SECTION 9.01. Discharge of Liability on Securities;
Defeasance. (a) When (i) the Issuer delivers to the Trustee all Outstanding
Securities (other than Securities replaced pursuant to Section 2.07) for
cancellation or (ii) all Outstanding Securities have become due and payable
and the Issuer irrevocably deposits with the Trustee funds sufficient to pay
at maturity all Outstanding Securities, including interest thereon (other than
Securities replaced pursuant to Section 2.07), and if in either case the
Issuer pays all other sums payable hereunder by the Issuer, then this
Indenture shall, subject to Sections 9.01(c) and 9.06, cease to be of further
effect. The Trustee shall acknowledge satisfaction and discharge of this
Indenture on demand of the Issuer accompanied by an Officers' Certificate and
an Opinion of Counsel as to the satisfaction of all conditions to such
satisfaction and discharge of this Indenture and at the cost and expense of
the Issuer.
(b) Subject to Sections 9.01(c), 9.02 and 9.06, the Issuer
at any time may terminate (i) all its obligations under the Securities and
this Indenture ("legal defeasance option") or (ii) its obligations under
Sections 4.02, 4.03, 4.04, 4.05, 4.06, 4.07, 4.08, 4.09, 4.10, 4.11, 4.12 and
5.01(a)(iii) and the operation of Sections 6.01(3), 6.01(5), 6.01(6) (with
respect to Significant Subsidiaries of Holdings only), 6.01(7) (with respect
to Significant Subsidiaries of Holdings only) and 6.01(8) and paragraph 6 of
the Securities ("covenant defeasance option"). 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 Securities may not be accelerated because of an Event of Default. If
the Issuer exercises its covenant defeasance option, payment of the Securities
may not be accelerated because of an Event of Default specified in 6.01(3),
6.01(5), 6.01(6) (with respect to Significant Subsidiaries only), 6.01(7)
(with respect to Significant Subsidiaries only) and 6.01(8) or because of the
failure of Holdings to comply with clause (a)(iii) of Section 5.01.
Upon satisfaction of the conditions set forth herein and
upon request of the Issuer, the Trustee shall acknowledge in writing the
discharge of those obligations that the Issuer terminates.
(c) Notwithstanding clauses (a) and (b) above, the Issuer's
obligations in Sections 2.03, 2.04, 2.05, 2.06,
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2.07, 7.07, 7.08, 9.04, 9.05 and 9.06 shall survive until the Securities have
been paid in full. Thereafter, the Issuer's obligations in Sections 7.07, 9.04
and 9.05 shall survive.
SECTION 9.02. Conditions to Defeasance. The
Issuer may exercise its legal defeasance option or its
covenant defeasance option only if:
(1) the Issuer irrevocably deposits in trust with
the Trustee money or U.S. Government Obligations for
the payment of Principal and interest on the Securities
to maturity or redemption, as the case may be;
(2) the Issuer delivers to the Trustee a certificate from a
nationally recognized firm of independent accountants expressing
their opinion that the payments of principal and interest when due
and without reinvestment on the deposited U.S. Government Obligations
plus any deposited money without investment will provide cash at such
times and in such amounts as will be sufficient to pay Principal and
interest when due on all the Securities to maturity or redemption, as
the case may be;
(3) 123 days pass after the deposit is made and during the
123-day period no Default described in Section 6.01(6) or (7) with
respect to the Issuer occurs which is continuing at the end of the
period;
(4) no Default has occurred and is continuing on the date of
such deposit and after giving effect thereto;
(5) the deposit does not constitute a default under any
other agreement binding on the Issuer;
(6) the Issuer delivers to the Trustee an Opinion of Counsel
to the effect that the trust resulting from the deposit does not
constitute, or is qualified as, a regulated investment company under
the Investment Company Act of 1940;
(7) in the case of the legal defeasance option, the Issuer
shall have delivered to the Trustee an Opinion of Counsel stating
that (i) the Issuer has received from, or there has been published
by, the Internal Revenue Service a ruling, or (ii) since the date of
this Indenture there has been a change in the applicable Federal
income tax law, in either case to the effect that, and based thereon
such Opinion of Counsel shall confirm that, the Holders will not
recognize income, gain or loss for Federal income tax purposes as a
result of such defeasance and will be
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subject to Federal income tax on the same amounts, in the same manner
and at the same times as would have been the case if such defeasance
had not occurred;
(8) in the case of the covenant defeasance option, the
Issuer shall have delivered to the Trustee an Opinion of Counsel to
the effect that the Holders will not recognize income, gain or loss
for Federal income tax purposes as a result of such covenant
defeasance and will be subject to Federal income tax on the same
amounts, in the same manner and at the same times as would have been
the case if such defeasance had not occurred; and
(9) the Issuer delivers to the Trustee an Officers'
Certificate and an Opinion of Counsel, each stating that all
conditions precedent to the defeasance and discharge of the
Securities as contemplated by this Article IX have been complied
with.
Notwithstanding the foregoing provisions of this Section,
the conditions set forth in the foregoing paragraphs (2), (3), (4), (5), (6),
(7) and (8) need not be satisfied so long as, at the time the Issuer makes the
deposit described in paragraph (1), (i) no Default or Event of Default
referred to in Section 6.01(1), 6.01(6) or 6.01(7) has occurred and is
continuing on the date of such deposit and after giving effect thereto and
(ii) either (x) a notice of redemption has been mailed pursuant to Section
3.03 providing for redemption of all the Securities not later than 30 days
after such mailing and the provisions of Section 3.01 with respect to such
redemption shall have been complied with or (y) the Stated Maturity of the
Securities will occur within 30 days. If the conditions in the preceding
sentence are satisfied, the Issuer shall be deemed to have exercised its
covenant defeasance option.
Before or after a deposit described in this Section 9.02,
the Issuer may make arrangements satisfactory to the Trustee for the
redemption of Securities at a future date in accordance with Article III.
SECTION 9.03. Application of Trust Money. The Trustee shall
hold in trust money or U.S. Government Obligations deposited with it pursuant
to this Article IX. It shall apply the deposited money and the money from U.S.
Government Obligations through the Paying Agent and in accordance with this
Indenture to the payment of Principal of and interest on the Securities.
SECTION 9.04. Repayment to the Issuer. The Trustee and the
Paying Agent shall promptly turn over to the Issuer upon request any excess
money or securities held by them at any time.
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Subject to any applicable abandoned property law, the
Trustee and the Paying Agent shall pay to the Issuer upon request any money
held by them for the payment of Principal or interest that remains unclaimed
for two years, and, thereafter, Holders entitled to the money must look to the
Issuer for payment as general creditors.
SECTION 9.05. Indemnity for Government Obligations.
The Issuer shall pay and shall indemnify the Trustee against any tax, fee
or other charge imposed on or assessed against deposited U.S. Government
Obligations or the principal and interest received on such U.S. Government
Obligations.
SECTION 9.06. Reinstatement. If the Trustee or Paying Agent
is unable to apply any money or U.S. Government Obligations in accordance with
this Article IX by reason of any legal proceeding or by reason of any order or
judgment of any court or governmental authority enjoining, restraining or
otherwise prohibiting such application, the Issuer's Obligations under this
Indenture and the Securities shall be revived and reinstated as though no
deposit had occurred pursuant to this Article IX until such time as the
Trustee or Paying Agent is permitted to apply all such money or U.S.
Government Obligations in accordance with this Article IX; provided, however,
that, if the Issuer has made any payment of interest on or Principal of any
Securities because of the reinstatement of its Obligations, the Issuer shall
be subrogated to the rights of the Holders of such Securities to receive such
payment from the money or U.S. Government Obligations held by the Trustee or
Paying Agent.
ARTICLE X
Amendments
----------
SECTION 10.01. Without Consent of Holders. The
Issuer and the Trustee may amend this Indenture or the
Securities without notice to or consent of any Holder:
(1) to cure any ambiguity, omission, defect or
inconsistency;
(2) to comply with Article V;
(3) to provide for uncertificated Securities in addition to
or in place of certificated Securities; provided, however, that the
uncertificated Securities are Issued in registered form for purposes
of Section 163(f) of the Code or in a manner such that the
uncertificated Securities are described in Section 163(f)(2)(B) of
the Code;
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(4) to add Guarantees with respect to the Securities or to
secure (or provide additional security for) the Securities;
(5) to add to the covenants of the Issuer or
Holdings for the benefit of the Holders or to surrender
any right or power herein conferred upon the Issuer;
(6) to provide for issuance of the Exchange Notes, which
will have terms substantially identical in all material respects to
the Initial Notes (except that the interest rate and transfer
restrictions contained in the Initial Notes will be modified or
eliminated, as appropriate), and which will be treated, together with
any Outstanding Initial Notes, as a single issue of securities;
(7) to comply with any requirements of the SEC in
connection with qualifying this Indenture under the
TIA; or
(8) to make any change that does not adversely
affect the rights of any Holder.
After an amendment under this Section becomes effective, the
Issuer shall mail to Holders a notice briefly describing such amendment. The
failure to give such notice to all Holders, or any defect therein, shall not
impair or affect the validity of an amendment under this Section.
SECTION 10.02. With Consent of Holders. The Issuer and the
Trustee may amend this Indenture or the Securities without notice to any
Holder but with the written consent of the Holders of at least a majority in
Principal amount of the Outstanding Securities. However, without the consent
of each Holder affected, an amendment may not:
(1) reduce the Principal amount of Securities
whose Holders must consent to an amendment;
(2) reduce the rate of or extend the time for
payment of interest on any Security;
(3) reduce the Principal of or extend the Stated
Maturity of any Security or reduce the Default Amount
of any Security;
(4) reduce the premium payable upon the redemption of any
Security or change the time at which any Security may be redeemed in
accordance with paragraph 5 of the Securities;
(5) make any Security payable in money other than
that stated in the Security;
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(6) make any change in Section 4.06 relating to the date by
which the Issuer must purchase, or in the obligation of the Issuer to
purchase, tendered Securities, the definitions of Change of Control
Put Event or Change of Control Call Event, Section 6.04 or 6.07 or
the second sentence of this Section; or
(7) make any change in paragraph 6 of the
Securities.
It shall not be necessary for the consent of the Holders
under this Section to approve the particular form of any proposed amendment,
but it shall be sufficient if such consent approves the substance thereof.
After an amendment under this Section becomes effective, the
Issuer shall mail to Holders a notice briefly describing such amendment. The
failure to give such notice to all Holders, or any defect therein, shall not
impair or affect the validity of an amendment under this Section.
SECTION 10.03. Compliance with Trust Indenture
Act. Every amendment to this Indenture or the Securities
shall comply with the TIA as then in effect.
SECTION 10.04. Revocation and Effect of Consents and
Waivers. Any amendment to this Indenture or the Securities shall become
effective in accordance with its terms when executed and delivered by the
Issuer and the Trustee provided that the Issuer has received the requisite
consents prior thereto. The Issuer shall not be obligated to execute any such
amendment regardless of whether such consents have been received. Any waiver
shall become effective when the requisite consents have been received or such
later time as the Issuer may elect by notice to the Trustee. A consent to an
amendment or a waiver by a Holder of a Security shall bind the Holder and
every subsequent Holder of that Security or portion of the Security that
evidences the same Debt as the consenting Holder's Security, even if notation
of the consent or waiver is not made on the Security. However, any such Holder
or subsequent Holder may revoke the consent or waiver as to such Holder's
Security or portion of the Security if the Trustee receives the notice of
revocation prior to the time that the Issuer receives the requisite number of
consents to such proposed amendment or waiver. After an amendment or waiver
becomes effective, it shall bind every Holder. A consent to any amendment or
waiver hereunder by any Holder given in connection with a tender of such
Holder's Securities shall not be rendered invalid by such tender.
The Issuer may, but shall not be obligated to, fix a record
date for the purpose of determining the Holders entitled to give their consent
or take any other action
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described above or required or permitted to be taken pursuant to this
Indenture. If a record date is fixed, then notwithstanding the immediately
preceding paragraph, those Persons who were Holders at such record date (or
their duly designated proxies), and only those Persons, shall be entitled to
give such consent or to revoke any consent previously given or to take any
such action, whether or not such Persons continue to be Holders after such
record date. No such consent shall be valid or effective for more than 120
days after such record date.
SECTION 10.05. Notation on or Exchange of Securities. If an
amendment changes the terms of a Security, the Trustee may require the Holder
of the Security to deliver it to the Trustee. The Trustee may place an
appropriate notation on the Security regarding the changed terms and return it
to the Holder. Alternatively, if the Issuer or the Trustee so determines, the
Issuer in exchange for the Security shall Issue and the Trustee shall
authenticate a new Security that reflects the changed terms. Failure to make
the appropriate notation or to Issue a new Security shall not affect the
validity of such amendment.
SECTION 10.06. Trustee To Sign Amendments. The Trustee shall
sign any amendment authorized pursuant to this Article X if the amendment
does not adversely affect the rights, duties, liabilities or immunities of the
Trustee. If it does, the Trustee may but need not sign it. In signing such
amendment the Trustee shall be entitled to receive indemnity reasonably
satisfactory to it and to receive, and (subject to Section 7.01) shall be
fully protected in relying upon, an Officers' Certificate and an Opinion of
Counsel stating that such amendment is authorized or permitted by this
Indenture.
SECTION 10.07. Payment for Consent. Neither the Issuer,
any Affiliate of the Issuer nor any Subsidiary shall, directly or
indirectly, pay or cause to be paid any consideration, whether by way of
interest, fee or otherwise, to any Holder for or as an inducement to any
consent, waiver or amendment of any of the terms or provisions of this
Indenture or the Securities unless such consideration is offered to be paid or
agreed to be paid to all Holders which so consent, waive or agree to amend in
the time frame set forth in solicitation documents relating to such consent,
waiver or amendment.
ARTICLE XI
Miscellaneous
-------------
SECTION 11.01. Trust Indenture Act Controls. If any
provision of this Indenture limits, qualifies or
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conflicts with another provision which is required to be included in this
Indenture by the TIA, the required provision shall control.
SECTION 11.02. Notices. Any notice or communication shall
be in writing and delivered in Person or mailed by first-class mail
addressed as follows:
if to FN Escrow:
First Nationwide Escrow Corp.
625 Madison Avenue, 12th Floor
New York, NY 10022
Attention of Chief Financial Officer
if to Holdings:
First Nationwide Holdings Inc.
625 Madison Avenue, 12th Floor
New York, New York 10022
Attention of Chief Financial Officer
if to the Trustee:
The Bank of New York
101 Barclay Street
Floor 21 West
New York, New York 10286
Attention of Corporate Trust Trustee
Administration
The Issuer or the Trustee by notice to the other may
designate additional or different addresses for subsequent notices or
communications.
Any notice or communication mailed to a Holder shall be sent
by first-class mail to the Holder at the Holder's address as it appears on the
registration books of the Registrar and shall be sufficiently given if so
mailed within the time prescribed.
Failure to mail a notice or communication to a Holder or any
defect in it shall not affect its sufficiency with respect to other Holders.
If a notice or communication is mailed to a Holder in the manner provided
above, it is duly given, whether or not the addressee receives it.
SECTION 11.03. Communication by Holders with other Holders.
Holders may communicate in accordance with TIA ss. 312(b) with other Holders
with respect to their rights under this Indenture or the Securities. The
Issuer, the
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Trustee, the Registrar and anyone else shall have the protection of TIA ss.
312(c).
SECTION 11.04. Certificate and Opinion as to Conditions
Precedent. Upon any request or application by the Issuer to the Trustee to
take or refrain from taking any action under this Indenture, the Issuer shall
furnish to the Trustee:
(1) an Officers' Certificate in form and substance
reasonably satisfactory to the Trustee stating that, in the opinion
of the signers, all conditions precedent, if any, provided for in
this Indenture relating to the proposed action have been complied
with; and
(2) an Opinion of Counsel in form and substance reasonably
satisfactory to the Trustee stating that, in the opinion of such
counsel, all such conditions precedent have been complied with;
provided, however, that, in the case of such application or request as to
which the furnishing of such documents, certificates or opinions is
specifically required by any provision of this Indenture relating to such
particular application or request, no additional certificate or opinion need
be furnished.
SECTION 11.05. Statements Required in Certificate or
Opinion. Each certificate or opinion with respect to compliance with a
covenant or condition provided for in this Indenture (other than the Officer's
Certificate required by Section 4.13) shall include:
(1) a statement that the Person making such
certificate or opinion has read such covenant or
condition;
(2) a brief statement as to the nature and scope of the
examination or investigation upon which the statements or opinions
contained in such certificate or opinion are based;
(3) a statement that, in the opinion of such Person, he has
made such examination or investigation as is necessary to enable him
to express an informed opinion as to whether or not such covenant or
condition has been complied with; and
(4) a statement as to whether or not, in the opinion of such
Person, such covenant or condition has been complied with.
SECTION 11.06. When Securities Disregarded. In
determining whether the Holders of the required Principal
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amount of Outstanding Securities have concurred in any request, demand,
authorization, direction, waiver or consent, Securities owned by the Issuer or
by any Person directly or indirectly controlling or controlled by or under
direct or indirect common control with the Issuer shall be disregarded and
deemed not to be Outstanding, except that, for the purpose of determining
whether the Trustee shall be protected in relying on any such request, demand,
authorization, direction, waiver or consent, only Securities which the Trustee
knows are so owned shall be so disregarded. Also, subject to the foregoing,
only Securities Outstanding at the time shall be considered in any such
determination.
SECTION 11.07. Rules by Trustee, Paying Agent and Registrar.
The Trustee may make reasonable rules for action by or a meeting of Holders.
The Registrar and the Paying Agent may make reasonable rules for their
functions.
SECTION 11.08. Legal Holidays. If a payment date is a Legal
Holiday, payment shall be made on the next succeeding day that is not a Legal
Holiday, and no interest shall accrue for the intervening period. If a regular
record date is a Legal Holiday, the record date shall not be affected.
SECTION 11.09. Governing Law. This Indenture and the
Securities shall be governed by, and construed in accordance with, the laws
of the State of New York but without giving effect to applicable principles
of conflicts of law to the extent that the application of the laws of
another jurisdiction would be required thereby.
SECTION 11.10. No Recourse Against Others. A director,
officer, employee or stockholder, as such, of the Issuer or the Trustee
shall not have any liability for any obligations of the Issuer or the Trustee
under the Securities or this Indenture or for any claim based on, in respect
of or by reason of such obligations or their creation. By accepting a
Security, each Holder shall waive and release all such liability. The waiver
and release shall be part of the consideration for the Issue of the
Securities.
SECTION 11.11. Successors. All agreements of the Issuer in
this Indenture and the Securities shall bind its successors. All agreements
of the Trustee in this Indenture shall bind its successors.
SECTION 11.12. Multiple Originals. The parties may sign any
number of copies of this Indenture. Each signed copy shall be an original,
but all of them together represent the same agreement. One signed copy is
enough to prove this Indenture.
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SECTION 11.13. Table of Contents; Headings. The table of
contents, cross-reference sheet and headings of the Articles and Sections of
this Indenture have been inserted for convenience of reference only, are not
intended to be considered a part hereof and shall not modify or restrict any
of the terms or provisions hereof.
IN WITNESS WHEREOF, the parties have caused this Indenture
to be duly executed as of the date first written above.
FIRST NATIONWIDE ESCROW CORP.
By:
-----------------------------
Title:
THE BANK OF NEW YORK,
as Trustee,
By:
----------------------------
Title:
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EXHIBIT A
[FORM OF FACE OF INITIAL NOTE]
THE SECURITIES HAVE NOT BEEN REGISTERED UNDER THE SECURITIES
ACT OF 1933, AS AMENDED (THE "SECURITIES ACT"), OR ANY STATE SECURITIES LAWS.
NEITHER THIS SECURITY NOR ANY INTEREST OR PARTICIPATION HEREIN MAY BE
REOFFERED, SOLD, ASSIGNED, TRANSFERRED, PLEDGED, ENCUMBERED OR OTHERWISE
DISPOSED OF IN THE ABSENCE OF SUCH REGISTRATION OR UNLESS SUCH TRANSACTION IS
EXEMPT FROM, OR NOT SUBJECT TO, REGISTRATION.
THE HOLDER OF THIS SECURITY BY ITS ACCEPTANCE HEREOF AGREES
TO OFFER, SELL OR OTHERWISE TRANSFER SUCH SECURITY, PRIOR TO THE DATE (THE
"RESALE RESTRICTION TERMINATION DATE") WHICH IS THREE YEARS AFTER THE LATER OF
THE ORIGINAL ISSUE DATE HEREOF AND THE LAST DATE ON WHICH THE ISSUER OR ANY
AFFILIATE OF THE ISSUER WAS THE OWNER OF THIS SECURITY (OR ANY PREDECESSOR OF
SUCH SECURITY), ONLY (A) TO THE ISSUER, (B) PURSUANT TO A REGISTRATION
STATEMENT WHICH HAS BEEN DECLARED EFFECTIVE UNDER THE SECURITIES ACT, (C) FOR
SO LONG AS THE SECURITIES ARE ELIGIBLE FOR RESALE PURSUANT TO RULE 144A UNDER
THE SECURITIES ACT, TO A PERSON IT REASONABLY BELIEVES IS A "QUALIFIED
INSTITUTIONAL BUYER" AS DEFINED IN RULE 144A UNDER THE SECURITIES ACT THAT
PURCHASES FOR ITS OWN ACCOUNT OR FOR THE ACCOUNT OF A QUALIFIED INSTITUTIONAL
BUYER TO WHOM NOTICE IS GIVEN THAT THE TRANSFER IS BEING MADE IN RELIANCE ON
RULE 144A, (D) PURSUANT TO OFFERS AND SALES TO NON-U.S. PERSONS THAT OCCUR
OUTSIDE THE UNITED STATES WITHIN THE MEANING OF REGULATION S UNDER THE
SECURITIES ACT, (E) TO AN INSTITUTIONAL "ACCREDITED INVESTOR" WITHIN THE
MEANING OF SUBPARAGRAPH (A)(1), (A)(2), (A)(3) OR (A)(7) OF RULE 501 UNDER THE
SECURITIES ACT THAT IS ACQUIRING THE SECURITY FOR ITS OWN ACCOUNT, OR FOR THE
ACCOUNT OF SUCH AN INSTITUTIONAL "ACCREDITED INVESTOR," IN EACH CASE IN A
MINIMUM PRINCIPAL AMOUNT OF THE SECURITIES OF $500,000, FOR INVESTMENT
PURPOSES AND NOT WITH A VIEW TO, OR FOR OFFER OR SALE IN CONNECTION WITH, ANY
DISTRIBUTION IN VIOLATION OF THE SECURITIES ACT, OR (F) PURSUANT TO ANOTHER
AVAILABLE EXEMPTION FROM THE REGISTRATION REQUIREMENTS OF THE SECURITIES ACT,
SUBJECT TO THE ISSUER'S OR THE TRUSTEE'S RIGHT PRIOR TO ANY SUCH OFFER, SALE
OR TRANSFER PURSUANT TO CLAUSES (D), (E) OR (F) TO REQUIRE THE DELIVERY OF AN
OPINION OF COUNSEL, CERTIFICATION AND/OR OTHER INFORMATION SATISFACTORY TO
EACH OF THEM, AND IN EACH OF THE FOREGOING CASES, TO REQUIRE THAT A
CERTIFICATE OF TRANSFER IN THE FORM APPEARING ON THE OTHER SIDE OF THIS
SECURITY IS COMPLETED AND DELIVERED BY THE TRANSFEROR TO THE TRUSTEE. THIS
LEGEND WILL BE REMOVED UPON THE REQUEST OF THE HOLDER AFTER THE RESALE
RESTRICTION TERMINATION DATE.
A-1
<PAGE>
Initial Notes eligible for deposit at The Depository Trust
Company shall also bear the following legend:
UNLESS THIS CERTIFICATE IS PRESENTED BY AN AUTHORIZED
REPRESENTATIVE OF THE DEPOSITORY TRUST COMPANY, A NEW YORK CORPORATION
("DTC"), NEW YORK, NEW YORK, TO THE ISSUER OR ITS AGENT FOR REGISTRATION OF
TRANSFER, EXCHANGE OR PAYMENT, AND ANY CERTIFICATE ISSUED IS REGISTERED IN THE
NAME OF CEDE & CO. OR SUCH OTHER NAME AS IS REQUESTED BY AN AUTHORIZED
REPRESENTATIVE OF DTC (AND ANY PAYMENT IS MADE TO CEDE & CO. OR TO SUCH OTHER
ENTITY AS IS REQUESTED BY AN AUTHORIZED REPRESENTATIVE OF DTC), ANY TRANSFER,
PLEDGE OR OTHER USE HEREOF FOR VALUE OR OTHERWISE BY OR TO ANY PERSON IS
WRONGFUL INASMUCH AS THE REGISTERED OWNER HEREOF, CEDE & CO., HAS AN INTEREST
HEREIN.
A-2
<PAGE>
No. _________ CUSIP No. _____________
ISIN No. _____________
FIRST NATIONWIDE ESCROW CORP.
10 5/8% Senior Subordinated Note Due 2003
$--------------
First Nationwide Escrow Corp., a Delaware corpora tion,
promises to pay __________________________________, or registered assigns, the
principal sum of __________________ Dollars ($_______________) on October 1,
2003.
Interest Payment Dates: April 1 and October 1
Record Dates: March 15 and September 15.
Additional provisions of this Security are set forth on the
other side of this Security.
Dated:
FIRST NATIONWIDE ESCROW CORP.
By
-------------------------
Vice President
-------------------------
Vice President
TRUSTEE'S CERTIFICATE OF
AUTHENTICATION
THE BANK OF NEW YORK,
as Trustee, certifies [Seal]
that this is one of
the Securities referred
to in the Indenture.
By
-----------------------------
Authorized Signatory
A-3
<PAGE>
[FORM OF REVERSE SIDE OF INITIAL NOTE]
FIRST NATIONWIDE ESCROW CORP.
10 5/8% Senior Subordinated Note Due 2003
1. Interest
First Nationwide Escrow Corp., a Delaware corporation (such
corporation, and its successors and assigns under the Indenture hereinafter
referred to, being herein called the "Issuer"), promises to pay interest on
the Principal amount of this Security at the rate per annum shown above;
provided, however, that if (a) by the 75th day following the date of
consummation of the Cal Fed Acquisition (or if such day is not a business day,
the first business day thereafter), the Shelf Registration Statement or the
Exchange Offer Registration Statement has not been filed with the SEC,
interest will accrue on the Securities from and including such date until but
excluding the earlier of (i) the date the Shelf Registration Statement or the
Exchange Offer Registration Statement is filed and (ii) the 180th day
following the date of consummation of the Cal Fed Acquisition (or if such day
is not a business day, the first business day thereafter), at a rate of 11
1/8% per annum and (b) by the 180th day following the date of consummation of
the Cal Fed Acquisition (or if such day is not a business day, the first
business day thereafter), neither (i) the Registered Exchange Offer is
consummated nor (ii) the Shelf Registration Statement with respect to the
resale of the Securities is declared effective, interest will accrue on the
Securities from and including such date until but excluding the earlier of (i)
the consummation of the Registered Exchange Offer and (ii) the effective date
of the Shelf Registration Statement at a rate of 11 1/8% per annum. The Issuer
will pay interest semiannually on April 1 and October 1 of each year,
commencing April 1, 1997; provided, however, that interest accruing on this
Security prior to the consummation of the Registered Exchange Offer will be
paid to the holder of this Security or the Exchange Note, as the case may be,
on the record date next preceding the interest payment date following the
consummation of the Registered Exchange Offer. Interest on the Securities will
accrue from the most recent date to which interest has been paid or, if no
interest has been paid, from September 19, 1996. Interest will be computed on
the basis of a 360-day year of twelve 30-day months. The Issuer shall pay
interest on overdue Principal at the rate borne by the Securities plus 1% per
annum, and it shall pay interest on overdue installments of interest at the
same rate to the extent lawful.
A-4
<PAGE>
2. Method of Payment
The Issuer will pay interest referred to in paragraph 1
above (except defaulted interest) on the Securities to the persons who are
registered holders of Securities at the close of business on the March 15 and
the September 15 next preceding the interest payment date even if Securities
are canceled after the record date and on or before the interest payment date.
Holders must surrender Securities to a Paying Agent to collect Principal
payments. The Issuer will pay Principal and interest in money of the United
States that at the time of payment is legal tender for payment of public and
private debts. However, the Issuer may pay Principal and interest, if any, by
check payable in such money. The Issuer may, at its option, mail a check
representing payment of interest to a Holder's registered address.
3. Paying Agent and Registrar
Initially, The Bank of New York (the "Trustee") will act as
Paying Agent and Registrar. The Issuer may appoint and change any Paying
Agent, Registrar or co-registrar without notice. The Issuer or any of its
domestically incorporated Wholly Owned Subsidiaries may act as Paying Agent,
Registrar, co-registrar or transfer agent.
4. Indenture
The Issuer has issued the Securities under an Indenture,
dated as of September 19, 1996 (the "Indenture"), between the Issuer and the
Trustee. The terms of the Securities include those stated in the Indenture and
those made part of the Indenture by reference to the Trust Indenture Act of
1939 (15 U.S.C. ss.ss. 77aaa-77bbbb) as in effect on the Issue Date (the
"Act"); provided, however, that in the event the Act is amended after the
Issue Date, the terms of the Securities, to the extent required by any such
amendment, include those made part of the Indenture by reference to the Act so
amended. Capitalized terms used herein and not defined herein have the
meanings ascribed thereto in the Indenture. The Securities are subject to all
such terms, and Holders are referred to the Indenture and the Act for a
statement of those terms.
The Securities are unsecured obligations of the Issuer,
subordinate and subject in right of payment to the prior payment in full of
all Senior Indebtedness, as described in paragraph 9 of this Security and in
the Indenture. The Securities are limited to $575,000,000 aggregate Principal
amount (subject to Section 2.07 of the Indenture). This Security is one of the
Initial Notes
A-5
<PAGE>
referred to in the Indenture. The Securities include the Initial Notes and any
Exchange Notes issued in exchange for the Initial Notes pursuant to the
Indenture. The Initial Notes and the Exchange Notes are treated as a single
class of securities under the Indenture. The Indenture imposes certain
limitations on the issuance of debt by the Issuer and its Subsidiaries, the
payment of dividends and other distributions and acquisitions or retirements
of the Issuer's Capital Stock, engaging in business activities, restrictions
on distributions by Subsidiaries, the creation of liens on assets of the
Issuer and transactions with Affiliates.
5. Optional Redemption
Except as set forth below, the Securities may not be
redeemed prior to January 1, 2001. On and after such date, the Securities may
be redeemed at the option of the Issuer, as a whole, or from time to time in
part, at the following redemption prices (expressed as percentages of
Principal amount), plus accrued and unpaid interest (if any) to the date of
redemption (subject to the right of Holders of record on the relevant record
date to receive interest due on the relevant interest payment date): if
redeemed during the 12-month period beginning January 1, 2001, at 105.313%,
during the 12-month period beginning on January 1, 2002, at 102.656%, and
thereafter at 100%.
Upon a Change of Control Call Event occurring after the date
on which the Cal Fed Acquisition and the FN Escrow Merger have both been
consummated and on or prior to December 31, 2000, the Issuer at its option may
redeem all, but not less than all, of the Securities at an aggregate redemption
price equal to the sum of (A) the then outstanding principal amount of the
Securities, plus (B) accrued and unpaid interest to the date of redemption,
plus (C) the Applicable Premium.
6. Mandatory Redemption
In the event that (i) the Cal Fed Acquisition or the FN
Escrow Merger is not consummated on or prior to April 1, 1997 or (ii) the
Issuer elects to abandon either or both of the Cal Fed Acquisition or the FN
Escrow Merger or the Merger Agreement or the FN Escrow Merger Agreement is
terminated, in any case, on or prior to April 1, 1997, for any reason, the
Issuer shall redeem all the Securities at a redemption price in cash equal to
100% of the aggregate principal amount thereof, plus accrued and unpaid
interest thereon to the redemption date (subject to the right of Holders of
record on the relevant record date to receive
A-6
<PAGE>
interest due on the related interest payment date) on (a) April 21, 1997, in
the event that either or both of the FN Escrow Merger and the Cal Fed
Acquisition are not consummated on or prior to April 1, 1997, or (b) the 20th
day (or if such day is not a Business Day, the next following Business Day)
following the abandonment of either or both of the Cal Fed Acquisition and the
FN Escrow Merger or the termination of either or both of the Merger Agreement
and FN Escrow Merger Agreement, in the event of such abandonment or
termination.
7. Notice of Redemption
Notice of redemption will be mailed at least 30 days but not
more than 60 days before the redemption date to each Holder of Securities to be
redeemed at his registered address. Securities in denominations larger than
$1,000 may be redeemed in part but only in whole multiples of $1,000. If money
sufficient to pay the redemption price of all Securities (or portions thereof)
to be redeemed on the redemption date is deposited with the Paying Agent (or,
if the Issuer or a Subsidiary acts as the Paying Agent, it segregates the money
held by it as Paying Agent and holds it as a separate trust fund) on or before
the redemption date and certain other conditions are satisfied, on and after
such date interest ceases to accrue on such Securities (or such portions
thereof) called for redemption.
8. Put Provisions
Upon a Change of Control Put Event, any Holder of Securities
will have the right to cause the Issuer to repurchase all or any part of the
Securities of such Holder at a repurchase price equal to 101% of the principal
amount of the Securities to be repurchased plus accrued and unpaid interest to
the date of repurchase as provided in, and subject to the terms of, the
Indenture.
9. Subordination of Securities
The indebtedness evidenced by this Security is, to the
extent provided in the Indenture, subordinate and subject in right of payment
to the prior payment in full of all Senior Indebtedness, and this Security is
issued subject to the provisions of the Indenture with respect thereto. Each
Holder of this Security, by accepting the same, (a) agrees to and shall be
bound by such provisions, (b) authorizes and directs the Trustee on his behalf
to take such action as may be necessary or appropriate to effectuate the
subordination so provided, and (c) appoints the Trustee his attorney-in-fact
for any and all such purposes.
A-7
<PAGE>
10. Denominations; Transfer; Exchange
The Securities are in registered form without coupons in
denominations of $1,000 and whole multiples of $1,000. A Holder may transfer
or exchange Securities in accordance with the Indenture. The Registrar may
require a Holder, among other things, to furnish appropriate endorsements or
transfer documents and to pay any taxes and fees required by law or permitted
by the Indenture. The Registrar need not register the transfer of or exchange
any Securities selected for redemption (except, in the case of a Security to
be redeemed in part, the portion of the Security not to be redeemed) or any
Securities for a period of 15 days before a selection of Securities to be
redeemed.
11. Persons Deemed Owners
The registered Holder of this Security may be treated as the
owner of it for all purposes.
12. Unclaimed Money
If money for the payment of Principal or interest remains
unclaimed for two years, the Trustee or Paying Agent shall pay the money back
to the Issuer at its request unless an abandoned property law designates
another person. After any such payment, Holders entitled to the money must
look only to the Issuer and not to the Trustee for payment.
13. Defeasance
Subject to certain conditions, the Issuer at any time may
terminate some or all of its obligations under the Securities and the
Indenture if the Issuer deposits with the Trustee money or U.S. Government
Obligations for the payment of Principal and interest, if any, on the
Securities to redemption or maturity, as the case may be.
14. Amendment, Waiver
Subject to certain exceptions set forth in the Indenture,
(i) the Indenture or the Securities may be amended with the written consent of
the Holders of at least a majority in Principal amount outstanding of the
Securities and (ii) any default or noncompliance with any provision may be
waived with the written consent of the Holders of a majority in Principal
amount outstanding of the Securities. Subject to certain exceptions set forth
in the Indenture, without the consent of any Holder, the Issuer and the
A-8
<PAGE>
Trustee may amend the Indenture or the Securities to cure any ambiguity,
omission, defect or inconsistency, or to comply with Article V of the
Indenture, or to provide for uncertificated Securities in addition to or in
place of certificated Securities, or to add Guarantees with respect to the
Securities or to secure (or provide additional security for) the Securities,
or to add additional covenants or surrender rights and powers conferred on the
Issuer or Holdings, or to provide for the Issuance of the Exchange Notes, or
to comply with any request of the SEC in connection with qualifying the
Indenture under the Act, or to make any change that does not adversely affect
the rights of any Holder. A consent to any amendment or waiver of any
provision in the Indenture or in the Securities by any Holder given in
connection with a tender of such Holder's Securities shall not be rendered
invalid by such tender.
15. Defaults and Remedies
Under the Indenture, Events of Default include (i) default
for 30 days in payment of interest on the Securities; (ii) default in payment
of Principal on the Securities at maturity, upon redemption pursuant to
paragraph 5 or 6 above, upon declaration or otherwise, or failure by the
Issuer to purchase or redeem Securities when required; (iii) failure by the
Issuer, Holdings or Holdings' Subsidiaries to comply with other agreements in
the Indenture or the Securities, in certain cases subject to notice and lapse
of time; (iv) certain accelerations (including failure to pay within any grace
period after final maturity) of other Debt of the Issuer, Holdings or any
Significant Subsidiary of Holdings if the total principal amount of the
portion of such Debt that is accelerated (or so unpaid) exceeds $25,000,000
and continues for 5 days after the required notice to the Issuer, Holdings or
such Significant Subsidiary; (v) certain events of bankruptcy or insolvency
with respect to the Issuer, Holdings or any Significant Subsidiary of
Holdings; or (vi) certain judgments or decrees for the payment of money in
excess of $25,000,000. If an Event of Default occurs and is continuing, the
Trustee or the Holders of at least 25% in Principal amount of the Securities
may declare the Default Amount of all the Securities to be due and payable
immediately. Certain events of bankruptcy or insolvency with respect to the
Issuer are Events of Default which will result in the Default Amount of the
Securities being due and payable immediately upon the occurrence of such
Events of Default.
Holders may not enforce the Indenture or the Securities
except as provided in the Indenture. The Trustee may refuse to enforce the
Indenture or the Securities unless it receives reasonable indemnity or
security. Subject to cer-
A-9
<PAGE>
tain limitations, Holders of a majority in Principal amount of the Securities
may direct the Trustee in its exercise of any trust or power. The Trustee
may withhold from Holders notice of any continuing Default (except a Default
in payment of Principal or interest) if it determines that withholding
notice is in their interest.
16. Trustee Dealings with the Issuer
Subject to certain limitations imposed by the Act, the
Trustee under the Indenture, in its individual or any other capacity, may
become the owner or pledgee of Securities and may otherwise deal with and
collect obligations owed to it by the Issuer or its Affiliates and may
otherwise deal with the Issuer or its Affiliates with the same rights it would
have if it were not Trustee.
17. No Recourse Against Others
A director, officer, employee or stockholder, as such, of the
Issuer or the Trustee shall not have any liability for any obligations of the
Issuer or the Trustee under the Securities or the Indenture or for any claim
based on, in respect of or by reason of such obligations or their creation. By
accepting a Security, each Holder waives and releases all such liability. The
waiver and release are part of the consideration for the Issue of the
Securities.
18. Authentication
This Security shall not be valid until an authorized
signatory of the Trustee (or an authenticating agent) manually signs the
certificate of authentication on the other side of this Security.
19. Abbreviations
Customary abbreviations may be used in the name of a Holder
or an assignee, such as TEN COM (=tenants in common), TEN ENT (=tenants by the
entireties), JT TEN (=joint tenants with rights of survivorship and not as
tenants in common), CUST (=custodian), and U/G/M/A (=Uniform Gift to Minors
Act).
20. CUSIP Numbers
Pursuant to a recommendation promulgated by the Committee on
Uniform Security Identification Procedures, the Issuer has caused CUSIP
numbers to be printed on the Secu-
A-10
<PAGE>
rities and has directed the Trustee to use CUSIP numbers in notices of
redemption as a convenience to Holders. No representation is made as to the
accuracy of such numbers either as printed on the Securities or as contained in
any notice of redemption and reliance may be placed only on the other
identification numbers placed thereon.
The Issuer will furnish to any Holder upon written request
and without charge to the Holder a copy of the Indenture which has in it the
text of this Security in larger type. Requests may be made to: First
Nationwide Escrow Corp., 625 Madison Avenue, 12th Floor, New York, New
York 10022, Attention of Secretary.
A-11
<PAGE>
- ------------------------------------------------------------------------------
ASSIGNMENT FORM
To assign this Security, fill in the form below:
I or we assign and transfer this Security to
(Print or type assignee's name, address and zip code)
(Insert assignee's soc. sec. or tax I.D. No.)
and irrevocably appoint agent to
transfer this Security on the books of the Issuer.
The agent may substitute another to act for him.
Date: ______________________ Your Signature: _______________
- ------------------------------------------------------------
In connection with any transfer of any of the Securities evidenced by this
certificate occurring prior to the date that is three years after the later of
the date of original Issuance of such Securities and the last date, if any, on
which such Securities were owned by the Issuer or any Affiliate of the Issuer,
the undersigned confirms that such Securities are being transferred:
CHECK ONE BOX BELOW
(1) /__/ to the Issuer; or
(2) /__/ pursuant to and in compliance with Rule 144A under
the Securities Act of 1933; or
(3) /__/ pursuant to and in compliance with Regulation S
under the Securities Act of 1933; or
(4) /__/ to an institutional "accredited investor" (as defined in Rule
501(a)(1), (2), (3) or (7) under the Securities Act of 1933) that has
furnished to the Trustee a signed letter containing certain
representations and agreements (the form of which letter can be
obtained from the Trustee); or
A-12
<PAGE>
(5) /__/ pursuant to another available exemption from the
registration requirements of the Securities Act of
1933; or
(6) /__/ pursuant to Section 2.06(2)(A) or (B) of the
Indenture.
Unless one of the boxes is checked, the Trustee will refuse to register any of
the Securities evidenced by this certifi cate in the name of any person other
than the registered Holder thereof; provided, however, that if box (3), (4) or
(5) is checked, the Issuer or the Trustee may require, prior to registering
any such transfer of the Securities,, in its sole discretion, such legal
opinions, certifications and other information as the Trustee or the Issuer
has reason ably requested to confirm that such transfer is being made pursuant
to an exemption from, or in a transaction not sub ject to, the registration
requirements of the Securities Act of 1933, such as the exemption provided by
Rule 144A under such Act.
-------------------------
Signature Guarantee: Signature
- ----------------------- -------------------------
Signature
- ------------------------------------------------------------------------------
A-13
<PAGE>
OPTION OF HOLDER TO ELECT PURCHASE
If you want to elect to have this Security purchased by the
Issuer pursuant to Section 4.06 of the Indenture, check the box:
/__/
If you want to elect to have only part of this
Security purchased by the Issuer pursuant to Section 4.06 of the Indenture,
state the Principal amount:
$--------------.
Date:__________________ Your Signature:_______________
(Sign exactly as your name appears
on the other side of the Security)
Signature Guarantee:________________________________________
(Signature must be guaranteed)
A-14
<PAGE>
EXHIBIT B
[FORM OF FACE OF EXCHANGE NOTE]
Exchange Notes eligible for deposit at The Depository Trust
Company shall also bear the following legend:
UNLESS THIS CERTIFICATE IS PRESENTED BY AN AUTHORIZED
REPRESENTATIVE OF THE DEPOSITORY TRUST COMPANY, A NEW YORK CORPORATION
("DTC"), NEW YORK, NEW YORK, TO THE ISSUER OR ITS AGENT FOR REGISTRATION OF
TRANSFER, EXCHANGE OR PAYMENT, AND ANY CERTIFICATE ISSUED IS REGISTERED IN THE
NAME OF CEDE & CO. OR SUCH OTHER NAME AS IS REQUESTED BY AN AUTHORIZED
REPRESENTATIVE OF DTC (AND ANY PAYMENT IS MADE TO CEDE & CO. OR TO SUCH OTHER
ENTITY AS IS REQUESTED BY AN AUTHORIZED REPRESENTATIVE OF DTC), ANY TRANSFER,
PLEDGE OR OTHER USE HEREOF FOR VALUE OR OTHERWISE BY OR TO ANY PERSON IS
WRONGFUL INASMUCH AS THE REGISTERED OWNER HEREOF, CEDE & CO., HAS AN INTEREST
HEREIN.
II-1
<PAGE>
No. _________ CUSIP No. __________________
ISIN No. __________________
FIRST NATIONWIDE [ESCROW CORP.] [HOLDINGS INC.]*/
10 5/8% Senior Subordinated Exchange Note Due 2003
$--------------
First Nationwide [Escrow Corp.] [Holdings Inc.], a Delaware
corporation, promises to pay _____________, or registered assigns, the
principal sum of __________________ Dollars ($__________) on October 1, 2003.
Interest Payment Dates: April 1 and October 1.
Record Dates: March 15 and September 15.
Additional provisions of this Security are set forth on the
other side of this Security.
Dated:
FIRST NATIONWIDE [ESCROW CORP.]
[HOLDINGS INC.]
BY
-----------------------
Vice President
-----------------------
Vice President
TRUSTEE'S CERTIFICATE OF
AUTHENTICATION
THE BANK OF NEW YORK,
as Trustee, certifies [Seal]
that this is one of
the Securities referred
to in the Indenture.
By
-----------------------------
Authorized Signatory
- --------
*/ First Nationwide Holdings Inc. if the Exchange Offer
occurs after the FN Escrow Merger.
II-2
<PAGE>
[FORM OF REVERSE SIDE OF EXCHANGE NOTE]
FIRST NATIONWIDE ESCROW CORP.
10 5/8% Senior Subordinated Exchange Note Due 2003
1. Interest
First Nationwide Escrow Corp., a Delaware corporation (such
corporation, and its successors and assigns under the Indenture hereinafter
referred to, being herein called the "Issuer"), promises to pay interest on
the principal amount of this Security at the rate per annum shown above
(without duplication of the interest that accrued on the Initial Note in
exchange for which this Security was issued); provided, however, that if (a)
by the 75th day following the date of consummation of the Cal Fed Acquisition
(or if such day is not a business day, the first business day thereafter), the
Shelf Registration Statement or the Exchange Offer Registration Statement has
not been filed with the SEC, interest will accrue on the Securities from and
including such date until but excluding the earlier of (i) the date the Shelf
Registration Statement or the Exchange Offer Registration Statement is filed
and (ii) the 180th day following the date of consummation of the Cal Fed
Acquisition (or if such day is not a business day, the first business day
thereafter) at a rate of 11 1/8% per annum and (b) by the 180th day following
the date of consummation of the Cal Fed Acquisition (or if such day is not a
business day, the first business day thereafter), neither (i) the Registered
Exchange Offer is consummated nor (ii) the Shelf Registration Statement with
respect to the resale of the Securities is declared effective, interest will
accrue on the Securities from and including such date until but excluding the
earlier of (i) the consummation of the Registered Exchange Offer and (ii) the
effective date of the Shelf Registration Statement at a rate of 11 1/8% per
annum. The Issuer will pay interest semiannually on April 1 and October 1 of
each year, commencing April 1, 1997. Interest on the Securities will accrue
from the most recent date to which interest has been paid on either the
Initial Notes or the Exchange Notes, or, if no interest has been paid on
either the Initial Notes or the Exchange Notes, from September 19, 1996.
Interest will be computed on the basis of a 360-day year of twelve 30-day
months. The Issuer shall pay interest on overdue Principal at the rate borne
by the Securities plus 1% per annum, and it shall pay interest on overdue
installments of interest at the same rate to the extent lawful.
II-3
<PAGE>
2. Method of Payment
The Issuer will pay interest referred to in paragraph 1
above (except defaulted interest) on the Exchange Notes to the persons who are
registered holders of Securities at the close of business on March 15 and
September 15 next preceding the interest payment date even if Exchange Notes
are canceled after the record date and on or before the interest payment date.
The Issuer will pay interest referred to in paragraph 1 of the Initial Notes
(except defaulted interest) on the Initial Notes in exchange for which the
Exchange Notes were issued to the Persons who, at the close of business on the
March 15 or the September 15 next preceding each interest payment date, are
registered holders of such Initial Notes, if such record date occurs prior to
such exchange, or registered holders of the Exchange Notes, if such record
date occurs on or after the date of such exchange, even if Exchange Notes are
canceled after the record date and on or before the interest payment date.
Holders must surrender Securities to a Paying Agent to collect Principal
payments. The Issuer will pay Principal and interest in money of the United
States that at the time of payment is legal tender for payment of public and
private debts. However, the Issuer may pay Principal and interest, if any, by
check payable in such money. The Issuer may, at its option, mail a check
representing payment of interest to a Holder's registered address.
3. Paying Agent and Registrar
Initially, The Bank of New York (the "Trustee"), will act as
Paying Agent and Registrar. The Issuer may appoint and change any Paying
Agent, Registrar or co-registrar without notice. The Issuer or any of its
domestically incorporated Wholly Owned Subsidiaries may act as Paying Agent,
Registrar, co-registrar or transfer agent.
4. Indenture
The Issuer has issued the Securities under an Indenture,
dated as of September 19, 1996 (the "Indenture"), between the Issuer and the
Trustee. The terms of the Securities include those stated in the Indenture and
those made part of the Indenture by reference to the Trust Indenture Act of
1939 (15 U.S.C. ss.ss. 77aaa-77bbbb) as in effect on the Issue Date (the
"Act"); provided, however, that in the event that the Act is amended after the
Issue Date, the terms of the Securities, to the extent required by any such
amendment, include those made part of the Indenture by reference to the Act so
amended. Capitalized terms used herein and not defined herein have the
meanings ascribed
II-4
<PAGE>
thereto in the Indenture. The Securities are subject to all such terms, and
Holders are referred to the Indenture and the Act for a statement of those
terms.
The Securities are unsecured obligations of the Issuer,
subordinate and subject in right of payment to the prior payment in full of
all Senior Indebtedness, as described in paragraph 9 of this Security and in
the Indenture. The Securities are limited to $575,000,000 aggregate Principal
amount (subject to Section 2.07 of the Indenture). This Security is one of the
Exchange Notes referred to in the Indenture. The Securities include the
Initial Notes and any Exchange Notes issued in exchange for the Initial Notes
pursuant to the Indenture. The Initial Notes and the Exchange Notes are
treated as a single class of securities under the Indenture. The Indenture
imposes certain limitations on the issuance of debt by the Issuer and its
Subsidiaries, the payment of dividends and other distributions and
acquisitions or retirements of the Issuer's Capital Stock, engaging in
business activities, restrictions on distributions by Subsidiaries, the
creation of liens on assets of the Issuer and transactions with Affiliates.
5. Optional Redemption
Except as set forth below, the Securities may not be
redeemed prior to January 1, 2001. On and after such date, the Securities may
be redeemed at the option of the Issuer, as a whole, or from time to time in
part, at the following redemption prices (expressed as percentages of
Principal amount), plus accrued and unpaid interest (if any) to the date of
redemption (subject to the right of Holders of record on the relevant record
date to receive interest due on the relevant interest payment date): if
redeemed during the 12-month period beginning January 1, 2001, at 105.313%,
during the 12-month period beginning on January 1, 2002, at 102.656%, and
thereafter at 100%.
Upon a Change of Control Call Event occurring after the date
on which the Cal Fed Acquisition and the FN Escrow Merger have both been
consummated, and on or prior to December 31, 2000, the Issuer at its option
may redeem all, but not less than all, of the Securities at an aggregate
redemption price equal to the sum of (A) the then outstanding principal amount
of the Securities, plus (B) accrued and unpaid interest to the date of
redemption, plus (C) the Applicable Premium.
II-5
<PAGE>
6. Mandatory Redemption
In the event that (i) the Cal Fed Acquisition or the FN
Escrow Merger is not consummated on or prior to April 1, 1997 or (ii) the
Issuer elects to abandon either or both of the Cal Fed Acquisition or the FN
Escrow Merger or the Merger Agreement or the FN Escrow Merger Agreement is
terminated, in any case, on or prior to April 1, 1997, for any reason, the
Issuer shall redeem all the Securities at a redemption price in cash equal to
100% of the aggregate principal amount thereof, plus accrued and unpaid
interest thereon to the redemption date (subject to the right of Holders of
record on the relevant record date to receive interest due on the related
interest payment date) on (a) April 21, 1997, in the event that either or both
of the FN Escrow Merger and the Cal Fed Acquisition are not consummated on or
prior to April 1, 1997, or (b) the 20th day (or if such day is not a Business
Day, the next following Business Day) following the abandonment of either or
both of the Cal Fed Acquisition and the FN Escrow Merger or the termination of
either or both of the Merger Agreement and FN Escrow Merger Agreement, in the
event of such abandonment or termination.
7. Notice of Redemption
Notice of redemption will be mailed at least 30 days but not
more than 60 days before the redemption date to each Holder of Securities to
be redeemed at his registered address. Securities in denominations larger than
$1,000 may be redeemed in part but only in whole multiples of $1,000. If money
sufficient to pay the redemption price of all Securities (or portions thereof)
to be redeemed on the redemption date is deposited with the Paying Agent (or,
if the Issuer or a Subsidiary acts as the Paying Agent, it segregates the money
held by it as Paying Agent and holds it as a separate trust fund) on or before
the redemption date and certain other conditions are satisfied, on and after
such date interest ceases to accrue on such Securities (or such portions
thereof) called for redemption.
8. Put Provisions
Upon a Change of Control Put Event, any Holder of Securities
will have the right to cause the Issuer to repurchase all or any part of the
Securities of such Holder at a repurchase price equal to 101% of the principal
amount of the Securities to be repurchased plus accrued and unpaid
II-6
<PAGE>
interest to the date of repurchase as provided in, and subject to the terms
of, the Indenture.
9. Subordination of Securities
The indebtedness evidenced by this Security is, to the
extent provided in the Indenture, subordinate and subject in right of payment
to the prior payment in full of all Senior Indebtedness, and this Security is
issued subject to the provisions of the Indenture with respect thereto. Each
Holder of this Security, by accepting the same, (a) agrees to and shall be
bound by such provisions, (b) authorizes and directs the Trustee on his behalf
to take such action as may be necessary or appropriate to effectuate the
subordination so provided, and (c) appoints the Trustee his attorney-in-fact
for any and all such purposes.
10. Denominations; Transfer; Exchange
The Securities are in registered form without coupons in
denominations of $1,000 and whole multiples of $1,000. A Holder may transfer
or exchange Securities in accordance with the Indenture. The Registrar may
require a Holder, among other things, to furnish appropriate endorsements or
transfer documents and to pay any taxes and fees required by law or permitted
by the Indenture. The Registrar need not register the transfer of or exchange
any Securities selected for redemption (except, in the case of a Security to
be redeemed in part, the portion of the Security not to be redeemed) or any
Securities for a period of 15 days before a selection of Securities to be
redeemed.
11. Persons Deemed Owners
The registered Holder of this Security may be treated as the
owner of it for all purposes.
12. Unclaimed Money
If money for the payment of Principal or interest remains
unclaimed for two years, the Trustee or Paying Agent shall pay the money back
to the Issuer at its request unless an abandoned property law designates
another person. After any such payment, Holders entitled to the money must
look only to the Issuer and not to the Trustee for payment.
II-7
<PAGE>
13. Defeasance
Subject to certain conditions, the Issuer at any time may
terminate some or all of its obligations under the Securities and the
Indenture if the Issuer deposits with the Trustee money or U.S. Government
Obligations for the payment of Principal and interest, if any, on the
Securities to redemption or maturity, as the case may be.
14. Amendment, Waiver
Subject to certain exceptions set forth in the Indenture,
(i) the Indenture or the Securities may be amended with the written consent of
the Holders of at least a majority in Principal amount outstanding of the
Securities and (ii) any default or noncompliance with any provision may be
waived with the written consent of the Holders of a majority in Principal
amount outstanding of the Securities. Subject to certain exceptions set forth
in the Indenture, without the consent of any Holder, the Issuer and the
Trustee may amend the Indenture or the Securities to cure any ambiguity,
omission, defect or inconsistency, or to comply with Article V of the
Indenture, or to provide for uncertificated Securities in addition to or in
place of certificated Securities, or to add Guarantees with respect to the
Securities or to secure (or provide additional security for) the Securities, or
to add additional covenants or surrender rights and powers conferred on the
Issuer or Holdings, or to provide for the issuance of the Exchange Notes, or
to comply with any request of the SEC in connection with qualifying the
Indenture under the Act, or to make any change that does not adversely affect
the rights of any Holder. A consent to any amendment or waiver of any
provision in the Indenture or in the Securities by any Holder given in
connection with a tender of such Holder's Securities shall not be rendered
invalid by such tender.
15. Defaults and Remedies
Under the Indenture, Events of Default include (i) default
for 30 days in payment of interest on the Securities; (ii) default in payment
of Principal on the Securities at maturity, upon redemption pursuant to
paragraph 5 or 6 above, upon declaration or otherwise, or failure by the
Issuer to purchase or redeem the Securities when required; (iii) failure by
the Issuer, Holdings or Holdings' Subsidiaries to comply with other agreements
in the Indenture or the Securities, in certain cases subject to notice and
lapse of time; (iv) certain accelerations (including failure to pay within any
grace period after final maturity) of other Debt of the Issuer, Holdings or
any
II-8
<PAGE>
Significant Subsidiary of Holdings if the total principal amount of the
portion of such Debt that is accelerated (or so unpaid) exceeds $25,000,000
and continues for 5 days after the required notice to the Issuer, Holdings or
such Significant Subsidiary; (v) certain events of bankruptcy or insolvency
with respect to the Issuer, Holdings or any Significant Subsidiary of
Holdings; or (vi) certain judgments or decrees for the payment of money in
excess of $25,000,000. If an Event of Default occurs and is continuing, the
Trustee or the Holders of at least 25% in Principal amount of the Securities
may declare the Default Amount of all the Securities to be due and payable
immediately. Certain events of bankruptcy or insolvency with respect to the
Issuer are Events of Default which will result in the Default Amount of the
Securities being due and payable immediately upon the occurrence of such
Events of Default.
Holders may not enforce the Indenture or the Securities
except as provided in the Indenture. The Trustee may refuse to enforce the
Indenture or the Securities unless it receives reasonable indemnity or
security. Subject to certain limitations, Holders of a majority in Principal
amount of the Securities may direct the Trustee in its exercise of any trust
or power. The Trustee may withhold from Holders notice of any continuing
Default (except a Default in payment of Principal or interest) if it
determines that withholding notice is in their interest.
16. Trustee Dealings with the Issuer
Subject to certain limitations imposed by the Act, the
Trustee under the Indenture, in its individual or any other capacity, may
become the owner or pledgee of Securities and may otherwise deal with and
collect obligations owed to it by the Issuer or its Affiliates and may
otherwise deal with the Issuer or its Affiliates with the same rights it would
have if it were not Trustee.
17. No Recourse Against Others
A director, officer, employee or stockholder, as such, of
the Issuer or the Trustee shall not have any liability for any obligations of
the Issuer or the Trustee under the Securities or the Indenture or for any
claim based on, in respect of or by reason of such obligations or their
creation. By accepting a Security, each Holder waives and releases all such
liability. The waiver and release are part of the consideration for the Issue
of the Securities.
II-9
<PAGE>
18. Authentication
This Security shall not be valid until an authorized
signatory of the Trustee (or an authenticating agent) manually signs the
certificate of authentication on the other side of this Security.
19. Abbreviations
Customary abbreviations may be used in the name of a Holder
or an assignee, such as TEN COM (=tenants in common), TEN ENT (=tenants by the
entireties), JT TEN (=joint tenants with rights of survivorship and not as
tenants in common), CUST (=custodian), and U/G/M/A (=Uniform Gift to Minors
Act).
20. CUSIP Numbers
Pursuant to a recommendation promulgated by the Committee on
Uniform Security Identification Procedures, the Issuer has caused CUSIP
numbers to be printed on the Securities and has directed the Trustee to use
CUSIP numbers in notices of redemption as a convenience to Holders. No
representation is made as to the accuracy of such numbers either as printed on
the Securities or as contained in any notice of redemption and reliance may be
placed only on the other identification numbers placed thereon.
The Issuer will furnish to any Holder upon written request and without charge
to the Holder a copy of the Indenture which has in it the text of this
Security in larger type. Requests may be made to: First Nationwide Escrow
Corp.(or if the FN Escrow Merger is consummated, First Nationwide Holdings
Inc.), 625 Madison Avenue, 12th Floor, New York, New York 10022, Attention of
Secretary.
II-10
<PAGE>
- ------------------------------------------------------------------------------
ASSIGNMENT FORM
To assign this Security, fill in the form below:
I or we assign and transfer this Security to
(Print or type assignee's name, address and zip code)
(Insert assignee's soc. sec. or tax I.D. No.)
and irrevocably appoint agent to
transfer this Security on the books of the Issuer.
The agent may substitute another to act for him.
Date: ______________________ Your Signature: _______________
- ------------------------------------------------------------
II-11
<PAGE>
OPTION OF HOLDER TO ELECT PURCHASE
If you want to elect to have this Security purchased by the
Issuer pursuant to Section 4.06 of the Indenture, check the box:
/__/
If you want to elect to have only part of this
Security purchased by the Issuer pursuant to Section 4.06 of the Indenture,
state the Principal amount:
$--------------.
Date:__________________ Your Signature:_______________
(Sign exactly as your name appears
on the other side of the Security)
Signature Guarantee:________________________________________
(Signature must be guaranteed)
II-12
<PAGE>
- -------------------------------------------------------------------------------
FIRST NATIONWIDE HOLDINGS INC.
FIRST NATIONWIDE ESCROW CORP.
10 5/8% Senior Subordinated Notes Due 2003
and
10 5/8% Senior Subordinated Exchange Notes Due 2003
----------------------------------------
FIRST SUPPLEMENTAL INDENTURE
Dated as of January 3, 1997
Supplementing the Indenture, Dated
as of September 19, 1996, Between
First Nationwide Escrow Corp. and
The Bank of New York, as Trustee
----------------------------------------
THE BANK OF NEW YORK
TRUSTEE
- -------------------------------------------------------------------------------
<PAGE>
FIRST SUPPLEMENTAL INDENTURE, dated as of January 3, 1997 (the "First
Supplemental Indenture"), among FIRST NATIONWIDE HOLDINGS INC., a Delaware
corporation ("Holdings"), FIRST NATIONWIDE ESCROW CORP., a Delaware corporation
("FN Escrow"), and THE BANK OF NEW YORK (the "Trustee"), as Trustee under the
Indenture referred to herein;
WHEREAS, FN Escrow and the Trustee heretofore executed and delivered
an Indenture, dated as of September 19, 1996 (the "Indenture"); and
WHEREAS, pursuant to the Indenture FN Escrow issued and the Trustee
authenticated and delivered $575 million aggregate principal amount of FN
Escrow's 10 5/8% Senior Subordinated Notes Due 2003 (the "Securities"); and
WHEREAS, Holdings and FN Escrow have entered into the Agreement and
Plan of Merger, dated as of September 19, 1996, pursuant to which FN Escrow
will merge with and into Holdings (the "FN Escrow Merger") on the date hereof;
and
WHEREAS, Section 5.01(a) of the Indenture provides that in the case of
the FN Escrow Merger, Holdings shall expressly assume by supplemental indenture
all the obligations under the Securities and the Indenture; and
WHEREAS, Section 10.01 of the Indenture provides that FN Escrow and
the Trustee may amend the indenture and the Securities without notice to or
consent of any Holders of the Securities in order to comply with Article V of
the Indenture; and
WHEREAS, this First Supplemental Indenture has been duly authorized by
all necessary corporate action on the part of each of Holdings and FN Escrow.
NOW, THEREFORE, Holdings, FN Escrow and the Trustee agree as follows
for the equal and ratable benefit of the Holders of the Securities:
2
<PAGE>
ARTICLE I
ASSUMPTION BY SUCCESSOR CORPORATION
SECTION 1.1. Assumption of the Securities. Holdings hereby expressly
assumes the due and punctual payment of the principal of and interest on the
Securities and all obligations of FN Escrow under the Securities and the
Indenture and shall be the successor to FN Escrow under the Indenture.
SECTION 1.2. Trustee's Acceptance. The Trustee hereby accepts this
First Supplemental Indenture and agrees to perform the same under the terms and
conditions set forth in the Indenture.
ARTICLE II
Miscellaneous
SECTION 2.1. Effect of Supplemental Indenture. Upon the later to occur
of (i) the execution and delivery of this First Supplemental Indenture by
Holdings, FN Escrow and the Trustee and (ii) the consummation of the FN Escrow
Merger, the Indenture shall be supplemented in accordance herewith, and this
First Supplemental Indenture shall form a part of the Indenture for all
purposes, and every Holder of Securities heretofore or hereafter authenticated
and delivered under the Indenture shall be bound thereby.
SECTION 2.2. Indenture Remains in Full Force and Effect. Except as
supplemented hereby, all provisions in the Indenture shall remain in full force
and effect.
SECTION 2.3. Indenture and Supplemental Indenture Construed Together.
This First Supplemental Indenture is an indenture supplemental to and in
implementation of the Indenture, and the Indenture and this First Supplemental
Indenture shall henceforth be read and construed together.
SECTION 2.4. Confirmation and Preservation of Indenture. The Indenture
as supplemented by this First Supplemental Indenture is in all respects
confirmed and preserved.
3
<PAGE>
SECTION 2.5. Conflict with Trust Indenture Act. If any provision of
this First Supplemental Indenture limits, qualifies or conflicts with any
provision of the TIA that is required under the TIA to be part of and govern
any provision of this First Supplemental Indenture, the provision of the TIA
shall control. If any provision of this First Supplemental Indenture modifies
or excludes any provision of the TIA that may be so modified or excluded, the
provision of the TIA shall be deemed to apply to the Indenture as so modified
or to be excluded by this First Supplemental Indenture, as the case may be.
SECTION 2.6. Severability. In case any provision in this First
Supplemental Indenture shall be invalid, illegal or unenforceable, the
validity, legality and enforceability of the remaining provisions shall not in
any way be affected or impaired thereby.
SECTION 2.7. Terms Defined in the Indenture. All capitalized terms not
otherwise defined herein shall have the meanings ascribed to them in the
Indenture.
SECTION 2.8. Headings. The Article and Section headings of this First
Supplemental Indenture have been inserted for convenience of reference only,
are not to be considered a part of this Supplemental Indenture and shall in no
way modify or restrict any of the terms or provisions hereof.
SECTION 2.9. Benefits of First Supplemental Indenture, etc. Nothing in
this First Supplemental Indenture or the Securities, express or implied, shall
give to any Person, other than the parties hereto and thereto and their
successors hereunder and thereunder and the Holders of the Securities, any
benefit of any legal or equitable right, remedy or claim under the Indenture,
this First Supplemental Indenture or the Securities.
SECTION 2.10. Successors. All agreements of Holdings in this First
Supplemental Indenture shall bind its successors. All agreements of the Trustee
in this First Supplemental Indenture shall bind its successors.
SECTION 2.11. Trustee Not Responsible for Recitals. The recitals
contained herein shall be taken
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<PAGE>
as the statements of FN Escrow and Holdings, and the Trustee assumes no
responsibility for their correctness.
SECTION 2.12. Certain Duties and Responsibilities of the Trustee. In
entering into this First Supplemental Indenture, the Trustee shall be entitled
to the benefit of every provision of the Indenture relating to the conduct or
affecting the liability or affording protection to the Trustee, whether or not
elsewhere herein so provided.
SECTION 2.13. Governing Law. This First Supplemental Indenture shall
be governed by, and construed in accordance with, the laws of the State of New
York but without giving effect to applicable principles of conflicts of law to
the extent that the application of the laws of another jurisdiction would be
required thereby.
SECTION 2.14. Counterpart Originals. The parties may sign any number
of copies of this First Supplemental Indenture. Each signed copy shall be an
original, but all of them together represent the same agreement.
5
<PAGE>
IN WITNESS WHEREOF, the parties have caused this First Supplemental
Indenture to be duly executed as of the date first written above.
FIRST NATIONWIDE HOLDINGS INC.
By: /s/ Glenn P. Dickes
---------------------------
Name: Glenn P. Dickes
Title: Vice President
FIRST NATIONWIDE ESCROW CORP.
By: /s/ Glenn P. Dickes
---------------------------
Name: Glenn P. Dickes
Title: Vice President
THE BANK OF NEW YORK, as Trustee
By: /s/ Vivian Georges
---------------------------
Name: Vivian Georges
Title: Assistant Vice
President
6
<PAGE>
- -------------------------------------------------------------------------------
FIRST NATIONWIDE HOLDINGS INC.
12 1/4% Senior Exchange Notes Due 2001
--------------------------------------
FIRST SUPPLEMENTAL INDENTURE
Dated as of January 17, 1997
Supplementing the Indenture, Dated
as of July 15, 1994, Between
First Nationwide Holdings Inc. and
State Street Bank and Trust Company, as successor
trustee to The First National Bank of Boston
--------------------------------------
STATE STREET BANK AND TRUST COMPANY
TRUSTEE
- -------------------------------------------------------------------------------
<PAGE>
FIRST SUPPLEMENTAL INDENTURE (the "First Supplemental Indenture") is
made as of the 17th day of Jnuary, 1997, between First Nationwide Holdings
Inc., a Delaware corporation (the "Company"), and State Street Bank and Trust
Company, as successor trustee to The First National Bank of Boston (the
"Trustee").
WHEREAS, the Company and the Trustee heretofore executed and delivered
an Indenture, dated as of July 15, 1994 (the "Indenture"); and
WHEREAS, pursuant to the Indenture, the Company issued and the Trustee
authenticated and delivered $200 million aggregate principal amount at maturity
of the Company's 12 1/4% Senior Exchange Notes Due 2001 (the "Securities"); and
WHEREAS, Section 9.02 of the Indenture provides that with the consent
of the Holders of not less than a majority in principal amount of the
Securities at the time outstanding (the "Requisite Amendment Consents"), the
Company and the Trustee may amend the Indenture; and
WHEREAS, the Company has obtained the Requisite Amendment Consents to
amend the Indenture in certain respects; and
WHEREAS, this First Supplemental Indenture has been duly authorized by
all necessary corporate action on the part of the Company.
NOW, THEREFORE, the Company and the Trustee agree as follows for the
equal and ratable benefit of the Holders of the Securities:
ARTICLE I
Amendments To Certain Provisions Of The Indenture
SECTION 1.1 Amendment of Certain Sections of the Indenture. The
Indenture is hereby amended in the following respects:
(a) In Section 1.01 of the Indenture, the definition of "Bank
Preferred Stock" shall be restated to read in its entirety as follows:
<PAGE>
"'Bank Preferred Stock' means the 11-1/2% Noncumulative Preferred
Stock issued by the Bank or, at the Company's 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 date of the First
Supplemental Indenture to this Indenture plus reasonable fees and
expenses incurred in connection with such Refinancing and accrued
dividends and premium, if any."
(b) In Section 1.01 of the Indenture, clause (i) of the definition of
"Consolidated Net Income" shall be restated to read in its entirety as follows:
"(i) 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) (other than any such dividends that are paid from funds that are
released from the Preferred Stock Escrow Account) and"
(c) In Section 1.01 of the Indenture, clause (c) of the definition of
"Consolidated Net Income" shall be restated to read in its entirety as follows:
"(c) any net income (or loss) of any Subsidiary (other than the Bank
or any of its Subsidiaries) if such Subsidiary is subject to restrictions,
directly or indirectly, on the payment of dividends or the making of
distributions by such Subsidiary, directly or indirectly, to the Company
(other than restrictions contained in any Qualified Preferred Stock),
except that (A) the Company's equity in the net income of any such
Subsidiary for such period shall be included in such Consolidated Net
Income up to the aggregate amount of cash actually distributed by such
Subsidiary during such period to the Company or another Subsidiary as a
dividend or other distribution (subject, in the case of a dividend or other
distribution to another Subsidiary, to the limitation contained in this
clause) and (B) the Company's equity in a net loss of any such Subsidiary
for such period shall be included in determining such Consolidated Net
Income;"
2
<PAGE>
(d) In Section 1.01 of the Indenture immediately after the conclusion
of the definition of the term "Principal" and immediately before the start of
the definition of the term "Redeemable Stock," the following definition of
"Qualified Preferred Stock" shall be added:
"'Qualified Preferred Stock' means (x) any Preferred Stock of any
Subsidiary of the Company (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 the Company (other than the Bank Preferred
Stock) Issued to Refinance any other Qualified Preferred Stock or, at the
Company's 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 Securities;
(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 the Company 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
3
<PAGE>
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 the Company; (ii) to make loans or
advances to the Company; or (iii) to transfer any of its property or assets
to the Company, except, in any such case, any encumbrance or restriction
permitted by Section 4.08 (other than clause (h) thereof);
(d) In the case of Preferred Stock Issued pursuant to clause (x)
above, Consolidated Net Income of the Company 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 the Company
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
4
<PAGE>
any other circumstance, the pro forma calculations shall be determined in
good faith by a responsible financial or accounting officer of the Company;
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."
(e) In Section 1.01 of the Indenture, the definition of "Refinance"
shall be restated to read in its entirety as follows:
"'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."
(f) In Section 1.01 of the Indenture, the definition of "Wholly Owned
Subsidiary" shall be restated to read in its entirety as follows:
"'Wholly Owned Subsidiary' means the Bank and any Subsidiary of the
Company all the Capital Stock of which (other than directors'
qualifying shares or Qualified Preferred Stock) is owned by the
Company, the Bank or another Wholly Owned Subsidiary."
(g) Section 4.04(b)(ii) of the Indenture shall be restated to read in
its entirety as follows:
"(ii) dividends on the Bank Preferred Stock or Qualified Preferred
Stock;"
(h) Section 4.08(f) of the Indenture shall be amended by deleting the
word "and" which appears immediately following the semi-colon at the end
thereof.
5
<PAGE>
(i) Section 4.08(g) of the Indenture shall be amended by deleting the
period which appears at the end thereof and substituting therefor a semi-colon
followed by the word "and".
(j) Immediately following Section 4.08(g) there shall be added a new
Section 4.08(h) which shall read in its entirety as follows:
"(h) pursuant to the terms of any Qualified Preferred Stock."
ARTICLE II
Miscellaneous
SECTION 2.1 Effect of Supplemental Indenture. Upon the execution and
delivery of this First Supplemental Indenture by the Company and the Trustee,
the Indenture shall be supplemented in accordance herewith, and this First
Supplemental Indenture shall form a part of the Indenture for all purposes, and
every Holder of Securities heretofore or hereafter authenticated and delivered
under the Indenture shall be bound thereby.
SECTION 2.2 Indenture Remains in Full Force and Effect. Except as
supplemented hereby, all provisions in the Indenture shall remain in full force
and effect.
SECTION 2.3 Indenture and Supplemental Indenture Construed Together.
This First Supplemental Indenture is an indenture supplemental to and in
implementation of the Indenture, and the Indenture and this First Supplemental
Indenture shall henceforth be read and construed together.
SECTION 2.4 Confirmation and Preservation of Indenture. The Indenture
as supplemented by this First Supplemental Indenture is in all respects
confirmed and preserved.
SECTION 2.5 Conflict with Trust Indenture Act. If any provision of
this First Supplemental Indenture limits, qualifies or conflicts with any
provision of the TIA that is required under the TIA to be part of and govern
any provision of this First Supplemental Inden-
6
<PAGE>
ture, the provision of the TIA shall control. If any provision of this First
Supplemental Indenture modifies or excludes any provision of the TIA that may
be so modified or excluded, the provision of the TIA shall be deemed to apply
to the Indenture as so modified or to be excluded by this First Supplemental
Indenture, as the case may be.
SECTION 2.6 Severability. In case any provision in this First
Supplemental Indenture shall be invalid, illegal or unenforceable, the
validity, legality and enforceability of the remaining provisions shall not in
any way be affected or impaired thereby.
SECTION 2.7 Terms Defined in the Indenture. All capitalized terms not
otherwise defined herein shall have the meanings ascribed to them in the
Indenture.
SECTION 2.8 Headings. The Article and Section headings of this First
Supplemental Indenture have been inserted for convenience of reference only,
are not to be considered a part of this Supplemental Indenture and shall in no
way modify or restrict any of the terms or provisions hereof.
SECTION 2.9 Benefits of First Supplemental Indenture, etc. Nothing in
this First Supplemental Indenture or the Securities, express or implied, shall
give to any Person, other than the parties hereto and thereto and their
successors hereunder and thereunder and the Holders of the Securities, any
benefit of any legal or equitable right, remedy or claim under the Indenture,
this First Supplemental Indenture or the Securities.
SECTION 2.10 Successors. All agreements of the Company in this First
Supplemental Indenture shall bind its successors. All agreements of the Trustee
in this First Supplemental Indenture shall bind its successors.
SECTION 2.11 Trustee Not Responsible for Recitals. The recitals
contained herein shall be taken as the statements of the Company, and the
Trustee assumes no responsibility for their correctness.
7
<PAGE>
SECTION 2.12 Certain Duties and Responsibilities of the Trustee. In
entering into this First Supplemental Indenture, the Trustee shall be entitled
to the benefit of every provision of the Indenture relating to the conduct or
affecting the liability or affording protection to the Trustee, whether or not
elsewhere herein so provided.
SECTION 2.13 Governing Law. This First Supplemental Indenture shall be
governed by, and construed in accordance with, the laws of the State of New
York but without giving effect to applicable principles of conflicts of law to
the extent that the application of the laws of another jurisdiction would be
required thereby.
SECTION 2.14 Counterpart Originals. The parties may sign any number of
copies of this First Supplemental Indenture. Each signed copy shall be an
original, but all of them together represent the same agreement.
8
<PAGE>
IN WITNESS WHEREOF, the parties have caused this First
Supplemental Indenture to be duly executed as of the date first written above.
FIRST NATIONWIDE HOLDINGS INC.
By: /s/ Glenn P. Dickes
---------------------------
Name: Glenn P. Dickes
Title: Vice President
STATE STREET BANK AND TRUST
COMPANY, as Trustee
By: /s/ Eric J. Donaghey
---------------------------
Name: Eric J. Donaghey
Title: Assistant Vice
President
9
<PAGE>
------------------------------------
FIRST NATIONWIDE BANK,
A FEDERAL SAVINGS BANK
AND
CALIFORNIA FEDERAL BANK,
A FEDERAL SAVINGS BANK
10% Subordinated Debentures Due 2006
-----------------------
SECOND SUPPLEMENTAL INDENTURE
Dated as of January 3, 1997
Supplementing the Indenture, dated
as of October 1, 1986, between
First Nationwide Bank and
Bank of America National Trust
and Savings Association, as Trustee
-----------------------
FIRST TRUST OF CALIFORNIA,
NATIONAL ASSOCIATION
TRUSTEE
------------------------------------
<PAGE>
SECOND SUPPLEMENTAL INDENTURE, dated as of January 3, 1997,
among FIRST NATIONWIDE BANK, A Federal Savings Bank ("Savings Bank"),
CALIFORNIA FEDERAL BANK, A Federal Savings Bank ("California Federal") and
FIRST TRUST OF CALIFORNIA, NATIONAL ASSOCIATION, (the "Trustee"), as Trustee
under the Indenture referred to herein;
WHEREAS, Savings Bank has duly authorized, executed and
delivered to the Trustee that certain Indenture, dated as of October 1, 1986,
as amended by the First Supplemental Indenture, dated as of September 30, 1994
(the "Indenture"), pursuant to which the 10% Subordinated Debentures Due 2006
(the "Securities") were issued (all capitalized terms used herein and not
defined shall have the meanings ascribed thereto in the Indenture); and
WHEREAS, effective as of 12:07 p.m., New York City time, on
the date hereof, pursuant to an Amended and Restated Agreement and Plan of
Merger, dated as of July 27, 1996, by and among Cal Fed Bancorp Inc.
("Bancorp"), California Federal, First Nationwide Holdings Inc. ("Holdings")
and CFB Holdings, Inc. ("Merger Sub"), Merger Sub was merged (the "Bancorp
Merger") with and into Bancorp; and
WHEREAS, immediately following the Bancorp Merger (i)
Holdings contributed all of the capital stock of Bancorp to Savings Bank, and
(ii) Savings Bank caused Bancorp to be liquidated; and
WHEREAS, it is contemplated that the Savings Bank will be
merged with and into California Federal pursuant to an Agreement and Plan of
Merger, dated the date hereof, between Savings Bank and California Federal;
and
WHEREAS, Section 6.01(i) of the Indenture provides that
Savings Bank shall not consolidate with or merge into another entity, unless
such surviving entity expressly assumes by supplemental indenture all the
obligations under the Securities and the Indenture; and
WHEREAS, all acts and things prescribed by law and by the
respective charter and by-laws (each as now in effect) of Savings Bank and
California Federal necessary to make this Second Supplemental Indenture a
valid in-
2
<PAGE>
strument legally binding on Savings Bank and California Federal for the
purposes herein expressed, in accordance with its terms, have been duly done
and performed.
NOW, THEREFORE, WITNESSETH THIS SECOND SUPPLEMENTAL
INDENTURE:
Section 1. Assumption of the Securities. California Federal
hereby assumes the due and punctual payment of the principal of and interest
on the Securities and all obligations (including, without limitation
indemnification of the Trustee under Section 8.07) of Savings Bank under the
Securities and the Indenture and shall be the successor to Savings Bank under
the Indenture.
Section 2. Trustee's Acceptance. The Trustee hereby
accepts this Second Supplemental Indenture and agrees to perform
the same under the terms and conditions set forth in the Indenture.
Section 3. Governing Law. This Second Supplemental Indenture
shall be governed by, and construed in accordance with, the laws of the State
of California but without giving effect to applicable principles of conflicts
of law to the extent that the application of the laws of another jurisdiction
would be required thereby.
Section 4. Multiple Originals. The parties may sign any
number of copies of this Second Supplemental Indenture. Each signed copy shall
be an original, but all of them together represent the same agreement. One
signed copy is enough to prove this Second Supplemental Indenture.
3
<PAGE>
IN WITNESS WHEREOF, the parties have caused this Second
Supplemental Indenture to be duly executed as of the date first written above.
FIRST NATIONWIDE BANK,
A Federal Savings Bank
BY: /s/ Carl B. Webb
------------------------------------
Name: Carl B. Webb
Title: President and Chief
Operating Officer
Attest:
/s/ Eric K. Kawamura
- -----------------------
Name: Eric K. Kawamura
Title: Senior Vice President
CALIFORNIA FEDERAL BANK,
A Federal Savings Bank
BY: /s/ Richard H. Terzian
------------------------------------
Name: Richard H. Terzian
Title: Executive Vice President
and Chief Financial Officer
Attest:
/s/ Blakeney A. Bobbitt
- -----------------------
Name: Blakeney A. Bobbitt
Title: Vice President and
Assistant Secretary
FIRST TRUST OF CALIFORNIA,
NATIONAL ASSOCIATION, as Trustee
BY: /s/ Josephine Libunao
------------------------------------
Name: Josephine Libunao
Title: Assistant Vice-President
Attest:
/s/ Jennifer Holder
- ----------------------
Name: Jennifer Holder
Title: Vice-President
4
<PAGE>
(CONFORMED)
==============================================================================
CALFED INC.
TO
MANUFACTURERS HANOVER TRUST COMPANY
TRUSTEE
---------
INDENTURE
DATED AS OF FEBRUARY 15, 1986
---------
U.S. $125,000,000
6 1/2% Convertible Subordinated Debentures
Due 2001
==============================================================================
<PAGE>
TABLE OF CONTENTS
Page
----
Parties......................................................................1
Recitals of the Company......................................................1
ARTICLE ONE
DEFINITIONS AND OTHER PROVISIONS OF GENERAL APPLICATION
Section 101. Definitions:
Act.............................................................1
Affiliate; control..............................................1
Authorized Newspaper............................................2
Bearer Security.................................................2
Board of Directors..............................................2
Board Resolution................................................2
Business Day....................................................2
California Federal..............................................2
Closing Market Price Per Share..................................2
Common Stock....................................................2
Company.........................................................3
Company Request; Company Order..................................3
Conversion Agent................................................3
Conversion Price................................................3
Converted Securities............................................3
Corporate Trust Office..........................................3
corporation.....................................................3
coupon..........................................................3
Defaulted Interest..............................................3
Dollar, U.S.$...................................................3
Event of Default................................................3
Exchange Date...................................................3
Global Security.................................................3
Holder..........................................................3
Indenture.......................................................3
Interest Payment Date...........................................3
Maturity........................................................3
Officers' Certificate...........................................4
Opinion of Counsel..............................................4
Outstanding.....................................................4
Paying Agent....................................................4
Person..........................................................4
Place of Conversion.............................................4
Place of Payment................................................4
Predecessor Security............................................4
Principal Subsidiary............................................5
Redemption Date.................................................5
Redemption Price................................................5
- ------------
Note: This table of contents shall not, for any purpose, be deemed part of the
Indenture.
<PAGE>
Page
----
Registered Security.............................................5
Regular Record Date.............................................5
Responsible Officer.............................................5
Security Register; Security Registrar...........................5
Senior Indebtedness.............................................5
Special Record Date.............................................5
Stated Maturity.................................................5
Subsidiary......................................................6
Transfer Agent..................................................6
Trustee.........................................................6
United States...................................................6
United States Alien.............................................6
Vice President..................................................6
Section 102. Form of Documents Delivered to Trustee..........................6
Section 103. Acts of Holders of Securities...................................6
Section 104. Notices, Etc., to Trustee and Company...........................8
Section 105. Notice to Holders of Securities; Waiver.........................8
Section 106. Effect of Headings and Table of Contents........................9
Section 107. Successors and Assigns..........................................9
Section 108. Separability Clause.............................................9
Section 109. Benefits of Indenture...........................................9
Section 110. Governing Law...................................................9
Section 111. Legal Holidays..................................................9
Section 112. Appointment of Agent for Service...............................10
ARTICLE TWO
SECURITY FORMS
Section 201. Forms Generally................................................10
Section 202. Forms of Definitive Securities.................................11
Section 203. Form of Temporary Global Security..............................21
Section 204. Form of Coupon.................................................23
Section 205. Form of Trustee's Certificate of Authentication................24
Section 206. Forms of Conversion Notice.....................................25
ARTICLE THREE
THE SECURITIES
Section 301. Title and Terms................................................26
Section 302. Denominations..................................................26
Section 303. Execution, Authentication, Delivery and Dating.................27
Section 304. Temporary Global Security; Exchange of Temporary
Global Security for Definitive Securities.............27
Section 305. Registration, Registration of Transfer and
Exchange..............................................29
Section 306. Mutilated, Destroyed, Lost or Stolen Securities
and Coupons...........................................31
Section 307. Payment of Interest; Interest Rights Preserved.................32
Section 308. Persons Deemed Owners..........................................33
Section 309. Cancellation...................................................34
Section 310. Computation of Interest........................................34
ii
<PAGE>
ARTICLE FOUR
Page
----
SATISFACTION AND DISCHARGE
Section 401. Satisfaction and Discharge of Indenture........................34
Section 402. Application of Trust Money.....................................35
ARTICLE FIVE
REMEDIES
Section 501. Events of Default..............................................35
Section 502. Acceleration of Maturity; Rescission and Assignment............37
Section 503. Collection of Indebtedness and Suits for
Enforcement by Trustee................................38
Section 504. Trustee May File Proofs of Claim...............................38
Section 505. Trustee May Enforce Claims Without Possession
of Securities or Coupons..............................39
Section 506. Application of Money Collected.................................39
Section 507. Limitation on Suits............................................39
Section 508. Unconditional Right of Holders to Receive Principal,
Premium and Interest and to Convert...................40
Section 509. Restoration of Rights and Remedies.............................40
Section 510. Rights and Remedies Cumulative.................................40
Section 511. Delay or Omission Not Waiver...................................41
Section 512. Control by Holders of Securities...............................41
Section 513. Waiver of Past Defaults........................................41
Section 514. Undertaking for Costs..........................................41
Section 515. Waiver of Stay or Extension Laws...............................42
ARTICLE SIX
THE TRUSTEE
Section 601. Certain Duties and Responsibilities............................42
Section 602. Certain Rights of Trustee......................................43
Section 603. Not Responsible for Recitals or Issuance
of Securities.........................................44
Section 604. May Hold Securities, Act as Trustee Under
Other Indentures......................................44
Section 605. Money Held in Trust............................................44
Section 606. Compensation and Reimbursement.................................44
Section 607. Corporate Trustee Required; Eligibility........................45
Section 608. Resignation and Removal; Appointment of Successor..............45
Section 609. Acceptance of Appointment by Successor.........................45
Section 610. Merger, Conversion, Consolidation or Succession
to Business...........................................46
ARTICLE SEVEN
CONSOLIDATION, MERGER, CONVEYANCE, TRANSFER OR LEASE
Section 701. Company May Consolidate, Etc., Only
on Certain Terms......................................47
Section 702. Successor Substituted..........................................47
iii
<PAGE>
ARTICLE EIGHT
Page
----
SUPPLEMENTAL INDENTURES
Section 801. Supplemental Indentures Without Consent
of Holders............................................47
Section 802. Supplemental Indentures With Consent of Holders
of Securities.........................................48
Section 803. Execution of Supplemental Indentures...........................49
Section 804. Effect of Supplemental Indentures..............................49
Section 805. Reference in Securities to Supplemental
Indentures............................................49
Section 806. Notice of Supplemental Indentures..............................49
ARTICLE NINE
MEETINGS OF HOLDERS OF SECURITIES
Section 901. Purposes for Which Meetings May Be Called......................50
Section 902. Call, Notice and Place of Meetings.............................50
Section 903. Persons Entitled to Vote at Meetings...........................50
Section 904. Quorum; Action.................................................50
Section 905. Determination of Voting Rights; Conduct and
Adjournment of Meetings...............................51
Section 906. Counting Votes and Recording Action of Meetings................52
ARTICLE TEN
COVENANTS
Section 1001. Payment of Principal, Premium and Interest....................52
Section 1002. Maintenance of Offices or Agencies............................52
Section 1003. Money for Security Payments to Be Held in Trust...............54
Section 1004. Additional Amounts............................................55
Section 1005. Corporate Existence...........................................55
Section 1006. Maintenance of Properties.....................................55
Section 1007. Payment of Taxes and Other Claims.............................56
Section 1008. Limitation on Debt Secured by Stock of
California Federal...................................56
Section 1009. Limitation on Disposition of Stock of
California Federal...................................56
Section 1010. Statement by Officers as to Default...........................56
Section 1011. Waiver of Certain Covenants...................................56
ARTICLE ELEVEN
REDEMPTION OF SECURITIES AT OPTION OF COMPANY
Section 1101. Right of Redemption...........................................57
Section 1102. Applicability of Article......................................57
Section 1103. Election to Redeem; Notice to Trustee.........................57
Section 1104. Selection by Trustee of Securities to Be
Redeemed.............................................57
Section 1105. Notice of Redemption..........................................58
Section 1106. Deposit of Redemption Price...................................58
Section 1107. Securities Payable on Redemption Date.........................59
Section 1108. Securities Redeemed in Part...................................59
iv
<PAGE>
ARTICLE TWELVE
Page
----
REDEMPTION OF SECURITIES AT OPTION OF HOLDERS
Section 1201. Redemption at Option of Holders...............................60
Section 1202. Applicability of Article......................................60
Section 1203. Notice of Redemption Date.....................................60
Section 1204. Deposit of Redemption Price...................................61
Section 1205. Securities Payable on Redemption Date.........................61
Section 1206. Securities Redeemed in Part...................................62
ARTICLE THIRTEEN
CONVERSION OF SECURITIES
Section 1301. Conversion Privilege and Conversion Price.....................62
Section 1302. Exercise of Conversion Privilege..............................62
Section 1303. Fractions of Shares...........................................63
Section 1304. Adjustment of Conversion Price................................63
Section 1305. Notice of Adjustments of Conversion Price.....................65
Section 1306. Notice of Certain Corporate Action............................66
Section 1307. Company to Reserve Common Stock...............................66
Section 1308. Taxes on Conversions..........................................67
Section 1309. Covenant as to Common Stock...................................67
Section 1310. Cancellation of Converted Securities..........................67
Section 1311. Provisions in Case of Consolidation, Merger
or Sale of Assets....................................67
Section 1312. Responsibility of Trustee for
Conversion Provisions................................68
ARTICLE FOURTEEN
SUBORDINATION OF SECURITIES
Section 1401. Securities Subordinate to Senior Indebtedness.................68
Section 1402. Payment Over of Proceeds Upon Dissolution, Etc................68
Section 1403. Prior Payment to Senior Indebtedness
Upon Acceleration of Securities......................69
Section 1404. No Payment When Senior Indebtedness in Default................69
Section 1405. Payment Permitted If No Default...............................70
Section 1406. Subrogation to Rights of Holders of
Senior Indebtedness..................................70
Section 1407. Provisions Solely to Define Relative Rights...................70
Section 1408. Trustee to Effectuate Subordination...........................71
Section 1409. No Waiver of Subordination Provisions.........................71
Section 1410. Notice to Trustee.............................................71
Section 1411. Reliance on Judicial Order or Certificate
of Liquidating Agent.................................72
Section 1412. Trustee Not Fiduciary for Holders of Senior
Indebtedness.........................................72
Section 1413. Rights of Trustee as Holder of Senior Indebtedness;
Preservation of Trustee's Rights.....................72
Section 1414. Article Applicable to Paying Agents...........................73
Section 1415. Certain Conversions Deemed Payment............................73
TESTIMONIUM.................................................................74
SIGNATURES AND SEALS........................................................74
ACKNOWLEDGEMENTS............................................................75
v
<PAGE>
INDENTURE, dated as of February 15, 1986, between CALFED INC., a
corporation duly organized and existing under the laws of the State of
Delaware (herein called the "Company"), having its principal office at 5670
Wilshire Boulevard, Los Angeles, California 90036, and MANUFACTURERS HANOVER
TRUST COMPANY, a corporation duly organized and existing under the laws of the
State of New York, as Trustee (herein called the "Trustee").
RECITALS OF THE COMPANY
The Company has duly authorized the creation of an issue of its 6
1/2% Convertible Subordinated Debentures Due 2001 (herein called the
"Securities") and the coupons, if any, thereto appertaining, of substantially
the tenor and amount hereinafter set forth, and to provide therefor the
Company has duly authorized the execution and delivery of this Indenture.
All things necessary to make the Securities and the coupons, if any,
thereto appertaining, when the Securities are executed by the Company and
authenticated and delivered hereunder and duly issued by the Company, the
valid obligations of the Company, and to make this Indenture a valid agreement
of the Company, in accordance with their and its terms, have been done.
NOW, THEREFORE, THIS INDENTURE WITNESSETH:
For and in consideration of the premises and the purchase of the
Securities by the Holders thereof, it is mutually covenanted and agreed, for
the equal and proportionate benefit of all Holders of the Securities and the
coupons, if any, thereto appertaining, as follows:
ARTICLE ONE
DEFINITIONS AND OTHER PROVISIONS
OF GENERAL APPLICATION
SECTION 101. Definitions.
For all purposes of this Indenture, except as otherwise expressly
provided or unless the context otherwise requires:
(1) the terms defined in this Article have the meanings
assigned to them in this Article and include the plural as well as
the singular;
(2) all accounting terms not otherwise defined herein have
the meanings assigned to them in accordance with generally accepted
accounting principles in the United States of America, and, except as
otherwise herein expressly provided, the term "generally accepted
accounting principles" with respect to any computation required or
permitted hereunder shall mean such accounting principles as are
generally accepted in the United States of America at the date of
such computation; and
(3) the words "herein", "hereof" and "hereunder" and other
words of similar import refer to this Indenture as a whole and not to
any particular Article, Section or other subdivision.
"Act", when used with respect to any Holder of a Security, has the
meaning specified in Section 103.
"Affiliate" of any specified Person means any other Person directly or
indirectly controlling or controlled by or under direct or indirect common
control with such specified Person. For
<PAGE>
the purposes of this definition, "control", when used with respect to any
specified Person, means the power to direct the management and policies of
such Person, directly or indirectly, whether through the ownership of voting
securities, by contract or otherwise; and the terms "controlling" and
"controlled" have meanings correlative to the foregoing.
"Authorized Newspaper" means a newspaper, in an official language of
the country of publication or in the English language, customarily published
on each Business Day, whether or not published on Saturdays, Sundays or
holidays, and of general circulation in the place in connection with which the
term is used or in the financial community of such place. Where successive
publications are required to be made in Authorized Newspapers, the successive
publications may be made in the same or in different newspapers in the same
city meeting the foregoing requirements and in each case on any Business Day.
"Bearer Security" means any Security in the form for Bearer
Securities set forth in Section 202 payable to bearer.
"Board of Directors" means either the board of directors of the
Company or any duly authorized committee of that board.
"Board Resolution" means a resolution duly adopted by the Board of
Directors, a copy of which, certified by the Secretary or an Assistant
Secretary of the Company to be in full force and effect on the date of such
certification, shall have been delivered to the Trustee.
"Business Day", when used with respect to any Place of Payment or
Place of Conversion, means each Monday, Tuesday, Wednesday, Thursday and
Friday which is not a day on which banking institutions in that Place of
Payment or Place of Conversion, as the case may be, are authorized or
obligated by law to close.
"California Federal" means California Federal Savings and Loan
Association or any successor corporation by merger, conversion, consolidation
or other combination or any transferee of all or substantially all the assets
of California Federal as an entirety.
"Closing Market Price Per Share" means, for any day, the last
reported sales price regular way of the Common Stock or, in case no such
reported sale takes place on such day, the average of the reported closing bid
and asked prices regular way of the Common Stock, in either case on the New
York Stock Exchange or, if the Common Stock is not listed or admitted to
trading on such Exchange, on the principal national securities exchange within
the United States on which the Common Stock is listed or admitted to trading
or, if not listed or admitted to trading on any national securities exchange
within the United States, the average of the closing bid and asked prices of
the Common Stock in the over-the-counter market as reported by National
Association of Securities Dealers' Automated Quotation System ("NASDAQ") or,
if not so reported by NASDAQ, the average of the closing bid and asked prices
of the Common Stock as furnished by any leading New York Stock Exchange member
firm selected from time to time by the Company for that purpose.
"Common Stock" includes any stock of any class of the Company which
has no preference in respect of dividends or of amounts payable in the event
of any voluntary or involuntary liquidation, dissolution or winding up of the
Company and which is not subject to redemption by the Company. However,
subject to the provisions of Section 1811, shares issuable on conversion of
Securities shall include only shares of the class designated as Common Stock
of the Company at the date of this instrument or shares of any class or
classes resulting from any reclassification or reclassifications thereof and
which have no preference in respect of dividends or of amounts payable in the
event of any voluntary or involuntary liquidation, dissolution or winding
2
<PAGE>
up of the Company and which are not subject to redemption by the Company;
provided that if at any time there shall be more than one such resulting
class, the shares of each such class then so issuable shall be substantially
in the proportion which the total number of shares of such class resulting
from all such reclassifications bears to the total number of shares of all
such classes resulting from all such reclassifications.
"Company" means the Person named as the "Company" in the first
paragraph of this instrument until a successor Person shall have become such
pursuant to the applicable provisions of this Indenture, and thereafter
"Company" shall mean such successor Person.
"Company Request" or "Company Order" means a written request or order
signed in the name of the Company by the Chairman of the Board, the President
or a Vice President, and by the Treasurer, an Assistant Treasurer, the
Secretary or an Assistant Secretary, of the Company, and delivered to the
Trustee.
"Conversion Agent" means any Person authorized by the Company to
convert Securities in accordance with Article Thirteen.
"Conversion Price" has the meaning specified in Section 1301.
"Converted Securities" means all Securities which have been converted
pursuant to Article Thirteen.
"Corporate Trust Office" means the principal office of the Trustee in
the Borough of Manhattan, The City of New York, at which at any particular
time its corporate trust business shall be administered.
"corporation" includes corporations, associations, companies and
business trusts.
"coupon" means any interest coupon appertaining to a Bearer Security.
"Defaulted Interest" has the meaning specified in Section 307.
"Dollar" or "U.S.$" means a dollar or other equivalent unit in such
coin or currency of the United States of America as at the time shall be legal
tender for the payment of public and private debts.
"Event of Default" has the meaning specified in Section 501.
"Exchange Date" means the date 90 days after the completion of the
distribution of the Securities established as contemplated by Section 304.
"Global Security" means a temporary security in the form set forth in
Section 203.
"Holder", when used with respect to any Security, means in the case
of a Registered Security the Person in whose name the Security is registered
in the Security Register and in the case of a Bearer Security or the Global
Security the bearer thereof and, when used with respect to any coupon, means
the bearer thereof.
"Indenture" means this instrument as originally executed or as it may
from time to time be supplemented or amended by one or more indentures
supplemental hereto entered into pursuant to the applicable provisions hereof.
"Interest Payment Date" means the Stated Maturity of an instalment of
interest on the Securities.
"Maturity", when used with respect to any Security, means the date on
which the principal of such Security becomes due and payable as therein or
herein provided, whether at the Stated
3
<PAGE>
Maturity or by declaration of acceleration, call for redemption, redemption at
the option of the Holder thereof or otherwise.
"Officers' Certificate" means a certificate signed by the Chairman of
the Board, the President or a Vice President, and by the Treasurer, an
Assistant Treasurer, the Secretary or an Assistant Secretary, of the Company,
and delivered to the Trustee.
"Opinion of Counsel" means a written opinion of counsel, who may be
counsel for the Company, and who shall be acceptable to the Trustee.
"Outstanding", when used with respect to Securities, means, as of the
date of determination, all Securities theretofore authenticated and delivered
under this Indenture, except:
(i) Securities theretofore cancelled by the Trustee or
delivered to the Trustee for cancellation;
(ii) Securities for whose payment or redemption money in the
necessary amount has been theretofore deposited with the Trustee or
any Paying Agent (other than the Company) in trust or set aside and
segregated in trust by the Company (if the Company shall act as its
own Paying Agent) for the Holders of such Securities and any coupons
thereto appertaining; provided that, if such Securities are to be
redeemed, notice of such redemption has been duly given pursuant to
this Indenture or provision therefor satisfactory to the Trustee has
been made; and
(iii) Securities which have been paid pursuant to Section
306 or in exchange for or in lieu of which other Securities have been
authenticated and delivered pursuant to this Indenture, other than
any such Securities in respect of which there shall have been
presented to the Trustee proof satisfactory to it that such
Securities are held by a bona fide purchaser in whose hands such
Securities are valid obligations of the Company;
provided, however, that in determining whether the Holders of the requisite
principal amount of the Outstanding Securities are present at a meeting of
Holders of Securities for quorum purposes or have given any request, demand,
authorization, direction, notice, consent or waiver hereunder. Securities
owned by the Company or any other obligor upon the Securities or any Affiliate
of the Company or such other obligor shall be disregarded and deemed not to be
Outstanding, except that, in determining whether the Trustee shall be
protected in relying upon any such determination as to the presence of a
quorum or upon any such request, demand, authorization, direction, notice,
consent or waiver, only Securities which the Trustee knows to be so owned
shall be so disregarded. Securities so owned which have been pledged in good
faith may be regarded as Outstanding if the pledgee establishes to the
satisfaction of the Trustee the pledgee's right so to act with respect to such
Securities and that the pledgee is not the Company or any other obligor upon
the Securities or any Affiliate of the Company or of such other obligor.
"Paying Agent" means any Person authorized by the Company to pay the
principal of (and premium, if any) or interest on any Securities on behalf of
the Company.
"Person" means any individual, corporation, partnership, joint
venture, trust, unincorporated organization or government or any agency or
political subdivision thereof.
"Place of Conversion" has the meaning specified in Section 301.
"Place of Payment" has the meaning specified in Section 301.
"Predecessor Security" of any particular Security means every
previous Security evidencing all or a portion of the same debt as that
evidenced by such particular Security; and, for the
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purposes of this definition, any Security authenticated and delivered under
Section 306 in exchange for or in lieu of a mutilated, destroyed, lost or
stolen Security shall be deemed to evidence the same debt as the mutilated,
destroyed, lost or stolen Security.
"Principal Subsidiary" means any present or future consolidated
Subsidiary of the Company whose consolidated assets constitute 10% or more of
the consolidated assets of the Company.
"Redemption Date", when used with respect to any Security to be
redeemed, means the date fixed for such redemption by or pursuant to this
Indenture.
"Redemption Price", when used with respect to any Security to be
redeemed, means the price at which it is to be redeemed pursuant to this
Indenture.
"Registered Security" means any Security in the form for Registered
Securities set forth in Section 202 registered in the Security Register.
"Regular Record Date" for the interest payable on any Interest
Payment Date means the February 5 (whether or not a Business Day) next
preceding such Interest Payment Date.
"Responsible Officer", when used with respect to the Trustee, means
the chairman or any vice-chairman of the board of directors, the chairman or
any vice-chairman of the executive committee of the board of directors, the
chairman of the trust committee, the president, any vice president, the
secretary, any assistant secretary, the treasurer, any assistant treasurer,
the cashier, any assistant cashier, any trust officer or assistant trust
officer, the controller or any assistant controller, or any other employee of
the Trustee customarily performing functions similar to those performed by any
of the above designated officers and also means, with respect to a particular
corporate trust matter, any other employee to whom such matter is referred
because of his knowledge of and familiarity with the particular subject.
"Security Register" and "Security Registrar" have the respective
meanings specified in Section 305.
"Senior Indebtedness" means the principal of (and premium, if any)
and interest on (a) all indebtedness of the Company (including indebtedness of
others guaranteed by the Company) other than the Securities, whether
outstanding on the date of this Indenture or thereafter created, incurred or
assumed, which is (i) for money borrowed or (ii) evidenced by a note or
similar instrument given in connection with the acquisition of any businesses,
properties or assets of any kind, except in the ordinary course of business,
(b) obligations of the Company as lessee under leases required to be
capitalized on the balance sheet of the lessee under generally accepted
accounting principles and leases of property or assets made as part of any
sale and lease-back transaction to which the Company is a party and (c)
amendments, renewals, extensions, modifications or refundings of any such
indebtedness or obligation, unless in any case in the instrument creating or
evidencing any such indebtedness or obligation or pursuant to which the same
is outstanding it is provided that such indebtedness or obligation is not
superior in right of payment to the Securities.
"Special Record Date" for the payment of any Defaulted Interest means
a date fixed by the Trustee pursuant to Section 307.
"Stated Maturity", when used with respect to any Security or any
instalment of interest thereon, means the date specified in such Security or a
coupon representing such instalment of interest at the fixed date on which the
principal of such Security or such instalment of interest is due and payable.
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"Subsidiary" means a corporation more than 50% of the outstanding
voting stock of which is owned, directly or indirectly, by the Company or by
one or more other Subsidiaries, or by the Company and one or more other
Subsidiaries. For the purposes of this definition, "voting stock" means stock
which ordinarily has voting power for the election of directors, whether at
all times or only so long as no senior class of stock has such voting power by
reason of any contingency.
"Transfer Agent" means any Person, which may be the Company,
authorized by the Company to exchange or register the transfer of Securities.
"Trustee" means the Person named as the "Trustee" in the first
paragraph of this instrument until a successor Trustee shall have become such
pursuant to the applicable provisions of this Indenture, and thereafter
"Trustee" shall mean such successor Trustee.
"United States" has the meaning set forth in the forms of Definitive
Securities contained in Section 202.
"United States Alien" has the meaning set forth in the forms of
Definitive Securities contained in Section 202.
"Vice President", when used with respect to the Company or the
Trustee, means any vice president, whether or not designated by a number or a
word or words added before or after the title "vice president".
SECTION 102. Form of Documents Delivered to Trustee.
In any case where several matters are required to be certified by, or
covered by an opinion of, any specified Person, it is not necessary that all
such matters be certified by, or covered by the opinion of, only one such
Person, or that they be so certified or covered by only one document, but one
such Person may certify or give an opinion with respect to some matters and
one or more other such Persons as to other matters, and any such Person may
certify or give an opinion as to such matters in one or several documents.
Any certificate or opinion of an officer of the Company may be based,
insofar as it relates to legal matters, upon a certificate or opinion of, or
representations by, counsel, unless such officer knows, or in the exercise of
reasonable care should know, that the certificate or opinion or
representations with respect to the matters upon which such certificate or
opinion is based are erroneous. Any such certificate or opinion of counsel may
be based, insofar as it relates to factual matters, upon a certificate or
opinion of, or representations by, an officer or officers of the Company
stating that the information with respect to such factual matters is in the
possession of the Company, unless such counsel knows, or in the exercise of
reasonable care should know, that the certificate or opinion or
representations with respect to such matters are erroneous.
Where any Person is required to make, give or execute two or more
applications, requests, consents, certificates, statements, opinions or other
instruments under this Indenture, they may, but need not, be consolidated and
form one instrument.
SECTION 103. Acts of Holders of Securities.
(a) Any request, demand, authorization, direction, notice, consent,
election, waiver or other action provided by this Indenture to be given or
taken by Holders of Securities may be embodied in and evidenced by (1) one or
more instruments of substantially similar tenor signed by such Holders in
person or by agent or proxy duly appointed in writing, (2) the record of
Holders of Securities voting in favor thereof, either in person or by proxies
duly appointed in
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writing, at any meeting of Holders of Securities duly called and held in
accordance with the provisions of Article Nine, or (3) a combination of such
instruments and any such record. Except as herein otherwise expressly
provided, such action shall become effective when such instrument or
instruments or record or both are delivered to the Trustee and, where it is
hereby expressly required, to the Company. Such instrument or instruments and
record (and the action embodied therein and evidenced thereby) are herein
sometimes referred to as the "Act" of the Holders of Securities signing such
instrument or instruments and so voting at such meeting. Proof of execution of
any such instrument or of a writing appointing any such agent or proxy, or of
the holding by any Person of a Security, shall be sufficient for any purpose
of this Indenture and (subject to Section 601) conclusive in favor of the
Trustee and the Company if made in the manner provided in this Section. The
record of any meeting of Holders of Securities shall be proved in the manner
provided in Section 906.
(b) The fact and date of the execution by any Person of any such
instrument or writing may be proved by the affidavit of a witness of such
execution or by a certificate of a notary public or other officer authorized
by law to take acknowledgments of deeds, certifying that the individual
signing such instrument or writing acknowledged to him the execution thereof.
Where such execution is by a signer acting in a capacity other than his
individual capacity, such certificate or affidavit shall also constitute
sufficient proof of his authority. The fact and date of the execution of any
such instrument or writing, or the authority of the Person executing the same,
may also be proved in any other manner which the Trustee deems sufficient.
(c) The principal amount and serial numbers of Bearer Securities held
by any Person, and the date of his holding the same, may be proved by the
production of such Bearer Securities or by a certificate executed, as
depositary, by any trust company, bank, banker or other depositary, wherever
situated, if such certificate shall be deemed by the Trustee to be
satisfactory, showing that at the date therein mentioned such Person had on
deposit with such depositary, or exhibited to it, the Bearer Securities
therein described; or such facts may be proved by the certificate or affidavit
of the Person holding such Bearer Securities, if such certificate or affidavit
is deemed by the Trustee to be satisfactory. The Trustee and the Company may
assume that such ownership of any Bearer Security continues until (1) another
certificate or affidavit bearing a later date issued in respect of the same
Bearer Security is produced, or (2) such Bearer Security is produced to the
Trustee by some other Person, or (3) such Bearer Security is surrendered in
exchange for a Registered Security; or (4) such Bearer Security is no longer
Outstanding.
(d) The fact and date of execution of any such instrument or writing,
the authority of the Person executing the same and the principal amount and
serial numbers of Bearer Securities held by the Person so executing such
instrument or writing and the date of holding the same may also be proved in
any other manner which the Trustee deems sufficient; and the Trustee may in
any instance require further proof with respect to any of the matters referred
to in this Section.
(e) The principal amount and serial numbers of Registered Securities
held by any Person, and the date of his holding the same, shall be proved by
the Security Register.
(f) Any request, demand, authorization, direction, notice, consent,
election, waiver or other Act of the Holder of any Security shall bind every
future Holder of the same Security and the Holder of every Security issued
upon the registration or transfer thereof or in exchange therefor or in lieu
thereof in respect of anything done, omitted or suffered to be done by the
Trustee or the Company in reliance thereon, whether or not notation of such
action is made upon such Security.
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SECTION 104. Notices, Etc. to Trustee and Company
Any request, demand, authorization, direction, notice, consent,
election, waiver or Act of Holders of Securities or other document provided or
permitted by this Indenture to be made upon, given or furnished to, or filed
with,
(1) the Trustee by any Holder of Securities or by the
Company shall be sufficient for every purpose hereunder if made,
given, furnished or filed in writing to or with the Trustee at its
Corporate Trust Office (which at the date hereof is located at 600
Fifth Avenue, New York, New York 10020), Attention: Corporate Trust
Department, or
(2) the Company by the Trustee or by any Holder of
Securities shall be sufficient for every purpose hereunder (unless
otherwise herein expressly provided) if in writing, mailed,
first-class postage prepaid, or telexed or telecopied and confirmed
by mail, first-class postage prepaid, addressed to it at the address
of its principal office specified in the first paragraph of this
instrument to the attention of its Secretary, or at any other address
previously furnished in writing to the Trustee by the Company.
Any request, demand, authorization, direction, notice, consent, election or
waiver required or permitted under this Indenture shall be in the English
language, except that any published notice (other than a notice published in
Luxembourg) may be in an official language of the country of publication.
SECTION 105. Notice to Holders of Securities; Waiver.
Except as otherwise expressly provided herein, where this Indenture
provides for notice to Holders of Securities of any event (the expense for
which shall be borne by the Company),
(1) such notice shall be sufficiently given to Holders of
Bearer Securities if published in an Authorized Newspaper in London
and, so long as the Securities are listed on the Luxembourg Stock
Exchange and such stock exchange shall so require, in Luxembourg or,
if not practicable, in Europe, on a Business Day at least twice, the
first such publication to be not earlier than the earliest date and
not later than the latest date prescribed for the giving of such
notice; and
(2) such notice shall be sufficiently given to Holders of
Registered Securities if in writing and mailed, first-class postage
prepaid, to each Holder of a Registered Security affected by such
event, at the address of such Holder as it appears in the Security
Register, not earlier than the earliest date, and not later than the
latest date, prescribed for the giving of such notice.
Neither failure to give notice by publication to Holders of Bearer
Securities as provided above, nor any defect in any notice so published, shall
affect the sufficiency of any notice mailed to Holders of Registered
Securities as provided above. In case by reason of the suspension of
publication of any Authorized Newspaper or Authorized Newspapers or by reason
of any other cause it shall be impracticable to publish any notice to Holders
of Bearer Securities as provided above, then such notification to Holders of
Bearer Securities as shall be given with the approval of the Trustee shall
constitute sufficient notice to such Holders for every purpose hereunder.
In any case where notice to Holders of Registered Securities is given
by mail, neither the failure to mail such notice, nor any defect in any notice
so mailed, to any particular Holder of a Registered Security shall affect the
sufficiency of such notice with respect to other Holders of Registered
Securities or the sufficiency of any notice by publication to Holders of
Bearer
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Securities given as provided above. In case by reason of the suspension of
regular mail service or by reason of any other cause it shall be impracticable
to give such notice by mail, then such notification to Holders of Registered
Securities as shall be made with the approval of the Trustee shall constitute
a sufficient notification to such Holders for every purpose hereunder.
Where this Indenture provides for notice in any manner, such notice
may be waived in writing by the Person entitled to receive such notice, either
before or after the event, and such waiver shall be the equivalent of such
notice. Waivers of notice by Holders shall be filed with the Trustee, but such
filing shall not be a condition precedent to the validity of any action taken
in reliance upon such waiver.
SECTION 106. Effect of Headings and Table of Contents.
The Article and Section headings herein and the Table of Contents are
for convenience only and shall not affect the construction hereof.
SECTION 107. Successors and Assigns.
All covenants and agreements in this Indenture by the Company shall
bind its successors and assigns, whether so expressed or not.
SECTION 108. Separability Clause.
In case any provision in this Indenture or in the Securities or
coupons shall be invalid, illegal or unenforceable, the validity, legality and
enforceability of the remaining provisions shall not in any way be affected or
impaired thereby.
SECTION 109. Benefits of Indenture.
Nothing in this Indenture or in the Securities or coupons, express or
implied, shall give to any Person, other than the parties hereto and their
successors hereunder, the holders of Senior Indebtedness and the Holders of
Securities and coupons, any benefit or any legal or equitable right, remedy or
claim under this Indenture.
SECTION 110. Governing Law.
This Indenture and each of the Securities and coupons shall be
governed by and construed in accordance with the laws of the State of New
York.
SECTION 111. Legal Holidays.
In any case where any Interest Payment Date, any Redemption Date or
the Stated Maturity of any Security or the last day on which a Holder of a
Security has the right to convert his Security shall not be a Business Day at
any Place of Payment or Place of Conversion, then (notwithstanding any other
provision of this Indenture or of the Securities or coupons) payment of
interest or principal (and premium, if any) or conversion of the Securities
need not be made at such Place of Payment or Place of Conversion on such day,
but may be made on the next succeeding Business Day at such Place of Payment
or Place of Conversion with the same force and effect as if made on the
Interest Payment Date or Redemption Date, or at the Stated Maturity or on such
last day for conversion, provided that, in the case of payment, no interest
shall accrue on the amount so payable for the period from and after such
Interest Payment Date, Redemption Date or Stated Maturity, as the case may be.
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SECTION 112. Appointment of Agent for Service.
By the execution and delivery of this Indenture, the Company hereby
appoints the Trustee as its agent upon which process may be served in any
legal action or proceeding which may be instituted in any Federal or State
court in the Borough of Manhattan, The City of New York, arising out of or
relating to the Securities, the coupons or this Indenture. Service of process
upon such agent at the office of such agent at 600 Fifth Avenue, New York, New
York 10020, Attention: Corporate Trust Department (or such other address in
the Borough of Manhattan, The City of New York, as may be the Corporate Trust
Office of the Trustee), and written notice of said service to the Company by
the Person serving the same addressed as provided in Section 104, shall be
deemed in every respect effective service of process upon the Company in any
such legal action or proceeding, and the Company hereby submits to the
jurisdiction of any such court in which any such legal action or proceeding is
so instituted. Such appointment shall be irrevocable so long as the Holders of
Securities or coupons shall have any rights pursuant to the terms thereof or
of this Indenture until the appointment of a successor by the Company with the
consent of the Trustee and such successor's acceptance of such appointment.
The Company further agrees to take any and all action, including the execution
and filing of any and all such documents and instruments, as may be necessary
to continue such designation and appointment of such agent or successor.
By the execution and delivery of this Indenture, the Trustee hereby
agrees to act as such agent and undertakes promptly to notify the Company of
receipt by it of service of process in accordance with this Section.
ARTICLE TWO
SECURITY FORMS
SECTION 201. Forms Generally.
The Securities and the coupons shall be in substantially the forms
set forth in this Article, with such appropriate insertions, omissions,
substitutions and other variations as are required or permitted by this
Indenture, and may have such letters, numbers or other marks of identification
and such legends or endorsements placed thereon as may be required to comply
with the rules of any securities exchange or as may, consistently herewith, be
determined by the officers executing such Securities and coupons, as evidenced
by their execution of the Securities.
The Trustee's certificates of authentication shall be in
substantially the form set forth in this Article.
Conversion notices shall be in substantially the form set forth in
this Article.
The definitive Securities and coupons shall be printed, lithographed
or engraved or produced by any combination of these methods on steel engraved
borders or may be produced in any other manner, all as determined by the
officers executing such Securities and coupons, as evidenced by their
execution of such Securities.
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SECTION 202. Forms of Definitive Securities.
[Form of Face]
[If Bearer Security:
ANY UNITED STATES PERSON WHO HOLDS THIS OBLIGATION WILL BE SUBJECT TO
LIMITATIONS UNDER THE UNITED STATES INCOME TAX LAWS, INCLUDING THE LIMITATIONS
PROVIDED IN SECTIONS 165(J) AND 1287(A) OF THE INTERNAL REVENUE CODE.
CALFED INC.
6 1/2% CONVERTIBLE SUBORDINATED DEBENTURE DUE 2001
No. B- U.S.$5,000
CALFED INC., a corporation duly organized and existing under the laws
of the State of Delaware (herein called the "Company", which term includes any
successor corporation under the Indenture referred to on the reverse hereof),
for value received, hereby promises to pay to bearer upon presentation and
surrender of this Security the principal sum of Five Thousand United States
Dollars on February 20, 2001 and to pay interest thereon, from the date
hereof, annually in arrears on February 20 in each year ("Interest Payment
Date"), commencing February 20, 1987, at the rate of 6 1/2% per annum, until
the principal hereof is paid or made available for payment. Such payments
(including premium, if any) shall be made, subject to any laws or regulations
applicable thereto and to the rights of the Company (limited as provided in
the Indenture) to terminate the appointment of any such Paying Agent, at the
main offices of Manufacturers Hanover Bank/Belgium S.A. in Brussels,
Manufacturers Hanover Bank Luxembourg S.A. in Luxembourg and Manufacturers
Hanover Trust Company in Frankfurt/Main, London and Zurich, or at such other
offices or agencies outside the United States (as defined below) as the
Company may designate and notify the Holder as provided on the reverse hereof,
by United States dollar check drawn on a bank in The City of New York, or by
transfer to a United States dollar account maintained by the payee with a bank
located in a European city. Interest on this Security due on or before
maturity (but not any additional amounts which may be payable as provided
below) shall be payable only upon presentation and surrender at such an office
or agency of the interest coupons hereto attached as they severally mature. No
payment of principal, premium or interest with respect to this Security shall
be made at the Corporate Trust Office of the Trustee under the Indenture or at
any other office or agency of the Company in the United States or by check
mailed to an address in the United States or by transfer to an account
maintained with a bank located in the United States. Notwithstanding the
foregoing, payment of principal of and premium, if any, and interest on this
Security and payment of any such additional amounts may be made at the Paying
Agent in the Borough of Manhattan, The City of New York if (but only if)
payment of the full amount of such principal, premium, interest or additional
amounts, as the case may be, at all offices outside the United States
maintained for the purpose by the Company in accordance with the Indenture is
illegal or effectively precluded by exchange controls or other similar
restrictions.]
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[If Registered Security:
CALFED INC.
6 1/2% CONVERTIBLE SUBORDINATED DEBENTURE DUE 2001
No. R- U.S.$
CALFED, INC., a corporation duly organized and existing under the
laws of the State of Delaware (herein called the "Company", which term
includes any successor corporation under the Indenture referred to on the
reverse hereof), for value received, hereby promises to pay to ,
or registered assigns, the principal sum of Thousand United
States Dollars on February 20, 2001 and to pay interest thereon, from
February 20, 1986 or from the most recent Interest Payment Date to which
interest has been paid or duly provided for, annually in arrears on February 20
in each year ("Interest Payment Date"), commencing February 20, 1987, at the
rate of 6 1/2% per annum, until the principal hereof is paid or made available
for payment. The interest so payable, and punctually paid or duly provided for,
on any Interest Payment Date will, as provided in the Indenture, be paid to the
Person in whose name this Security (or one or more Predecessor Securities) is
registered at the close of business on the Regular Record Date for such
interest, which shall be the February 5 (whether or not a Business Day) next
preceding such Interest Payment Date. Except as otherwise provided in the
Indenture, any such interest not so punctually paid or duly provided for will
forthwith cease to be payable to the Holder on such Regular Record Date and may
either be paid to the Person in whose name this Security (or one or more
Predecessor Securities) is registered at the close of business on a Special
Record Date for the payment of such Defaulted Interest to be fixed by the
Trustee, notice whereof shall be given to Holders of Securities not less than
10 days prior to such Special Record Date, or be paid at any time in any other
lawful manner not inconsistent with the requirements of any securities exchange
on which the Securities may be listed, and upon such notice as may be required
by such exchange, all as more fully provided in the Indenture. Payments of
principal of and premium, if any, on this Security shall be made at the option
of the Holder (a) at the Corporate Trust Office of the Trustee, or at such
other office or agency of the Company as may be designated by it for such
purpose in the Borough of Manhattan, The City of New York, in such coin or
currency of the United States of America as at the time of payment shall be
legal tender for the payment of public and private debts of (b) subject to any
laws or regulations applicable thereto and to the right of the Company (limited
as provided in the Indenture) to terminate the appointment of any such Paying
Agent, at the main offices of Manufacturers Hanover Bank/Belgium S.A. in
Brussels and Manufacturers Hanover Bank Luxembourg S.A. in Luxembourg or at
such other offices or agencies which are both Paying and Transfer Agents as
the Company may designate and notify the Holder as provided on the reverse
hereof, by United States dollar check drawn on, or by transfer to a United
States dollar account maintained by the payee with, a bank in The City of New
York. Payment of interest on this Security shall be made by United States
dollar check drawn on a bank in The City of New York and mailed to the address
of the Person entitled thereto as such address shall appear in the Security
Register, or upon application by the Holder hereof to the Security Registrar
not later than the Regular Record Date in the year the payment is to be
received, by transfer to a United States dollar account maintained by the
payee with a bank in The City of New York.]
The Company will pay to the holder of this Security [If Bearer
Security or of any coupon appertaining hereto] who is a United States Alien
(as defined below) such additional amounts as may be necessary in order that
every net payment of the principal of (and premium, if any)
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and interest on this Security after deduction or withholding for or on account
of any present or future tax, assessment or other governmental charge imposed
upon or as a result of such payment by the United States [If Registered
Security -- (as defined below)] or any political subdivision or taxing
authority thereof or therein, will not be less than the amount provided for in
this Security [If Bearer Security - or in such coupon] to be then due and
payable; provided, however, that the foregoing obligation to pay additional
amounts will not apply to any one or more of the following:
(a) any tax, assessment or other governmental charge which
would not have been so imposed but for (i) the existence of any
present or former connection between such Holder (or between a
fiduciary, settlor, beneficiary or member of such Holder, if such
Holder is an estate, a trust or a partnership) and the Untied States,
including, without limitation, such Holder (or such fiduciary,
settlor, beneficiary or member) being or having been a citizen or
resident or treated as a resident thereof, or being or having been
engaged in trade or business or present therein, or having or having
had a permanent establishment therein, or (ii) such Holder's present
or former status as a personal holding company, a foreign personal
holding company, or a controlled foreign corporation for United
States tax purposes or a corporation which accumulates earnings to
avoid United States federal income tax;
(b) any tax, assessment or other governmental charge which
would not have been imposed but for the presentation by the Holder of
this Security [If Bearer Security -- or any coupon appertaining
hereto] for payment on a date more than 15 days after the date on
which such payment became due and payable or the date on which payment
thereof is duly provided for, whichever occurs later;
(c) any estate, inheritance, gift, sales, transfer,
personal property or any similar tax, assessment or governmental
charge;
(d) any tax, assessment or other governmental charge which
would not have been imposed but for the failure to comply with any
certification, identification or other reporting requirements
concerning the nationality, residence, identity or connection with
the United States of the Holder or beneficial owner of this Security
[If Bearer Security -- or any coupon appertaining hereto], if
compliance is required by statute or by regulation of the United
States Treasury Department as a precondition to exemption from such
tax, assessment or other governmental charge;
(e) any tax, assessment or other governmental charge which
is payable otherwise than by deduction or withholding from payments
of principal of (and premium, if any) or interest on this Security;
or
(f) any tax, assessment or other governmental charge imposed
on interest received by a person holding, actually or constructively,
10% or more of the total combined voting power of all classes of
stock of the Company entitled to vote;
nor will additional amounts be paid with respect to any payment of principal
of (and premium, if any) or interest on this Security to any United States
Alien who is a fiduciary or partnership or other than the sole beneficial
owner of any such payment to the extent that a beneficiary or settlor with
respect to such fiduciary, a member of such a partnership or the beneficial
owner would not have been entitled to the additional amounts had such
beneficiary, settlor, member or beneficial owner been the Holder of this
Security [If Bearer Security -- or any coupon appertaining hereto]. The term
"United States Alien" means any person who, for United States
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federal income tax purposes, is a foreign corporation, a nonresident alien
individual, a nonresident alien fiduciary of a foreign estate or trust, or a
foreign partnership one or more of the members of which is, for United States
federal income tax purposes, a foreign corporation, a nonresident alien
individual or a nonresident alien fiduciary of a foreign estate or trust, and
the term "United States" means the United States of America, its territories
and possessions.
Notwithstanding the foregoing, if and so long as a certification,
identification or other information reporting requirement referred to in the
fourth paragraph on the reverse hereof would be fully satisfied by payment of
a backup withholding tax or similar charge, the Company may elect, by so
stating in the Determination Notice (as defined on the reverse hereof), to
have the provisions of this paragraph apply in lieu of the provisions of such
paragraph. In such event, the Company will pay as additional amounts such
amounts as may be necessary so that every net payment made following the
effective date of such requirements outside the United States by the Company
or any of its Paying Agents of principal (premium, if any) or interest due in
respect of any Bearer Security or any coupon appertaining thereto of which the
beneficial owner is a United States Alien (but without any requirement that
the nationality, residence or identity of such beneficial owner be disclosed
to the Company, any Paying Agent or any governmental authority), after
deduction or withholding for or on account of such backup withholding tax or
similar charge other than a backup withholding tax or similar charge which is
(i) the result of a certification, identification or information reporting
requirement described in the second parenthetical clause of such paragraph, or
(ii) imposed as a result of the fact that the Company or any of its Paying
Agents has actual knowledge that the beneficial owner of such Bearer Security
or coupon is within the category of persons described in clause (a) of the
preceding paragraph, or (iii) imposed as a result of presentation of such
Bearer Security or coupon for payment more than 15 days after the date on
which such payment becomes due and payable or on which payment thereof is duly
provided for, whichever occurs later, will not be less than the amount
provided for in such Bearer Security or coupon to be then due and payable.
Except as specifically provided herein and in the indenture, the
Company shall not be required to make any payment with respect to any tax,
assessment or other governmental charge imposed by any government or any
political subdivision or taxing authority thereof or therein.
Reference is hereby made to the further provisions of this Security
set forth on the reverse hereof, which further provisions shall for all
purposes have the same effect as if set forth at this place.
[If Bearer Security:
Unless the certificate of authentication hereon has been executed by
the Trustee by the manual signature of one of its authorized officers, neither
this Security, nor any coupon appertaining hereto, shall be entitled to any
benefit under the Indenture or be valid or obligatory for any purpose.
IN WITNESS WHEREOF, the Company has caused this Security to be duly
executed under its corporate seal and coupons bearing the facsimile signature
of its Treasurer to be annexed hereto.
Dated as of February 20, 1986]
14
<PAGE>
[If Registered Security:
Unless the certificate of authentication hereon has been executed by
the Trustee referred to on the reverse hereof by the manual signature of one
of its authorized officers, this Security shall not be entitled to any benefit
under the Indenture or be valid or obligatory for any purpose.
IN WITNESS WHEREOF, the Company has caused this Security to be duly
executed under its corporate seal.
Dated: ]
CALFED INC.
By _________________________________
Chairman of the Board
Attest:
- -------------------------------
Secretary
[Form of Reverse]
This Security is one of a duly authorized issue of Securities of the
Company designated as its 6 1/2% Convertible Subordinated Debentures Due 2001
(herein called the "Securities"), limited (except as otherwise provided in the
Indenture) in aggregate principal amount to U.S.$125,000,000, issued and to be
issued under an Indenture, dated as of February 15, 1986 (herein called the
"Indenture"), between the Company and Manufacturers Hanover Trust Company, as
Trustee (herein called the "Trustee", which term includes any successor
trustee under the Indenture), to which Indenture and all indentures
supplemental thereto reference is hereby made for a statement of the
respective rights, limitations of rights, duties and immunities thereunder of
the Company, the Trustee, the holders of Senior Indebtedness and the Holders
of the Securities and any coupons appertaining thereto and of the terms upon
which the Securities are, and are to be, authenticated and delivered. The
Securities are issuable as Bearer Securities, with interest coupons attached,
in the denomination of U.S.$5,000 and as Registered Securities, without
coupons, in denominations of U.S.$5,000 and integral multiples thereof. As
provided in the Indenture and subject to certain limitations therein set
forth, [If Bearer Security -- Bearer Securities and] Registered Securities are
exchangeable for a like aggregate principal amount of Registered Securities of
any authorized denominations as requested by the Holder surrendering the same
upon surrender of the Security or Securities to be exchanged, [If Bearer
Security -- with all unmatured coupons and all matured coupons in default
thereto appertaining, except as provided below,] at the office or agency of
the Company in the Borough of Manhattan, The City of New York or, subject to
any laws or regulations applicable thereto and to the right of the Company to
terminate the appointment of any such Transfer Agent, at the main offices of
Manufacturers Hanover Bank/Belgium S.A. in Brussels and Manufacturers Hanover
Bank Luxembourg S.A. in Luxembourg, or at such other offices or agencies as
the Company may designate. [If Bearer Security -- Bearer Securities
surrendered in exchange for Registered Securities between a Regular Record
Date and the relevant Interest Payment Date will not be required to be
surrendered with the coupon relating to such Interest Payment Date.]
Registered Securities may not be surrendered in exchange for Bearer
Securities.
15
<PAGE>
The Securities are subject to redemption at the option of the Company
(1) at any time after the expiration of 30 days following the Exchange Date,
as a whole or in part, at the following Redemption Prices (expressed as
percentages of the principal amount). If redeemed during the 12-month period
beginning February 20 of the years indicated.
REDEMPTION REDEMPTION
YEAR PRICE YEAR PRICE
- ---- ---------- ---- ----------
1986............. 106% 1989............. 103%
1987............. 105% 1990............. 102%
1988............. 104% 1991............. 101%
and thereafter at a Redemption Price equal to 100% of the principal amount,
and (2) under the circumstances described in the next two succeeding
paragraphs at a Redemption Price equal to 100% of the principal amount,
together in the case of any such redemption under clause (1) or (2) of this
sentence with accrued interest to the Redemption Date; provided, however, that
interest instalments on Bearer Securities whose Stated Maturity is on or prior
to such Redemption Date will be payable only upon presentation and surrender
of coupons for such interest (at an office or agency outside the United States
except as herein provided otherwise), and provided, further, that interest
instalments on Registered Securities whose Stated Maturity is on or prior to
such Redemption Date will be payable to the Holders of such Securities, or one
or more Predecessor Securities, of record at the close of business on the
relevant Regular Record Date referred to on the face hereof, all as provided
in the Indenture. Notwithstanding the foregoing, the Company may not, prior to
February 20, 1993, redeem any Securities pursuant to clause (1) of the next
preceding sentence unless the Closing Market Price Per Share (as defined in
the Indenture) of the Common Stock on each day on which there was such a price
within the 30 days immediately preceding the fifteenth day prior to the
initial publication of the notice of such redemption is at least 130% of the
Conversion Price is effect at the close of business on such day. Partial
redemptions must be in an amount not less than U.S.$1,000,000 principal amount
of Securities.
The Securities may be redeemed, as a whole but not in part, at the
option of the Company, upon notice given in the manner provided below, at a
redemption price equal to 100% of their principal amount, together with
interest accrued to the date fixed for redemption, if, as a result of any
amendment to, or change in, the laws or regulations of the United States or
any political subdivision or taxing authority thereof or therein affecting
taxation, or any amendment to or change in an official interpretation or
application of such laws or regulations by a taxing authority, court or
administrative agency, which amendment or change is effective on or after
February 20, 1986, the Company will become obligated to pay additional
amounts, as described in the second paragraph of the face of this Security, on
the next succeeding Interest Payment Date; provided, however, that, at the
time such notice is given, such obligation to pay such additional amounts
remains in effect.
In addition, if the Company determines, based upon a written opinion
of independent counsel, that any payment made outside the United States by the
Company or any of its Paying Agents of the full amount of principal (and
premium, if any) or interest due with respect to any Bearer Security or coupon
would, under any present or future laws or regulations of the United States,
be subject to any certification, identification or other information reporting
requirement of any kind, the effect of which requirement is the disclosure to
the Company, any Paying Agent or any United States governmental authority of
the nationality, residence or identity of a beneficial owner of such Bearer
Security or coupon who is a United States Alien (other than such a requirement
(a) which would not be applicable to a payment made by the Company or any one
of its Paying Agents (i) directly to the beneficial owner or (ii) to any
custodian,
16
<PAGE>
nominee or other agent of the beneficial owner, or (b) which can be satisfied
by the custodian, nominee or other agent certifying that the beneficial owner
is a United States Alien, provided that in each case referred to in clauses
(a)(ii) and (b) payment by such custodian, nominee or other agent to such
beneficial owner is not otherwise subject to any such requirement), the
Company at its election will either (x) redeem the Securities, as a whole but
not in part, upon notice given in the manner provided below, at a redemption
price equal to 100% of their principal amount, together with interest accrued
to the date fixed for redemption, or (y) if and as long as the conditions set
forth in the third paragraph of the face of this Security are satisfied, pay
the additional amounts specified in such paragraph. The Company will make such
determination and election and notify the Trustee thereof as soon as
practicable, and the Trustee will promptly give notice of such determination
in the manner provided below (the "Determination Notice"), in each case
stating the effective date of such certification, identification or
information reporting requirement, whether the Company will redeem the
Securities or will pay the additional amounts specified is such paragraph and
(if applicable) the last date by which the redemption of the Securities must
take place. If the Company elects to redeem the Securities, such redemption
shall take place on such date, not later than one year after publication of
the Determination Notice, as the Company elects by notice to the Trustee at
least 75 days before such date, unless shorter notice is acceptable to the
Trustee. Notwithstanding the foregoing, the Company will not so redeem the
Securities if the Company, based upon an opinion of independent counsel,
subsequently determines, not less than 30 days prior to the date fixed for
redemption, that subsequent payments would not be subject to any such
requirement, in which case the Company will notify the Trustee, which will
promptly give notice of that determination in the manner provided below and
any earlier redemption notice will thereupon be revoked and of no further
effect. If the Company elects as provided in clause (y) above to pay
additional amounts, and as long as the Company is obligated to pay such
additional amounts, the Company may subsequently redeem the Securities, at any
time, as a whole but not in part, upon notice given in the manner provided
below, at 100% of these principal amount, together with interest accrued to
the date fixed for redemption, but without reduction for applicable United
States withholding taxes.
Subject to and upon compliance with the provisions of the Indenture
(unless previously redeemed by the Company and notwithstanding any prior call
for redemption at the election of the Company on a Redemption Date on or after
February 20, 1993), this Security is subject to redemption on February 20,
1993, at the election of the Holder, exercisable on or before January 20,
1993, but not prior to December 20, 1992, at a Redemption Price equal to 123%
of the principal amount to be redeemed, plus accrued interest, to the
Redemption Date. For this Security to be redeemed at the election of the
Holder hereof, the Company must receive at the office of one of the Paying and
Conversion Agents appointed by the Company on or after December 20, 1992 until
and including, but not after, the close of business on January 20, 1993, this
Security [If Bearer Security -- , together with all coupons maturing after the
Redemption Date,] accompanied by written notice to the Company (which shall be
substantially in the form of optional redemption notice hereon) that the
Holder hereof instructs the Company to redeem this Security [If Registered
Security -- , or if less than the entire amount hereof is to be redeemed, the
portion hereof to be redeemed]. The Holder of a Registered Security may elect
redemption by the Company of such Security in the principal amount of
U.S.$5,000 or an integral multiple thereof. The Holder of a Bearer Security
may elect redemption by the Company of such Security as a whole but not in
part. Such form of notice duly received shall be irrevocable; provided,
however, that Holders of Securities who provide such optional notice of
redemption shall retain the right to require such Securities to be converted
into Common Stock
17
<PAGE>
on or prior to February 20, 1993, provided that notice of conversion and the
Holder's nontransferable receipt of deposit from the Paying and Conversion
Agent representing such Securities are delivered on or prior to the close of
business on such conversion date to the Paying and Conversion Agent holding
such Securities. In the event such Securities are converted on (but not prior
to) February 20, 1993, the Holders of the appurtenant coupons the Stated
Maturity of which is February 20, 1993 shall be entitled to receive the
interest payable on such Securities on such date. The Company shall give the
Holders of the Securities not less than 75 days nor more than 100 days notice
prior to February 20, 1993 advising such Holders of the Redemption Date for
redemption at the election of Holders.
Notice of redemption at the option of the Company and of the
Redemption Date for redemption at the election of Holders will be given by
publication in Authorized Newspapers in The City of New York, in London and,
so long as the Securities are listed on the Luxembourg Stock Exchange and such
stock exchange shall so require, in Luxembourg, or, if not practicable, in
Europe, and by mail to Holders of Registered Securities. In the case of a
redemption in whole at the election of the Company, notice will be given not
less than 30 days nor more than 60 days prior to the Redemption Date and in
the case of partial redemption at the election of the Company,notice will be
given twice, the first notice to be given not more than 75 nor less than 60
days prior to the Redemption Date and the second notice at least 20 days
thereafter but not less than 30 days prior to the Redemption Date, all as
provided in the Indenture.
In the event of a redemption in part at the option of the Company,
the Company shall not be required (i) to register the transfer of or exchange
Registered Securities or to exchange Bearer Securities for Registered
Securities for a period of 15 days immediately preceding the date notice is
given identifying the serial numbers of the Securities called for such
redemption; (ii) to register the transfer of or exchange any Registered
Security, or portion thereof, called for redemption; or (iii) to exchange any
Bearer Security called for redemption, provided, however, that a Bearer
Security called for redemption may be exchanged for a Registered Security
which is simultaneously surrendered to the Security Registrar or Transfer
Agent making such exchange with written instruction for payment consistent
with the provisions of the Indenture.
Subject to an upon compliance with the provisions of the Indenture,
the Holder of this Security is entitled, at his option, at any time on or
after the opening of business on the Exchange Date and on or before the close
of business on February 20, 2001, or in case this Security [If Registered
Security -- or a portion hereof] is called for redemption, then in respect of
this Security [If Registered Security -- or such portion hereof] until and
including, but (unless the Company defaults in making the payment due upon
redemption] not after, the close of business on the Redemption Date, to
convert this Security [If Registered Security -- (or any portion of the
principal amount hereof which is U.S.$5,000 or an integral multiple thereof)],
at the principal amount hereof [If Registered Security -- or of such portion],
into fully paid and nonassessable shares (calculated as to each conversion to
the nearest 1/100 of a share) of Common Stock of the Company at a Conversion
Price equal to U.S.$35.25 aggregate principal amount of Securities for each
share of Common Stock (or at the current adjusted Conversion Price if an
adjustment has been made as provided in the Indenture) by surrender of this
Security together with [If Bearer Security -- all unmatured coupons and any
matured coupons in default appertaining hereto] [If Registered Security -- (if
so required by the Company or the Trustee) instruments of transfer in form
satisfactory to the Company and the Security Registrar, duly executed by the
registered Holder or by his duly authorized attorney and, in case such
surrender shall be made during the period from the close of business on any
Regular Record Date next preceding any Interest Payment Date to the opening of
business on such
18
<PAGE>
Interest Payment Date (unless this Security or the portion thereof being
converted has been called for redemption on a Redemption Date within such
period), also accompanied by payment in funds acceptable to the Company of an
amount equal to the interest payable on such interest Payment Date on the
principal amount of the Security then being converted (or, if such Registered
Security was issued in exchange for a Bearer Security after the close of
business on such Regular Record Date, by surrender of one or more coupons
relating to such Interest Payment Date or by both payment in such funds and
surrender of such coupon or coupons, in either case, in an amount equal to the
interest payable on such Interest Payment Date on the principal amount of the
Security then being converted)] and the conversion notice hereon duly executed
(a) at the Corporate Trust Office of the Trustee, or at such other office or
agency of the Company as may be designated by it for such purpose in the
Borough of Manhattan, The City of New York, or (b) subject to any laws or
regulations applicable thereto and subject to the right of the Company to
terminate the appointment of any such Conversion Agent, at the main offices of
Manufacturers Hanover Bank/Belgium S.A. in Belgium, Manufacturers Hanover Bank
Luxembourg S.A. in Luxembourg and Manufacturers Hanover Trust Company in
Frankfurt/Main and London, or at such other offices or agencies as the Company
may designate. [If Registered Security -- Subject to the aforesaid requirement
for payment and, in the case of a conversion after the Regular Record Date
next preceding any Interest Payment Date and on or before such Interest
Payment Date, to the right of the Holder of this Security (or any Predecessor
Security) of record at such Regular Record Date to receive as instalment of
interest (with certain exceptions provided in the Indenture),] [no--No]
payment or adjustment is to be made on conversion for interest secured hereon
or for dividends on the Common Stock delivered on conversion. No fractions of
shares or scrip representing fractions of shares will be issued or delivered
on conversion, but instead of any fractional interest the Company shall pay a
cash adjustment as provided in the Indenture. The Conversion Price is subject
to adjustment as provided in the Indenture. In addition, the Indenture
provides that in case of certain consolidations or mergers to which the
Company is a party or the transfer of substantially all of the assets of the
Company, the Indenture shall be amended, without the consent of any Holders of
Securities, so that this Security, if then outstanding, will be convertible
thereafter, during the period this Security shall be convertible as specified
above, only into the kind and amount of securities, cash and other property
receivable upon such consolidation, merger or transfer by a holder of the
number of shares of Common Stock into which this Security might have been
converted immediately prior to such consolidation, merger or transfer
(assuming such holder of Common Stock failed to exercise any rights of
election and received per share the kind and amount received per share by the
plurality of the non-electing shares) assuming, if such consolidation, merger
or transfer is prior to the Exchange Date, that this Security were convertible
at the time of such consolidation, merger or transfer at the initial
Conversion Price specified above as adjusted from February 20, 1986 to such
time pursuant to the Indenture.
[If Registered Security -- In the event of redemption or conversion
of this Security in part only, a new Security or Securities for the unredeemed
or unconverted portion hereof will be issued in the name of the Holder hereof
upon the cancellation hereof.]
The indebtedness evidenced by this Security and any coupons
appertaining hereto is, to the extent provided in the Indenture, subordinate
and subject in right of payment to the prior payment in full of all Senior
Indebtedness, and this Security is issued subject to the provisions of the
Indenture with respect thereto. Each Holder of this Security or any coupon
appertaining to this Security, by accepting the same, (a) agrees to and shall
be bound by such provisions of the Indenture, (b) authorizes and directs the
Trustee on his behalf to take such action as may
19
<PAGE>
be necessary or appropriate to effectuate the subordination of this Security
as provided in the Indenture and (c) appoints the Trustee his attorney-in-fact
for any and all such purposes.
If an Event of Default shall occur and be continuing, the principal
of all the Securities may be declared due and payable in the manner and with
the effect provided in the Indenture.
The Indenture permits, with certain exceptions as therein provided,
the amendment thereof and the modification of the rights and obligations of
the Company and the rights of the Holders of the Securities and coupons under
the Indenture at any time by the Company and the Trustee with the consent of
the Holders of a majority in aggregate principal amount of the Securities at
the time Outstanding (or such lesser amount as shall have acted at a meeting
pursuant to the provisions of the Indenture). The Indenture also contains
provisions permitting the Holders of specified percentages in aggregate
principal amount of the Securities at the time Outstanding, on behalf of the
Holders of all the Securities and coupons, to waive compliance by the Company
with certain provisions of the Indenture and certain past defaults under the
Indenture and their consequences. Any such consent or waiver by the Holder of
this Security shall be conclusive and binding upon such Holder and upon all
future Holders of this Security and any coupon appertaining hereto and of any
Security issued [If Registered Security -- upon registration of transfer
hereof or] in exchange herefor or in the lien hereof, whether or not notation
of such consent or waiver is made upon this Security or such other Security.
No reference herein to the Indenture and no provision of this
Security or of the Indenture shall alter or impair the obligation of the
Company, which is absolute and unconditional, to pay the principal of (and
premium, if any) and interest (including additional amounts, as described on
the face hereof) on this Security at the times, places and rate, and in the
coin or currency, herein prescribed or to convert this Security as provided in
the Indenture.
Title to Bearer Securities and coupons shall pass by delivery. As
provided in the Indenture and subject to certain limitations therein set
forth, the transfer of Registered Securities is registrable on the Security
Register upon surrender of a Registered Security for registration of transfer
at the Corporate Trust Office of Manufacturers Hanover Trust Company, as
Security Registrar, in the Borough of Manhattan, The City of New York or,
subject to any laws or regulations applicable thereto and to the right of the
Company to terminate the appointment of any such Transfer Agent, at the main
offices of Manufacturers Hanover Bank/Belgium S.A. in Brussels and
Manufacturers Hanover Bank Luxembourg S.A. in Luxembourg, or at such other
offices or agencies as the Company may designate, duly endorsed by, or
accompanied by a written instrument of transfer in form satisfactory to the
Company and the Security Registrar or any such Transfer Agent, as the case may
be, duly executed by, the Holder thereof or his attorney duly authorized in
writing, and thereupon one or more new Registered Securities, of authorized
denominations and for the same aggregate principal amount, will be issued to
the designated transferee or transferees. No service charge shall be made for
any such registration of transfer or exchange, but the Company may require
payment of a sum sufficient to cover any tax or other governmental charge
payable in connection therewith.
The Company, the Trustee and any agent of the Company or the Trustee
may treat the bearer of a Bearer Security and any coupon appertaining thereto
and, prior to due presentment for registration of transfer, the Person in
whose name a Registered Security is registered as the owner thereof for all
purposes, whether or not the Security or coupon be overdue, and neither the
Company, the Trustee nor any such agent shall be affected by notice to the
contrary.
20
<PAGE>
The Indenture, the Securities and any coupons appertaining thereto
shall be governed by and construed in accordance with the laws of the State of
New York.
All terms used in this Security which are defined in the Indenture
shall have the meanings assigned to them in the Indenture.
[FORM OF NOTICE OF REDEMPTION AT HOLDER'S OPTION]
To: CALFED INC.
The undersigned Holder of this Security hereby irrevocably instructs
the Company to redeem this Security [If Registered Security --, or portion
hereof in the principal amount below designated,] in accordance with the terms
of the Indenture referred to in this Security [If Registered Security --, and
directs that any Registered Securities representing any principal amount
hereof which is not to be redeemed in accordance with these instructions be
issued and delivered to the registered Holder hereof unless a different name
has been indicated below].
Dated: ____________________________
[If Registered Security -- ___________________________________
Fill in for registration of Registered Signature
Securities if to be issued otherwise
than to the registered Holder. [If Registered Security --
Principal amount to be redeemed (in
___________________________________ an integral multiple of U.S.$5,000,
Name if less than all):
- -----------------------------------
Address $____________]
- -----------------------------------
(Please print name and address,
including zip code number)]
Note: Exercise of the option to elect redemption is irrevocable,
except that Holders who provide the foregoing notice retain
the right to require the Securities tendered herewith to be
converted, provided that notice to such effect and the
Holder's nontransferable receipt from a Paying and
Conversion Agent representing such Securities are delivered
on or prior to February 20, 1993, to the Paying and
Conversion Agent holding the tendered Securities to be
converted. In the event tendered Securities are converted on
(but not prior to) February 20, 1993, the Holder [If Bearer
Security-- of the coupon the Stated Maturity of which is
such date] will be entitled to receive the interest payable
[If Registered Security-- on such Securities] on that date.
SECTION 203. Form of Temporary Global Security.
THIS SECURITY HAS NOT BEEN REGISTERED UNDER THE UNITED STATES
SECURITIES ACT OF 1933. NEITHER THIS SECURITY NOR ANY PORTION HEREOF MAY BE
OFFERED OR SOLD DIRECTLY OR INDIRECTLY IN THE UNITED STATES OF AMERICA, ITS
TERRITORIES OR POSSESSIONS ("UNITED STATES") OR TO NATIONALS OR RESIDENTS
THEREOF, TO ANY CORPORATION, PARTNERSHIP OR OTHER ENTITY CREATED OR ORGANIZED
IN OR UNDER THE LAWS OF THE UNITED STATES OR ANY POLITICAL SUBDIVISION THEREOF
OR TO ANY ESTATE OR TRUST WHICH IS SUBJECT TO UNITED STATES FEDERAL INCOME
TAXATION REGARDLESS OF THE SOURCE OF ITS INCOME ("UNITED STATES PERSONS").
21
<PAGE>
CALFED INC.
6 1/2% CONVERTIBLE SUBORDINATED DEBENTURE DUE 2001
TEMPORARY GLOBAL SECURITY
CALFED INC., a corporation duly organized and existing under the laws
of the State of Delaware (herein called the "Company", which term includes any
successor corporation under the Indenture hereinafter referred to), for value
received, hereby promises to pay to bearer upon presentation and surrender of
this Global Security the principal sum of One Hundred Twenty-Five Million
United States Dollars on February 20, 2001 and to pay interest thereon, from
the date hereof, annually in arrears on February 20 in each year, commencing
February 20, 1987, at the rate of 6 1/2% per annum, until principal hereof is
paid or made available for payment; provided, however, that interest on this
Global Security shall be payable only after the issuance of the definitive
Securities for which this Global Security is exchangeable and, in the case of
definitive Securities in bearer form, only upon presentation and surrender (at
an office or agency outside the United States, except as otherwise provided in
the Indenture referred to below) of the interest coupons thereto attached as
they severally mature.
This Global Security is one of a duly authorized issue of Securities
of the Company designated as specified in the title hereof, issued and to be
issued under the Indenture, dated as of February 15, 1986 (herein called the
"Indenture"), between the Company and Manufacturers Hanover Trust Company, as
Trustee (herein called the "Trustee", which term includes any successor
trustee under the Indenture). It is a temporary security and is exchangeable
in whole or from time to time in part without charge upon request of the
Holder hereof for definitive Securities in bearer form, with interest coupons
attached, or in registered form, without coupons, of authorized denominations,
(a) not earlier than 90 days after the date on which the distribution of the
Securities has been completed as Credit Suisse First Boston Limited shall have
advised the Trustee in writing and (b) as promptly as practicable following
presentation of certification, in the form set forth in the Indenture for such
purpose, that the beneficial owner or owners of this Global Security (or, if
such exchange is only for a part of this Global Security, of such part) are
not United States Persons. Definitive Securities in bearer form to be
delivered in exchange for any part of this Global Security shall be delivered
only outside the United States. Upon any exchange of a part of this Global
Security for definitive Securities, the portion of the principal amount hereof
so exchanged shall be endorsed by the Trustee on the Schedule hereto, and the
principal amount hereof shall be reduced for all purposes by the amount so
exchanged.
Until exchanged in full for definitive Securities, this Global
Security shall in all respects be entitled to the same benefits under, and
subject to the same terms and conditions of, the Indenture as definitive
Securities authenticated and delivered thereunder, except that neither the
Holder hereof nor the beneficial owners of this Global Security shall be
entitled to receive payment of interest hereon or to convert this Global
Security into Common Stock of the Company or any other security, cash or other
property.
This Global Security shall be governed by and construed in accordance
with the laws of the State of New York.
All terms used in this Global Security which are defined in the
Indenture shall have the meanings assigned to them in the Indenture.
Unless the certificate of authentication hereon has been executed by
the Trustee by the manual signature of one of its authorized officers, this
Global Security shall not be entitled to any benefit under the Indenture or be
valid or obligatory for any purpose.
22
<PAGE>
IN WITNESS WHEREOF, the Company has caused this Global Security to be
duly executed under its corporate seal.
Dated as of February 20, 1986
CALFED INC.
By __________________________________
Chairman of the Board
Attest:
- -------------------------------------
Secretary
SCHEDULE OF EXCHANGES
REMAINING
PRINCIPAL PRINCIPAL
AMOUNT AMOUNT NOTATION MADE
DATE EXCHANGED FOR FOLLOWING ON BEHALF OF THE
MADE DEFINITIVE SECURITIES SUCH EXCHANGE TRUSTEE
-------- --------------------- ------------- ----------------
======== ===================== ================ =============
======== ===================== ================ =============
======== ===================== ================ =============
======== ===================== ================ =============
======== ===================== ================ =============
======== ===================== ================ =============
SECTION 204. Form of Coupon.
[FORM OF FACE]
ANY UNITED STATES PERSON WHO HOLDS THIS OBLIGATION WILL BE SUBJECT TO
LIMITATIONS UNDER THE UNITED STATES INCOME TAX LAWS, INCLUDING THE LIMITATIONS
PROVIDED IN SECTIONS 165(j) AND 1287(a) OF THE INTERNAL REVENUE CODE.
23
<PAGE>
NO.
CALFED INC. U.S.$
DUE
6 1/2% CONVERTIBLE SUBORDINATED DEBENTURE DUE 2001
Unless the Security to which this coupon appertains shall have been
called for previous redemption and payment thereof duly provided for or
converted on the date set forth hereon. CALFED INC. (herein called the
"Company") will pay to bearer, upon surrender hereof, the amount shown hereon
(together with any additional amounts in respect thereof which the Company may
be required to pay according to the terms of said Security and the Indenture
referred to therein) at the Paying Agents set out on the reverse hereof or at
such other places (which, except as otherwise provided in the Security to
which this coupon appertains, shall be located outside the United States of
America, its territories and possessions) as the Company may determine from
time to time, by United States dollar check drawn on a bank in The City of New
York, or by transfer to a United States dollar account maintained by the payee
with a bank located in a European city, being one year's interest then payable
on said Security.
By __________________________________
Treasurer
[Reverse of Coupon]
Manufacturers Hanover Manufacturers Hanover Bank
Bank/Belgium S.A. Luxembourg S.A.
Rue de Ligne, 13 39 Boulevard de Prince Henri
B-1000 Brussels Luxembourg
Belgium
Manufacturers Hanover Manufacturers Hanover Trust
Trust Company Company
Boekanheimer Landstrasse 51-53 7 Princes Street
6000 Frankfurt/Main London EC2P 2LR
Federal Republic of Germany England
Manufacturers Hanover Trust Company
Storkerasusse 33
6027 Zurich
Switzerland
SECTION 205. Form of Trustee's Certificate of Authentication.
This is one of the Securities referred to in the within-mentioned
Indenture.
MANUFACTURERS HANOVER TRUST COMPANY
as Trustee
By __________________________________
Authorized Officer
24
<PAGE>
SECTION 206. Forms of Conversion Notice.
CONVERSION NOTICE
[If Bearer Security --
The undersigned Holder of this Security hereby irrevocably exercises
the option to convert this Security into shares of Common Stock in accordance
with the terms of the Indenture referred to in this Security and directs that
such shares be registered in the name of and delivered, together with a check
in payment for any fractional share, to the undersigned unless a different
name has been indicated below. If shares are to be registered in the name of a
Person other than the undersigned, the undersigned will pay all transfer taxes
payable with respect thereto.
Dated: ________________________
-------------------------------------
Signature
If shares are to be registered in HOLDER
the name of and delivered to a Person
other than the Holder, please print
such Person's name & address: Please print name & address of Holder:
- ------------------------------------- -------------------------------------
- ------------------------------------- -------------------------------------
- ------------------------------------- -------------------------------------]
[If Registered Security --
The undersigned Holder of this Security hereby irrevocably exercises
the option to convert this Security, or portion hereof (which is U.S.$5,000 or
an integral multiple thereof) below designated, into shares of Common Stock in
accordance with the terms of the Indenture referred to in this Security,
delivers herewith the amount of interest payable on the next Interest Payment
Date if this conversion is made between the Regular Record Date for such
Interest Payment Date and such Interest Payment Date, and directs that such
shares, together with a check is payment for any fractional share and any
Securities representing any unconverted principal amount hereof, be delivered
to and be registered in the name of the undersigned unless a different name
has been indicated below. If shares or Securities are to be registered in the
name of a Person other than the undersigned, the undersigned will pay all
transfer taxes payable with respect thereto.
Dated: __________________
-------------------------------------
Signature
25
<PAGE>
If shares or Securities are to be If only a portion of the Securities
registered in the name of a Person is to a converted, please indicate:
other than the Holder, please print
such Person's name & address: 1. Principal Amount to be
converted: U.S.$_____________
____________________________________ 2. Amount and denomination of
____________________________________ Registered Securities
____________________________________ representing unconverted
principal amount to be issued:
Amount: U.S.$________________
Denominations: U.S.$_________
(U.S.$5,000 or an integral multiple
thereof)]
ARTICLE THREE
THE SECURITIES
SECTION 301. Title and Terms.
The aggregate principal amount of Securities which may be
authenticated and delivered under this Indenture is limited to
U.S.$125,000,000 except for Securities authenticated and delivered upon
registration of transfer of, or in exchange for, or in lieu of other
Securities pursuant to Section 304, 305, 306, 405, 1108, 1296 or 1802.
The Securities shall be known and designated as the "6 1/2%
Convertible Subordinated Debentures Due 2001" of the Company. Their Stated
Maturity shall be February 20, 2001, and they shall bear interest at the rate
of 6 1/2% per annum from February 20, 1986 payable annually in arrears on
February 20 in each year, commencing February 20, 1987, until the principal
thereof is paid or made available for payment.
The principal of (and premium, if any) and interest on the Securities
shall be payable as provided in the forms of Securities set forth in Section
202 (any city in which any Paying Agent is located being herein called a
"Place of Payment").
The Securities shall be redeemable at the option of the Company as
provided in Article Eleven.
The Securities shall be redeemable at the option of the Holders as
provided in Article Twelve.
The Securities shall be convertible as provided in Article Thirteen
(any city in which any Conversion Agent is located being herein called a
"Place of Conversion").
The Securities shall be subordinated in right of payment to Senior
Indebtedness as provided in Article Fourteen.
SECTION 302. Denominations.
The definitive Securities shall be issuable in bearer form, with
interest coupons attached, in the denomination of U.S.$5,000 and in fully
registered form, without coupons, in the denominations of U.S.$5,000 and
integral multiples thereof.
26
<PAGE>
SECTION 303. Execution, Authentication, Delivery and Dating.
The Securities shall be executed on behalf of the Company by its
Chairman of the Board, its President or one of its Vice Presidents, under its
corporate seal reproduced thereon attested by its Secretary or one of its
Assistant Secretaries. The signature of any of these officers on the
Securities may be manual or facsimile. Coupons shall bear the facsimile
signature of the Treasurer or any Assistant Treasurer of the Company.
Securities and coupons bearing the manual or facsimile signature of
any Person who was at any time a proper officer of the Company shall bind the
Company, notwithstanding that such Person has ceased to hold such office prior
to the authentication and delivery of such Securities or did not hold such
office at the date of such Securities.
At any time and from time to time after the execution and delivery of
the Indenture, the Company may deliver Securities executed by the Company to
the Trustee for authentication, together with a Company Order for the
authentication and delivery of such Securities; and the Trustee in accordance
with the Company Order shall authenticate and deliver such Securities as in
this Indenture provided and not otherwise.
Each Bearer Security and the Global Security shall be dated as of the
date of this Indenture. Each Registered Security shall be dated the date of
its authentication.
No Security or coupon shall be entitled to any benefit under this
Indenture or be valid or obligatory for any purpose unless there appears on
such Security a certificate of authentication substantially in the form
provided for herein executed by the Trustee by manual signature, and such
certificate upon any Security shall be conclusive evidence, and the only
evidence, that such Security has been duly authenticated and delivered
hereunder. Except as permitted by Section 304, 306 or 307, the Trustee shall
not authenticate and deliver any Bearer Security unless all appurtenant
coupons for interest then matured have been detached and cancelled.
SECTION 304. Temporary Global Security Exchange of Temporary Global
Security for Definitive Securities.
The Securities shall be issued initially in the form of one temporary
Global Security, which temporary Global Security shall be deposited on behalf
of the subscribers for the Securities with the London office of The Chase
Manhattan Bank (National Association), as common depositary (the "Common
Depositary"), for credit to their respective accounts (or to such other
accounts as they may direct) at Morgan Guaranty Trust Company of New York,
Brussels Office, as operator of the Euro-clear System ("Euro-clear") or CEDEL
S.A.
Without unnecessary delay but in any event not more than 90 days
after the date on which the distribution of the Securities has been completed,
as Credit Suisse First Boston Limited shall have advised the Trustee in
writing, the Company shall deliver to the Trustee definitive Securities in
aggregate principal amount equal to the principal amount of the Global
Security, executed by the Company. Such definitive Securities shall be in the
form of Bearer Securities or Registered Securities, or any combination
thereof, as may be specified by the Trustee. On or after the Exchange Date the
Global Security shall be surrendered by the Common Depositary to the Trustee,
as the Company's agent for such purpose, to be exchanged, in whole or from
time to time in part, for definitive Securities without charge and the Trustee
shall authenticate and deliver in exchange for the Global Security or the
portions thereof to be exchanged, an equal aggregate principal amount of
definitive Securities in the form of Bearer Securities or Registered
Securities, or any combination thereof, as shall be specified by the
beneficial owner
27
<PAGE>
thereof, provided, however, that upon such presentation by the Common
Depositary, the Global Security is accompanied by a certificate dated the
Exchange Date or a subsequent date and signed by Euro-clear as to the portion
of the Global Security held for its account then to be exchanged and a
certificate dated the Exchange Date or a subsequent date and signed by CEDEL
S.A. as to the portion of the Global Security held for its account then to be
exchanged, each to the effect hereinafter provided. The Company hereby
appoints the main office of the Trustee in London as its agent outside the
United States where Bearer Securities may be delivered in exchange for the
Global Security or portions thereof. Notwithstanding any other provision
hereof or of the Securities, no Bearer Security will be mailed to or otherwise
delivered in connection with its original issuance to any location within the
United States.
Each certificate to be provided by Euro-clear and CEDEL S.A. upon
exchange of a portion of the Global Security shall be substantially to the
following effect or with such changes therein as shall be approved by the
Company and Credit Suisse First Boston Limited.
[Form of certificate to be given by Euro-clear and CEDEL S.A.]
CERTIFICATE
CALFED INC.
6 1/2% CONVERTIBLE SUBORDINATED DEBENTURES DUE 2001
This is to certify with respect to U.S.$ principal amount of the
above-captioned Securities (i) that we have received from each of the persons
appearing in our records as persons entitled to a portion of such principal
amount (our "Qualified Account Holders") a certificate with respect to each
portion substantially in the form set out below, and (ii) that we are not
submitting herewith for exchange any portion of the Global Security
representing the above-captioned Securities excepted in such certificates.
We further certify that as of the date hereof we have not received
any notification from any of our Qualified Account Holders to the effect that
the statements made by such Qualified Account Holders with respect to any
portion of the part submitted herewith for exchange are no longer true and
cannot be relied upon as of the date hereof.
Dated: , 19 *
[MORGAN GUARANTY TRUST COMPANY OF NEW
YORK, BRUSSELS OFFICE, AS OPERATOR OF
THE EURO-CLEAR CLEARANCE SYSTEM]
[CEDEL, S.A.]
By __________________________________
- -------------
* To be dated no earlier than the Exchange Date.
Each certificate received by Euro-clear and CEDEL S.A. from persons
appearing in their records as persons entitled to a portion of the Global
Security shall be substantially to the following offset or with such changes
therein as shall be approved by the Company and Credit Suisse First Boston
Limited.
28
<PAGE>
[Form of certificate to be given by Qualified Account Holders]
CERTIFICATE
CALFED INC.
6 1/2% CONVERTIBLE SUBORDINATED DEBENTURES DUE 2001
This is to certify that as of the date hereof and except as provided
in the third paragraph hereof, none of the above-captioned Securities held by
you for our account is beneficially owned by nationals or residents of the
United States, by any corporation, partnership or other entity created or
organized in or under the laws of the United States or any political
subdivision thereof or by any estate or trust which is subject to United
States Federal income taxation regardless of the source of its income. As used
herein, "United States" means the United States of America, its territories
and possessions.
We undertake to advise you by telex if the above statement as to
beneficial ownership is not correct on [Insert a date which is the Exchange
Date] as to all of the above-captioned Securities then appearing in your books
as being held for our account.
This certificate excepts and does not relate to U.S.$ principal
amount of the above-captioned Securities appearing in your books as being held
for our account but which we have sold or as to which we are not yet able to
certify and as to which we understand exchange and delivery of definitive
Securities cannot be made until we are able so to certify.
We understand that this certificate is required in connection with
certain securities and tax legislation in the United States. If administrative
or legal proceedings are commenced or threatened in connection with which this
certificate is or would be relevant, we irrevocably authorize you to produce
this certificate or a copy thereof to any interested party in such
proceedings.
-------------------------------------
Account Holder
Dated
- ------------
* To be dated on or after the 15th day before the Exchange Date.
Upon any such exchange of a portion of the Global Security for definitive
Securities, the Global Security shall be endorsed to reflect the reduction of
the principal amount evidenced thereby. Until so exchanged in full, the Global
Security shall in all respects be entitled to the same benefits under, and
subject to the same terms and conditions of, this Indenture as definitive
Securities authenticated and delivered hereunder, except that none of
Euro-clear, CEDEL, S.A. or the beneficial owners of the Global Security shall
be entitled to receive payment of interest thereon or to convert the Global
Security into Common Stock of the Company or any other security, cash or other
property.
SECTION 305. Registration, Registration of Transfer and Exchange.
The Company shall come to be kept at the Corporate Trust Office of
the Trustee a register (the register maintained in such office and in any
other office or agency designated pursuant to Section 1002 as a Transfer Agent
being herein sometimes collectively referred to as the "Security Register") in
which, subject to such reasonable regulations as it may prescribe, the Company
shall provide for the registration of Registered Securities and of transfers
of
29
<PAGE>
Registered Securities. The Trustee and each Transfer Agent are hereby
appointed "Security Registrars" for the purpose of registering Registered
Securities and transfers of Registered Securities as herein provided.
Upon surrender for registration of transfer of any Registered
Security at an office or agency of the Company designated pursuant to Section
1002 for such purpose, the Company shall execute, and the Trustee shall
authenticate and deliver, in the name of the designated transferee or
transferees, one or more new Registered Securities of any authorized
denominations and of a like aggregate principal amount.
At the option of the Holder, Bearer Securities may be exchanged for
Registered Securities of any authorized denominations and of a like aggregate
principal amount, upon surrender of the Bearer Securities to be exchanged at
any such office or agency, with all unmatured coupons and all matured coupons
in default thereto appertaining. If the Holder of a Bearer Security is unable
to produce any such unmatured coupon or coupons or matured coupon or coupons
in default, such exchange may be effected if the Bearer Securities are
accompanied by payment in funds acceptable to the Company in an amount equal
to the face amount of such missing coupon or coupons or the surrender of such
missing coupon or coupons may be waived by the Company and the Trustee, if
there be furnished to them such maturity or indemnity as they may require to
have each of them and any Paying Agent harmless. If thereafter the Holder of
such Security shall surrender to any Paying Agent any such missing coupon in
respect of which such a payment shall have been made, such Holder shall be
entitled to receive the amount of such payment; provided, however, that,
except as otherwise provided in the forms of Security set forth in Section
202, interest represented by coupons shall be payable only upon presentation
and surrender of those coupons at an office or agency outside the United
States. Notwithstanding the foregoing, in case a Bearer Security is
surrendered in exchange for a Registered Security at an office or agency
designated pursuant to Section 1002 after the close of business at such office
or agency on (i) any Regular Record Date and before the opening of business at
such office or agency on the next succeeding Interest Payment Date, or (ii)
any Special Record Date and before the opening of business at such office or
agency on the related date for payment of Defaulted Interest, such Bearer
Security shall be surrendered without the coupon relating to such Interest
Payment Date or proposed date of payment, as the case may be.
At the option of the Holder, Registered Securities may be exchanged
for other Registered Securities of any authorized denominations and of a like
aggregate principal amount, upon surrender of the Securities to be exchanged
at any such office or agency. Whenever any Registered Securities are so
surrendered for exchange, the Company shall execute, and the Trustee shall
authenticate and deliver, the Registered Securities which the Holder making
the exchange is entitled to receive, Registered Securities may not be
surrendered in exchange for Bearer Securities.
All Securities issued upon any registration of transfer or exchange
of Securities shall be the valid obligations of the Company, evidencing the
same debt, and entitled to the same benefits under this Indenture, as the
Securities surrendered upon such registration of transfer or exchange.
Every Registered Security presented or surrendered for registration
of transfer or for exchange shall (if so required by the Company or the
Trustee) be duly endorsed, or be accompanied by a written instrument of
transfer in form satisfactory to the Company and the Security Registrar duly
executed, by the Holder thereof or his attorney duly authorized in writing.
30
<PAGE>
No service charge shall be made for any registration of transfer or
exchange of Securities, but the Company may require payment of a sum
sufficient to cover any tax or other governmental charge that may be imposed
in connection with any registration of transfer or exchange of Securities,
other than exchanges pursuant to Section 304, 305, 1108, 1206, 1302 not
involving any transfer.
The Company shall not be required (i) to register the transfer of or
exchange Registered Securities or to exchange Bearer Securities for Registered
Securities for a period of 15 days immediately preceding the date notice is
given identifying the serial numbers of the Securities called for such
redemption, or (ii) to register the transfer of or exchange any Registered
Security, or portion thereof, called for redemption, or (iii) to exchange any
Bearer Security called for redemption, provided, however, that a Bearer
Security called for redemption may be exchanged for a Registered Security
which is simultaneously surrendered to the Security Registrar or Transfer
Agent making such exchange with written instruction for payment consistent
with the provisions of this Indenture.
SECTION 306. Mutilated, Destroyed, Lost or Stolen Securities and
Coupons.
If any mutilated Security or a Security with a mutilated coupon
appertaining to it is surrendered to the Trustee, the Company shall execute
and the Trustee shall authenticate and deliver in exchange therefor a new
Security of like tenor and principal amount and bearing a number not
contemporaneously outstanding, with coupons corresponding to the coupons, if
any, appertaining to the surrendered Security.
If there shall be delivered to the Company and the Trustee (i)
evidence to their satisfaction of the destruction, loss or theft of any
Security or coupon, and (ii) such security or indemnity as may be required by
them to save each of them and any agent of either of them harmless, then, in
the absence of notice to the Company or the Trustee that such Security or
coupon has been acquired by a bona fide purchaser, the Company shall execute
and upon Company Request the Trustee shall authenticate and deliver, in lieu
of any such destroyed, lost or stolen Security or in exchange for the Security
to which such coupon appertains (with all appurtenant coupons not destroyed,
lost or stolen), a new Security of like tenor and principal amount and bearing
a number not contemporaneously outstanding, with coupons corresponding to the
coupons, if any, appertaining to such destroyed, lost or stolen Security or to
the Security to which such destroyed, lost or stolen coupon appertains.
In case any such mutilated, destroyed, lost or stolen Security or
coupon has become or is about to become due and payable, the Company in its
discretion may, instead of issuing a new Security, pay such Security or
coupon; provided, however, that, except as otherwise provided in the forms of
Security set forth in Section 202, the principal of (and premium, if any) and
interest on Bearer Securities shall be payable only at an office or agency
outside the United States and, in the case of interest (but not in the case of
any additional amounts payable as provided in Section 1004), only upon
presentation and surrender of the coupons appertaining thereto.
Upon the issuance of any new Security under this Section, the Company
may require the payment of a sum sufficient to cover any tax or other
governmental charge that may be imposed in relation thereto and any other
expenses (including the fees and expenses of the Trustee) connected therewith.
Every new Security with its coupons, if any, issued pursuant to this
Section in lieu of any destroyed, lost or stolen Security, or in exchange for
a Security to which a destroyed, lost or
31
<PAGE>
stolen coupon appertains, shall constitute an original additional contractual
obligation of the Company, whether or not the destroyed, lost or stolen
Security and its coupons, if any, or the destroyed, lost or stolen coupon
shall be at any time enforceable by anyone, and such new Security and coupons,
if any, shall be entitled to all the benefits of this Indenture equally and
proportionately with any and all other Securities and coupons duly issued
hereunder.
The provisions of this Section are exclusive and shall preclude (to
the extent lawful) all other rights and remedies with respect to the
replacement or payment of mutilated, destroyed, lost or stolen Securities or
coupons.
SECTION 307. Payment of Interest; Interest Rights Preserved.
Interest on any Registered Security which is payable, and is
punctually paid or duly provided for, on any Interest Payment Date shall be
paid to the Person in whose name that Security (or one or more Predecessor
Securities) is registered at the close of business on the Regular Record Date
for such interest. In case a Bearer Security is surrendered in exchange for a
Registered Security at an office or agency of the Company designated pursuant
to Section 1002 for the purpose after the close of business (at such office or
agency) on any Regular Record Date and before the opening of business (at such
office or agency) on the next succeeding Interest Payment Date, such Bearer
Security shall be surrendered without the coupon relating to such Interest
Payment Date and interest will not be payable on such Interest Payment Date in
respect of the Registered Security issued in exchange for such Bearer Security,
but will be payable only to the Holder of such coupon when due.
Any interest on any Registered Security which is payable, but is not
punctually paid or duly provided for, on any Interest Payment Date (herein
called "Defaulted Interest") shall forthwith cease to be payable to the Holder
on the relevant Regular Record Date by virtue of having been such Holder, and
such Defaulted Interest may be paid by the Company, at its election in each
case, as provided in Clause (1) or (3) below:
(1) The Company may elect to make payment of any Defaulted
Interest to the Persons in whose names the Registered Securities (or
their respective Predecessor Securities) are registered at the close
of business on a Special Record Date for the payment of such
Defaulted Interest, which shall be fixed in the following manner. The
Company shall notify the Trustee in writing of the amount of
Defaulted Interest proposed to be paid on each Registered Security
and the date of the proposed payment, and at the same time the
Company shall deposit with the Trustee an amount of money equal to
the aggregate amount proposed to be paid in respect of such Defaulted
Interest or shall make arrangements satisfactory to the Trustee for
such deposit prior to the date of the proposed payment, such money
when deposited to be held in trust for the benefit of the Persons
entitled to such Defaulted Interest as in this Clause provided.
Thereupon the Trustee shall fix a Special Record Date for the payment
of such Defaulted Interest which shall be not more than 15 days and
not less than 10 days prior to the date of the proposed payment and
not less then 10 days after the receipt by the Trustee of the notice
of the proposed payment. The Trustee shall promptly notify the
Company of such Special Record Date and, in the name and at the
expense of the Company, shall cause notice of the proposed payment of
such Defaulted Interest and the Special Record Date therefor to the
mailed, first-class postage prepaid, to each Holder of Registered
Securities at the address of such Holder as it appears in the
Security Register, not less than 10 days prior to such Special Record
Date. Notice of the proposed payment of such Defaulted Interest and
the Special Record Date therefor having been so mailed, such
Defaulted Interest shall be paid to the Persons
32
<PAGE>
in whose names the Registered Securities (or their respective
Predecessor Securities) are registered at the close of business on
such Special Record Date and shall no longer be payable pursuant to
the following Clause (2). in case a Bearer Security is surrendered in
exchange for a Registered Security at an office or agency of the
Company designated pursuant to Section 1002 for the purpose after the
close of business (at such office or agency) on any Special Record
Date and before the opening of business (at such office or agency) on
the related proposed date for payment of Defaulted Interest, such
Bearer Security shall be surrendered without the coupon relating to
such proposed date of payment and Defaulted Interest will not be
payable on such proposed date of payment in respect of the
Registered Security issued in exchange for such Bearer Security, but
will be payable only to the Holder of such coupon.
(2) The Company may make payment of any Defaulted Interest
in any other lawful manner not inconsistent with the requirements of
any securities exchange on which the Securities may be listed, and
upon such notice as may be required by such exchange if, after notice
given by the Company to the Trustee of the proposed payment pursuant
to this Clause, such manner of payment shall be deemed practicable by
the Trustee.
Subject to the foregoing provisions of this Section, each Security
delivered under this Indenture upon registration of transfer of or in exchange
for or in lieu of any other Security shall carry the rights to interest
secured and unpaid, and to accrue, which were carried by such other Security.
In the case of any Registered Security which is converted after any
Regular Record Date and on or prior to the next succeeding Interest Payment
Date (other than any Registered Security whose Maturity is prior to such
Interest Payment Date), interest whose Stated Maturity is on such Interest
Payment Date shall be payable on such Interest Payment Date notwithstanding
such conversion, and such interest (whether or not punctually paid or duly
provided for) shall be paid to the Person in whose name that Registered
Security (or one or more Predecessor Securities) is registered at the close of
business on such Regular Record Date. Except as otherwise expressly provided
in the immediately preceding sentence, in the case of any Security which is
converted, interest whose Stated Maturity is after the date of conversion of
such Security shall not be payable.
SECTION 308. Persons Deemed Owners.
The Company, the Trustee and any agent of the Company or the Trustee
may treat the bearer of any Bearer Security or the Global Security and the
bearer of any coupon as the absolute owner of such Security or coupon for the
purpose of receiving payment thereof or on account thereof and for all other
purposes whatsoever, whether or not such Security or coupon be overdue, and
neither the Company, the Trustee nor any agent of the Company or the Trustee
shall be affected by notice to the contrary. Prior to due presentment of a
Registered Security for registration of transfer, the Company, the Trustee and
any agent of the Company or the Trustee may treat the Person in whose name
such Security is registered as the owner of such Security for the purpose of
receiving payment of principal of (and premium, if any) and (subject to
Section 307) interest on such Security and for all other purposes whatsoever,
whether or not such Security be overdue, and neither the Company, the Trustee
nor any agent of the Company or the Trustee shall be affected by notice to the
contrary.
33
<PAGE>
SECTION 209. Cancellation.
All Securities and coupons surrendered for payment, redemption,
conversion, registration of transfer or exchange shall if surrendered to any
Person other than the Trustee, be delivered to the Trustee. All Registered
Securities and matured coupons so delivered shall be cancelled promptly by the
Trustee. All Bearer Securities and unmatured coupons so delivered shall be
held by the Trustee and, upon instruction by a Company Order, shall be
cancelled or held for reissuance. Bearer Securities and unmatured coupons held
for reissuance may be reissued only in replacement of mutilated, lost, stolen
or destroyed Securities or coupons pursuant to Section 306. All Bearer
Securities and unmatured coupons held by the Trustee pending such cancellation
or reissuance shall be deemed to be delivered for cancellation for all
purposes of this Indenture and the Securities. The Company may at any time
deliver to the Trustee for cancellation any Securities previously
authenticated and delivered hereunder which the Company may have acquired in
any manner whatsoever, and all Securities so delivered shall be promptly
cancelled or held for reissuance as hereinabove provided. No Securities shall
be authenticated in lieu of or in exchange for any Securities cancelled as
provided in this Section, except as expressly permitted by this Indenture. All
cancelled Securities and coupons held by the Trustee shall be destroyed and
the Trustee shall furnish to the Company a certificate with respect to such
destruction, except that the cancelled Global Security and certificates
referred to in Section 304 shall not be destroyed but shall be delivered to
the Company.
SECTION 310. Computation of Interest.
Interest on the Securities shall be computed on the basis of a year
of twelve 30-day months.
ARTICLE FOUR
SATISFACTION AND DISCHARGE
Section 401. Satisfaction and Discharge of Indenture.
This Indenture shall cease to be of further effect (except as to any
surviving rights of conversion, registration of transfer or exchange of
Securities herein expressly provided for, and any right to receive additional
amounts under the second or third paragraph on the face of the forms of
Securities set forth in Section 202), and the Trustee, on demand of and at the
expense of the Company, shall execute proper instruments acknowledging
satisfaction and discharge of this Indenture, when
(1) either
(A) all Securities theretofore authenticated and delivered
and all coupons appertaining thereto (other than (i) coupons
appertaining to Bearer Securities surrendered for exchange for
Registered Securities and maturing after such exchange, whose
surrender is not required or has been waived as provided in Section
305, (ii) Securities and coupons which have been destroyed, lost or
stolen and which have been replaced or paid as provided in Section
306, (iii) coupons appertaining to Securities called for redemption
and maturing after the relevant Redemption Date, whose surrender has
been waived as provided in Section 1107 or Section 1205, and (iv)
Securities and coupons for whose payment money has theretofore been
deposited in trust or segregated and held in trust by the Company and
thereafter repaid to the Company or discharged from such trust, as
provided in Section 1003) have been delivered to the Trustee for
cancellation; or
34
<PAGE>
(B) all such Securities not theretofore delivered to the
Trustee for cancellation
(i) have become due and payable or
(ii) will become due and payable at their Stated
Maturity within one year, or
(iii) are to be called for redemption within one year
under arrangements satisfactory to the Trustee for the
giving of notice of redemption by the Trustee in the name,
and at the expense, of the Company;
and the Company, in the case of (i), (ii) or (iii) above, has
deposited or caused to be deposited with the Trustee as trust funds
in trust for the purpose an amount sufficient to pay and discharge
the entire indebtedness, on such Securities and coupons not
theretofore delivered to the Trustee for cancellation, for principal
(and premium, if any) and interest to the date of such deposit (in
the case of Securities which have become due and payable) or to the
Stated Maturity or Redemption Date, as the case may be;
(2) the Company has paid or caused to be paid all other sums
payable hereunder by the Company; and
(3) the Company has delivered to the Trustee an Officers'
Certificate and an Opinion of Counsel, each stating that all
conditions precedent herein provided for relating to the satisfaction
and discharge of this Indenture have been complied with.
Notwithstanding the satisfaction and discharge of this Indenture, the
obligations of the Company to the Trustee under Section 606 shall survive and,
if money shall have been deposited with the Trustee pursuant to Clause (1)(B)
of this Section, the obligations of the Trustee under Section 402 and the last
paragraph of Section 1003 shall survive.
SECTION 402. Application of Trust Money.
Subject to the provisions of the last paragraph of Section 1003, all
money deposited with the Trustee pursuant to Section 401 shall be held in
trust and applied by it, in accordance with the provisions of the Securities,
the coupons and this Indenture, to the payment, either directly or through any
Paying Agent (including the Company acting as its own Paying Agent) as the
Trustee may determine, to the Persons entitled thereto, of the principal (and
premium, if any) and interest for whose payment such money has been deposited
with the Trustee. All moneys deposited with the Trustee pursuant to Section
401 (and held by it or any Paying Agent) for the payment of Securities
subsequently converted shall be returned to the Company upon Company Request.
ARTICLE FIVE
REMEDIES
SECTION 501. Events of Default.
"Event of Default", wherever used herein, means any one of the
following events (whatever the reason for such Event of Default and whether it
shall be occasioned by the provisions of Article Fourteen or be voluntary or
involuntary or be effected by operation of law or pursuant to any judgment,
decree or order of any court or any order, rule or regulation of any
administrative or governmental body):
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(1) default in the payment of any interest upon any Security
when it becomes due and payable, and continuance of such default for
a period of 30 days; or
(2) default in the payment of the principal of (or premium,
if any, on) any Security at its Maturity; or
(3) default in the performance, or breach of any covenant or
warranty of the Company in this Indenture (other than a covenant or
warranty a default in whose performance or whose breach is elsewhere
in this Section specifically dealt with), and continuance of such
default or breach for a period of 60 days after there has been given,
by registered or certified mail, to the Company by the Trustee or to
the Company and the Trustee by the Holders of at least 25% in
principal amount of the Outstanding Securities a written notice
specifying such default or breach and requiring it to be remedied and
stating that such notice is a "Notice of Default" hereunder, or
(4) default under any bond, debenture, note or other
evidence of indebtedness for money borrowed by the Company or any
Principal Subsidiary or under any mortgage, indenture or instrument
under which there may be issued or by which there may be secured or
evidenced any indebtedness for money borrowed by the Company or any
Principal Subsidiary, whether such indebtedness now exists or shall
hereafter be created, which default shall constitute a failure to pay
any portion of the principal of such indebtedness when due and
payable after the expiration of any applicable grace period with
respect thereto or shall have resulted in such indebtedness becoming
or being declared due and payable prior to the date on which it would
otherwise have become due and payable, and the aggregate amount of
any and all issues of such indebtedness exceeds U.S.$10,000,000
without such indebtedness having been discharged, or such
acceleration having been rescinded or annulled, within a period of 10
days after there shall have been given, by registered or certified
mail, to the Company by the Trustee or to the Company and the Trustee
by the Holders of at least 25% in principal amount of the Outstanding
Securities a written notice specifying such default and requiring the
Company to cause such indebtedness to be discharged or cause such
acceleration to be rescinded or annulled and stating that such notice
is a "Notice of Default" hereunder; or
(5) the entry by a court having jurisdiction in the premises
of (A) a decree or order for relief in respect of the Company or any
Principal Subsidiary in an involuntary case or proceeding under any
applicable United States Federal or State bankruptcy, insolvency,
reorganization or other similar law or (B) a decree or order
adjudging the Company or any Principal Subsidiary a bankrupt or
insolvent, or approving as properly filed a petition seeking
reorganization, arrangement, adjustment or composition of or in
respect of the Company or any Principal Subsidiary under any
applicable United States Federal or State law, or appointing a
custodian, receiver, liquidator, assignee, trustee, sequestrator or
other similar official of the Company or any Principal Subsidiary or
of any substantial part of its property, or ordering the winding up
or liquidation of its affairs, and the continuance of any such decree
or order for relief or any such other decree or order unstayed and in
effect for a period of 60 consecutive days; or
(6) the commencement by the Company or any Principal
Subsidiary of a voluntary case or proceeding under any applicable
United States Federal or State bankruptcy, insolvency, reorganization
or other similar law or of any other case or proceeding to be
adjudicated a bankrupt or insolvent, or the consent by the Company or
any Principal Subsidiary to the entry of a decree or order for relief
in respect of the Company or any
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Principal Subsidiary in an involuntary case or proceeding under any
applicable United States Federal or State bankruptcy, insolvency,
reorganization or other similar law or to the commencement of any
bankruptcy or insolvency case or proceeding against the Company or
any Principal Subsidiary, or the filing by the Company or any
Principal Subsidiary of a petition or answer or consent seeking
reorganization or relief under any applicable United States Federal
or State law, or the consent by the Company or any Principal
Subsidiary to the filing of such petition or to the appointment of or
the taking possession by a custodian, receiver, liquidator, assignee,
trustee, sequestrator or similar official of the Company or any
Principal Subsidiary or of any substantial part of its property, or
the making by the Company or any Principal Subsidiary of an
assignment for the benefit of creditors, or the admission by the
Company or any Principal Subsidiary in writing of its inability to
pay its debts generally as they become due, or the taking of
corporate action by the Company or any Principal Subsidiary in
furtherance of any such action.
SECTION 502. Acceleration of Maturity; Rescission and Annulment.
If an Event of Default occurs and is continuing, then and in every
such case the Trustee or the Holders of not less than 25% in principal amount
of the Outstanding Securities may declare the principal of all the Securities
to be due and payable immediately, by a notice in writing to the Company (and
to the Trustee if given by Holders), and upon any such declaration such
principal amount shall become immediately due and payable.
At any time after such a declaration of acceleration has been made
and before a judgment or decree for payment of the money due has been obtained
by the Trustee as hereinafter in this Article provided, the Holders of a
majority in principal amount of the Outstanding Securities (or such lesser
amount as shall have acted at a meeting pursuant to the provisions of this
Indenture, provided that such lesser amount is more than the principal amount,
if any, of the Outstanding Securities whose Holders shall have given written
notice of such declaration), by written notice to the Company and the Trustee,
may rescind and annul such declaration and its consequences if
(1) the Company has paid or deposited with the Trustee a sum
sufficient to pay
(A) all overdue interest on all Securities,
(B) the principal of (and premium, if any, on) any
Securities which have become due otherwise than by such
declaration of acceleration and interest thereon at the rate
borne by the Securities,
(C) to the extent that payment of such interest is
lawful, interest upon overdue interest at the rate borne by
the Securities, and
(D) all sums paid or advanced by the Trustees
hereunder and the reasonable compensation, expenses,
disbursements and advances of the Trustee, its agents and
counsel;
and
(2) All Events of Default, other than the non-payment of the
principal of Securities which have become due solely by such
declaration of acceleration, have been cured or waived as provided in
Section 513.
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No such rescission or annulment shall affect any subsequent default or impair
any right consequent thereon.
SECTION 503. Collection of Indebtedness and Suits for Enforcement by
Trustee.
The Company covenants that if
(1) default is made in the payment of any interest on any
Security when such interest becomes due and payable and such default
continues for a period of 30 days, or
(2) default is made in the payment of the principal of (or
premium, if any, on) any Security at the Maturity thereof,
the Company will, upon demand of the Trustee, pay to it, for the benefit of
the Holders of such Securities and coupons, the whole amount then due and
payable on such Securities and coupons for principal (and premium, if any) and
interest and, to the extent that payment of such interest shall be legally
enforceable, interest on any overdue principal (and premium, if any) and on
any overdue interest, at the rate borne by the Securities, and, in addition
thereto, such further amount as shall be sufficient to cover the costs and
expenses of collection, including the reasonable compensation, expenses,
disbursements and advances of the Trustee, its agents and counsel.
If the Company fails to pay such amounts forthwith upon such demand,
the Trustee, in its own name and as trustee of an express trust, may initiate
a judicial proceeding for the collection of the sums so due and unpaid, may
prosecute such proceeding to judgment or final decree and may enforce the same
against the Company or any other obligor upon the Securities and collect the
moneys adjudged or decreed to be payable in the manner provided by law out of
the property of the Company or any other obligor upon the Securities, wherever
situated.
If an Event of Default occurs and is continuing, the Trustee may in
its discretion proceed to protect and enforce its rights and the rights of the
Holders of Securities and coupons by such appropriate judicial proceedings as
the Trustee shall deem most effectual to protect and enforce any such rights,
whether for the specific enforcement of any covenant or agreement in this
Indenture or in aid of the exercise of any power granted herein, or to enforce
any other proper remedy.
SECTION 504. Trustee May File Proofs of Claim.
In case of the pendency of any receivership, insolvency, liquidation,
bankruptcy, reorganization, arrangement, adjustment, composition or other
judicial proceeding relative to the Company or any other obligor upon the
Securities or the property of the Company or such other obligor or their
creditors, the Trustee (irrespective of whether the principal of the
Securities shall then be due and payable as therein expressed or by
declaration or otherwise and irrespective of whether the Trustee shall have
made any demand on the Company for the payment of overdue principal or
interest) shall be entitled and empowered, by intervention in such proceeding
or otherwise.
(i) to file and prove a claim for the whole amount of
principal (and premium, if any) and interest owing and unpaid in
respect of the Securities and to file such other papers or documents
as may be necessary or advisable in order to have the claims of the
Trustee (including any claim for the reasonable compensation,
expenses, disbursements and advances of the Trustee, its agents and
counsel) and of the Holders of Securities and coupons allowed in such
judicial proceeding; and
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(ii) to collect and receive any moneys or other property
payable or deliverable on any such claims and to distribute the same;
and any custodian, receiver, assignee, trustee, liquidator, sequestrator or
other similar official in any such judicial proceeding is hereby authorized by
each Holder of Securities and coupons to make such payments to the Trustee
and, in the event that the Trustee shall consent to the making of such
payments directly to the Holders of Securities and coupons, to pay to the
Trustee any amount due to it for the reasonable compensation, expenses,
disbursements and advances of the Trustee, its agents and counsel and any
other amounts due the Trustee under Section 606.
Nothing herein contained shall be deemed to authorize the Trustee to
authorize or consent to or accept, or adopt on behalf of any Holder of a
Security or coupon, any plan or reorganization, arrangement, adjustment or
composition affecting the Securities or the coupons or the rights of any
Holder thereof or to authorize the Trustee to vote in respect of the claim of
any Holder of a Security or coupon in any such proceeding.
Section 505. Trustee May Enforce Claims Without Possession of
Securities or Coupons.
All rights of action and claims under this Indenture or the
Securities or coupons may be prosecuted and enforced by the Trustee without
the possession of any of the Securities or coupons or the production thereof
in any proceeding relating thereto, and any such proceeding instituted by the
Trustee shall be brought in its own name as trustee of an express trust, and
any recovery of judgment shall, after provision for the payment of the
reasonable compensation, expenses, disbursements and advances of the Trustee,
its agents and counsel, be for the ratable benefit of the Holder of the
Securities and coupons in respect of which such judgment has been recovered.
SECTION 506. Application of Money Collected.
Subject to Article Fourteen, any money collected by the Trustee
pursuant to this Article shall be applied in the following order, at the date
or dates fixed by the Trustee and, in case of the distribution of such money
on account of principal (or premium, if any) or interest, upon presentation
of the Securities or coupons, or both, as the case may be, and the notation
thereon of the payment if only partially paid and upon surrender thereof if
fully paid;
FIRST: To the payment of all amounts due the Trustee under
Section 606;
SECOND: To the payment of the amounts then due and unpaid for
principal of (and premium, if any) and interest on the Securities and
coupons in respect of which or for the benefit of which such money
has been collected, ratably, without preference or priority of any
kind, according to the amounts due and payable on such Securities and
coupons for principal (and premium, if any) and interest,
respectively; and
THIRD: The balance, if any, to the Person or Persons entitled
thereto.
SECTION 507. Limitation on Suits.
No Holder of any Security or coupon shall have any right to institute
any proceeding, judicial or otherwise, with respect to this Indenture, or for
the appointment of a receiver or trustee, or for any other remedy hereunder,
unless:
(1) such Holder has previously given written notice to the
Trustee of a continuing Event of Default;
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(2) the Holders of not less than 25% in principal amount of
the Outstanding Securities shall have made written request to the
Trustee to institute proceedings in respect of such Event of Default
in its own name as Trustee hereunder;
(3) such Holder or Holders have offered to the Trustee
reasonable indemnity against the costs, expenses and liabilities to
be incurred in compliance with such request;
(4) the Trustee for 60 days after its receipt of such
notice, request and offer of indemnity has failed to institute any
such proceeding; and
(5) no direction inconsistent with such written request has
been given to the Trustee during such 60-day period by the Holders of
a majority in principal amount of the Outstanding Securities (or such
lesser amount as shall have acted at a meeting pursuant to the
provisions of this Indenture, provided that such lesser amount is
more than the principal amount of the Outstanding Securities whose
Holders shall have made such written request);
it being understood and intended that no one or more of such Holders shall
have any right in any manner whatever by virtue of, or by availing of, any
provision of this Indenture to affect, disturb or prejudice the rights of any
other of such Holders, or to obtain or seek to obtain priority or preference
over any others of such Holders or to enforce any right under this Indenture,
except in the manner herein provided and for the equal and ratable benefit of
all of such Holders.
SECTION 508. Unconditional Right of Holders to Receive Principal,
Premium and Interest and to Convert.
Notwithstanding any other provision in this Indenture, the Holder of
any Security or coupon shall have the right, which is absolute and
unconditional, to receive payment of the principal of (and premium, if any)
and (subject to Section 307) interest on such Security or payment of such
coupon on the respective Stated Maturities expressed in such Security or
coupon (or, in the case of redemption at the option of the Company or the
Holder, on the Redemption Date) and to convert such Security in accordance
with Article Thirteen, and to institute suit for the enforcement of any such
payment and right to convert, and such rights shall not be impaired without
the consent of such Holder.
SECTION 509. Restoration of Rights and Remedies.
If the Trustee or any Holder of a Security or coupon has instituted
any proceeding to enforce any right or remedy under this Indenture and such
proceeding has been discontinued or abandoned for any reason, or has been
determined adversely to the Trustee or to such Holder, then and in every such
case, subject to any determination in such proceeding, the Company, the
Trustee and the Holder of Securities and coupons shall be rendered severally
and respectively to their former positions hereunder, and thereafter all
rights and remedies of the Trustee and the Holders shall continue as though no
such proceeding had been instituted.
SECTION 510. Rights and Remedies Cumulative.
Except as otherwise provided with respect to the replacement or
payment of mutilated, destroyed, lost or stolen Securities or coupons in the
last paragraph of Section 306, no right or remedy herein conferred upon or
reserved to the Trustee or to the Holders of Securities or coupons is intended
to be exclusive of any other right or remedy, and every right and remedy shall,
to the extent permitted by law, be cumulative and in addition to every other
right and remedy given hereunder or now or hereafter existing at law or in
equity or otherwise. The
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assertion or employment of any right or remedy hereunder, otherwise, shall not
prevent the concurrent assertion or employment of any other appropriate right
or remedy.
SECTION 511. Delay or Omission Not Waiver.
No delay or omission of the Trustee or of any Holder of a Security or
coupon to exercise any right or remedy accruing upon any Event of Default
shall impair any such right or remedy or constitute a waiver of any such Event
of Default or as acquiescence therein. Every right and remedy given by this
Article or by law to the Trustee or to the Holders of Securities or coupons
may be exercised from time to time, and as often as may be deemed expedient,
by the Trustee or by the Holders of Securities or coupons, as the case may be.
SECTION 512. Control by Holders of Securities.
The Holders of a majority in principal amount of the Outstanding
Securities (or such lesser amount as shall have acted at a meeting pursuant to
the provisions of this Indenture) shall have the right to direct the time,
method and place of conducting any proceeding for any remedy available to the
Trustee or exercising any trust or power conferred on the Trustee, provided
that
(1) such direction shall not be in conflict with any rule of
law or with this Indenture, including, but not limited to Sections
507 and 602(e) hereof, and
(2) the Trustee may take any other action deemed proper by
the Trustee which is not inconsistent with such direction.
SECTION 513. Waiver of Past Defaults.
The Holders of not less than a majority in principal amount of the
Outstanding Securities (or such lesser amount as shall have acted at a meeting
pursuant to the provisions of this Indenture) may on behalf of the Holder of
all the Securities and coupons waive any past default hereunder and its
consequences, except a default
(1) in the payment of the principal of (or premium, if any)
or interest on any Security, or
(2) in respect of a covenant or provision hereof which under
Article Eight cannot be modified or amended without the consent of
the Holder of each Outstanding Security affected.
Upon any such waiver, such default shall cease to exist, and any
Event of Default arising therefrom shall be deemed to have been cured, for
every purpose of this Indenture; but no such waiver shall extend to any
subsequent or other default or impair any right consequent thereon.
SECTION 514. Undertaking for Costs.
All parties to this Indenture agree, and each Holder of any Security
or coupon by his acceptance thereof shall be deemed to have agreed, that any
court may in its discretion require, in any suit for the enforcement of any
right or remedy under this Indenture, or in any suit against the Trustee for
any action taken, suffered or omitted by it as Trustee, the filing by any
party litigant in such suit of an undertaking to pay the costs of such suit,
and that such court may in its discretion assess reasonable costs, including
reasonable attorneys' fees, against any party litigant in such suit, having
due regard to the merits and good faith of the claims or defenses made by such
party litigant; but the provisions of this Section shall not apply to any
suit instituted by the Company, to any suit instituted by the Trustee, to any
suit instituted by any Holder, or group of Holders, holding in the aggregate
more than 10% in principal amount of
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the Outstanding Securities, or to any suit instituted by any Holder of any
Security or coupon for the enforcement of the payment of the principal of (or
premium, if any) or interest on any Security or the payment of any coupon on
or after the respective Stated Maturities expressed in such Security or coupon
(or, in the case of redemption at the option of the Company or the Holder, on
or after the Redemption Date) or for the enforcement of the right to convert
any Security in accordance with Article Thirteen.
SECTION 515. Waiver of Stay or Extension Laws.
The Company covenants (to the extent that it may lawfully do so) that
it will not at any time insist upon, or plead, or in any manner whatsoever
claim or take the benefit or advantage of, any stay or extension law wherever
enacted, now or at any time hereafter in force, which may affect the covenants
or the performance of this Indenture; and the Company (to the extent that it
may lawfully do so) hereby expressly waives all benefit or advantage of any
such law and covenants that it will not hinder, delay or impede the execution
of any power herein granted to the Trustee, but will suffer and permit the
execution of every such power as though no such law had been enacted.
ARTICLE SIX
THE TRUSTEE
SECTION 601. Certain Duties and Responsibilities.
(a) Except during the continuance of an Event of Default,
(1) the Trustee undertakes to perform such duties and only
such duties as are specifically set forth in this Indenture, and no
implied covenants or obligations shall be read into this Indenture
against the Trustee; and
(2) in the absence of bad faith on its part, the Trustee may
conclusively rely, as to the truth of the statements and the
correctness of the opinions expressed therein, upon certificates or
opinions furnished to the Trustee and conforming to the requirements
of this Indenture; but in the case of any such certificates or
opinions which by any provision hereof are specifically required to
be furnished to the Trustee, the Trustee shall be under a duty to
examine the same to determine whether or not they conform to the
requirements of this Indenture.
(b) In case an Event of Default has occurred and is continuing, the
Trustee shall exercise such of the rights and powers vested in it by this
Indenture, and use the same degree of care and skill in their exercise, as a
prudent man would exercise or use under the circumstances in the conduct of
his own affairs.
(c) No provision of this Indenture shall be construed to relieve the
Trustee from liability for its own negligent action, it own negligent failure
to act, or its own wilful misconduct, except that
(1) this Subsection shall not be construed to limit the
effect of Subsection (a) of this Section;
(2) the Trustee shall not be liable for any error of
judgment made in good faith by a Responsible Officer, unless it shall
be proved that the Trustee was negligent in ascertaining the
pertinent facts;
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(3) the Trustee shall not be liable with respect to any
action taken or omitted to be taken by it in good faith in accordance
with the direction of the Holders of a majority in principal amount
of the Outstanding Securities (or such lesser amount as shall have
acted at a meeting pursuant to the provisions of this Indenture)
relating to the time, method and place of conducting any proceeding
for any remedy available to the Trustee, or exercising any trust or
power conferred upon the Trustee, under this Indenture; and
(4) no provision of this Indenture shall require the Trustee
to expend or risk its own funds or otherwise incur any financial
liability in the performance of any of its duties hereunder, or in
the exercise of any of its rights or powers, if it shall have
reasonable grounds for believing that repayment of such funds or
adequate indemnity against such risk or liability is not reasonably
assured to it.
(d) Whether or not therein expressly so provided, every provision of
this Indenture relating to the conduct or affecting the liability of or
affording protection to the Trustee shall be subject to the provisions of this
Section.
SECTION 602. Certain Rights of Trustee.
Subject to the provisions of Section 601:
(a) the Trustee may rely and shall be protected in acting or
refraining from acting upon any resolution, certificate, statement,
instrument, opinion, report, notice, request, direction, consent,
order, bond, debenture, note, coupon, other evidence of indebtedness
or other paper or document believed by it to be genuine and to have
been signed or presented by the proper party or parties;
(b) any request or direction of the Company mentioned herein
shall be sufficiently evidenced by a Company Request or Company Order
and any resolution of the Board of Directors may be sufficiently
evidenced by a Board Resolution;
(c) whenever in the administration of this Indenture the
Trustee shall deem it desirable that a matter be proved or
established prior to taking, suffering or omitting any action
hereunder, the Trustee (unless other evidence be herein specifically
prescribed) may, in the absence of bad faith on its part, rely upon
an Officers' Certificate;
(d) the Trustee may consult with counsel and the written
advice of such counsel or any Opinion of Counsel shall be full and
complete authorization and protection in respect of any action taken,
suffered or omitted by it hereunder in good faith and in reliance
thereon;
(e) the Trustee shall be under no obligation to exercise any
of the rights or powers vested in it by this Indenture at the request
or direction of any of the Holders of Securities or coupons pursuant
to this Indenture, unless such Holders shall have offered to the
Trustee reasonable security or indemnity against the costs, expenses
and liabilities which might be incurred by it in compliance with such
request or direction;
(f) the Trustee shall not be bound to make any investigation
into the facts or matters stated in any resolution, certificate,
statement, instrument, opinion, report, notice, request, direction,
consent, order, bond, debenture, note, coupon, other evidence of
indebtedness or other paper or document, but the Trustee, in its
discretion, may make such further inquiry or investigation into such
facts or matters as it may see fit, and, if the Trustee shall
determine to make such further inquiry or investigation, it shall be
entitled to examine the books, records and premises of the Company,
personally or by agent or attorney; and
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(g) the Trustee may execute any of the trusts or powers
hereunder or perform duties hereunder either directly or by or
through agents or attorneys and the Trustee shall not be responsible
for any misconduct or negligence on the part of any agent or attorney
appointed with due care by it hereunder.
SECTION 603. Not Responsible for Recitals or Issuance of Securities.
The recitals contained herein and in the Securities (except the
Trustee's certificates of authentication) and in the coupons shall be taken at
the statements of the Company, and the Trustee assumes no responsibility for
their correctness. The Trustee makes no representations as to the validity or
sufficiency of this Indenture or of the Securities or coupons. The Trustee
shall not be accountable for the use or application by the Company of
Securities or the proceeds thereof.
SECTION 604. May Hold Securities, Act as Trustee Under Other
Indentures.
The Trustee, any Paying Agent, any Transfer Agent, any Conversion
Agent, any Security Registrar or any other agent of the Company, in its
individual or any other capacity, may become the owner pledgee of Securities
and coupons and may otherwise deal with the Company with the same rights it
would have if it were not Trustee, Paying Agent, Transfer Agent, Conversion
Agent, Security Registrar or such other agent.
The Trustee may become and act as trustee under other indentures
under which other securities, or certificates of interest or participation in
other securities, of the Company are outstanding in the same manner as if it
were not Trustee.
SECTION 605. Money Held in Trust.
Money held by the Trustee in trust hereunder need not be segregated
from other funds except to the extent required by law. The Trustee shall be
under no liability for interest on money received by it hereunder except as
otherwise agreed with the Company.
SECTION 606. Compensation and Reimbursement.
The Company agrees
(1) to pay to the Trustee from time to time reasonable
compensation for all services rendered by it hereunder (which
compensation shall not be limited by any provision of law in regard
to the compensation of a trustee of an express trust):
(2) except as otherwise expressly provided herein, to
reimburse the Trustee upon its request for all reasonable expenses,
disbursements and advances incurred or made by the Trustee in
accordance with any provision of this Indenture (including the
reasonable compensation and the expenses and disbursements of its
agents and counsel), except any such expense, disbursement or advance
as may be attributable to its negligence or bad faith; and
(3) to indemnify the Trustee for, and to hold it harmless
against, any loss, liability or expense incurred without negligence
or bad faith on its part, arising out of or in connection with the
acceptance or administration of this trust, including the costs and
expenses of defending itself against any claim or liability in
connection with the exercise or performance of any of its powers or
duties hereunder.
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As security for the performance of the obligations of the Company
under this Section, the Trustee shall have a claim prior to the Securities
upon all property and funds held or collected by the Trustee as such, except
funds held in trust (whether or not segregated) for the payment of principal
of (and premium, if any) or interest on Securities.
SECTION 607. Corporate Trustee Required: Eligibility.
There shall at all times be a Trustee hereunder which shall be a
corporation organized and doing business under the laws of the United States
of America, any State thereof or the District of Columbia, authorized under
such laws to exercise corporate trust powers, having a combined capital and
surplus of at least U.S.$50,000,000, subject to supervision or examination by
Federal or State authority and having its Corporate Trust Office in the
Borough of Manhattan, The City of New York. If such corporation publishes
reports of condition at least annually, pursuant to law or to the requirements
of said supervising or examining authority, then for the purposes of this
Section, the combined capital and surplus of such corporation shall be deemed
to be its combined capital and surplus as set forth in its most recent report
of condition so published. If at any time the Trustee shall cease to be
eligible in accordance with the provisions of this Section, it shall resign
immediately in the manner and with the effect hereinafter specified in this
Article.
SECTION 608. Resignation and Removal; Appointment of Successor.
(a) No resignation or removal of the Trustee and no appointment of a
successor Trustee pursuant to this Article shall become effective until the
acceptance of appointment by the successor Trustee in accordance with the
applicable requirements of Section 609.
(b) The Trustee may resign at any time by giving written notice
thereof to the Company. If the instrument of acceptance by a successor Trustee
required by Section 609 shall not have been delivered to the Trustee within 30
days after the giving of such notice of resignation, the resigning Trustee may
petition any court of competent jurisdiction for the appointment of a
successor Trustee.
(c) The Trustee may be removed at any time by Act of the Holders of a
majority in principal amount of the Outstanding Securities (or such lesser
amount as shall have acted at a meeting pursuant to the provisions of this
Indenture), delivered to the Trustee and the Company.
(d) If at any time:
(1) the trustee shall cease to be eligible under Section 607
and shall fail to resign after written request therefor by the
Company or by any Holder of a Security who has been a bona fide
Holder of a Security for at least six months, or
(2) the Trustee shall become incapable of acting or shall be
adjudged a bankrupt or insolvent or a receiver of the Trustee or of
its property shall be appointed or any public officer shall take
charge or control of the Trustee or of its property or affairs for
the purpose of rehabilitation, conservation or liquidation,
then, in any such case, (i) the Company by a Board Resolution may remove the
Trustee, or (ii) subject to Section 514, any Holder of a Security who has been
a bona fide Holder of a Security for at least six months may, on behalf of
himself and all others similarly situated, petition any court of competent
jurisdiction for the removal of the Trustee and the appointment of a successor
Trustee.
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(e) If the Trustee shall resign, be removed or become incapable of
acting, or if a vacancy shall occur in the office of Trustee for any cause,
the Company, by a Board Resolution, shall promptly appoint a successor Trustee
and shall comply with the applicable requirements of Section 609. If, within
one year after such resignation, removal or incapability, or the occurrence of
such vacancy, a successor Trustee shall be appointed by Act of the Holders of
a majority in principal amount of the Outstanding Securities (or such lesser
amount as shall have acted at a meeting pursuant to the provisions of this
Indenture) delivered to the Company and the retiring Trustee, the successor
Trustee so appointed shall, forthwith upon its acceptance of such appointment
in accordance with the applicable requirements of Section 609, become the
successor Trustee and supersede the successor Trustee appointed by the
Company. If no successor Trustee shall have been so appointed by the Company
or the Holders of Securities and accepted appointment in the manner required
by Section 609, any Holder of a Security who has been a bona fide Holder of a
Security for at least six months may, on behalf of himself and all others
similarly situated, petition any court of competent jurisdiction for the
appointment of a successor Trustee.
(f) The Company shall give notice of each resignation and each
removal of the Trustee and each appointment of a successor Trustee to the
Holders of Securities in the manner provided in Section 105. Each notice shall
include the name of the successor Trustee and the address of its Corporate
Trust Office.
SECTION 609. Acceptance of Appointment by Successor.
Every successor Trustee appointed hereunder shall execute,
acknowledge and deliver to the Company and to the retiring Trustee an
instrument accepting such appointment, and thereupon the resignation or
removal of the retiring Trustee shall become effective and such successor
Trustee, without any further act, deed or conveyance, shall become vested with
all the rights, powers, trusts and duties of the retiring Trustee; but, on
request of the Company or the successor Trustee, such retiring Trustee shall,
upon payment of its charges, execute and deliver an instrument transferring to
such successor Trustee all the rights, powers and trusts of the retiring
Trustee and shall duly assign, transfer and deliver to such successor Trustee
all property and money held by such retiring Trustee hereunder. Upon request
of any such successor Trustee, the Company shall execute any and all
instruments for more fully and certainly vesting in and confirming to such
successor Trustee all such rights, powers and trusts.
No successor Trustee shall accept its appointment unless at the time
of such acceptance such successor Trustee shall be eligible under this
Article.
SECTION 610. Merger, Conversion, Consolidation or Succession to
Business.
Any corporation into which the Trustee may be merged or converted
or with which it may be consolidated, or any corporation resulting from any
merger, conversion or consolidation to which the Trustee shall be a party,
or any corporation succeeding to all or substantially all the corporate trust
business of the Trustee, shall be the successor of the Trustee hereunder,
provided such corporation shall be otherwise eligible under this Article,
without the execution or filing of any paper or any further act on the part of
any of the parties hereto. In case any Securities shall have been authenticated,
but not delivered, by the Trustee then in office, any successor by merger,
conversion or consolidation to such authenticating Trustee may
adopt such authentication and deliver the Securities so authenticated with the
same effect as if such successor Trustee had itself authenticated such
Securities.
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ARTICLE SEVEN
CONSOLIDATION, MERGER, CONVEYANCE, TRANSFER OR LEASE
SECTION 701. Company May Consolidate, Etc. Only on Certain Terms.
The Company shall not consolidate with or merge into any other Person
or convey, transfer or lease its properties and assets substantially as an
entirety to any Person, unless:
(1) the Person formed by such consolidation or into which
the Company is merged or the Person which acquires by conveyance or
transfer, or which leases, the properties and assets of the Company
substantially as an entirety shall be a corporation, organized and
validly existing under the laws of the United States of America, any
State thereof or the District of Columbia and shall expressly assume,
by an indenture supplemental hereto, executed and delivered to the
Trustee, in form satisfactory to the Trustee, the due and punctual
payment of the principal of (and premium, if any) and interest
(including all additional amounts payable pursuant to Section 1004),
on all the Securities and the performance of every covenant of this
Indenture on the part of the Company to be performed or observed and
shall have provided for conversion rights in accordance with Section
1311;
(2) immediately after giving effect to such transaction, no
Event of Default and no event which, after notice or lapse of time or
both, would become an Event of Default, shall have happened and be
continuing; and
(3) the Company shall have delivered to the Trustee an
Officers' Certificate and an Opinion of Counsel, each stating that
such consolidation, merger, conveyance, transfer or lease and, if a
supplemental indenture is required in connection with such
transaction, such supplemental indenture comply with this Article and
that all conditions precedent herein provided for relating to such
transaction have been complied with.
SECTION 702. Successor Substituted.
Upon any consolidation of the Company with, or merger of the Company
into, any other Person or any conveyance, transfer or lease of the properties
and assets of the Company substantially as an entirety in accordance with
Section 701, the successor corporation formed by such consolidation or into
which the Company is merged or to which such conveyance, transfer or lease is
made shall succeed to, and be substituted for, and may exercise every right
and power of, the Company under this Indenture with the same effect as if such
successor corporation had been named as the Company herein, and thereafter,
except in the case of a lease, the predecessor corporation had been named as
the Company herein, and thereafter, except in the case of a lease, the
predecessor corporation shall be relieved of all obligations and covenants
under this Indenture and the Securities and coupons.
ARTICLE EIGHT
SUPPLEMENTAL INDENTURES
SECTION 801. Supplemental Indentures With Consent of Holders.
Without the consent of any Holders of Securities or coupons, the
Company, when authorized by a Board Resolution, and the Trustee at any time
and from time to time, may enter
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into one or more indentures supplemental hereto, in form satisfactory to the
Trustee, or for any of the following purposes:
(1) to evidence the succession of another corporation to the
Company and the assumption by any such successor of the covenants of
the Company herein in the Securities and in the coupons; or
(2) to add to the covenants of the Company for the benefit
of the Holders of Securities or coupons, or to surrender any right or
power herein conferred upon the Company; or
(3) to secure the Securities pursuant to the requirements of
Section 1008 or otherwise; or
(4) to permit Registered Securities to be exchanged for
Bearer Securities or to relax or eliminate the restrictions on
payment of principal of (and premium, if any) or interest on Bearer
Securities in the United States; or
(5) to make provision with respect to the conversion rights
of Holders of Securities pursuant to Section 1311; or
(6) to cure any ambiguity, to correct or supplement any
provision herein which may be inconsistent with any other provision
herein, or to make any other provisions with respect to matters or
questions arising under this Indenture, provided such action pursuant
to this clause (6) shall not adversely affect the interests of the
Holders of Securities or coupons in any material respect.
SECTION 802. Supplemental Indenture with Consent of Holders of
Securities.
With the consent of the Holders of not less than a majority in
principal amount of the Outstanding Securities (or such lesser amount as shall
have acted at a meeting pursuant to the provisions of this Indenture), by Act
of said Holders delivered to the Company and the Trustee, the Company, when
authorized by a Board Resolution, and the Trustee may enter into an indenture
or indentures supplemental hereto for the purpose of adding any provisions to
or changing in any manner or eliminating any of the provisions of this
Indenture or of modifying in any manner the rights of the Holders of the
Securities or coupons under this Indenture; provided, however, that no such
supplemental indenture shall, without the consent of the Holder of each
Outstanding Security or coupon affected thereby.
(1) change the Stated Maturity of the principal of, or any
instalment of interest on, any Security, or reduce the principal
amount thereof or the rate of interest thereon or any premium payable
upon the redemption thereof, or change the obligation of the Company
to pay additional amounts pursuant to Section 1004 (except as
contemplated by Section 701(l) and permitted by Section 801(l)), or
change the coin or currency in which any Security or any premium or
the interest thereon is payable, or impair the right to institute
suit for the enforcement of any such payment on or after the Stated
Maturity thereof (or, in the case of redemption at the option of the
Company or the Holders, on or after the Redemption Date), or
adversely affect the right to convert any Securities as provided in
Article Thirteen or modify the provisions of this Indenture with
respect to the subordination of the Securities in a manner adverse to
the Holders, or
(2) reduce the requirements of Section 904 for quorum or
voting, or reduce the percentage in principal amount of the
Outstanding Securities the consent of whose Holders
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is required for any supplemental indenture or the consent of whose
Holders is required for any waiver (of compliance with certain
provisions of this Indenture or certain defaults hereunder and their
consequences) provided for in this Indenture, or
(3) change the obligation of the Company to maintain an
office or agency in the Borough of Manhattan, The City of New York,
and in a European city pursuant to Section 1002, or
(4) modify any of the provisions of this Section, Section
513 or Section 1011, except to increase any such percentage or to
provide that certain other provisions of this Indenture cannot be
modified or waived without the consent of the Holder of each
Outstanding Security affected thereby.
It shall not be necessary for any Act of Holders of Securities under
this Section to approve the particular form of any proposed supplemental
indenture, but it shall be sufficient if such Act shall approve the substance
thereof.
SECTION 803. Execution of Supplemental Indentures.
In executing, or accepting the additional trusts created by, any
supplemental indenture permitted by this Article or the modification thereby
of the trusts created by this Indenture, the Trustee shall be entitled to
receive, and (subject to Section 601) shall be fully protected in relying
upon, an Opinion of Counsel stating that the execution of such supplemental
indenture is authorized or permitted by this Indenture. The Trustee may, but
shall not be obligated to, enter into any such supplemental indenture which
affects the Trustee's own rights, duties or immunities under this Indenture or
otherwise.
SECTION 804. Effect of Supplemental Indenture.
Upon the execution of any supplemental indenture under this Article,
this Indenture shall be modified in accordance therewith, and such
supplemental indenture shall form a part of this Indenture for all purposes;
and every Holder of Securities theretofore or thereafter authenticated and
delivered hereunder and of any coupons appertaining thereto shall be bound
thereby.
SECTION 805. Reference in Securities to Supplemental Indentures.
Securities authenticated and delivered after the execution of any
supplemental indenture pursuant to this Article may, and shall if required by
the Trustee, bear a notation in form approved by the Trustee as to any matter
provided for in such supplemental indenture. If the Company shall so
determine, new Securities so modified as to conform, in the opinion of the
Company and the Trustee, to any such supplemental indenture may be prepared
and executed by the Company and authenticated and delivered by the Trustee in
exchange for Outstanding Securities.
SECTION 806. Notice of Supplemental Indentures.
Promptly after the execution by the Company and the Trustee of any
supplemental indenture pursuant to the provisions of Section 802, the Company
shall give notice, setting forth in general terms the substance of such
supplemental indenture, in the manner provided in Section 106. Any failure of
the Company to give such notice, or any defect therein, shall not in any way
impair or affect the validity of any such supplemental indenture.
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ARTICLE NINE
MEETINGS OF HOLDERS OF SECURITIES
SECTION 901. Purposes for Which Meetings May Be Called.
A meeting of Holders of Securities may be called at any time and from
time to time pursuant to this Article to make, give or take any request,
demand, authorization, direction, notice, consent, election, waiver or other
action provided by this Indenture to be made, given or taken by Holders of
Securities.
SECTION 902. Call, Notice and Place of Meetings.
(a) The Trustee may at any time call a meeting of Holders of
Securities for any purpose specified in Section 901, to be held at such time
and at such place in the Borough of Manhattan, The City of New York, or in
London as the Trustee shall determine. Notice of every meeting of Holders of
Securities, setting forth the time and the place of such meeting and in
general terms the action proposed to be taken at such meeting, shall be given,
in the manner provided in Section 105, not less than 21 nor more than 180 days
prior to the date fixed for the meeting.
(b) In case at any time the Company, pursuant to a Board Resolution,
or the Holders of at least 10% in principal amount of the Outstanding
Securities shall have requested the Trustee to call a meeting of the Holders
of Securities for any purpose specified in Section 901, by written request
setting forth in reasonable detail the action proposed to be taken at the
meeting, and the Trustee shall not have made the first publication of the
notice of such meeting within 21 days after receipt of such request or shall
not thereafter proceed to cause the meeting to be held as provided herein, then
the Company or the Holders of Securities in the amount above specified, as the
case may be, may determine the time and the place in the Borough of Manhattan,
The City of New York, or in London for such meeting and may call such meeting
for such purposes by giving notice thereof as provided in subsection (a) of
this Section.
SECTION 903. Persons Entitled to Vote at Meetings.
To be entitled to vote at any meeting of Holders of Securities, a
Person shall be (1) a Holder of one or more Outstanding Securities, or (2) a
Person appointed by an instrument in writing as proxy for a Holder or Holders
of one or more Outstanding Securities by such Holder or Holders. The only
Persons who shall be entitled to be present or to speak at any meeting of
Holders shall be the Persons entitled to vote at such meeting and their
counsel, any representatives of the Trustee and its counsel and any
representatives of the Company and its counsel.
SECTION 904. Quorum; Action.
The Persons entitled to vote a majority in principal amount of the
Outstanding Securities shall constitute a quorum. In the absence of a quorum
within 30 minutes of the time appointed for any such meeting, the meeting
shall, if convened at the request of Holders of Securities, be dissolved. In
any other case the meeting may be adjourned for a period of not less than 10
days as determined by the chairman of the meeting prior to the adjournment of
such meeting. In the absence of a quorum at any such adjourned meeting, such
adjourned meeting may be further adjourned for a period of not less than 10
days as determined by the chairman of the meeting prior to the adjournment of
such adjourned meeting. Notice of the reconvening of any adjourned meeting
shall be given as provided in Section 902(a), except that such notice need be
given only
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once not less than five days prior to the date on which the meeting is
scheduled to be reconvened. Notice of the reconvening of an adjourned meeting
shall state expressly the percentage of the principal amount of the
Outstanding Securities which shall constitute a quorum.
Subject to the foregoing, at the reconvening of any meeting adjourned
for a lack of a quorum the Persons entitled to vote 25% in principal amount of
the Outstanding Securities at the time shall constitute a quorum for the
taking of any action set forth in the notice of the original meeting.
At a meeting or an adjourned meeting duly reconvened and at which a
quorum is present as aforesaid, any resolution and all matters (except as
limited by the proviso to Section 802) shall be effectively passed and decided
if passed or decided by the Persons entitled to vote 66 2/3% in principal
amount of Outstanding Securities represented and voting at such meeting.
Any resolution passed or decision taken at any meeting of Holders of
Securities duly held in accordance with this Section shall be binding on all
the Holders of Securities and coupons, whether or not present or represented
at the meeting.
SECTION 905. Determination of Voting Rights; Conduct and Adjournment
of Meetings.
(a) Notwithstanding any other provisions of this Indenture, the
Trustee may make such reasonable regulations as it may deem advisable for any
meeting of Holders of Securities in regard to proof of the holding of
Securities and of the appointment of proxies and in regard to the appointment
and duties of inspectors of votes, the submission and examination of proxies,
certificates and other evidence of the right to vote, and such other matters
concerning the conduct of the meeting as it shall deem appropriate. Except as
otherwise permitted or required by any such regulations, the holding of
Securities shall be proved in the manner specified 103 and the appointment of
any proxy shall be proved in the manner specified in Section 103 or by having
the signature of the person executing the proxy witnessed or guaranteed by any
trust company, bank or banker authorized by Section 103 to certify to the
holding of Bearer Securities. Such regulations may provide that written
instruments appointing proxies, regular on their face, may be presumed valid
and genuine without the proof specified in Section 103 or other proof.
(b) The Trustee shall, by an instrument in writing, appoint a
temporary chairman of the meeting, unless the meeting shall have been called
by the Company or by Holders of Securities as provided in Section 902(b), in
which case the Company or the Holders of Securities calling the meeting, as the
case may be, shall in like manner appoint a temporary chairman. A permanent
chairman and a permanent secretary of the meeting shall be elected by vote of
the Persons entitled to vote a majority in principal amount of the Outstanding
Securities represented at the meeting.
(c) At any meeting each Holder of a Security or proxy shall be
entitled to one vote for each U.S.$5,000 principal amount of Securities held
or represented by him; provided, however, that no vote shall be cast or
counted at any meeting in respect of any Security challenged as not
Outstanding and ruled by the chairman of the meeting to be not Outstanding.
The chairman of the meeting shall have no right to vote, except as a Holder of
a Security or proxy.
(d) Any meeting of Holders of Securities duly called pursuant to
Section 902 at which a quorum is present may be adjourned from time to time by
Persons entitled to vote a majority in
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principal amount of the Outstanding Securities represented at the meeting, and
the meeting may be held as so adjourned without further notice.
SECTION 906. Counting Votes and Recording Action of Meetings.
The vote upon any resolution submitted to any meeting of Holders of
Securities shall be by written ballots on which shall be subscribed the
signatures of the Holders of Securities or of their representatives by proxy
and the principal amounts and serial numbers of the Outstanding Securities
held or represented by them. The permanent chairman of the meeting shall
appoint two inspectors of votes who shall count all votes cast at the meeting
for or against any resolution and who shall make and file with the secretary
of the meeting their verified written reports in duplicate of all votes cast
at the meeting. A record, at least in duplicate, of the proceedings of each
meeting of Holders of Securities shall be prepared by the secretary of the
meetings and there shall be attached to said record the original reports of
the inspectors of votes on any vote by ballot taken thereat and affidavits by
one or more persons having knowledge of the facts setting forth a copy of the
notice of the meeting and showing that said notice was given as provided in
Section 902 and, if applicable, Section 904. Each copy shall be signed and
verified by the affidavits of the permanent chairman and secretary of the
meeting and one such copy shall be delivered to the Company and another to the
Trustee to be preserved by the Trustee, the latter to have attached thereto
the ballots voted at the meeting. Any record so signed and verified shall be
conclusive evidence of the matters therein stated.
ARTICLE TEN
COVENANTS
SECTION 1001. Payment of Principal, Premium and Interest.
The Company will duly and punctually pay the principal of (and
premium, if any) and interest on the Securities in accordance with the terms
of the Securities, the coupons appertaining thereto and this Indenture. The
interest due on the Bearer Securities on or before Maturity, other than
additional amounts payable as provided in Section 1004 in respect of principal
of (or premium, if any, on) such a Security, shall be payable only upon
presentation and surrender of the several coupons for such interest
instalments as are evidenced thereby as they severally mature.
SECTION 1002. Maintenance of Offices or Agencies.
The Company hereby appoints (1) the Corporate Trust Office of the
Trustee as its agent in the Borough of Manhattan, The City of New York, where
Registered Securities may be presented or surrendered for payment, where
Bearer Securities and coupons may be presented or surrendered for payment in
the circumstances described below (and not otherwise), where Securities may be
surrendered for registration of transfer or exchange, where Securities may be
surrendered for conversion and where notices and demands to or upon the
Company in respect of the Securities and coupons and this Indenture may be
served and (2) the main office of the Trustee in London as its agent outside
of the United States where, subject to any applicable laws or regulations,
Bearer Securities and coupons may be presented and surrendered for payment.
As provided in the forms of Security set forth in Section 202, payment of
principal of and premium, if any, and interest on Bearer Securities and
payment of any additional amounts payable on Bearer Securities pursuant to
Section 1004 may be made at the Paying Agent in the
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Borough of Manhattan, The City of New York, if (but only if) payment of the
full amount of such principal, premium, interest or additional amounts, as the
case may be, at offices outside the United States maintained for the purpose
by the Company in accordance with this Indenture is illegal or effectively
precluded by exchange controls or other similar restrictions.
In addition, the Company hereby appoints (1) the main offices of
Manufacturers Hanover Bank/Belgium S.A. in Brussels, Manufacturers Hanover
Bank Luxembourg S.A. in Luxembourg and Manufacturers Hanover Trust Company in
Frankfurt/Main, London and Zurich as additional Paying Agents for the payment
of principal of (and premium, if any) and interest on the Securities, (2) the
main offices of Manufacturers Hanover Bank/Belgium S.A. in Brussels,
Manufacturers Hanover Bank Luxembourg S.A. in Luxembourg and Manufacturers
Hanover Trust Company in Frankfurt/Main and London as additional Conversion
Agents for the conversion of the Securities in accordance with Article
Thirteen, and (3) the main offices of Manufacturers Hanover Bank/Belgium S.A.
in Brussels and Manufacturers Hanover Bank Luxembourg S.A. in Luxembourg as
additional Transfer Agents where Securities may be surrendered for registration
of transfer or exchange.
The Company may at any time and from time to time vary or terminate
the appointment of any such agent or appoint any additional agents for any or
all of such purposes; provided, however, that until the Securities have been
delivered to the Trustee for cancellation, or moneys sufficient to pay the
principal of and premium, if any, and interest on the Securities have been made
available for payment and either paid or returned to the Company pursuant to
the provisions of Section 1003, the Company will maintain (1) in the Borough
of Manhattan, The City of New York, an office or agency where Registered
Securities may be presented or surrendered for payment, where Bearer
Securities and coupons may be presented or surrendered for payment in the
circumstances described in the last sentence of the first paragraph of this
Section (and not otherwise), where Securities may be surrendered for
registration of transfer or exchange, where Securities may be surrendered for
conversion and where notices and demands to or upon the Company in respect of
the Securities and coupons and this Indenture may be served and (3) subject to
any laws or regulations applicable thereto, in a European city an office or
agency where Bearer Securities and coupons may be presented or surrendered for
payment and where Securities may be presented for registration of transfer or
exchange and surrendered for conversion; and provided, further, that so long as
the Securities are listed on the Luxembourg Stock Exchange and such stock
exchange shall so require, the Company will maintain a Paying Agent and
Conversion Agent in Luxembourg. The Company will give prompt written notice to
the Trustee and the Holders of the appointment or termination of any such
agent and of the location and any change in the location of any such office or
agency.
If at any time the Company shall fail to maintain any such required
office or agency in the Borough of Manhattan, The City of New York, or in a
European city, or shall fail to furnish the Trustee with the address thereof,
presentations and surrenders may be made (subject to the limitations described
in the preceding paragraph) at and notices and demands may be served on and
Securities may be surrendered for conversion to the Corporate Trust Office of
the Trustee, and Securities and coupons may be presented and surrendered for
payment to the Trustee at its main office in London, and the Company hereby
appoints the same as its agent to receive such presentations, surrenders,
notices and demands.
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SECTION 1003. Money For Security Payments to Be Held in Trust.
If the Company shall act as a Paying Agent, it will, on or before
each due date of the principal of (and premium, if any) or interest on any of
the Securities, segregate and hold in trust for the benefit of the Persons
entitled thereto a sum sufficient to pay the principal (and premium, if any)
or interest so becoming due until such sums shall be paid to such Persons or
otherwise disposed of as herein provided and the Company will promptly notify
the Trustee of its action or failure so to act.
Whenever the Company shall have one or more Paying Agents, it will,
prior to each due date of the principal of (and premium, if any) or interest on
any Securities, deposit with a Paying Agent a sum sufficient to pay the
principal (and premium, if any) or interest so becoming due, such sum to be
held in trust for the benefit of the Persons entitled to such principal,
premiums or interest, and (unless such Paying Agent is the Trustee) the Company
will promptly notify the Trustee of its action or failure so to act.
The Company will cause each Paying Agent other than the Trustee to
execute and deliver to the Trustee an instrument in which such Paying Agent
shall agree with the Trustee, subject to the provisions of this Section, that
such Paying Agent will:
(1) hold all sums held by it for the payment of the
principal of (and premium, if any) or interest on Securities in trust
for the benefit of the Persons entitled thereto until such sums shall
be paid to such Persons or otherwise disposed of as herein provided;
(2) give the Trustee notice of any default by the Company
(or any other obligor upon the Securities) in the making of any
payment of principal (and premium, if any) or interest; and
(3) at any time during the continuance of any such default,
upon the written request of the Trustee, forthwith pay to the Trustee
all sums so held in trust by such Paying Agent.
The Company may at any time, for the purpose of obtaining the
satisfaction and discharge of this Indenture or for any other purpose, pay, or
by Company Order direct any Paying Agent to pay, to the Trustee all sums held
in trust by the Company or such Paying Agent, such sums to be held by the
Trustee upon the same trusts as those upon which such sums were held by the
Company or such Paying Agent; and, upon such payment by any Paying Agent to
the Trustee, such Paying Agent shall be released from all further liability
with respect to such money.
Any money deposited with the Trustee or any Paying Agent, or then
held by the Company, in trust for the payment of the principal of (and
premium, if any) or interest on any Security and remaining unclaimed for two
years after such principal (and premium, if any) or interest has become due
and payable shall be paid to the Company on Company Request, or (if then held
by the Company) shall be discharged from such trust, and the Holder of such
Security or any coupon appertaining thereto shall thereafter, as an unsecured
general creditor, look only to the Company for payment thereof, and all
liability of the Trustee or such Paying Agent with respect to such trust
money, and all liability of the Company as trustee thereof, shall thereupon
cause; provided, however, that the Trustee or such Paying Agent, before being
required to make any such repayment, may at the expense of the Company cause
notice to be given as provided in Section 105, except that such notice need be
given only once, that such money remains unclaimed and that, after a date
specified therein, which shall not be less than 30 days from the latest date
of such notice, any unclaimed balance of such money then remaining will be
repaid to the Company.
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SECTION 1004. Additional Amounts.
The Company will pay to the Holder of any Security or any coupon
appertaining thereto additional amounts as provided in the second paragraph on
the face of the forms of Securities set forth in Section 202 and any
additional amounts which may become payable as provided in the third paragraph
on the face of the forms of Securities set forth in Section 202. Whenever in
this Indenture there is mentioned, in any context, the payment of the
principal of (or premium, if any) or interest on, or in respect of, any
Security or any coupon, such mention shall be deemed to include mention of the
payment of additional amounts provided for in this Section to the extent that,
in such context, additional amounts are, were or would be payable in respect
thereof pursuant to the provisions of this Section and express mention of the
payment of additional amounts (if applicable) in any provisions hereof shall
not be construed as excluding additional amounts in those provisions hereof
where such express mention is not made.
At least 10 days prior to February 20, 1987 (and at least 10 days
prior to each date of payment of principal (and premium, if any) or
interest after February 20, 1987 if there has been any change with respect to
the matters set forth in the below-mentioned Officers' Certificate) the
Company will furnish the Trustee and the Company's Paying Agent in the Borough
of Manhattan, The City of New York, if other than the Trustee, with an
Officers' Certificate instructing the Trustee and such Paying Agent whether
such payment of principal of (and premium, if any) or interest on the
Securities shall be made to Holders of Securities or coupons who are United
States Aliens without withholding for or on account of any tax, assessment or
other governmental charge described in the second paragraph on the face of the
forms of Securities set forth in Section 202. If any such withholding shall be
required, then such Officers' Certificate shall specify by country the amount,
if any, required to be withheld on such payments to such Holders of Securities
or coupons and the Company will pay to the Trustee or such Paying Agent the
additional amounts required by this Section to be paid in the event of any
such withholding. The Company covenants to indemnify the Trustee and any
Paying Agent for, and to hold them harmless against, any loss, liability or
expense reasonably incurred without negligence or bad faith on their part
arising out of or in connection with actions taken or omitted by any of them
in reliance on any Officers' Certificate furnished pursuant to this Section.
SECTION 1005. Corporate Existence.
Subject to Article Seven, the Company will do or cause to be done
all things necessary to preserve and keep in full force and effect its
corporate existence, rights (charter and statutory) and franchises; provided,
however, that the Company shall not be required to preserve any such right or
franchise if the Board of Directors shall determine that the preservation
thereof is no longer desirable in the conduct of the business of the Company
and that the loss thereof is not disadvantageous in any material respect to
the Holders.
SECTION 1006. Maintenance of Properties.
The Company will cause all properties used or useful in the conduct
of its business or the business of any Subsidiary to be maintained and kept in
good condition, repair and working order and supplied with all necessary
equipment and will cause to be made all necessary repairs, renewals,
replacements, betterments and improvements thereof, all as in the judgment of
the Company may be necessary so that the business carried on in connection
therewith may be properly and advantageously conducted at all times; provided,
however, that nothing in this Section shall prevent the Company from
discontinuing the operation or maintenance of any of
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such properties if such discontinuance is, in the judgment of the Company,
desirable in the conduct of its business or the business of any Subsidiary and
not disadvantageous in any material respect to the Holders.
SECTION 1007. Payment of Taxes and Other Claims.
The Company will pay or discharge or cause to be paid or discharged
before the same shall become delinquent, (1) all taxes, assessments and
governmental charges levied or imposed upon the Company or any Subsidiary or
upon the income, profits or property of the Company or any Subsidiary, and (2)
all lawful claims for labor, materials and supplies which, if unpaid, might by
law become a lien upon the property of the Company or any Subsidiary;
provided, however, that the Company shall not be required to pay or discharge
or cause to be paid or discharged any such tax, assessment, charge or claim
whose amount, applicability or validity is being contested in good faith by
appropriate proceedings.
SECTION 1008. Limitation on Debt Secured by Stock of California
Federal.
The Company will not agree to secure any indebtedness for borrowed
money (or any guarantee or indemnity in respect thereof) by any mortgage,
lien, pledge or other security interest upon, or with respect to, any of the
capital stock of California Federal, unless the Company shall, simultaneously
therewith or prior thereto, take any and all action necessary effectively to
secure the Securities equally and ratably with (or prior to), or by security
not materially less beneficial than that securing, such other indebtedness,
guarantee or indemnity.
SECTION 1009. Limitation on Disposition of Stock of California
Federal.
Except in a transaction under Section 701, the Company (which term
shall include any successor by merger, assumption or otherwise) will own
directly or indirectly more than 80% of the outstanding shares of capital
stock having voting power for the election of directors (except for directors'
qualifying shares) of California Federal.
SECTION 1010. Statement by Officers as to Default.
The Company will deliver to the Trustee, within 120 days after the
end of each fiscal year (which on the date hereof end on December 31) of the
Company ending after the date hereof, an Officers' Certificate, stating
whether or not to the best knowledge of the signers thereof the Company is in
default in the performance and observance of any of the terms, provisions and
conditions of this Indenture, and if the Company shall be in default,
specifying all such defaults and the nature and status thereof of which they
may have knowledge.
SECTION 1011. Waiver of Certain Covenants.
The Company may omit in any particular instance to comply with any
term, provision or condition set forth in Sections 1006 to 1009, inclusive, if
before the time for such compliance the Holders of at least a majority in
principal amount of the Outstanding Securities (or such lesser amount as
shall have acted at a meeting pursuant to the provisions of this Indenture)
shall, by Act of such Holders, either waive such compliance in such instance
or generally waive compliance with such term, provision or condition, but no
such waiver shall extend to or affect such term, provision or condition except
to the extent so expressly waived, and, until such waiver shall become
effective, the obligations of the Company and the duties of the Trustee in
respect of any such term, provision or condition shall remain in full force
and effect.
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ARTICLE ELEVEN
REDEMPTION OF SECURITIES AT OPTION OF COMPANY
SECTION 1101. Right of Redemption.
The Securities may be redeemed subject to the conditions, at the times
and at the Redemption Prices specified in the forms of Securities set forth in
Section 202, together with accrued interest to the Redemption Date; provided,
however, that until the expiration of the thirtieth day after the Exchange
Date, the Company may not redeem the Securities other than under the
circumstances described in the third paragraph on the reverse side of such
forms (involving United States taxes) or in the fourth paragraph on the reverse
side of such forms (involving certification requirements).
SECTION 1102. Applicability of Article.
Redemption of Securities at the election of the Company, as permitted
or required by any provision of the Securities or this Indenture, shall be
made in accordance with such provision and this Article.
SECTION 1103. Election to Redeem; Notice to Trustee.
The election of the Company to redeem any Securities shall be
evidenced by a Board Resolution. In case of any redemption at the election of
the Company of all of the Securities, the Company shall, at least 60 days
prior to the Redemption Date fixed by the Company (unless a shorter notice
shall be satisfactory to the Trustee), notify the Trustee of such Redemption
Date. In case of any redemption at the election of the Company of less than all
the Securities, the Company shall, at least 75 days prior to the Redemption
Date fixed by the Company (unless a shorter notice shall be satisfactory to the
Trustee), notify the Trustee of such Redemption Date and of the principal
amount of Securities to be redeemed. If the Securities are to be redeemed
pursuant to an election of the Company which is subject to a condition
specified in the forms of Securities set forth in Section 202, the Company
shall furnish the Trustee with an Officers' Certificate stating that the
Company is entitled to effect such redemption and setting forth a statement of
facts demonstrating the same.
SECTION 1104. Selection by Trustee of Securities to Be Redeemed.
If less than all the Securities are to be redeemed, the particular
Securities to be redeemed shall be selected not more than 60 days prior to the
Redemption Date by the Trustee, from the Outstanding Securities not previously
called for redemption, by such method as the Trustee shall deem fair and
equitable and which may provide for the selection for redemption of portions
(equal to U.S.$5,000 or any integral multiple thereof) of the principal amount
of Registered Securities of a denomination larger than U.S.$5,000. Partial
redemptions must be in an amount not less than U.S.$1,000,000 principal amount
of Securities.
If any Registered Security selected for partial redemption is
converted in part before termination of the conversion right with respect to
the portion of the Security so selected, the converted portion of such
Security shall be deemed (so far as may be) to be the portion selected for
redemption. Securities which have been converted during a selection of
Securities to be redeemed may be treated by the Trustee as Outstanding for the
purpose of such selection.
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The Trustee shall promptly notify the Company and each Security
Registrar in writing of the Securities selected for redemption and, in the
case of any Registered Securities selected for partial redemption, the
principal amount thereof to be redeemed.
For all purposes of this Indenture, unless the context otherwise
requires all provisions relating to the redemption of Securities shall
relate, in the case of any Securities redeemed or to be redeemed only in part,
to the portion of the principal amount of such Securities which has been or is
to be redeemed.
SECTION 1105. Notice of Redemption.
Notice of redemption shall be given in the manner provided in Section
105 to the Holders of Securities to be redeemed. If all of the Outstanding
Securities are to be redeemed, notice shall be given not less than 30 nor more
than 60 days prior to the Redemption Date. If less than all the Outstanding
Securities are to be redeemed, notice shall be given twice, the first such
notice to be given not more than 75 nor less than 60 days prior to the
Redemption Date and the second notice to be given at least 20 days after the
first such notice but not less than 30 days prior to the Redemption Date.
All notices of redemption shall state:
(1) the Redemption Date,
(2) the Redemption Price,
(3) if less than all the Outstanding Securities are to be redeemed,
the aggregate principal amount of Securities to be redeemed and the aggregate
principal amount of Securities which will be Outstanding after such partial
redemption,
(4) that on the Redemption Date the Redemption Price will become due
and payable upon each such Security to be redeemed, and that interest thereon
shall cease to accrue on and after said date,
(5) the Conversion Price, the date on which the right to convert the
principal of the Securities to be redeemed will terminate and the place or
places where such Securities may be surrendered for conversion, and
(6) the place or places where such Securities, together in the case
of Bearer Securities with all coupons appertaining thereto, if any, maturing
after the Redemption Date, are to be surrendered for payment of the Redemption
Price.
In case of a partial redemption, the first notice given shall specify
the last date on which exchanges or transfers of Securities may be made
pursuant to Section 305, and the second notice shall specify the serial
numbers of the Bearer Securities called for redemption and, in the case of
Registered Securities, the serial numbers and the portions thereof called for
redemption.
Notice of redemption of Securities to be redeemed at the election of
the Company shall be given by the Company or, at the Company's request, by the
Trustee in the name of and at the expense of the Company.
SECTION 1006. Deposit of Redemption Price.
Prior to any Redemption Date, the Company shall deposit with the
Trustee or with a Paying Agent (or, if the Company is acting as its own Paying
Agent, aggregate and hold in trust as provided in Section 1003) an amount of
money sufficient to pay the Redemption Price of, and
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(except if the Redemption Date shall be an Interest Payment Date) accrued
interest on all the Securities which are to be redeemed on that date other
than any Securities called for redemption on that date which have been
converted prior to the date of such deposit.
If any Security called for redemption is converted, any money
deposited with the Trustee or with any Paying Agent or so segregated and held
in trust for the redemption of such Security shall (subject to any right of
the Holder of such Security or any Predecessor Security to receive interest as
provided in the last paragraph of Section 307) be paid to the Company upon
Company Request or, if then held by the Company, shall be discharged from such
trust.
SECTION 1107. Securities Payable on Redemption Date.
Notice of redemption having been given as aforesaid, the Securities
so to be redeemed shall, on the Redemption Date, become due and payable at the
Redemption Price therein specified, and from and after such date (unless the
Company shall default in the payment of the Redemption Price and accrued
interest) such Securities shall cause to bear interest and the coupons for
such interest appertaining to Bearer Securities shall, except to the extent
provided below, be void. Upon surrender of any such Security for redemption in
accordance with said notice, together with all coupons, if any, appertaining
thereto maturing after the Redemption Date, such Security shall be paid by the
Company at the Redemption Price together with accrued interest to the
Redemption Date, provided, however, that instalments of interest on Bearer
Securities whose State Maturity is on or prior to the Redemption Date shall be
payable only upon presentation and surrender of coupons for such interest (at
an office or agency outside the United States except, as otherwise provided in
the forms of Security set forth in Section 202); and provided, further, that
instalments of interest on Registered Securities whose Stated Maturity is on
or prior to the Redemption Date shall be payable to the Holders of such
Securities, or one or more Predecessor Securities, registered as such at the
close of business on the relevant Record Date according to their terms and the
provisions of Section 307.
If any Security called for redemption shall not be paid upon
surrender thereof for redemption, the principal (and premium, if any) shall,
until paid, bear interest from the Redemption Date at the rate prescribed
therefor in the Security.
If any Bearer Security surrendered for redemption shall not be
accompanied by all appurtenant coupons maturing after the Redemption Date,
such Security may be paid after deducting from the Redemption Price as amount
equal to the face amount of all such missing coupons or the surrender of such
missing coupon or coupons may be waived by the Company and the Trustee, if
there be furnished to them such security or indemnity as they may require to
save each of them and any Paying Agent harmless. If thereafter the Holder of
such Security shall surrender to any Paying Agent any such missing coupon in
respect of which a deduction shall have been made from the Redemption Price,
such Holder shall be entitled to receive the amount so deducted, provided,
however, that interest represented by coupons shall be payable only upon
presentation and surrender of these coupons at an office or agency located
outside of the United States (except, as otherwise provided in the forms of
Security set forth in Section 202).
SECTION 1108. Securities Redeemed in Part.
Any Registered Security which is to be redeemed only in part shall be
surrendered at an office or agency of the Company designated for that purpose
pursuant to Section 1002 (with, if the Company or the Trustee so requires, due
endorsement by, or a written instrument of transfer in form satisfactory to
the Company and the Trustee duly executed by, the Holder
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thereof or the attorney duly authorized in writing), and the Company shall
execute and the Trustee shall authenticate and deliver to the Holder of such
Security without service charge, a new Registered Security or Securities, of
any authorized denomination as requested by such Holder, in aggregate
principal amount equal to and in exchange for the unredeemed portion of the
principal of the Security so surrendered.
ARTICLE TWELVE
REDEMPTION OF SECURITIES AT OPTION OF HOLDERS
SECTION 1201. Redemption at Option of Holders.
The Securities shall be redeemed by the Company at the option of the
Holders thereof, as a whole or in part, under the conditions and at the
Redemption Price for redemption at the option of Holders specified in the
forms of Securities set forth in Section 202 together with accrued interest to
the Redemption Date. Upon the deposit of any Security with a Paying and
Conversion Agent together with a duly signed and completed Notice of
Redemption at Holder's Option, all in accordance with the provisions contained
in the forms of Securities set forth in Section 202, the Holder of such
Security shall be entitled to receive from such Paying and Conversion Agent a
nontransferable receipt of deposit evidencing such deposit. Provided that such
Securities are surrendered for redemption at the option of the Holder in
accordance with the terms hereof, such Securities shall be redeemed on the
Redemption Date and at the Redemption Price specified for redemption at the
option of the Holder, notwithstanding the fact that such Securities have been
called for redemption at the option of the Company on a Redemption Date on or
after (but not before) February 20, 1993.
SECTION 1202. Applicability of Article.
Redemption of Securities at the election of the Holders thereof, as
required by any provision of this Indenture, shall be made in accordance with
such provision and this Article.
For all purposes of this Indenture, unless the context otherwise
requires, all provisions relating to the redemption of Securities at the
option of the Holders thereof shall relate, in the case of any Registered
Security redeemed or to be redeemed only in part, to the portion of the
principal amount of such Registered Security which has been or is to be
redeemed.
SECTION 1203. Notice of Redemption Date.
Notice of the February 20, 1993 Redemption Date shall be given by the
Company not less than 75 nor more than 100 days prior to the February 20, 1993
Redemption Date to each Holder of Securities in accordance with Section 105.
The notice as to the Redemption Date shall state:
(1) the Redemption Date;
(2) the Redemption Price and accrued interest to the
Redemption Date;
(3) the place or places where such Securities, together in
the case of Bearer Securities with all coupons appertaining thereto
maturing after February 20, 1993 are to be surrendered for payment of
the Redemption Price and such accrued interest and the date by which
Securities must be so surrendered in order to be redeemed;
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(4) that exercise of the option to elect redemption is
irrevocable, except that Holders who provide the option notice will
retain the right to require tendered Securities to be converted,
provided that notice to such effect and the Holder's nontransferable
receipt from the Paying and Conversion Agent representing such
Securities are delivered on or prior to February 20, 1993 to the
Paying and Conversion Agent holding the tendered Securities to be
converted and the other requirements of Article Thirteen are met:
(5) that in the event tendered Securities are converted on
(but not prior to) February 20, 1993, such Holders shall be entitled
to received the interest payable on such Securities on such date; and
(6) the Conversion Price for conversion of Securities.
SECTION 1204. Deposit of Redemption Price.
Prior to the February 20, 1993 Redemption Date, the Company shall
deposit with the Trustee or with a Paying Agent (or, if the Company is acting
as its own Paying Agent, segregate and hold in trust as provided in Section
1003) an amount of money sufficient to pay the Redemption Price of and accrued
interest on all of the Securities which are to be redeemed on that date. If
any Security tendered for a redemption is converted, any money deposited with
the Trustee or with the Paying Agent or so segregated and held in trust for
the redemption of such Security shall (subject to any right of the Holder of
such Security or any Predecessor Security to receive interest as provided in
the last paragraph of Section 307) be paid to the Company on Company Request,
or, if then held by the Company shall be discharged from such trust.
SECTION 1205. Securities Payable on Redemption Date.
Notice of election to redeem having been given as specified in the
forms of Securities set forth in Section 202, the Securities so to be redeemed
shall, as the Redemption Date, become due and payable at the Redemption Price
applicable thereto and from and after such date (unless the Company shall
default in the payment of the Redemption Price and accrued interest) such
Securities shall cease to bear interest and the coupons for such interest
appertaining to Bearer Securities shall, except to the extent provided below,
be void. Upon surrender of any such Security for redemption in accordance with
said notice, together with all coupons, if any, appertaining thereto maturing
after the Redemption Date, such Security shall be paid by the Company at the
Redemption Price together with accrued interest to the Redemption Date.
If any Security shall not be paid upon surrender thereof for
redemption, the principal (and premium, if any) shall, until paid, bear
interest from the Redemption Date at the rate prescribed therefor in such
Security.
If any Bearer Security surrendered for redemption shall not be
accompanied by all appurtenant coupons maturing after the Redemption Date,
such Security may be paid after deducting from the Redemption Price an amount
equal to the face amount of all such missing coupons or the surrender of such
missing coupon or coupons may be waived by the Company and the Trustee, if
there be furnished to them such security or indemnity as they may require to
save each of them and any Paying Agent harmless. If thereafter the Holder of
such Security shall surrender to any Paying Agent any such missing coupon in
respect of which a deduction shall have been made from the Redemption Price,
such Holder shall be entitled to receive the amount so deducted; provided,
however, that interest represented by coupons shall be payable only upon
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presentation and surrender of those coupons at an office or agency located
outside of the United States (except as otherwise provided in the forms of
Securities set forth in Section 202)
SECTION 1206. Securities Redeemed in Part.
Any Registered Security which is to be redeemed only in part shall be
surrendered at any office or agency of the Company designated for that purpose
pursuant to Section 1002 (with, if the Company or the Trustee so requires, due
endorsement by, or a written instrument of transfer in form satisfactory to
the Company and the Trustee duly executed by the Holder thereof or his
attorney duly authorized in writing), and the Company shall execute and the
Trustee shall authenticate and deliver to the Holder of such Security without
service charge, a new Registered Security or Securities, of any authorized
denomination as requested by such Holder, in aggregate principal amount equal
to and in exchange for the unredeemed portion of the principal of the Security
so surrendered.
ARTICLE THIRTEEN
CONVERSION OF SECURITIES
SECTION 1301. Conversion Privilege and Conversion Price.
Subject to and upon compliance with the provisions of this Article,
at the option of the Holder thereof, any definitive Security or, in the case
of any Registered Security, any portion of the principal amount thereof which
is U.S$5,000 or an integral multiple of U.S.$5,000 may be converted at the
principal amount thereof, or of such portion thereof, into fully paid and
nonassessable shares (calculated as to each conversion to the nearest 1/100 of
a share) of Common Stock, at the Conversion Price, determined as hereinafter
provided, in effect at the time of conversion. Such conversion right shall
commence at the opening of business on the Exchange Date and expire at the
close of business on February 20, 2001. In case a Security or portion thereof
is called for redemption or tendered by the Holder thereof for redemption, such
conversion right in respect of the Security or portion so called or tendered
shall expire at the close of business on the Redemption Date, unless the
Company defaults in making the payment due upon redemption.
The price at which shares of Common Stock shall be delivered upon
conversion (herein called the "Conversion Price") shall be initially
U.S.$85.25 per share of Common Stock. The Conversion Price shall be adjusted
in certain instances as provided in paragraphs (1), (2), (3), (4) and (7) of
Section 1304.
SECTION 1302. Exercise of Conversion Privilege.
In order to exercise the conversion privilege, the Holder of any
definitive Security to be converted shall surrender such Security, together in
the case of Bearer Securities with all unmatured coupons and any matured
coupons in default appertaining thereto, duly endorsed or assigned to the
Company or in blank, at any office or agency of the Company maintained for
that purpose pursuant to Section 1002, accompanied by written notice to the
Company at such office or agency that the Holder elects to convert such
Security or, if less than the entire principal amount thereof is to be
converted, the portion thereof to be converted. Registered Securities
surrendered for conversion during the period from the close of business on any
Regular Record Date next preceding any Interest Payment Date to the opening of
business on such Interest Payment Date shall (except in the case of Registered
Securities or portions thereof which have
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been called for redemption on a Redemption Date within such period) be
accompanied by payment in funds acceptable to the Company of an amount equal
to the interest payable on such Interest Payment Date on the principal amount
of Registered Securities being surrendered for conversion (or, if such
Registered Security was issued in exchange for a Bearer Security after the
close of Business on such Regular Record Date, by surrender of the coupon
relating to such Interest Payment Date or by payment in such funds in an
amount equal to the interest payable on such Interest Payment Date on the
principal amount of the Registered Security then being converted). Except as
provided in the preceding sentence and subject to the last paragraph of
Section 307, no payment or adjustment shall be made upon any conversion on
account or any interest accrued on the Securities surrendered for conversion
or on account of any dividends on the Common Stock issued upon conversion.
Securities shall be deemed to have been converted immediately prior
to the close of business on the day of surrender of such Securities for
conversion in accordance with the foregoing provisions, and at such time the
rights of the Holders of such Securities as Holders shall cease, and the
Person or Persons entitled to receive the Common Stock issuable upon
conversion shall be treated for all purposes as the record holder or holders
of such Common Stock at such time. As promptly as practicable on or after the
conversion date, the Company shall issue and shall deliver at such office or
agency a certificate or certificates for the number of full shares of Common
Stock issuable upon conversion, together with payment in lieu of any fraction
of a share, as provided in Section 1303.
In the case of any Registered Security which is converted in part
only, upon such conversion the Company shall execute and the Trustee shall
authenticate and deliver to the Holder thereof, at the expense of the Company,
a new Registered Security or Registered Securities of authorized denominations
in aggregate principal amount equal to the unconverted portion of the
principal amount of such Registered Securities.
SECTION 1303. Fractions of Shares.
No fractional shares of Common Stock shall be issued upon conversion
of Securities. If more than one Security shall be surrendered for conversion at
one time by the same Holder, the number of full shares which shall be issuable
upon conversion thereof shall be computed on the basis of the aggregate
principal amount of the Securities (or, in the case of Registered Securities,
specified portions thereof) so surrendered. Instead of any fractional share of
Common Stock which would otherwise be issuable upon the conversion of any
Security or Securities (or in the case of Registered Securities, specified
portions thereof), the Company shall pay a cash adjustment in respect of such
fraction in an amount equal to the current market value of such fractional
interest computed to the nearest cost on the basis of the Closing Market Price
Per Share of the Common Stock on the last day prior to the day of conversion
on which there is such a Closing Market Price Per Share.
SECTION 1304. Adjustment of Conversion Price.
(1) In case at any time after February 20, 1986 the Company shall pay
or make a dividend or other distribution on any class or series of capital
stock of the Company in Common Stock, the Conversion Price in effect at the
opening of business on the day following the date fixed for the determination
of stockholders entitled to receive such dividend or other distribution shall
be reduced by multiplying such Conversion Price by a fraction of which the
numerator shall be the number of shares of Common Stock outstanding at the
close of business on the date fixed for such determination and the denominator
shall be the sum of such number of shares and the total
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number of shares constituting such dividend or other distribution, such
reduction to become effective immediately after the opening of business on
the day following the date fixed for such determination. For the purpose of
this paragraph (1), the number of shares of Common Stock at any time
outstanding shall not include shares held in the treasury of the Company but
shall include shares issuable in respect of scrip certificates issued in lieu
of fractions of shares of Common Stock. The Company will not pay any dividend
or make any distribution on shares of Common Stock held in the treasury of the
Company.
(2) In case at any time after February 20, 1986 the Company shall
issue rights or warrants to holders of any class or series of its capital
stock entitling them to subscribe for or purchase shares of Common Stock at a
price per share less than the current market price per share (determined as
provided in paragraph (6) of this Section) of the Common Stock on the date
fixed for the determination of stockholders entitled to receive such rights or
warrants, the Conversion Price in effect at the opening of business on the day
following the date fixed for such determination shall be reduced by
multiplying such Conversion Price by a fraction of which the numerator shall
be the number of shares of Common Stock outstanding at the close of business
on the date fixed for such determination plus the number of shares of Common
Stock which the aggregate of the offering price of the total number of shares
of Common Stock so offered for subscription or purchase would purchase at such
current market price and the denominator shall be the number of shares of
Common Stock outstanding at the close of business on the date fixed for such
determination plus the number of shares of Common Stock so offered for
subscription or purchase, such reduction to become effective immediately after
the opening of business on the day following the date fixed for such
determination. For the purposes of this paragraph (2), the number of shares of
Common Stock at any time outstanding shall not include shares held in the
treasury of the Company but shall include shares issuable in respect of scrip
certificates issued in lieu of fractions of shares of Common Stock. The
Company will not issue any rights or warrants in respect of shares of Common
Stock held in the treasury of the Company.
(3) In case at any time after February 20, 1986 outstanding shares of
Common Stock shall be subdivided into a greater number of shares of Common
Stock, the Conversion Price in effect at the opening of business on the day
following the day upon which such subdivision becomes effective shall be
proportionately reduced, and, conversely, in case at any time after
February 20, 1986 outstanding shares of Common Stock shall each be combined
into a smaller number of shares of Common Stock, the Conversion Price in
effect at the opening of business on the day following the day upon which such
combination becomes effective shall be proportionately increased, such
reduction or increase, as the case may be, to become effective immediately
after the opening of business on the day following the day upon which such
subdivision or combination becomes effective.
(4) In case at any time after February 20, 1986 the Company shall, by
dividend or otherwise, distribute to all holders of its Common Stock evidence
of its indebtedness or assets (including securities, but excluding any rights
or warrants referred to in paragraph (2) of this Section, any dividend or
distribution paid in cash out of the earned surplus of the Company and any
dividend or distribution referred to in paragraph (1) of this Section), the
Conversion Price shall be adjusted so that the same shall equal the price
determined by multiplying the Conversion Price in effect immediately prior to
the close of business on the date fixed for the determination of stockholders
entitled to receive such distribution by a fraction of which the numerator
shall be the current market price per share (determined as provided in
paragraph (6) of this Section) of the Common Stock on the date fixed for such
determination less the then
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fair market value (as determined by the Board of Directors, whose
determination shall be conclusive and described in a Board Resolution) of the
portion of the assets or evidences of indebtedness so distributed applicable
to one share of Common Stock and the denominator shall be such current market
price per share of the Common Stock, such adjustment to become effective
immediately prior to the opening of business on the day following the date
fixed for the determination of stockholders entitled to receive such
distribution.
(5) The reclassification of Common Stock into securities other than Common
Stock (other than any reclassification upon a consolidation or merger to
which Section 1311 applies) shall be deemed to involve (a) a distribution of
such securities other than Common Stock to all holders of Common Stock (and
the effective date of such reclassification shall be deemed to be "the date
fixed for the determination of stockholders entitled to receive such
distribution" and "the date fixed for such determination" within the meaning
of paragraph (4) of this Section), and (b) a subdivision or combination, as
the case may be, of the number of shares of Common Stock outstanding
immediately prior to such reclassification into the number of shares of Common
Stock outstanding immediately thereafter (and the effective date of such
reclassification shall be deemed to be "the day upon which such subdivision
becomes effective" or "the day upon which such combination becomes
effective", as the case may be, and "the day upon which such subdivision or
combination becomes effective" within the meaning of paragraph (3) of this
Section).
(6) For the purpose of any computation under paragraphs (2) and (4) of
this Section, the current market price per share of Common Stock on any date
shall be deemed to be the average of the Closing Market Prices Per Share for
30 consecutive trading days selected by the Company commencing 30 trading
days before the day in question.
(7) The Company may make such reductions in the Conversion Price, in
addition to those required by paragraphs (1), (2), (3) and (4) of this
Section, as it considers to be advisable in order that any event treated for
United States Federal income tax purposes as a dividend of stock or stock
rights shall not be taxable to the recipients.
(8) No adjustment in the Conversion Price shall be required unless such
adjustment would require an increase or decrease of at least 1% in the
Conversion Price; provided, however, that any adjustments which by reason of
this paragraph (3) are not required to be made shall be carried forward and
taken into account in any subsequent adjustment. All calculations shall be
made to the nearest cent or to the nearest one-thousandth of a share, as the
case may be.
SECTION 1305. Notice of Adjustments of Conversion Price.
Whenever the Conversion Price is adjusted as herein provided:
(a) the Company shall compute the Conversion Price in accordance with
Section 1304 and shall prepare a certificate signed by the Treasurer of the
Company setting forth the adjusted Conversion Price and showing in
reasonable detail the facts upon which such adjustment is based, and such
certificate shall forthwith be filed at each office or agency maintained
for the purpose of conversion of Securities pursuant to Section 1002; and
(b) a notice stating that the Conversion Price has been adjusted and
setting forth the adjusted Conversion Price shall as soon as practicable
after the effectiveness of such adjustment be mailed by the Company to all
Registered Holders at their last addresses as
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they shall appear in the Security Register and shall be published (but only
once) in accordance with Section 105.
SECTION 1306. Notice of Certain Corporate Action.
In case at any time after February 20, 1986:
(a) the Company shall declare a dividend (or any other distribution) on
its Common Stock payable otherwise than in cash out of its earned surplus;
or
(b) the Company shall authorize the granting to the holders of its Common
Stock of rights or warrants to subscribe for or purchase any shares of
capital stock of any class or of any other rights; or
(c) there shall occur any reclassification of the Common Stock of the
Company (other than a subdivision or combination of its outstanding shares
of Common Stock), or any consolidation or merger to which the Company is a
party and for which approval of any stockholders of the Company is required,
or the sale or transfer of all or substantially all of the assets of the
Company; or
(d) there shall occur the voluntary or involuntary dissolution,
liquidation or winding up of the Company;
then the Company shall cause to be filed at each office or agency maintained
for the purpose of conversion of Securities pursuant to Section 1002, and
shall cause to be mailed to all Registered Holders at their last addresses as
they shall appear in the Security Register and shall publish (but only once)
in accordance with Section 106, in each case, at least 20 days (or 10 days in
any case specified in clause (a) or (b) above) prior to the applicable record
date hereinafter specified, a notice stating (x) the date on which a record
is to be taken for the purpose of such dividend, distribution, rights or
warrants, or, if a record is not to be taken, the date as of which the
holders of Common Stock of record to be entitled to such dividend,
distribution, rights or warrants are to be determined, or (y) the date on
which such reclassification, consolidation, merger, sale, transfer,
dissolution, liquidation or winding up is expected to become effective, and
the date as of which it is expected that holders of Common Stock of record
shall be entitled to exchange their shares of Common Stock for securities,
cash or other property deliverable upon such reclassification, consolidation,
merger, sale, transfer, dissolution, liquidation or winding up.
SECTION 1307. Company to Reserve Common Stock.
The Company shall at all times reserve and keep available, free from
pre-emptive rights, out of its authorized but unissued Common Stock, for the
purpose of effecting the conversion of Securities, the full number of shares
of Common Stock then issuable upon the conversion of all Outstanding
Securities.
The Company shall in good faith and as promptly as possible after the
issuance of the Global Security endeavor (i) to cause all registrations with,
and to obtain any approval by, any governmental authority under any Federal
or state law of the United States that may be required before the shares of
Common Stock may be lawfully issued or transferred and delivered pursuant to
this Article and (ii) to list the shares of Common Stock required to be
issued or delivered upon conversion of Securities prior to such issue or
delivery on each national securities exchange on which the outstanding Common
Stock is listed at the time of such delivery.
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SECTION 1308. Taxes on Conversions.
The Company will pay and all stamp, excise or similar taxes or duties that
may be payable in respect of the issue or delivery of shares of Common Stock
on conversion of Securities pursuant hereto. The Company shall not, however,
be required to pay any tax or duty which may be payable in respect of any
transfer involved in the issue and delivery or shares of Common Stock in a
name other than that of the Holder of the Security or Securities to be
converted, and no such issue or delivery shall be made unless and until the
person requesting such issue has paid to the Company the amount of any such
tax or duty, or has established to the satisfaction of the Company that such
tax or duty has been paid.
SECTION 1309. Covenant as to Common Stock.
The Company covenants that all shares of Common Stock which may be issued
upon conversion of Securities will upon issue be fully paid and nonassessable
and, except as provided in Section 1308, the Company will pay all taxes or
duties, liens and charges with respect to the issue thereof.
SECTION 1310. Cancellation of Converted Securities.
All Securities delivered for conversion shall be delivered to the Trustee
to be cancelled by or at the direction of the Trustee, which shall dispose of
the same as provided in Section 309.
SECTION 1311. Provisions in Case of Consolidation, Merger or Sale of
Assets.
In case of any consolidation of the Company with, or merger of the Company
into, any other corporation, or in case of any merger of another corporation
into the Company (other than a merger which does not result in any
reclassification, conversion, exchange or cancellation of outstanding shares
of Common Stock of the Company), or in case of any sale or transfer of all or
substantially all of the assets of the Company, the corporation formed by
such consolidation or resulting from such merger or which acquires such
assets, as the case may be, shall execute and deliver to the Trustee a
supplemental indenture providing that the Holder of each Security then
outstanding shall have the right thereafter, during the period such Security
shall be convertible as specified in Section 1301, to convert such Security
only into the kind and amount of securities, cash and other property
receivable upon such consolidation, merger, sale or transfer by a holder of
the number of shares of Common Stock into which such Security might have been
converted immediately prior to such consolidation, merger, sale or transfer,
assuming such holder of Common Stock failed to exercise his rights of
election, if any, as to the kind or amount of securities, cash or other
property receivable upon such consolidation, merger, sale or transfer
(provided that if the kind or amount of securities, cash and other property
receivable upon such consolidation, merger, sale or transfer is not the same
for each share of Common Stock in respect of which such rights of election
shall not have been exercised ("non-electing share"), then for the purpose of
this Section the kind and amount of securities, cash and other property
receivable upon such consolidation, merger, sale or transfer by each
non-electing share shall be deemed to be the kind and amount so receivable
per share by a plurality of the non-electing shares), and assuming, if such
consolidation, merger, sale or transfer is prior to the Exchange Date, that
the Securities were convertible at the time of such consolidation, merger,
sale or transfer at the initial Conversion Price specified in Section 1301 as
adjusted from February 20, 1986 to such time pursuant to Section 1304. Such
supplemental indenture shall provide for adjustments which shall be as nearly
equivalent as may be practicable to the
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adjustments provided for in this Article. The above provisions of this
Section shall similarly apply to successive consolidations, mergers, sales or
transfers.
SECTION 1312. Responsibility of Trustee for Conversion Provisions.
The Trustee, subject to the provisions of Section 601, and any Conversion
Agent shall not at any time be under any duty or responsibility to any Holder
to determine whether any facts exist which may require any adjustment of the
Conversion Price, or with respect to the nature or extent of any such
adjustment when made, or with respect to the method employed, or herein or in
any supplemental indenture provided to be employed in making the same.
Neither the Trustee, subject to the provisions of Section 601, nor any
Conversion Agent shall be accountable with respect to the validity or value
(or the kind or amount) of any shares of Common Stock, or of any other
securities or property, which may at any time be issued or delivered upon the
conversion of any Security; and it or they do not make any representation
with respect thereto. Neither the Trustee, subject to the provisions of
Section 601, nor any Conversion Agent shall be responsible for any failure of
the Company to make any cash payment or to issue, transfer or deliver any
shares of stock or stock certificates or other securities or property upon
the surrender of any Security for the purpose of conversion; and the Trustee,
subject to the provisions of Section 601, and any Conversion Agent shall not
be responsible for any failure of the Company to comply with any of the
covenants of the Company contained in this Article.
ARTICLE FOURTEEN
SUBORDINATION OF SECURITIES
SECTION 1401. Securities Subordinate to Senior Indebtedness.
The Company covenants and agrees, and each Holder of a Security, by his
acceptance thereof, likewise covenants and agrees, that, to the extent and in
the manner hereinafter set forth in this Article, the indebtedness
represented by the Securities and the payment of the principal of (and
premium, if any) and interest on each and all of the Securities are hereby
expressly made subordinate and subject in right of payment to the prior
payment in full of all Senior Indebtedness.
SECTION 1402. Payment Over of Proceeds Upon Dissolution, Etc.
In the event of (a) any insolvency or bankruptcy case or proceeding, or
any receivership, liquidation, reorganization or other similar case or
proceeding in connection therewith, relative to the Company or to its
creditors, as such, or to its assets, or (b) any liquidation, dissolution or
other winding up of the Company, whether voluntary or involuntary and whether
or not involving insolvency or bankruptcy, or (c) any assignment for the
benefit of creditors or any other marshalling of assets and liabilities of
the Company, then and in any such event, the holders of Senior Indebtedness
shall be entitled to receive payment in full of all amounts due or to become
due on or in respect of all Senior Indebtedness, or provision shall be made
for such payment in money or money's worth, before the Holders of the
Securities are entitled to receive any payment on account of principal of (or
premium, if any) or interest on the Securities, and to that end the holders
of Senior Indebtedness shall be entitled to receive, for application to the
payment thereof, any payment or distribution of any kind or character,
whether in cash, property or securities, which may be payable or deliverable
in respect of the Securities in any such case, proceeding, dissolution,
liquidation or other winding up or event.
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In the event that, notwithstanding the foregoing provisions of this
Section, the Trustee or the Holder of any Security shall have received any
payment or distribution of assets of the Company of any kind or character,
whether in cash, property of securities, before all Senior Indebtedness is
paid in full or payment thereof provided for, and if such facts shall, at or
prior to the time of such payment or distribution, have been made known to
the Trustee or, as the case may be, such Holder, then and in such event such
payment or distribution shall be paid over or delivered forthwith to the
trustee in bankruptcy, receiver, liquidating trustee, custodian, assignee,
agent or other Person making payment or distribution of assets of the Company
for application to the payment of all Senior Indebtedness remaining unpaid,
to the extent necessary to pay all Senior Indebtedness in full, after giving
effect to any concurrent payment or distribution to or for the holders of
Senior Indebtedness.
The consolidation of the Company with, or the merger of the Company into,
another corporation or the liquidation or dissolution of the Company
following the conveyance or transfer of its properties and assets
substantially as an entirety to another corporation upon the terms and
conditions set forth in Article Seven shall not be deemed a dissolution,
winding up, liquidation, reorganization, assignment for the benefit of
creditors or marshalling of assets and liabilities of the Company for the
purposes of this Section if the corporation formed by such consolidation or
into which the Company is merged or which acquires by conveyance or transfer
such properties and assets substantially as an entirety, as the case may be,
shall, as a part of such consolidation, merger, conveyance or transfer,
comply with the conditions set forth in Article Seven.
SECTION 1403. Prior Payment to Senior Indebtedness Upon Acceleration of
Securities.
In the event that any Securities are declared due and payable before their
Stated Maturity, then and in such event the holders of Senior Indebtedness
shall be entitled to receive payment in full of all amounts due or to become
due on or in respect of all Senior Indebtedness, or provision shall be made
for such payment in money or money's worth, before the Holders of the
Securities or coupons appertaining thereto are entitled to receive any
payment by the Company on account of the principal of (or premium, if any) or
interest on the Securities or such coupons or on account of the purchase or
other acquisition of Securities or such coupons.
In the event that, notwithstanding the foregoing, the Company shall make
any payment to the Trustee or the Holder of any Security prohibited by the
foregoing provision of this Section, and if such fact shall, at or prior to
the time of such payment, have been made known to the Trustee or, as the case
may be, such Holder, then and in such event such payment shall be paid over
and delivered forthwith to the Company.
The provisions of this Section shall not apply to any payment with respect
to which Section 1402 would be applicable.
SECTION 1404. No Payment When Senior Indebtedness in Default.
(a) In the event and during the continuation of any default in the payment
of principal of (or premium, if any) or interest on any Senior Indebtedness
beyond any applicable grace period with respect thereto, or in the event that
any event of default with respect to any Senior Indebtedness shall have
occurred and be continuing permitting the holders of such Senior Indebtedness
(or a trustee on behalf of the holders thereof) to declare such Senior
Indebtedness due and payable prior to the date on which it would otherwise
have become due and payable, unless and until such event of default shall
have been cured or waived or shall have
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ceased to exist and such acceleration shall have been rescinded or annulled,
or in the event any judicial proceeding shall be pending with respect to
any such default in payment or event of default, then no payment shall be
made by the Company on account of principal of (or premium, if any) or
interest on the Securities or on account of the purchase or other acquisition
of Securities.
In the event that, notwithstanding the foregoing, the Company shall make
any payment to the Trustee or the Holder of any Security prohibited by the
foregoing provisions of this Section, and if such fact shall then have been
made known to the Trustee or, as the case may be, such Holder, then and in
such event such payment shall be paid over and delivered forthwith to the
Company.
The provisions of this Section shall not apply to any payment with respect
to which Section 1402 would be applicable.
SECTION 1405. Payment Permitted If No Default.
Nothing contained in this Article or elsewhere in this Indenture or in any
of the Securities shall prevent (a) the Company, 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 the Company referred to in Section 1402 or under
the conditions described in Section 1403 or 1404, from making payments at any
time of principal of (and premium, if any) or interest on the Securities, 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 (and premium, if any) or
interest on the Securities or the retention of such payment by the Holders of
the Securities, if, one day prior to the time of such application by the
Trustee, the Trustee did not have knowledge that such payment would have been
prohibited by the provisions of this Article.
SECTION 1406. Subrogation to Rights of Holders of Senior Indebtedness.
Subject to the payment in full of all Senior Indebtedness, the Holders of
the Securities shall be subrogated to the extent of the payments or
distributions made to the Holders of such Senior Indebtedness pursuant to the
provisions of this Article (equally and ratably with the holders of all
indebtedness of the Company which by its express terms is subordinated to
indebtedness of the Company to substantially the same extent as the
Securities are subordinated and is entitled to like rights of subrogation) to
the rights of the holders of such Senior Indebtedness to receive payments and
distributions of cash, property and securities applicable to the Senior
Indebtedness until the principal of (and premium, if any) and interest on the
Securities shall be paid in full. For purposes of such subrogation, no
payments or distributions to the holders of the Senior Indebtedness of any
cash, property or securities to which the Holders of the Securities or the
Trustee would be entitled except for the provisions of this Article, and no
payments over pursuant to the provisions of this Article to the holders of
Senior Indebtedness by Holders of the Securities or the Trustee, shall, as
among the Company, its creditors other than holders of Senior Indebtedness
and the Holders of the Securities, be deemed to be a payment or distribution
by the Company to or on account of the Senior Indebtedness.
SECTION 1407. Provisions Solely to Define Relative Rights.
The provisions of this Article are and are intended solely for the purpose
of defining the relative rights of the Holders of the Securities on the one
hand and the holders of Senior
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Indebtedness on the other hand. Nothing contained in this Article or
elsewhere in this Indenture or in the Securities is intended to or shall (a)
impair, as among the Company, its creditors other than holders of Senior
Indebtedness and the Holders of the Securities, the obligation of the Company,
which is absolute and unconditional, to pay to the Holders of the Securities
the principal of (and premium, if any) and interest on the Securities as and
when the same shall become due and payable in accordance with their terms; or
(b) affect the relative rights against the Company of the Holders of the
Securities and creditors of the Company other than the holders of Senior
Indebtedness; or (c) prevent the Trustee or the Holder of any Security from
exercising all remedies otherwise permitted by applicable law upon default
under this Indenture, subject to the rights, if any, under this Article of the
holders of Senior Indebtedness to receive cash, property and securities
otherwise payable or deliverable to the Trustee or such Holder.
SECTION 1408. Trustee to Effectuate Subordination.
Each Holder of a Security by his acceptance thereof authorizes and directs
the Trustee on his behalf to take such action as may be necessary or
appropriate to effectuate the subordination provided in this Article and
appoints the Trustee his attorney-in-fact for any and all such purposes.
SECTION 1409. No Waiver of Subordination Provisions.
No right of any present or future holder of any Senior Indebtedness to
enforce subordination as herein provided shall at any time in any way be
prejudiced or impaired by any act or failure to act on the part of the
Company or by any act or failure to act, in good faith, by any such holder,
or by any non-compliance by the Company with the terms, provisions and
covenants of this Indenture, regardless of any knowledge thereof any such
holder may have or be otherwise charged with.
Without in any way limiting the generality of the foregoing paragraph, the
holders of Senior Indebtedness may, at any time and from time to time,
without the consent of or notice to the Trustee or the Holders of the
Securities, without incurring responsibility to the Holders of the Securities
and without impairing or releasing the subordination provided in this Article
or the obligations hereunder of the Holders of the Securities to the holders
of Senior Indebtedness, do any one or more of the following: (i) change the
manner, place or terms of payment or extend the time of payment of, or renew
or alter, Senior Indebtedness, or otherwise amend or supplement in any manner
Senior Indebtedness or any instrument evidencing the same or any agreement
under which Senior Indebtedness is outstanding; (ii) sell, exchange, release
or otherwise deal with any property pledged, mortgaged or otherwise securing
Senior Indebtedness; (iii) release any Person liable in any manner for the
collection of Senior Indebtedness; and (iv) exercise or refrain from
exercising any rights against the Company and any other Person.
SECTION 1430. Notice to Trustee.
The Company shall give prompt written notice to the Trustee of any fact
known to the Company which would prohibit the making of any payment to or by
the Trustee in respect of the Securities. Notwithstanding the provisions of
this Article or any other provision of this Indenture, the Trustee shall not
be charged with knowledge of the existence of any facts which would prohibit
the making of any payment to or by the Trustee in respect of the Securities,
unless and until the Trustee shall have received written notice thereof from
the Company or a
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holder of Senior Indebtedness or from any trustee therefor; and, prior to the
receipt of any such written notice, the Trustee, subject to the provisions of
Section 601, shall be entitled in all respects to assume that no such facts
exist.
Subject to the provisions of Sections 601, the Trustee shall be entitled
to rely on the delivery to it of a written notice by a Person representing
himself to be a holder of Senior Indebtedness (or a trustee therefor) to
establish that such notice has been given by a holder of Senior Indebtedness
(or a trustee therefor). In the event that the Trustee determines in good
faith that further evidence is required with respect to the right of any
Person as a holder of Senior Indebtedness to participate in any payment or
distribution pursuant to this Article, the Trustee may request such Person to
furnish evidence to the reasonable satisfaction of the Trustee as to the
amount of Senior Indebtedness held by such Person, the extent to which such
Person is entitled to participate in such payment or distribution and any
other facts pertinent to the rights of such Person under this Article, and if
such evidence is not furnished, the Trustee may defer any payment to such
Person pending judicial determination as to the right of such Person to
receive such payment.
SECTION 1411. Reliance on Judicial Order or Certificate of Liquidating
Agent.
Upon any payment or distribution of assets of the Company referred to in
this Article, the Trustee, subject to the provisions of Section 601, and the
Holders of the Securities shall be entitled to rely upon any order or decree
entered by any court of competent jurisdiction in which such insolvency,
bankruptcy, receivership, liquidation, reorganization, dissolution, winding up
or similar case or proceeding is pending, or a certificate of the trustee in
bankruptcy, liquidating trustee, custodian, receiver, assignee for the benefit
of creditors, agent or other Person making such payment or distribution,
delivered to the Trustee or to the Holders of Securities, for the purpose of
ascertaining the Persons entitled to participate in such payment or
distribution, the holders of the Senior Indebtedness and other indebtedness
of the Company, the amount thereof or payable thereon, the amount or amounts
paid or distributed thereon and all other facts pertinent thereto or to this
Article.
SECTION 1412. Trustee Not Fiduciary for Holders of Senior Indebtedness.
The Trustee shall not be deemed to owe any fiduciary duty to the holders of
Senior Indebtedness and shall not be liable to any such holders if it shall
in good faith mistakenly pay over or distribute to Holders of Securities or
to the Company or to any other Person cash, property or securities to which
any holders of Senior Indebtedness shall be entitled by virtue of this
Article or otherwise.
SECTION 1413. Rights of Trustees as Holder of Senior Indebtedness;
Preservation of Trustee's Rights.
The Trustee in its individual capacity shall be entitled to all the
rights set forth in this Article with respect to any Senior Indebtedness
which may at any time be held by it, to the same extent as any other holder
of Senior Indebtedness, and nothing in this Indenture shall deprive the
Trustee of any of its rights as such holder.
Nothing in this Article shall apply to claims of, or payments to, the
Trustee under or pursuant to Section 606.
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SECTION 1414. Article Applicable to Paying Agents.
In case at any time any Paying Agent other than the Trustee shall have
been appointed by the Company and be then acting hereunder, the term
"Trustee" as used in this Article shall in such case (unless the context
otherwise requires) be construed as extending to and including such Paying
Agent within its meaning as fully for all intents and purposes as if such
Paying Agent were named in this Article in addition to or in place of the
Trustee; provided, however, that Section 1413 shall not apply to the Company
or any Affiliate of the Company if it or such Affiliate acts as Paying
Agent.
SECTION 1415. Certain Conversions Deemed Payment.
For the purposes of this Article only, (1) the issuance and delivery of
junior securities upon conversion of Securities in accordance with Article
Thirteen shall not be deemed to constitute a payment or distribution on
account of the principal of or premium or interest on Securities or on
account of the purchase or other acquisition of Securities, and (2) the
payment issuance or delivery of cash, property or securities (other than
junior securities) upon conversion of a Security shall be deemed to
constitute payment on account of principal of such Security. For the
purposes of this Section, the term "junior securities" means (a) shares of
any stock of any class of the Company and (b) securities of the Company which
are subordinated in right of payment to all Senior Indebtedness which may be
outstanding at the time of issuance or delivery of such securities to
substantially the same extent as, or to a greater extent than, the Securities
are so subordinated as provided in this Article. Nothing contained in this
Article or elsewhere is this Indenture or in the Securities is intended to or
shall impair, as among the Company, its creditors other than holders of
Senior Indebtedness and the Holders of the Securities, the right, which is
absolute and unconditional, of the Holder of any Security to convert such
Security in accordance with Article Thirteen.
This instrument may be executed in any number of counterparts, each of
which when so executed shall be deemed to be an original, but all such
counterparts shall together constitute but one and the same instrument.
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IN WITNESS WHEREOF, the parties hereto have caused this Indenture to be
duly executed, and their respective corporate seal to be hereunto affixed and
attested, all as of the day and year first above written.
CALFED INC.
By: /s/ GEORGE P. RUTLAND
----------------------------------------
President and
Chief Executive Officer
Attest:
/s/ WILLIAM L. CALLENDER
- ----------------------------
Secretary
[SEAL]
MANUFACTURERS HANOVER TRUST COMPANY
By: /s/ F. J. GRIPPO
----------------------------------------
Vice President
Attest:
/s/ P. FERRERI
- ----------------------------
Trust Officer
[SEAL]
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STATE OF CALIFORNIA
} ss:
COUNTY OF LOS ANGELES
On the 19th day of February, 1986, before me personally came George P.
Rutland, to me known, who, being by me duly sworn, did depose and may say
that he is President and Chief Executive Officer of CALFED INC., one of the
corporations described in and which executed the foregoing instrument; that
he knows the seal of said corporation; that the seal affixed to said
instrument is such corporate seal; that it was so affixed by authority of the
Board of Directors of said corporation, and that he signed his name thereto
by like authority.
/s/ ARLENE ROGERS
-----------------------------------
Arlene Rogers
Notary Public--California
Principal Office in Los Angeles County
My Commission Expires October 28, 1988
STATE OF NEW YORK
} ss:
COUNTY OF NEW YORK
On the 19th day of February, 1986, before me personally came F.J. Grippo,
to me known, who, being by me duly sworn, did depose and may say that he is
Vice President of MANUFACTURERS HANOVER TRUST COMPANY, one of the
corporations described in and which executed the foregoing instrument; that
he knows the seal of said corporation; that the seal affixed to said
instrument is such corporate seal; that it was so affixed by authority of the
Board of Directors of said corporation, and that he signed his name thereto
by like authority.
/s/ JAMES FOLEY
-----------------------------------
James Foley
Notary Public, State of New York
No. 31-6348400
Qualified in New York County
Commission Expires March 30, 1986
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--------------------------------------
CALFED INC.
XCF ACCEPTANCE CORPORATION
CALIFORNIA FEDERAL BANK, A FEDERAL SAVINGS BANK
and
CHEMICAL BANK,
as Trustee
-----------------------
FIRST SUPPLEMENTAL INDENTURE
Dated as of December 16, 1992
to
INDENTURE
Dated as of February 15, 1986
-----------------------
U.S. $125,000,000
6 1/2% Convertible Subordinated Debentures
Due 2001
---------------------------------------
<PAGE>
First Supplemental Indenture dated as of December 16, 1992
among CalFed Inc., a Delaware corporation (the "Company"), XCF Acceptance
Corporation, a California corporation ("XCF Acceptance Corporation"),
California Federal Bank, a Federal Savings Bank (formerly known as California
Federal Savings and Loan Association; the "Bank"), and Chemical Bank, a
banking corporation organized under the laws of the State of New York and
successor by merger to Manufacturers Hanover Trust Company, as trustee (the
"Trustee").
R E C I T A L S O F T H E C O M P A N Y
- - - - - - - - - - - - - - - - - - - -
WHEREAS, the Company has duly authorized, executed and
delivered to the Trustee that certain indenture dated as of February 15, 1986
(the "Indenture") pursuant to which the Company's 6 1/2% Convertible
Subordinated Debentures Due 2001 (the "Securities") were issued (all
capitalized terms used herein and not otherwise defined shall have the
meanings ascribed thereto in the Indenture);
WHEREAS, as part of a restructuring (the "Restructuring"),
the Company (i) has made an offer (the "Offer") to the holders (the "Holders")
of Securities to exchange their Securities for shares of Classes B, C and D of
common stock, $.20 per value (the "Bank Stock"), of the Bank, and 10%
Subordinated Debentures due 2003 (the "Bank Debentures") of the Bank and (ii)
will merge (the "Merger"), after consummation of the Offer, with and into XCF
Acceptance Corporation, a wholly owned subsidiary of the Bank, pursuant to
which each outstanding share of common stock, $1.00 par value (the "Common
Stock"), of the Company will automatically be converted into one share of
Class A Bank Stock, in each case as fully described in the Offering Circular
and Consent Solicitation dated November 16, 1992 of the Company;
WHEREAS, in connection with the Restructuring of the
Company, the Board of Directors of the Company has determined that it is in
the best interests of the Company (i) to amend the Indenture (the
"Amendments") to, (A) defer until February 20, 2000 the February 20, 1993
Redemption Date with respect to the right of Holders to require the Company to
purchase their Securities for 123% of the face amount of the Securities, (B)
eliminate the covenant that requires, with certain exceptions, that the
Company own directly or indirectly more than 80% of the outstanding shares of
capital stock having voting power for the election of directors of the Bank,
(C) extend the condition precedent to the Company's ability to redeem the
Securities at its option prior to February 20, 1993, which condition provides,
in essence, that the Company can only redeem the Securities at its option if
during a certain period of time prior to
<PAGE>
any such redemption the closing market price of the Common Stock of the
Company is at least 130% of the conversion price under the Indenture, and (D)
make conforming changes to the Indenture with respect to the foregoing
amendments, and (ii) to provide for the assumption of the Indenture, as
amended, by XCF Acceptance Corporation upon the effectiveness of the Merger;
WHEREAS, Holders of at least 90% in aggregate principal
amount of the Outstanding Securities, constituting a majority in aggregate
principal amount of the Securities not owned by the Company or its Affiliates,
have tendered duly executed consents to the Amendments by Act of such Holders
delivered to the Company and the Trustee, and such consents have not been
withdrawn;
WHEREAS, the Board of Directors adopted a Board Resolution
on December 16, 1992 authorizing the Company to enter into a supplemental
indenture to effect the Amendments;
WHEREAS, pursuant to Section 801 of the Indenture, without
the consent of any Holders of Securities or coupons, the Company, when
authorized by a Board Resolution, and the Trustee at any time and from time to
time, may enter into one or more indentures supplemental to the Indenture for,
among other purposes, to evidence the succession of another corporation to the
Company and the assumption by such successor of the covenants of the Company
in the Securities and in the coupons and to make provision with respect to the
conversion rights of Holders of Securities pursuant to Section 1311 of the
Indenture; and
WHEREAS, pursuant to Section 802 of the Indenture, with the
consent of the Holders of not less than a majority in principal amount of the
Outstanding Securities, by Act of said Holders delivered to the Company and
the Trustee, the Company, when authorized by a Board Resolution, and the
Trustee may enter into an indenture or indentures supplemental to the
Indenture for the purpose of adding any provisions to or changing in any
manner or eliminating any of the provisions of the Indenture or modifying in
any manner the rights of the Holders of the Securities or coupons under the
Indenture;
NOW, THEREFORE, the Company covenants and agrees with the
Trustee, for the equal and proportionate benefit and security of those who
shall hold the Securities from time to time, as hereinafter set forth.
2
<PAGE>
ARTICLE ONE
Effectiveness
-------------
The Amendments set forth in this First Supplemental
Indenture shall become effective, as of the time that the Company and the
Exchange Agent certify to the Trustee that the Holders of at least 90% in
aggregate principal amount of the Outstanding Securities, constituting a
majority in aggregate principal amount of the Securities not owned by the
Company or its Affiliates, have tendered duly executed consents to the
Amendments and such consents have not been withdrawn, only when the Company
has notified the Trustee that the Offer is consummated and (i) the Company has
irrevocably deposited with Chemical Bank, as exchange agent for the Offer (the
"Exchange Agent"), and has given the Exchange Agent irrevocable instructions
to distribute, the shares of Bank Stock and the Bank Debentures to be issued
to Holders for the Securities tendered pursuant to the Offer and (ii) there
shall not exist, to the actual knowledge of the Trustee, any legal prohibition
on the distribution of such Bank Stock and Bank Debentures by the Exchange
Agent.
ARTICLE TWO
Amendments
----------
Section 2.1 Amendments to Section 202.
(a) The second full paragraph of the Form of Reverse of the
Securities set forth in Section 202, "Forms of Definitive Securities," of the
Indenture is hereby amended and restated to read as follows:
The Securities are subject to redemption at the
option of the Company (1) at any time after the expiration
of 30 days following the Exchange Date, as a whole or in
part, at the following Redemption Prices (expressed as
percentages of the principal amount): If redeemed during the
12-month period beginning February 20 of the years
indicated,
<TABLE>
<CAPTION>
Redemption Redemption
Year Price Year Price
---- ----------- ----- -----------
<S> <C> <C> <C>
1986.................... 106% 1989............ 103%
1987.................... 105% 1990............ 102%
1988.................... 104% 1991............ 101%
</TABLE>
and thereafter at a Redemption Price equal to 100% of
the principal amount; and (2) under
3
<PAGE>
the circumstances described in the next two succeeding
paragraphs at a Redemption Price equal to 100% of the
principal amount, together in the case of any such
redemption under clause (1) or (2) of this sentence with
accrued interest to the Redemption Date; provided, however,
that interest installments on Bearer Securities whose Stated
Maturity is on or prior to such Redemption Date will be
payable only upon presentation and surrender of coupons for
such interest (at an office or agency outside the United
States except as herein provided otherwise), and provided,
further, that interest installments on Registered Securities
whose Stated Maturity is on or prior to such Redemption Date
will be payable to the Holders of such Securities, or one or
more Predecessor Securities, of record at the close of
business on the relevant Regular Record Date referred to on
the face hereof, all as provided in the Indenture.
Notwithstanding the foregoing, the Company may not, prior to
February 20, 2000, redeem any Securities pursuant to clause
(1) of the next preceding sentence unless the Closing Market
Price Per Share (as defined in the Indenture) of the Common
Stock on each day on which there was such a price within the
30 days immediately preceding the fifteenth day prior to the
initial publication of the notice of such redemption is at
least 130% of the Conversion Price in effect at the close of
business on such day. Partial redemptions must be in an
amount not less than U.S. $1,000,000 principal amount of
Securities.
(b) The fifth full paragraph of the Form of Reverse of the
Securities set forth in Section 202, "Forms of Definitive Securities," of the
Indenture is hereby amended and restated to read as follows:
Subject to and upon compliance with the provisions
of the Indenture (unless previously redeemed by the Company
and notwithstanding any prior call for redemption at the
election of the Company on a Redemption Date on or after
February 20, 2000), this Security is subject to redemption
on February 20, 2000, at the election of the Holder,
exercisable on or before January 20, 2000, but not prior to
December 20, 1999, at a Redemption Price equal to 123% of
the principal amount to be redeemed, plus accrued
4
<PAGE>
interest to the Redemption Date. For this Security to be
redeemed at the election of the Holder hereof, the Company
must receive at the office of one of the Paying and
Conversion Agents appointed by the Company on or after
December 20, 1999 until and including, but not after, the
close of business on January 20, 2000, this Security [If
Bearer Security --, together with all coupons maturing after
the Redemption Date,] accompanied by written notice to the
Company (which shall be substantially in the form of
optional redemption notice hereon) that the Holder hereof
instructs the Company to redeem this Security [If Registered
Security --, or if less than the entire amount hereof is to
be redeemed, the portion hereof to be redeemed]. The Holder
of a Registered Security may elect redemption by the Company
of such Security in the principal amount of U.S. $5,000 or
an integral multiple thereof. The Holder of a Bearer
Security may elect redemption by the Company of such
Security as a whole but not in part. Such form of notice
duly received shall be irrevocable; provided, however, that
Holders of Securities who provide such optional notice of
redemption shall retain the right to require such Securities
to be converted into Common Stock on or prior to February
20, 2000, provided that notice of conversion and the
Holder's non-transferable receipt of deposit from the Paying
and Conversion Agent representing such Securities are
delivered on or prior to the close of business on such
conversion date to the Paying and Conversion Agent holding
such Securities. In the event such Securities are converted
on (but not prior to) February 20, 2000, the Holders of the
appurtenant coupons the Stated Maturity of which is February
20, 2000 shall be entitled to receive the interest payable
on such Securities on such date. The Company shall give the
Holders of the Securities not less than 75 days nor more
than 100 days notice prior to February 20, 2000 advising
such Holders of the Redemption Date for redemption at the
election of Holders.
(c) The italicized Note of the Form of Notice of Redemption
at Holder's Option set forth in Section 202, "Forms of Definitive Securities,"
of the Indenture is hereby amended and restated to read as follows:
5
<PAGE>
Note: Exercise of the option to elect redemption
is irrevocable, except that Holders who
provide the foregoing notice retain the
right to require the Securities tendered
herewith to be converted, provided that
notice to such effect and the Holder's
nontransferable receipt from a Paying and
Conversion Agent representing such
Securities are delivered on or prior to
February 20, 2000, to the Paying and
Conversion Agent holding the tendered
Securities to be converted. In the event
tendered Securities are converted on (but
no prior to) February 20, 2000, the Holder
[If Bearer Security - of the coupon the
stated Maturity of which is such date] will
be entitled to receive the interest payable
[If Registered Security - on such
Securities] on that date.
Section 2.2 Amendment to Section 1009.
Section 1009, "Limitation on Disposition of Stock of
California Federal," of the Indenture is hereby deleted in its entirety.
Section 2.3 Amendments to Article Twelve.
(a) Section 1201, "Redemption at Option of Holders," of the
Indenture is hereby amended and restated to read as follows:
Notwithstanding any contrary provisions set forth
in Securities authenticated and delivered prior to [date of
this First Supplemental Indenture], 1992, the Securities
shall be redeemed by the Company at the option of the
Holders thereof, as a whole or in part, under the conditions
and at the Redemption Price for redemption at the option of
Holders specified in the forms of Securities set forth in
Section 202 together with accrued interest to the Redemption
Date. Upon the deposit of any Security with a Paying and
Conversion Agent together with a duly signed and completed
Notice of Redemption at Holder's Option, all in accordance
with the provisions contained in the forms of Securities set
forth in Section 202, the Holder of such Security shall be
entitled to receive from such Paying and Conversion Agent a
nontransferable receipt of deposit evidencing such deposit.
Provided
6
<PAGE>
that such Securities are surrendered for redemption at the
option of the Holder in accordance with the terms hereof,
such Securities shall be redeemed on the Redemption Date and
at the Redemption Price specified for redemption at the
option of the Holder, notwithstanding the fact that such
Securities have been called for redemption at the option of
the Company on a Redemption Date on or after (but not
before) February 20, 2000.
(b) Section 1203, "Notice of Redemption Date," of the
Indenture is hereby amended and restated to read as follows:
Notwithstanding any contrary provisions set forth
in Securities authenticated and delivered prior to [date of
this First Supplemental Indenture], 1992, notice of the
February 20, 2000 Redemption Date shall be given by the
Company not less than 75 nor more than 100 days prior to the
February 20, 2000 Redemption Date to each Holder of
Securities in accordance with Section 105.
The notice as to the Redemption Date shall state:
(1) the Redemption Date;
(2) the Redemption Price and accrued
interest to the Redemption Date;
(3) the place or places where such
Securities, together in the case of Bearer
Securities with all coupons appertaining thereto
maturing after February 20, 2000, are to be
surrendered for payment of the Redemption Price and
such accrued interest and the date by which
Securities must be so surrendered in order to be
redeemed;
(4) that exercise of the option to elect
redemption is irrevocable, except that Holders who
provide the option notice will retain the right to
require tendered Securities to be converted,
provided that notice to such effect and the
Holder's nontransferable receipt from the Paying
and Conversion Agent representing such Securities
are delivered on or prior to February 20, 2000 to
the Paying and Conversion Agent holding the
tendered Securities to be
7
<PAGE>
converted and the other requirements of
Article Thirteen are met;
(5) that in the event tendered Securities
are converted on (but not prior to) February 20,
2000, such Holders shall be entitled to receive the
interest payable on such Securities on such date;
and
(6) the Conversion Price for
conversion of Securities.
(c) Section 1204, "Deposit of Redemption Price," of the
Indenture is hereby amended and restated to read as follows:
Prior to the February 20, 2000 Redemption
Date, the Company shall deposit with the Trustee or
with a Paying Agent (or, if the Company is acting
as its own Paying Agent, segregate and hold in
trust as provided in Section 1003) an amount of
money sufficient to pay the Redemption Price of and
accrued interest on all of the Securities which are
to be redeemed on that date. If any Security
tendered for a redemption is converted, any money
deposited with the Trustee or with the Paying Agent
or so segregated and held in trust for the
redemption of such Security shall (subject to any
right of the Holder of such Security or any
Predecessor Security to receive interest as
provided in the last paragraph of Section 307) be
paid to the Company on Company Request, or, if then
held by the Company shall be discharged from such
trust.
Section 2.4. Other Amendments. All other reference to the
date "February 20, 1993" in the Indenture or in the form of Securities are
hereby amended to read "February 20, 2000."
ARTICLE THREE
Successor Provisions
--------------------
Section 3.1. Assumption by Successor. XCF Acceptance
Corporation, the successor to the Company pursuant to the Merger, hereby
expressly assumes upon the effectiveness of the Merger and this First
Supplemental Indenture, by execution hereof and delivery to the Trustee, the
due and punctual payment of the principal of (and premium, if any) and
interest (including all additional amounts payable pursuant to Section 1004 of
the Indenture)
8
<PAGE>
on all the Securities, as modified by this First Supplemental Indenture, and
the performance of every covenant of the Indenture on the part of the Company
to be performed or observed, as modified by this First Supplemental Indenture.
Section 3.2. Provisions for Conversion. The Holder of each
Security outstanding after the Merger shall have the right, during the period
such Security shall be convertible as specified in Section 1301 of the
Indenture, to convert such Security only into the number of shares of Bank
Stock receivable in the Merger by a holder of the number of shares of Common
Stock of the Company into which such Security might have been converted
immediately prior to the Merger.
ARTICLE FOUR
Miscellaneous Provisions
------------------------
Section 4.1. Interpretation. This First Supplemental
Indenture is a supplemental indenture pursuant to Sections 801 and 802 of the
Indenture. Upon execution, delivery and effectiveness pursuant to Article One
of this First Supplemental Indenture, the Indenture shall be modified and
amended in accordance with this First Supplemental Indenture, and all the
terms and conditions of both shall be read together as though they constitute
one instrument, except that, in case of conflict, the provisions of this First
Supplemental Indenture will control. Upon execution, delivery and
effectiveness pursuant to Section 3.1 of Article Three of this First
Supplemental Indenture, the Indenture, as modified and amended in accordance
with this First Supplemental Indenture, shall be assumed by XCF Acceptance
Corporation. The Indenture, as modified and amended by this First Supplemental
Indenture, is hereby ratified and confirmed in all respects and shall bind
every holder of Securities. In case of conflict between the terms and
conditions contained in the Securities and those contained in the Indenture,
as modified and amended by this First Supplemental Indenture, the provisions
of the Indenture, as modified and amended by this First Supplemental Indenture,
shall control.
Section 4.2. Successors and Assigns. All the covenants,
stipulations, promises and agreements in this First Supplemental Indenture made
by or on behalf of the Company, or the Trustee, shall bind and inure to the
benefit of their respective successors and assigns.
Section 4.3. Counterparts. This First Supplemental
Indenture may be executed in any number of counterparts, and all such
counterparts taken together shall be deemed to constitute one and the same
agreement.
9
<PAGE>
Section 4.4. Title and Section Headings. The titles of
the Articles and the Section headings are for convenience only and shall not
affect the construction hereof.
Section 4.5. Recitals. The recitals contained herein and in
the Securities, as amended hereby, (except the Trustee's certificates of
authentication) shall be taken as the statements of the Company, and the
Trustee assumes no responsibility for their correctness. The Trustee makes no
representations as to the validity or sufficiency of this Supplemental
Indenture or of the Securities, as amended hereby, or coupons.
Section 4.6. Governing Law. This First Supplemental
Indenture shall be governed by and construed in accordance with the laws of
the State of New York.
IN WITNESS WHEREOF, the parties hereto have caused this
First Supplemental Indenture to be duly executed as of the day and year first
above written.
CALFED INC.
By: /s/ Jerry St. Dennis
________________________
Jerry St. Dennis
Chairman of the Board,
President and Chief
Executive Officer
Attest:
/s/ Douglas J. Wallis
- ------------------------
Douglas J. Wallis
Secretary
XCF ACCEPTANCE CORPORATION
By: /s/ Jerry St. Dennis
________________________
Jerry St. Dennis
President
Attest:
/s/ Julia L. Greenfield
- ------------------------
Julia L. Greenfield
Secretary
10
<PAGE>
CALIFORNIA FEDERAL BANK, A
FEDERAL SAVINGS BANK
By: /s/ William L. Callender
________________________
William L. Callender
President and Chief
Executive Officer
Attest:
/s/ Douglas J. Wallis
- ------------------------
Douglas J. Wallis
Secretary
CHEMICAL BANK, as Trustee
By:________________________
Its:_______________________
Attest:
By:________________________
Its:_______________________
11
<PAGE>
STATE OF CALIFORNIA )
) ss.
COUNTY OF LOS ANGELES )
On the 16th day of December 1992, before me, personally came Jerry St.
Dennis to me known, who, being by me duly sworn, did depose and say that he
resides at Los Angeles, California; that he is Chairman, President & CEO of
CalFed Inc., one of the parties described in and who executed the above
instrument; and that he signed his name thereto by authority of the Board
of Directors of said Company.
WITNESS my hand and official seal.
[GRAPHIC OMITTED] /s/ Leslie A. Lorden
---------------------------
Notary Public in and for
said State
[Seal]
STATE OF CALIFORNIA )
) ss.
COUNTY OF LOS ANGELES )
On the 16th day of December 1992, before me, personally came Douglas J.
Wallis to me known, who, being by me duly sworn, did depose and say that he
resides at Glendale, California; that he is SVP and Chief Legal Officer of
CalFed Inc., one of the parties described in and who executed the above
instrument; and that he signed his name thereto by authority of the Board of
Directors of said Company.
WITNESS my hand and official seal.
[GRAPHIC OMITTED] /s/ Leslie A. Lorden
---------------------------
Notary Public in and for
said State
[Seal]
12
<PAGE>
STATE OF CALIFORNIA )
) ss.
COUNTY OF LOS ANGELES )
On the 16th day of December 1992, before me, personally came Jerry St.
Dennis to me known, who, being by me duly sworn, did depose and say that he
resides at Los Angeles, California; that he is President & CEO of XCF
Acceptance Corporation, one of the parties described in and who executed the
above instrument; and that he signed his name thereto by authority of the
Board of Directors of said Company.
WITNESS my hand and official seal.
[GRAPHIC OMITTED] /s/ Leslie A. Lorden
---------------------------
Notary Public in and for
said State
[Seal]
STATE OF CALIFORNIA )
) ss.
COUNTY OF LOS ANGELES )
On the 16th day of December 1992, before me, personally came Julia L.
Greenfield to me known, who, being by me duly sworn, did depose and say that
she resides at Los Angeles, California; that she is Secretary of XCF Acceptance
Corporation, one of the parties described in and who executed the above
instrument; and that she signed her name thereto by authority of the Board of
Directors of said Company.
WITNESS my hand and official seal.
[GRAPHIC OMITTED] /s/ Michelle Wahnich
---------------------------
Notary Public in and for
said State
[Seal]
13
<PAGE>
STATE OF CALIFORNIA )
) ss.
COUNTY OF LOS ANGELES )
On the 16th day of December 1992, before me, personally came William L.
Callender to me known, who, being by me duly sworn, did depose and say that he
resides at Encino, California; that he is President & CEO of California Federal
Bank, a Federal Savings Bank, one of the parties described in and who executed
the above instrument; and that he signed his name thereto by authority of the
Board of Directors of said Company.
WITNESS my hand and official seal.
[GRAPHIC OMITTED] /s/ Leslie A. Lorden
---------------------------
Notary Public in and for
said State
[Seal]
STATE OF CALIFORNIA )
) ss.
COUNTY OF LOS ANGELES )
On the 16th day of December 1992, before me, personally came Douglas J.
Wallis to me known, who, being by me duly sworn, did depose and say that he
resides at Glendale, California; that he is SVP and Chief Legal Officer of
California Federal Bank, a Federal Savings Bank, one of the parties described
in and who executed the above instrument; and that he signed his name thereto
by authority of the Board of Directors of said Company.
WITNESS my hand and official seal.
[GRAPHIC OMITTED] /s/ Leslie A. Lorden
---------------------------
Notary Public in and for
said State
[Seal]
14
<PAGE>
STATE OF _______________ )
) ss.
COUNTY OF ______________ )
On the _____ day of ____________________ 1992, before me, personally came
________________________ to me known, who, being by me duly sworn, did depose
and say that he resides at ____________________, ______________; that he is
__________________ of Chemical Bank, one of the parties described in and who
executed the above instrument; and that he signed his name thereto by
authority of the Board of Directors of said Company.
WITNESS my hand and official seal.
---------------------------
Notary Public in and for
said State
[Seal]
STATE OF _______________ )
) ss.
COUNTY OF ______________ )
On the _____ day of ____________________ 1992, before me, personally came
________________________ to me known, who, being by me duly sworn, did depose
and say that he resides at ____________________, ______________; that he is
__________________ of Chemical Bank, one of the parties described in and who
executed the above instrument; and that he signed his name thereto by
authority of the Board of Directors of said Company.
WITNESS my hand and official seal.
---------------------------
Notary Public in and for
said State
[Seal]
15
<PAGE>
------------------------------------------------
XCF ACCEPTANCE CORPORATION
CALIFORNIA FEDERAL BANK, A FEDERAL SAVINGS BANK
and
THE CHASE MANHATTAN BANK,
as Trustee
----------------------
SECOND SUPPLEMENTAL INDENTURE
Dated as of December 13, 1996
to
INDENTURE
Dated as of February 15, 1986
-----------------------
6 1/2% Convertible Subordinated Debentures
Due 2001
------------------------------------------------
<PAGE>
SECOND SUPPLEMENTAL INDENTURE, dated as of December 13, 1996
(the "Second Supplemental Indenture"), among XCF Acceptance Corporation, a
corporation duly organized and existing under the laws of the State of
California ("XCF"), California Federal Bank, A Federal Savings Bank (the
"Bank"), and The Chase Manhattan Bank (formerly Chemical Bank, successor by
merger to Manufacturers Hanover Trust Company), a New York corporation, as
Trustee (the "Trustee").
RECITALS OF THE COMPANY
WHEREAS, XCF (as successor by merger to CalFed Inc., a
Delaware corporation) has duly authorized, executed and delivered to the
Trustee that certain indenture dated as of February 15, 1986, as amended by
the First Supplemental Indenture dated as of December 16, 1992 (the
"Indenture"), pursuant to which the 6 1/2% Convertible Subordinated Debentures
Due 2001 (the "Securities") of XCF were issued (all capitalized terms used
herein and not otherwise defined shall have the meanings ascribed thereto in
the Indenture);
WHEREAS, in December 1992, the Bank and its then parent
company, CalFed Inc., undertook a corporate restructuring (the "1992
Restructuring") pursuant to which CalFed Inc. was merged into XCF, a
subsidiary of the Bank, and thus ceased to be the holding company for the
Bank;
WHEREAS, the Offering Circular and Consent Solicitation
dated November 16, 1992 (the "Offering Circular"), which was distributed to
holders of the Securities in connection with certain amendments to the
Indenture necessary to effect the 1992 Restructuring, stated that, upon
consummation of the 1992 Restructuring, the Securities remaining outstanding
would be convertible into shares of the Bank's common stock and that
antidilution adjustments with respect to the conversion price for the
Securities would be made based on certain changes in the outstanding shares of
the Bank's common stock;
WHEREAS, in compliance with the express language of Sections
101 and 1311 of the Indenture, upon consummation of the 1992 Restructuring,
XCF, as the successor to CalFed Inc., was substituted as the "Company" for all
purposes of the Indenture, including the antidilution and other conversion
provisions contained in Article Thirteen of the Indenture, but the Securities
became convertible into the common stock of the Bank;
WHEREAS, such compliance with Sections 101 and 1311 of the
Indenture in connection with the 1992 Restructuring has led to the nonsensical
result that, although the Securities are convertible into Bank common stock,
the antidilution adjustments to the conversion price of the Securities under
Section 1304 of the Indenture are tied to changes in the outstanding capital
stock of XCF, a subsidiary of the Bank, contrary to the description and intent
set forth in the Offering Circular;
WHEREAS, the substitution of XCF as the "Company" for
purposes of Section 1311 of the Indenture when the Securities are convertible
into the common stock of the Bank, not XCF, renders Section 1311 inoperative
as to successive merger or acquisition transactions of the Bank, which is
inconsistent with the last sentence of Section 1311, which states that the
provisions in
<PAGE>
case of consolidations or mergers or sale of assets "shall similarly apply to
successive consolidations, mergers, sales or transfers;"
WHEREAS, the substitution of XCF for the term "Company" in
the antidilution and other conversion provisions of Article Thirteen of the
Indenture is inconsistent with and contrary to the intent of Article Thirteen
of the Indenture, the intent of which was evidenced by the statements made to
holders of the Securities in the Offering Circular;
WHEREAS, after consummation of the 1992 Restructuring, the
obligor on the Securities was no longer the issuer of the common stock into
which the Securities were convertible and as a result the inconsistencies and
ambiguities stated in the preceding recitals have arisen, reflecting the fact
that the Indenture fails to anticipate circumstances in which the "Company"
merges into a subsidiary of another entity while the Securities become
convertible into the parent of such subsidiary;
WHEREAS, pursuant to Section 801(6) of the Indenture, the
Trustee is permitted to enter into a supplemental indenture, without obtaining
the consent of the holders of the Securities, "to cure any ambiguity, to
correct or supplement any provision [therein] which may be inconsistent with
any other provision [therein], or to make any other provisions with respect to
matters or questions arising under [the] Indenture, provided such action . . .
shall not adversely affect the interests of the Holders of the Securities . . .
in any material respect;"
WHEREAS, the inconsistencies contained in Article Thirteen
of the Indenture would be cured if references to the "Company" in such Article
were deemed to be references to the Bank or its successors, as the issuer of
the Common Stock into which the Securities were convertible, rather than XCF,
as the issuer of the Securities; and
WHEREAS, on October 18, 1996, the Boards of Directors of XCF
and the Bank each authorized the execution and delivery of this Second
Supplemental Indenture;
NOW, THEREFORE, XCF and the Bank each covenants and agrees
with the Trustee, for the equal and proportionate benefit and security of
those who shall hold the Securities from time to time, as hereinafter set
forth.
ARTICLE ONE
Amendments
Section 1.1 Amendments to Section 101
The definition of "Company" set forth in Section 101 of the
Indenture is hereby amended and restated to read as follows:
"Company" means the Person named as the "Company"
in the first paragraph of this instrument until a successor
Person shall have become such pursuant to the applicable
provisions of this Indenture, and thereafter "Company" shall
mean such successor Person; provided however, that for
purposes of (x) Article Thirteen of this Indenture, (y) the
definition of "Common Stock" contained in Section 101 of
this Indenture and (z) all other
2
<PAGE>
defined terms used in, or with respect to, Article Thirteen
of this Indenture, the defined term "Company" means
California Federal Bank, A Federal Savings Bank, until the
occurrence of a transaction contemplated by Section 1311 of
the Indenture, at which time all such references to the
"Company" shall be deemed references to the corporation or
other entity that, pursuant to Section 1311 of this
Indenture, becomes the issuer of the Common Stock or other
securities into which the Securities become convertible in
accordance with Section 1311 of this Indenture.
ARTICLE TWO
Miscellaneous Provisions
Section 2.1 Interpretation. This Second Supplemental
Indenture is a supplemental indenture pursuant to Section 801 of the
Indenture. Upon execution and delivery of this Second Supplemental Indenture,
the Indenture shall be modified and amended in accordance with this Second
Supplemental Indenture, and all the terms and conditions of both shall be read
together as though they constitute one instrument, except that, in case of
conflict, the provisions of this Second Supplemental Indenture will control.
The Indenture, as modified and amended by this Second Supplemental Indenture,
is hereby ratified and confirmed in all respects and shall bind every Holder
of Securities. In case of conflict between the terms and conditions contained
in the Securities and those contained in the Indenture, as modified and
amended by this Second Supplemental Indenture, the provisions of the
Indenture, as modified and amended by this Second Supplemental Indenture,
shall control.
Section 2.2 Successors and Assigns. All the covenants,
stipulations, promises and agreements in this Second Supplemental Indenture
made by or on behalf of XCF, the Bank or the Trustee, shall bind and inure to
the benefit of their respective successors and assigns.
Section 2.3 Counterparts. This Second Supplemental Indenture
may be executed in any number of counterparts, and all such counterparts taken
together shall be deemed to constitute one and the same agreement.
Section 2.4 Title and Section Headings. The titles of the
Articles and the Section headings are for convenience only and shall not
affect the construction hereof.
Section 2.5 Recitals. The recitals contained herein and in
the Securities, as amended hereby, (except the Trustee's certificate of
authentication) shall be taken as the statements of XCF and the Bank, and the
Trustee assumes no responsibility for their correctness. The Trustee makes no
representations as to the validity or sufficiency of this Second Supplemental
Indenture or of the Securities, as amended hereby, or coupons.
Section 2.6 Governing Law. This Second Supplemental
Indenture shall be governed by and construed in accordance with the laws of
the State of New York.
3
<PAGE>
IN WITNESS WHEREOF, the parties hereto have caused this
Second Supplemental Indenture to be duly executed by their respective officers
hereunto duly authorized, all as of the day and year first written above.
XCF ACCEPTANCE CORPORATION
By: /s/ Douglas J. Wallis
--------------------------------------
Name: Douglas J. Wallis
Title: President
Attest:
/s/ Trude Tsujimoto
- -------------------------
Name: Trude Tsujimoto
Title: Secretary
CALIFORNIA FEDERAL BANK, A FEDERAL SAVINGS BANK
By: /s/ Douglas J. Wallis
--------------------------------------
Name: Douglas J. Wallis
Title: Executive Vice President and Secretary
Attest:
/s/ Trude Tsujimoto
- -------------------------
Name: Trude Tsujimoto
Title: Senior Vice President and Assistant Secretary
THE CHASE MANHATTAN BANK, as Trustee
By:
--------------------------------------
Name: Andrew Deck
Title: Senior Trust Officer
Attest:
- -------------------------
Name:
Title:
4
<PAGE>
IN WITNESS WHEREOF, the parties hereto have caused this
Second Supplemental Indenture to be duly executed by their respective officers
hereunto duly authorized, all as of the day and year first written above.
XCF ACCEPTANCE CORPORATION
By:
----------------------------------
Name: Douglas J. Wallis
Title: President
Attest:
- --------------------------
Name: Trude Tsujimoto
Title: Secretary
CALIFORNIA FEDERAL BANK, A FEDERAL
SAVINGS BANK
By:
----------------------------------
Name: Douglas J. Wallis
Title: Executive Vice President and Secretary
Attest:
- -------------------------
Name: Trude Tsujimoto
Title: Senior Vice President and Assistant
THE CHASE MANHATTAN BANK, as Trustee
By: /s/ Andrew Deck
----------------------------------
Name: Andrew Deck
Title: Senior Trust Officer
Attest:
/s/ Glenn G. McKeever
- -------------------------
Name: Glenn G. McKeever
Title: Senior Trust Officer
5
<PAGE>
STATE OF California )
) ss.
COUNTY OF Los Angeles )
On the 13th day of December 1996, before me, personally came
Douglas J. Wallis to me known, who, being by me duly sworn, did depose and say
that he resides at 1849 Hillside Dr., Glendale CA; that he is Executive VP &
Secretary of California Federal Bank, A Federal Savings Bank, one of the
parties described in and who executed the above instrument; and that he signs
his name thereto by authority of the Board of Directors of said Company.
WITNESS my hand and official seal.
/s/ Marsden Chew MacRae
-----------------------------------
Notary Public in and for said State
[Seal]
STATE OF California )
) ss.
COUNTY of Los Angeles )
On the 13th day of December 1996, before me, personally came
Trude A. Tsujimoto to me known, who, being by me duly sworn, did depose and
say that she resides at 419 S. Mayflower Ave., Monrovia CA; that she is Senior
Vice President of California Federal Bank, A Federal Savings Bank, one of the
parties described in and who executed the above instrument; and that he signs
his name thereto by authority of the Board of Directors of said Company.
WITNESS my hand and official seal.
/s/ Marsden Chew MacRae
-----------------------------------
Notary Public in and for said State
[Seal]
6
<PAGE>
STATE OF New York )
) ss.
COUNTY OF New York )
On the 13th day of December 1996, before me, personally came
Drew M. Deck to me known, who, being by me duly sworn, did depose and say that
he resides at Great Neck, New York; that he is Senior Trust Officer of The
Chase Manhattan Bank, one of the parties described in and who executed the
above instrument; and that he signed his name thereto by authority of the
Board of Directors of said Company.
WITNESS my hand and official seal.
/s/ Emily Fayan
-----------------------------------
Notary Public in and for said State
[Seal]
STATE OF New York )
) ss.
COUNTY OF New York )
On the 13th day of December 1996, before me, personally came
Glenn G. McKeever to me known, who, being by me duly sworn, did depose and say
that he resides at Bayside, New York; that he is Senior Trust Officer of The
Chase Manhattan Bank, one of the parties described in and who executed the
above instrument; and that he signed his name thereto by authority of the
Board of Directors of said Company.
WITNESS my hand and official seal.
/s/ Emily Fayan
-----------------------------------
Notary Public in and for said State
[Seal]
7
<PAGE>
- -------------------------------------------------------------------------------
XCF ACCEPTANCE CORPORATION
CALIFORNIA FEDERAL BANK, A FEDERAL SAVINGS BANK
CAL FED BANCORP INC.
and
THE CHASE MANHATTAN BANK,
as Trustee
--------------------------------
THIRD SUPPLEMENTAL INDENTURE
Dated as of December 13, 1996
to
INDENTURE
Dated as of February 15, 1986
--------------------------------
6 1/2% Convertible Subordinated Debentures
Due 2001
- -------------------------------------------------------------------------------
<PAGE>
THIRD SUPPLEMENTAL INDENTURE, dated as of December 13, 1996 (the
"Third Supplemental Indenture"), among XCF Acceptance Corporation, a
corporation duly organized and existing under the laws of the State of
California ("XCF"), California Federal Bank, A Federal Savings Bank
(the "Bank"), Cal Fed Bancorp Inc., a corporation duly organized and existing
under the laws of the State of Delaware ("Bancorp"), and The Chase Manhattan
Bank (formerly Chemical Bank, successor by merger to Manufacturers Hanover
Trust Company), a New York corporation, as Trustee (the "Trustee").
RECITALS OF THE COMPANY
WHEREAS, XCF (as successor by merger to CalFed Inc., a Delaware
corporation) has duly authorized, executed and delivered to the Trustee that
certain indenture dated as of February 15, 1986, as amended by the First
Supplemental Indenture dated as of December 16, 1992 and the Second
Supplemental Indenture dated as of December 13, 1996 (the "Indenture"),
pursuant to which the 6 1/2% Convertible Subordinated Debentures Due 2001
(the "Securities") of XCF were issued (all capitalized terms used herein and
not otherwise defined shall have the meanings ascribed thereto in the
Indenture);
WHEREAS, pursuant to the terms of the Indenture, the Securities were
convertible into shares of Bank common stock prior to the execution of this
Third Supplemental Indenture;
WHEREAS, effective January 1, 1996, the Bank was merged (the "Bank
Merger") with California Federal Interim Bank, A Federal Savings Bank, which
was a subsidiary of Bancorp, pursuant to an Agreement and Plan of
Reorganization dated as of October 16, 1995, with the Bank being the
surviving corporation, and each share of the Bank common stock was
converted into one share of Bancorp common stock;
WHEREAS, on October 18, 1996, the Boards of Directors of XCF, Bancorp
and the Bank each authorized the execution and delivery of this Third
Supplemental Indenture;
WHEREAS, pursuant to Section 801(5) of the Indenture, the Trustee is
permitted to enter into a supplemental indenture, without obtaining the consent
of the holders of the Securities, "to make provisions with respect to the
conversion rights of Holders of Securities pursuant to Section 1311" of the
Indenture; and
WHEREAS, Section 1311 of the Indenture requires that, as a result of
the Bank Merger, the Securities become convertible into shares of Bancorp
common stock;
NOW, THEREFORE, XCF, the Bank and Bancorp each covenants and agrees
with the Trustee, for the equal and proportionate benefit and security of
those who shall hold the Securities from time to time, as hereinafter set
forth.
<PAGE>
ARTICLE ONE
Provisions for Conversion
Section 1.1. Conversion into Bancorp Common Stock. The Holder of
each Security outstanding after the Bank Merger shall have the right, during
the period such Security shall be convertible as specified in Section 1301 of
the Indenture, to convert such Security only into the number of shares of
common stock, par value $1.00 per share, of Bancorp (the "Bancorp Common
Stock") receivable in the Bank Merger by a holder of the number of shares
of common stock, par value $1.00 per share, of the Bank (the "Bank Common
Stock") into which such Security might have been converted immediately
prior to the Bank Merger.
Section 1.2. Release of the Bank. As a result of the Securities
no longer being convertible into the Bank Common Stock, each of the parties
hereto agrees that the Bank has satisfied all of its obligations under the
Indenture and that the Bank shall be released from any further obligation
under the Indenture.
ARTICLE TWO
Miscellaneous Provisions
Section 2.1. Interpretation. This Third Supplemental Indenture is a
supplemental indenture pursuant to Section 801 of the Indenture. Upon execution
and delivery of this Third Supplemental Indenture, the Indenture shall be
modified and amended in accordance with this Third Supplemental Indenture, and
all the terms and conditions of both shall be read together as though they
constitute one instrument, except that, in case of conflict, the provisions of
this Third Supplemental Indenture will control. The Indenture, as modified and
amended by this Third Supplemental Indenture, is hereby ratified and confirmed
in all respects and shall bind every Holder of Securities. In case of conflict
between the terms and conditions contained in the Securities and those
contained in the Indenture, as modified and amended by this Third Supplemental
Indenture, the provisions of the Indenture, as modified and amended by this
Third Supplemental Indenture, shall control.
Section 2.2. Successors and Assigns. All the covenants, stipulations,
promises and agreements in this Third Supplemental Indenture made by or on
behalf of XCF, the Bank, Bancorp or the Trustee, shall bind and inure to the
benefit of their respective successors and assigns.
Section 2.3. Counterparts. This Third Supplemental Indenture may be
executed in any number of counterparts, and all such counterparts taken
together shall be deemed to constitute one and the same agreement.
Section 2.4. Title and Section Headings. The titles of the Articles
and the Section headings are for convenience only and shall not affect the
construction hereof.
Section 2.5. Recitals. The recitals contained herein and in the
Securities, as amended hereby, (except the Trustee's certificate of
authentication) shall be taken as the
2
<PAGE>
statements of XCF, the Bank and Bancorp, and the Trustee assumes no
responsibility for their correctness. The Trustee makes no representations
as to the validity or sufficiency of this Third Supplemental Indenture or of
the Securities, as amended hereby, or coupons.
Section 2.6. Governing Law. This Third Supplemental Indenture
shall be governed by and construed in accordance with the laws of the State
of New York.
IN WITNESS WHEREOF, the parties hereto have caused this Third
Supplemental Indenture to be duly executed by their respective officers
hereunto duly authorized, all as of the day and year first written above.
XCF ACCEPTANCE CORPORATION
By: /s/ Douglas J. Wallis
---------------------------
Name: Douglas J. Wallis
Title: President
Attest:
/s/ Trude Tsujimoto
- ----------------------
Name: Trude Tsujimoto
Title: Secretary
CALIFORNIA FEDERAL BANK, A
FEDERAL SAVINGS BANK
By: /s/ Douglas J. Wallis
-----------------------------
Name: Douglas J. Wallis
Title: Executive Vice President
and Secretary
Attest:
/s/ Trude Tsujimoto
- ----------------------
Name: Trude Tsujimoto
Title: Senior Vice President and
Assistant Secretary
3
<PAGE>
CAL FED BANCORP INC.
By:
-----------------------------
Name: Douglas J. Wallis
Title: Executive Vice President
and Secretary
Attest:
- ----------------------
Name: Trude Tsujimoto
Title: Senior Vice President and
Assistant Secretary
THE CHASE MANHATTAN BANK,
as Trustee
By: /s/ Andrew Deck
-----------------------------
Name: Andrew Deck
Title: Senior Trust Officer
Attest:
/s/ Glenn G. McKeever
- ----------------------
Name: Glenn G. McKeever
Title: Senior Trust Officer
4
<PAGE>
CAL FED BANCORP INC.
By: /s/ Douglas J. Wallis
-----------------------------
Name: Douglas J. Wallis
Title: Executive Vice President
and Secretary
Attest:
/s/ Trude Tsujimoto
- ----------------------
Name: Trude Tsujimoto
Title: Senior Vice President and
Assistant Secretary
THE CHASE MANHATTAN BANK,
as Trustee
By:
-----------------------------
Name: Andrew Deck
Title: Senior Trust Officer
Attest:
- ----------------------
Name:
Title:
5
<PAGE>
STATE OF California )
)ss.
COUNTY OF Los Angeles )
On the 13th day of December, 1996, before me, personally came
Douglas J. Wallis to me known, who, being by me duly sworn, did depose and
say that he resides at 1849 Hillside Dr., Glendale, CA; that he is Executive
VP & Secretary of California Federal Bank, A Federal Savings Bank, one of the
parties described in and who executed the above instrument; and that he signs
his name thereto by authority of the Board of Directors of said Company.
WITNESS my hand and official seal.
/s/ Marsden Chew Mac Rae
-------------------------------
Notary Public in and for said State
[Seal] [GRAPHIC OMITTED]
STATE OF California )
)ss.
COUNTY OF Los Angeles )
On the 13th day of December, 1996, before me, personally came
Trude A. Tsujimoto to me known, who, being by me duly sworn, did depose and
say that she resides at 419 S. Mayflower, Monrovia, CA; that she is Senior
Vice President of California Federal Bank, A Federal Savings Bank, one of
the parties described in and who executed the above instrument; and that she
signs her name thereto by authority of the Board of Directors of said Company.
WITNESS my hand and official seal.
/s/ Marsden Chew Mac Rae
-------------------------------
Notary Public in and for said State
[Seal] [GRAPHIC OMITTED]
6
<PAGE>
STATE OF New York )
)ss.
COUNTY OF New York )
On the 13th day of December, 1996, before me, personally came
Andrew M. Deck to me known, who, being by me duly sworn, did depose and
say that he resides at Great Neck, New York; that he is Senior Trust
Officer of The Chase Manhattan Bank, one of the parties described in
and who executed the above instrument, and that he signed his name thereto
by authority of the Board of Directors of said Company.
WITNESS my hand and official seal.
/s/ Emily Fayan
-------------------------------
Notary Public in and for said State
[Seal] [GRAPHIC OMITTED]
STATE OF New York )
)ss.
COUNTY OF New York )
On the 13th day of December, 1996, before me, personally came
Glenn G. McKeever to me known, who, being by me duly sworn, did depose and
say that he resides at Bayside, New York; that he is Senior Trust
Officer of The Chase Manhattan Bank, one of the parties described in
and who executed the above instrument; and that he signs his name thereto
by authority of the Board of Directors of said Company.
WITNESS my hand and official seal.
/s/ Emily Fayan
-------------------------------
Notary Public in and for said State
[Seal] [GRAPHIC OMITTED]
7
<PAGE>
- -------------------------------------------------------------------------------
XCF ACCEPTANCE CORPORATION
CAL FED BANCORP INC.
and
THE CHASE MANHATTAN BANK
as Trustee
--------------------------------
FOURTH SUPPLEMENTAL INDENTURE
Dated as of December 13, 1996
to
INDENTURE
Dated as of February 15, 1986
--------------------------------
6 1/2% Convertible Subordinated Debentures
Due 2001
- -------------------------------------------------------------------------------
<PAGE>
FOURTH SUPPLEMENTAL INDENTURE, dated as of December 13, 1996 (the
"Fourth Supplemental Indenture"), among XCF Acceptance Corporation, a
corporation duly organized and existing under the laws of the State of
California ("XCF"), Cal Fed Bancorp Inc., a corporation duly organized and
existing under the laws of the State of Delaware ("Bancorp"), and The Chase
Manhattan Bank (formerly Chemical Bank, successor by merger to Manufacturers
Hanover Trust Company), a New York corporation, as Trustee (the "Trustee").
RECITALS OF THE COMPANY
WHEREAS, XCF (as successor by merger to CalFed Inc., a Delaware
corporation) has duly authorized, executed and delivered to the Trustee that
certain indenture dated as of February 15, 1986, as amended by the First
Supplemental Indenture dated as of December 16, 1992, the Second Supplemental
Indenture dated as of December 13, 1996 and the Third Supplemental Indenture
dated as of December 13, 1996 (the "Indenture"), pursuant to which the 6 1/2%
Convertible Subordinated Debentures Due 2001 (the "Securities") of XCF were
issued (all capitalized terms used herein and not otherwise defined shall have
the meanings ascribed thereto in the Indenture);
WHEREAS, pursuant to the terms of the Indenture the Securities were
convertible into shares of Bancorp common stock prior to the execution of this
Fourth Supplemental Indenture;
WHEREAS, pursuant to an Amended and Restated Agreement and Plan of
Merger dated as of July 27, 1996 (the "Acquisition Agreement"), by and among
First Nationwide Holdings Inc., Bancorp and California Federal Bank, A Federal
Savings Bank ("California Federal"), it is contemplated that CFB Holdings,
Inc., a subsidiary of First Nationwide Holdings Inc., will be merged with and
into Bancorp (the "Bancorp Merger"), with Bancorp being the surviving
corporation, as a result of which each share of the common stock, par value
$1.00 per share, of Bancorp (the "Bancorp Common Stock") will be converted
into $23.50 in cash (without interest) and one-tenth of a Secondary
Participation Interest (as defined in the Acquisition Agreement); provided,
however, that no fractional Secondary Participation Interests shall be issued
and, in lieu of such a fractional interests, holders of Bancorp Common Stock
will receive a cash payment in an amount determined in accordance with the
Acquisition Agreement;
WHEREAS, on October 18, 1996, the Boards of Directors of XCF and
Bancorp each authorized the execution and delivery of this Fourth Supplemental
Indenture;
WHEREAS, pursuant to Section 801(5) of the Indenture, the Trustee is
permitted to enter into a supplemental indenture, without obtaining the consent
of the Holders of the Securities, "to make provisions with respect to the
conversion rights of Holders of Securities pursuant to Section 1311" of the
Indenture; and
WHEREAS, Section 1311 of the Indenture requires that, as a result of
the Bancorp Merger, the Securities become convertible into the consideration
to be issued in the Bancorp Merger in consideration of Bancorp common stock;
<PAGE>
NOW, THEREFORE, XCF and Bancorp each covenants and agrees with the
Trustee, for the equal and proportionate benefit and security of those who
shall hold the Securities from time to time, as hereinafter set forth.
ARTICLE ONE
Effectiveness
-------------
This Agreement shall become effective only upon consummation of the
Bancorp Merger.
ARTICLE TWO
Amendments
----------
Section 2.1. Conversion into Cash and Secondary Participation
Interests. The Holder of each Security outstanding after the Bancorp Merger
shall have the right, during the period such Security shall be convertible
as specified in Section 1301 of the Indenture, to convert such Security
only into the amount of cash (without interest), payable by Bancorp, and
number of Secondary Participation Interests, issuable by Bancorp, receivable
in the Bancorp Merger by a holder of the number of shares of common stock,
par value $1.00 per share, of Bancorp into which such Security might have
been converted immediately prior to the Bancorp Merger; provided, however,
that no fractional Secondary Participation Interests shall be issued to any
Holder of Securities and, in lieu of such a fractional interest, a Holder
who converts a Security shall receive from Bancorp a cash payment in an
amount determined in accordance with the Acquisition Agreement.
Section 2.2. Definitions. Section 101 of the Indenture is hereby
amended to add the following definition in alphabetical order:
"Acquisition Agreement" means that Amended and Restated Agreement
and Plan of Merger dated as of July 27, 1996, by and among First Nationwide
Holdings Inc., Cal Fed Bancorp Inc. and California Federal Bank, A Federal
Savings Bank.
"Secondary Participation Interest" has the meaning set forth in the
Acquisition Agreement.
ARTICLE THREE
Miscellaneous Provisions
Section 3.1. Interpretation. This Fourth Supplemental Indenture is a
supplemental indenture pursuant to Section 801 of the Indenture. Upon execution,
delivery and effectiveness pursuant to Article One of this Fourth Supplemental
Indenture, the Indenture shall be modified and amended in accordance with this
Fourth Supplemental Indenture, and all the terms and conditions of both shall
be read together as though they constitute one instrument, except that, in
case of conflict, the provisions of this Fourth Supplemental Indenture will
control. The Indenture, as modified and amended by this Fourth Supplemental
Indenture, is hereby ratified and confirmed in all respects and shall bind
every Holder of Securities. In case of conflict between the terms and
2
<PAGE>
conditions contained in the securities and those contained in the Indenture,
as modified and amended by this Fourth Supplemental Indenture, the provisions
of the Indenture, as modified and amended by this Fourth Supplemental
Indenture, shall control.
Section 3.2. Successors and Assigns. All the covenants, stipulations,
promises and agreements in this Fourth Supplemental Indenture made by or on
behalf of XCF, Bancorp or the Trustee, shall bind and inure to the benefit
of their respective successors and assigns.
Section 3.3. Counterparts. This Fourth Supplemental Indenture may be
executed in any number of counterparts, and all such counterparts taken
together shall be deemed to constitute one and the same agreement.
Section 3.4. Title and Section Headings. The titles of the Articles
and the Section headings are for convenience only and shall not affect the
construction hereof.
Section 3.5. Recitals. The recitals contained herein and in the
Securities, as amended hereby, (except the Trustee's certificate of
authentication) shall be taken as the statements of XCF and Bancorp, and
the Trustee assumes no responsibility for their correctness. The Trustee
makes no representations as to the validity or sufficiency of this Fourth
Supplemental Indenture or of the Securities, as amended hereby, or coupons.
Section 3.6. Governing Law. This Fourth Supplemental Indenture
shall be governed by and construed in accordance with the laws of the State
of New York.
3
<PAGE>
IN WITNESS WHEREOF, the parties hereto have caused this Fourth
Supplemental Indenture to be duly executed by their respective officers
hereunto duly authorized, all as of the day and year first written above.
XCF ACCEPTANCE CORPORATION
By: /s/ Douglas J. Wallis
---------------------------
Name: Douglas J. Wallis
Title: President
Attest:
/s/ Trude Tsujimoto
- ----------------------
Name: Trude Tsujimoto
Title: Secretary
CAL FED BANCORP INC.
By: /s/ Douglas J. Willis
-----------------------------
Name: Douglas J. Wallis
Title: Executive Vice President
and Secretary
Attest:
/s/ Trude Tsujimoto
- ----------------------
Name: Trude Tsujimoto
Title: Senior Vice President and
Assistant Secretary
THE CHASE MANHATTAN BANK,
as Trustee
By:
-----------------------------
Name: Andrew Deck
Title: Senior Trust Officer
Attest:
- ----------------------
Name:
Title:
4
<PAGE>
IN WITNESS WHEREOF, the parties hereto have caused this Fourth
Supplemental Indenture to be duly executed by their respective officers
hereunto duly authorized, all as of the day and year first written above.
XCF ACCEPTANCE CORPORATION
By:
---------------------------
Name: Douglas J. Wallis
Title: President
Attest:
- ----------------------
Name: Trude Tsujimoto
Title: Secretary
CAL FED BANCORP INC.
By:
-----------------------------
Name: Douglas J. Wallis
Title: Executive Vice President
and Secretary
Attest:
- ----------------------
Name: Trude Tsujimoto
Title: Senior Vice President and
Assistant Secretary
THE CHASE MANHATTAN BANK,
as Trustee
By: /s/ Andrew Deck
-----------------------------
Name: Andrew Deck
Title: Senior Trust Officer
Attest:
/s/ Glenn G. McKeever
- ----------------------
Name: Glenn G. McKeever
Title: Senior Trust Officer
4
<PAGE>
STATE OF California )
)ss.
COUNTY OF Los Angeles )
On the 13th day of December, 1996, before me, personally came
Douglas J. Wallis to me known, who, being by me duly sworn, did depose and
say that he resides at 1849 Hillside Dr., Glendale, CA; that he is Exec.
VP & Secretary of Cal Fed Bancorp Inc., one of the parties described in
and who executed the above instrument; and that he signs his name thereto
by authority of the Board of Directors of said Company.
WITNESS my hand and official seal.
/s/ Marsden Chew MacRae
-------------------------------
Notary Public in and for said State
[Seal]
STATE OF California )
)ss.
COUNTY OF Los Angeles )
On the 13th day of December, 1996, before me, personally came
Trude A. Tsujimoto to me known, who, being by me duly sworn, did depose and
say that she resides at 419 S. Mayflower, Monrovia, CA; that she is Sr. VP &
Asst. Sec. of Cal Fed Bancorp Inc., one of the parties described in
and who executed the above instrument; and that he signs his name thereto
by authority of the Board of Directors of said Company.
WITNESS my hand and official seal.
/s/ Marsden Chew MacRae
-------------------------------
Notary Public in and for said State
[Seal]
<PAGE>
STATE OF New York )
)ss.
COUNTY OF New York )
On the 13th day of December, 1996, before me, personally came
Andrew M. Deck to me known, who, being by me duly sworn, did depose and
say that he resides at Great Neck, New York; that he is Senior Trust
Officer of The Chase Manhattan Bank, one of the parties described in
and who executed the above instrument; and that he signs his name thereto
by authority of the Board of Directors of said Company.
WITNESS my hand and official seal.
/s/ Emily Fayan
-------------------------------
Notary Public in and for said State
[Seal]
STATE OF New York )
)ss.
COUNTY OF New York )
On the 13th day of December, 1996, before me, personally came
Glenn G. McKeever to me known, who, being by me duly sworn, did depose and
say that he resides at Great Neck, New York; that he is Senior Trust
Officer of The Chase Manhattan Bank, one of the parties described in
and who executed the above instrument; and that he signs his name thereto
by authority of the Board of Directors of said Company.
WITNESS my hand and official seal.
/s/ Emily Fayan
-------------------------------
Notary Public in and for said State
[Seal]
<PAGE>
THIS INDENTURE, dated as of December 1, 1992, and entered
into between CALIFORNIA FEDERAL BANK, A FEDERAL SAVINGS BANK (the "Bank"),
having its office at 5700 Wilshire Boulevard, Los Angeles, California 90036,
and CHEMICAL BANK, a New York banking corporation, as trustee (the "Trustee")
having its Corporate Trust Office at 450 West 33rd Street, 15th Floor, New
York, New York 10001.
RECITALS OF THE BANK
The Bank has duly authorized the creation of an issue of its
10% Subordinated Debentures due January 3, 2003 (herein called the
"Debentures") in the form and in the amount hereinafter set forth, and to
provide therefor the Bank has duly authorized the execution and delivery of
this Indenture.
All things necessary to make the Debentures, when executed
by the Bank and authenticated and delivered by the Trustee hereunder and duly
issued by the Bank, the valid obligations of the Bank, and to make this
Indenture a valid agreement of the Bank, in accordance with their and its
terms, have been done.
NOW, THEREFORE, THIS INDENTURE WITNESSETH:
For and in consideration of the premises and the purchase of
the Debentures by the Holders thereof, it is mutually covenanted and agreed,
for the equal and proportionate benefit of all Holders of the Debentures, as
follows:
ARTICLE ONE
DEFINITIONS AND OTHER PROVISIONS
OF GENERAL APPLICATION
Section 1.01 Definitions.
For all purposes of this Indenture, except as otherwise
expressly provided or unless the context otherwise requires:
(1) the terms defined in this Article have the
meanings assigned to them in this Article and include the
plural as well as the singular;
(2) all accounting terms not otherwise defined
herein have the meanings assigned to them in accordance with
generally accepted accounting principles; and
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(3) the words "herein," "hereof" and "hereunder"
and other words of similar import refer to this Indenture as
a whole and not to any particular Article, Section or other
subdivision.
Certain terms, used principally in Article Nine, are defined
in that Article.
"Act" when used with respect to any Holder has the meaning
specified in Section 1.04.
"Affiliate" means, as to any specified Person, any entity
(other than, in the case of the Bank, a Subsidiary, or, in the case of a
Subsidiary, the Bank) directly or indirectly controlling, controlled by, or
under common control with, such corporation. "Control," as used with respect
to any person, means the power to direct the management and policies of such
person, either directly or indirectly, whether through the ownership of voting
stock or by contract or otherwise, and "controlling," "controlled by" and
"under common control with" shall have correlative meanings.
"Aggregate Outstanding Investment" has the meaning
specified in Section 6.13.
"Board of Directors" means with respect to the Bank, the
board of directors of the Bank and any Executive Committee or other committee
authorized pursuant to applicable law to exercise the powers of the board of
directors of the Bank with respect to the matters relating to the Debentures.
"Board Resolution" means a copy of a resolution certified by
the Secretary or an Assistant Secretary of the Bank to have been duly adopted
by the Board of Directors and to be in full force and effect on the date of
such certification, and delivered to the Trustee.
"Business Day" means any day, other than a Saturday, a
Sunday or a day on which banking institutions in the State of New York or any
Place of Payment are authorized or obligated by law or executive order to
close.
"Corporate Trust Office" means the principal office of the
Trustee at which at any particular time its corporate trust business shall be
administered. Until notice of change thereof as provided in this Indenture,
the Corporate Trust Office of the Trustee is located at 450 West 33rd Street,
New York, New York 10001.
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"Covered Transactions" has the meaning specified in
Section 6.11.
"Debenture Register" and "Debenture Registrar" have the
respective meanings specified in Section 3.04.
"Defaulted Interest" has the meaning specified in Section
3.06.
"Event of Default" has the meaning specified in Section
8.01.
"FDIC" means the Federal Deposit Insurance Corporation or
successor thereto.
"Holder" means a Person in whose name a Debenture is
registered in the Debenture Register.
"Indebtedness" with respect to any Person, or the Bank,
means any liability of the Bank or any Person for (a) all indebtedness of the
Bank, whether outstanding on the date of execution of this Indenture or
thereafter created, incurred or assumed, which is (i) for money borrowed or
(ii) evidenced by a note or similar instrument given in connection with the
acquisition of any business, properties or assets (including securities),
including the purchase price of real property and all obligations of the Bank
under capitalized leases or purchase money mortgages, (b) all claims
(including post-default interest) against the Bank having the same priority as
savings account holders or any higher priority, (c) any indebtedness of others
of the kinds described in the preceding clauses (a) and (b) for the payment of
which the Bank is responsible or liable as guarantor or otherwise and (d)
amendments, renewals, extensions and refundings of any such indebtedness,
unless in any case in any instrument or instruments evidencing or securing
such indebtedness or pursuant to which the same is outstanding, or in any such
amendment, renewal, extension or refunding, it is provided that such
indebtedness is not superior in right of payment to the Debentures.
"Indenture" means this instrument as originally executed or
as it may from time to time be supplemented or amended by one or more
indentures supplemental hereto entered into pursuant to the applicable
provisions hereof.
"Interest Payment Date" has the meaning specified in
Section 3.02.
"Issue Date" means December 17, 1992.
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"Maturity Date" means January 3, 2003.
"OTS" means the Office of Thrift Supervision or successor
thereto.
"OTS Rules and Regulations" means the rules and regulations
of the OTS concerning the offer and sale of subordinated debt securities set
forth at 12 C.F.R. Section 563.81
"Officers' Certificate" means a certificate signed by the
Chairman of the Board, the President or a Vice President, and by the
Treasurer, an Assistant Treasurer, the Secretary or an Assistant Secretary, of
the Bank, and delivered to the Trustee.
"Opinion of Counsel" or "Opinion" means a written opinion of
legal counsel who is acceptable to the Trustee. Such counsel may be an
employee of or counsel to the Bank.
"Order of the Bank" or "Request of the Bank" means a written
order or request signed in the name of the Bank by the Chairman of the Board,
the President or a Vice President, and by the Treasurer, an Assistant
Treasurer, the Secretary or an Assistant Secretary, of the Bank, and delivered
to the Trustee.
"Outstanding" when used with respect to Debentures, means,
as of the date of determination, all Debentures theretofore authenticated
and delivered under this Indenture, except:
(i) Debentures theretofore cancelled by the Trustee
or delivered to the Trustee for cancellation;
(ii) Debentures for the payment of which money in
the amount required by Section 7.01 has been theretofore deposited
with the Trustee or any Paying Agent (other than the Bank) in trust
or set aside and segregated in trust by the Bank (if the Bank shall
act as its own Paying Agent) for the Holders of such Debentures; and
(iii) Debentures in exchange for or in lieu of
which other Debentures have been authenticated and delivered or which
shall have been paid pursuant to this Indenture, unless proof
satisfactory to the Trustee is presented that any such Debentures are
held by persons in whose hands any of such Debentures is a valid,
binding and legal obligation of the Bank;
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provided, however, that in determining whether the Holders of the requisite
principal amount of the Outstanding Debentures have given any request, demand,
authorization, direction, notice, consent or waiver hereunder, Debentures
beneficially owned by the Bank or any other obligor upon the Debentures or any
Affiliate or Subsidiary of the Bank or of such other obligor at the time of
the giving of such request, demand, authorization, direction, notice, consent
or waiver shall be disregarded and deemed not to be Outstanding, except that,
in determining whether the Trustee shall be protected in relying upon any such
request, demand, authorization, direction, notice, consent or waiver, only
Debentures which the Trustee knows to be so owned shall be so disregarded.
Debentures so owned which have been pledged in good faith may be regarded as
Outstanding if the pledgee establishes to the reasonable satisfaction of the
Trustee the pledgee's right so to act with respect to such Debentures and that
the pledgee is not the Bank or any other obligor upon the Debentures or any
Affiliate or Subsidiary of the Bank or of such other obligor.
"Paying Agent" means any Person authorized by the Bank to
pay the principal of, premium, if any, or interest on any Debentures on behalf
of the Bank.
"Person" means any individual, corporation, partnership,
joint venture, association, joint-stock company, trust, unincorporated
organization or government or any agency or political subdivision thereof.
"Place of Payment" means a county, city or political
subdivision thereof designated as such in Section 3.01.
"Predecessor Debenture" of any particular Debenture means
every previous Debenture evidencing all or a portion of the same debt as that
evidenced by such particular Debenture; and, for the purposes of this
definition, any Debenture authenticated and delivered under Section 3.05 in
exchange for or in lieu of a mutilated, destroyed, lost or stolen Debenture
shall be deemed to evidence the same debt as the mutilated, destroyed, lost or
stolen Debenture.
"Ranking Junior to the Debentures" means, as respects any
obligation of the Bank, an obligation that by express provisions in the
instrument creating, evidencing or governing such obligation (1) is
specifically designated as ranking junior to the Debentures, (2) ranks junior
to and not equally with or prior to the Debentures (or to the Debentures and
any other obligations of the Bank Ranking on a Parity with the Debentures) in
right of payment upon the
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happening of any of the events specified in the first sentence of Section
4.02, and (3) is also made junior and subordinate in right of payment to other
obligations of the Bank to at least the same extent as the Debentures are made
junior and subordinate thereto by the provisions of Section 4.02
"Ranking on a Parity with the Debentures" means with respect
to any obligation of the Bank, an obligation that by express provisions in the
instrument creating, evidencing or governing such obligation (1) is
specifically designated as ranking on a parity with the Debentures, (2) ranks
equally with and not prior to the Debentures in right of payment upon the
happening of any of the events specified in the first sentence of Section
4.02, and (3) is also made junior and subordinate in right of payment to other
obligations of the Bank to at least the same extent as the Debentures are made
junior and subordinate thereto by the provisions of Section 4.02.
"Redemption Date" means any date fixed for redemption of
Debentures in accordance with Section 5.02.
"Redemption Price" with respect to any Debentures to be
redeemed means the price at which it is to be redeemed pursuant to this
Indenture.
"Regular Record Date" for any Interest Payment Date means
the last day of the calendar month preceding the calendar month in which such
Interest Payment Date (whether or not a Business Day) occurs.
"Responsible Officer" when used with respect to the Trustee,
means the chairman or any vice-chairman of the board of directors, the
chairman or any vice-chairman of the executive committee of the board of
directors, the chairman of the trust committee, the president, any vice
president, the secretary, any assistant secretary, the treasurer, any
assistant treasurer, the cashier, any assistant cashier, any trust officer or
assistant trust officer, the controller or any assistant controller or any
other officer of the Trustee customarily performing functions similar to those
performed by any of the above designated officers and also means, with respect
to a particular corporate trust matter, any other officer to whom such matter
is referred because of his knowledge of and familiarity with the particular
subject.
"Senior Indebtedness" means with respect to the Bank, the
principal of, premium, if any, and unpaid interest on (a) all savings
accounts, other deposits and customer repurchase agreements held by the Bank,
including
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instruments and categories of accounts which are authorized after the issuance
of the Debentures by law or by regulatory agencies and which carry the same
priority as currently authorized instruments and categories of accounts,
whether existing on the date of execution of this Indenture or arising
thereafter, (b) all Indebtedness of the Bank, including without limitation the
Bank's 10.668% Senior Subordinated Notes Due December 22, 1998; provided,
however, that "Senior Indebtedness" shall not include the Debentures and any
other obligation of the Bank which by its terms is made pari passu or
subordinate in right of payment of the Debentures.
"Special Record Date" for the payment of any Defaulted
Interest means a date fixed by the Trustee pursuant to Section 3.06.
"Specified Event" and "Specified Events" have the
meanings specified in Section 4.02.
"Subsidiary" means, as to a particular parent corporation at
any time, any entity of which more than fifty percent (50%) of the outstanding
voting stock or other equity interest entitled ordinarily to vote in the
election of the directors or other governing body (however designated) of such
entity is at the time beneficially owned or controlled directly or indirectly
by such parent corporation, by one or more such entities or by such parent
corporation and one or more such entities.
"Trustee" means the Person named as the "Trustee" in the
first paragraph of this instrument until a successor Trustee shall have become
such pursuant to the applicable provisions of this Indenture, and thereafter
"Trustee" shall mean such successor Trustee.
Section 1.02 Compliance Certificates and Opinions.
Upon any application or request by the Bank to the Trustee
to take any action under any provision of this Indenture, the Bank shall
furnish to the Trustee (i) an Officers' Certificate stating that all
conditions precedent to be complied with by the Bank, if any, provided for in
this Indenture relating to the proposed action have been complied with and
(ii) an Opinion of Counsel stating that in the opinion of such counsel all
such conditions precedent, if any, have been complied with, except that in the
case of any such application or request as to which the furnishing of such
documents is specifically required by any provision of this Indenture relating
to such particular application or request, no additional certificate or
opinion need be
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furnished; provided, however, that the Trustee may authenticate Debentures
pursuant to Section 3.03 without complying with this Section 1.02.
Every certificate or opinion with respect to compliance with
a condition or covenant provided for in this Indenture shall include:
(1) a statement that each individual signing such
certificate or opinion has read such covenant or condition and the
definitions herein relating thereto;
(2) a brief statement as to the nature and scope of
the examination or investigation upon which the statements or
opinions contained in such certificate or opinion are based;
(3) a statement that, in the opinion of each such
individual, he has made such examination or investigation as is
necessary to enable him to express an informed opinion as to whether
or not such covenant or condition has been complied with; and
(4) a statement as to whether, in the opinion of
each such individual, such condition or covenant has been complied
with.
Section 1.03. Form of Documents Delivered to Trustee.
In any case where several matters are required to be
certified by, or covered by an Opinion of, any specified Persons, it is not
necessary that all such matters be certified by, or covered by the Opinion
of, only one such Person, or that they be so certified or covered by only one
document, but one such Person may certify or give an Opinion with respect to
some matters and one or more other such Persons as to other matters, and any
such Person may certify or give an Opinion as to such matters in one or
several documents.
Any certificate or Opinion of an officer of the Bank may be
based, insofar as it relates to legal matters, upon a certificate or Opinion
of, or representations by, Counsel, unless such officer knows, or in the
exercise of reasonable care should know, that the certificate or Opinion or
representations with respect to the matters upon which his certificate or
Opinion is based are erroneous. Any such certificate or Opinion of Counsel may
be based, insofar as it relates to factual matters or information in the
possession of the Bank, upon a certificate or Opinion of, or representations
by, an officer or officers of the Bank,
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unless such counsel knows, or in the exercise of reasonable care should know,
that the certificate or Opinion or representations with respect to such
matters are erroneous.
Where any Person is required to make, give or execute two or
more applications, requests, consents, certificates, statements, Opinions or
other instruments under this Indenture, they may, but need not, be consolidated
and form one Instrument.
Section 1.04 Acts of Holders.
(a) Any request, demand, authorization, direction, notice,
consent, waiver or other action provided by this Indenture to be given or
taken by Holders may be embodied in and evidenced by one or more instruments
of substantially similar tenor signed by one or more such Holders in person or
by an agent duly appointed in writing; and, except as herein otherwise
expressly provided, such action shall become effective when such instrument or
instruments are delivered to the Trustee and, where it is hereby expressly
required, to the Bank. Such instrument or instruments (and the action embodied
therein and evidenced thereby) are herein sometimes referred to as the "Act"
of the Holders signing such instrument or instruments. Proof of execution of
any such instrument or of a writing appointing any such agent shall be
sufficient for any purpose of this Indenture and (subject to Section 9.01)
conclusive in favor of the Trustee and the Bank, if made in the manner
provided in this Section.
(b) The fact and date of the execution of any such
instrument or writing, or the authority of the Person executing the same, may
be proved in any manner that the Trustee deems sufficient.
(c) The ownership of Debentures shall be proved by the
Debenture Register.
(d) Any request, demand, authorization, direction, notice,
consent, waiver or other Act of the Holder of any Debenture shall bind such
Holder, every future Holder of the same Debenture and the Holder of every
Debenture issued upon the registration of transfer thereof or in exchange
therefor or in lieu thereof in respect of anything done, omitted or suffered
to be done by the Trustee or the Bank in reliance thereon, whether or not
notation of such action is made upon such Debenture.
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Section 1.05 Notices, Etc., to Trustee and Bank.
Any request, demand, authorization, direction, notice,
consent, waiver or Act of Holders or other document provided or permitted by
this Indenture to be made upon given or furnished to, or filed with,
(1) the Trustee by any Holder or by the Bank shall
be sufficient for every purpose hereunder if made, given,
furnished or filed in writing to or with the Trustee at its
Corporate Trust Office, Attention: Vice President-Corporate
Trust Administration, 15th Floor, or
(2) the Bank by the Trustee or by any Holder shall
be sufficient for every purpose hereunder (unless otherwise herein
expressly provided) if in writing and delivered or mailed,
first-class postage prepaid, to the Bank addressed to it at 5700
Wilshire Boulevard, Los Angeles, California 90036, Attention:
Secretary, or at any other address furnished in writing to the
Trustee by the Bank.
Section 1.06 Notice to Holders; Waiver.
Where this Indenture provides for notice to Holders of any
event, such notice shall be sufficiently given (unless otherwise herein
expressly provided) if in writing and mailed, first-class postage prepaid, to
each Holder affected by such event, at his address as it appears in the
Debenture Register, not later than the latest date, and not earlier than the
earliest date, prescribed herein for the giving of such notice, whether or not
such Holder actually receives such notice. In any case where notice to Holders
is given by mail, neither the failure to mail such notice, nor any defect in
any notice so mailed, to any particular Holder shall affect the sufficiency of
such notice with respect to other Holders. Where this Indenture provides for
notice in any manner, such notice may be waived in writing by the Person
entitled to receive such notice, either before or after the event, and such
notice shall be treated as having been given for all purposes hereunder.
Waivers of notice by Holders shall be filed with the Trustee, but such filing
shall not be a condition precedent to the validity of any action taken in
reliance upon such waiver.
In case by reason of the suspension of regular mail service
or by reason of any other cause it shall be impracticable to give such notice
by mail, then such
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notification as shall be made with the approval of the Trustee shall
constitute a sufficient notification for every purpose hereunder.
Section 1.07 Effect of Headings and Table of Contents.
The Article and Section headings herein and in the Table of
Contents are for convenience only and shall not affect the construction
hereof.
Section 1.08 Successors and Assigns.
All covenants and agreements in this Indenture by the Bank
shall bind its successors and assigns.
Section 1.09 Separability Clause.
In case any provision in this Indenture or in the Debentures
shall be invalid, illegal or unenforceable, the validity, legality and
enforceability of the remaining provisions shall not in any way be affected or
impaired thereby.
Section 1.10 Benefits of Indentures.
Nothing in this Indenture or in the Debentures, express or
implied, shall give to any Person, other than the parties hereto and their
successors hereunder, the Holders and the holders of Senior Indebtedness, any
benefit or any legal or equitable right, remedy or claim under this Indenture.
Section 1.11 Governing Law.
This Indenture and the Debentures shall be governed by and
construed in accordance with the laws of the State of New York.
Section 1.12 Legal Holidays.
In any case where any Interest Payment Date, Maturity Date
or Redemption Date of any Debenture or any date on which any Defaulted
Interest is proposed to be paid shall not be a Business Day, then
(notwithstanding any other provision of this Indenture or such Debenture)
payment of principal of, premium, if any, and interest on the Debentures need
not be made on such date, but may be made on the next succeeding Business Day
with the same force and effect as if made on such Interest Payment Date,
Maturity Date, Redemption Date or date on which Defaulted Interest is proposed
to be paid, and no interest shall accrue for the
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period from and after such Interest Payment Date, Maturity Date, Redemption
Date or date on which Defaulted Interest is proposed to be paid.
ARTICLE TWO
FORM OF NOTES
Section 2.01 Form of Debenture and Trustee's Certificate
of Authentication.
The Debentures and the Trustee's certificate of
authentication shall be in substantially the forms set forth in Exhibit A
hereto, with such appropriate insertions, omissions, substitutions and other
variations as are required or permitted by this Indenture, and may have such
letters, numbers or other marks of identification and such legends or
endorsements placed thereon as may, consistently herewith, be determined by
the officers executing such Debentures, as conclusively evidenced by their
execution of such Debentures.
The Debentures shall be printed, lithographed or engraved or
produced by any combination of such methods as determined by the officers
executing such Debentures, as conclusively evidenced by their execution of
such Debentures.
ARTICLE THREE
THE NOTES
Section 3.01 Title and Terms.
Notwithstanding anything to the contrary in this Indenture,
the Debentures or in any related document, all of the terms of the Debentures
are subject to the provisions of Section 3.09 hereof.
The aggregate principal amount of Debentures that may be
authenticated and delivered under this Indenture is limited to $17,718,000
except for Debentures authenticated and delivered upon registration of
transfer of, in exchange for or in lieu of other Debentures pursuant to
Sections 3.04, 3.05 or 11.05.
The Debentures shall be known and designated as the "10%
Subordinated Debentures Due January 3, 2003" of the Bank.
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The Principal of the Debentures shall be due and payable on
the Maturity Date unless earlier redeemed or accelerated after an Event of
Default on the terms and in the manner described in the Indenture.
The Debentures will bear interest at the rate of 10% per
annum from the Issue Date until the principal thereof is paid or duly provided
for. Such interest will be payable semi-annually in arrears on July 15 and
January 15 of each year, commencing on July 15, 1993, and the Maturity Date
(each an "Interest Payment Date"). On such Interest Payment Date, interest
payments will include interest accrued from the most recent date to which
interest has been paid or duly provided for, or, if no interest has been paid,
from the Issue Date. Interest shall be computed on the basis of a year of 360
days and twelve 30-day months.
The principal of, premium, if any, and interest on each
Debenture shall be payable at the Corporate Trust Office of the Trustee, in
New York, New York (the "Place of Payment") in such coin or currency of the
United States of America as at the time of payment is legal tender for payment
of public and private debts; provided, however, that payment of interest shall
be made by check mailed to the address of the Holder of such Debenture as it
shall appear on the Debenture Register.
Section 3.02 Form and Denominations.
The Debentures shall be issuable only in registered form
without coupons and in denominations of $100 or any multiple thereof.
Section 3.03 Execution, Authentication, Delivery and Dating.
The Debentures shall be executed on behalf of the Bank by
its Chairman of the Board, its President or one of its Vice Presidents and by
its Treasurer or one of its Assistant Treasurers or its Secretary or one of
its Assistant Secretaries, under its corporate seal reproduced thereon. The
signature of any or all of such officers on the Debentures may be manual or
facsimile.
Debentures bearing the manual or facsimile signatures of
individuals who were at any time the proper officers of the Bank shall bind
the Bank, notwithstanding that such individuals or any of them have ceased to
hold such offices prior to the authentication and delivery of such Debentures
or did not hold such offices at the date of such Debentures.
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At any time and from time to time after the execution and
delivery of this Indenture, the Bank may deliver Debentures executed by the
Bank to the Trustee for authentication, together with an Order of the Bank for
the authentication and delivery of such Debentures, and the Trustee shall
authenticate such Debentures as in this Indenture provided and not otherwise.
Each Debenture shall be dated the date of its
authentication.
No Debenture shall be entitled to any benefit under this
Indenture or be valid or obligatory for any purpose unless there appears on
such Debenture a certificate of authentication substantially in the form
provided for in Exhibit A hereto, executed by the Trustee by manual signature
of one of its authorized officers, and such certificate upon any Debenture
shall be conclusive evidence, and the only evidence, that such Debenture has
been duly authenticated and delivered hereunder.
Section 3.04 Registration: Registration of Transfer and Exchange.
The Bank shall cause to be kept at the office or agency to
be maintained by the Bank as provided in Section 6.02, a register (the
"Debenture Register") in which, subject to such reasonable regulations as it
may prescribe, the Bank shall provide for the registration of Debentures and
of transfers of Debentures. Unless or until otherwise determined by the Bank,
the Trustee shall act as "Debentures Registrar" for the purpose of registering
Debentures and transfers of Debentures as herein provided. At all reasonable
times the Debenture Register and the records of the Debenture Registrar shall
be open for inspection by the Trustee.
Upon surrender for registration of transfer of any
Debentures at said office or agency, the Bank shall execute, and the Trustee
shall authenticate and deliver, in the name of the designated transferee or
transferees, one or more new Debentures of any authorized denomination or
denominations, of a like aggregate principal amount, all as requested by the
transferor.
At the option of the Holder, Debentures may be exchanged for
other Debentures of any authorized denominations, of a like aggregate
principal amount, upon surrender of the Debentures to be exchanged at such
office or agency. Whenever any Debentures are so surrendered for
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exchange, the Bank shall execute, and the Trustee shall authenticate and
deliver, the Debentures which the Holder making the exchange is entitled to
receive.
All Debentures issued upon any registration of transfer or
exchange of Debentures shall be the valid obligations of the Bank, evidencing
the same debt, and entitled to the same benefits under this Indenture, as the
Debentures surrendered upon such registration of transfer or exchange.
Every Debenture presented for registration of transfer or
for exchange shall (if so required by the Bank, or the Trustee or the
Debenture Registrar) (i) be duly endorsed, or be accompanied by a written
instrument of transfer in form satisfactory to the Bank, the Trustee and the
Debenture Registrar, duly executed by the holder thereof or his attorney duly
authorized in writing and (ii) be accompanied by such certification as may be
required by the Bank, the Trustee or the Debenture Registrar that the
transferee is eligible to hold such Debenture under the provisions of Section
3.09(c).
No service charge shall be made for any registration of
transfer or exchange of Debentures, but the Bank may require payment of a sum
sufficient to cover any tax or other governmental charge that may be imposed
in connection with any transfer, registration of transfer or exchange of
Debentures, other than exchange expressly provided in this Indenture to be
made at the Bank's own expense or without charge to Holders.
The Bank shall not be required (i) to transfer or exchange
any Debenture for a period of 15 days next preceding any selection by the
Trustee of Debentures being called for redemption or (ii) to transfer or
exchange any Debenture called or being called for redemption in whole or in
part.
Section 3.05 Mutilated, Destroyed, Lost or Stolen Debentures.
A mutilated Debenture may be surrendered to the Trustee and
thereupon the Bank shall execute, and the Trustee shall authenticate and
deliver in exchange therefor, a new Debenture of like tenor and principal
amount and bearing a number not contemporaneously outstanding.
If there shall be delivered to the Bank and the Trustee (i)
evidence to their satisfaction of the destruction, loss or theft of any
Debentures and (ii) such
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security or indemnity as may be required by them to save each of them
harmless, then, in the absence of notice to the Bank or the Trustee received
at the Corporate Trust Office of the Trustee giving the Bank or the Trustee
reasonable grounds to believe that such Debenture has been acquired by a bona
fide purchaser, the Bank shall execute and upon the Request of the Bank, the
Trustee shall authenticate and deliver, in lieu of any such destroyed, lost or
stolen Debenture, a new Debenture of like tenor and principal amount and
bearing a number not contemporaneously outstanding.
In case any such mutilated, destroyed, lost or stolen
Debenture has become or is about to become due and payable, the Bank in its
discretion may, instead of issuing a new Debenture, pay such Debenture.
Upon the issuance of any new Debenture under this Section,
the Bank may require the payment of a sum sufficient to cover any tax or other
governmental charges that may be imposed in relation thereto and any other
expenses (including the fees and expenses of the Trustee-connected therewith.
Every new Debenture issued pursuant to this Section in lieu
of any destroyed, lost or stolen Debenture shall constitute an original
additional contractual obligation of the Bank, whether or not the destroyed,
lost or stolen Debenture shall be at any time enforceable by anyone, and shall
be entitled to all the benefits of this Indenture equally and proportionately
with any and all other Debentures duly issued hereunder.
The provisions of this Section are exclusive and shall
preclude (to the extent lawful) all other rights and remedies with respect to
the replacement or payment of mutilated, destroyed, lost or stolen Debentures.
Until definitive Debentures are ready for delivery, the Bank
may prepare and the Trustee shall authenticate temporary Debentures, which
shall be substantially in the form of definitive Debentures, but may have
variations that the Bank considers appropriate for temporary Debentures. The
Bank shall prepare, and the Trustee shall authenticate, definitive Debentures
in exchange for temporary Debentures without unreasonable delay.
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Section 3.06 Payment of Interest: Interest Rights Preserved.
Interest on any Debenture which is payable, and is
punctually paid or duly provided for, on any Interest Payment Date shall be
paid to the Person in whose name that Debenture (or one or more Predecessor
Debentures) is registered at the close of business on the Regular Record Date
for such Interest Payment Date.
Any interest on any Debenture which is payable, but is not
punctually paid or duly provided for on any Interest Payment Date (herein
called "Default Interest"), shall forthwith cease to be payable to the Holder
in whose name such Debenture (or one or more Predecessor Debentures) is
registered on the relevant Regular Record Date by virtue of having been such
Holder, and such Defaulted Interest may be paid by the Bank, at its election
in each case, as provided in clause (1) or (2) below:
(1) The Bank may elect to make payment of any Defaulted
Interest to the Persons in whose names the Debentures (or their
respective Predecessor Debentures) are registered at the close of
business on a Special Record Date for the payment of such Defaulted
Interest, which shall be fixed in the following manner. The Bank
shall notify the Trustee in writing of the amount of Defaulted
Interest proposed to be paid on each Debenture and the date of the
proposed payment, and at the same time the Bank shall deposit with
the Trustee an amount of money equal to the aggregate amount proposed
to be paid in respect of such Defaulted Interest or shall make
arrangements satisfactory to the Trustee for such deposit prior to
the date of the proposed payment, such money when deposited to be
held in trust for the benefit of the Persons entitled to such
Defaulted Interest as in this clause provided. Thereupon the Trustee
shall fix a Special Record Date for the payment of such Defaulted
Interest which shall be not more than 15 days and not less than 10
days prior to the date of the proposed payment and not less than 10
days after the receipt by the Trustee of the notice of the proposed
payment. The Trustee shall promptly notify the Bank of such Special
Record Date and, in the name and at the expense of the Bank, shall
cause notice of the proposed payment of such Defaulted Interest and
the Special Record Date therefor to be mailed, first-class postage
prepaid, to each Holder at his address as it appears in the Debenture
Register, not less than 10 days prior to such Special Record Date.
Notice of the proposed payment of such Defaulted Interest and the
Special Record Date therefor
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having been so mailed, such Defaulted Interest shall be paid to the
Persons in whose names the Debentures (or their respective
Predecessor Debentures) are registered on such Special Record Date
and shall no longer be payable pursuant to the following clause (2).
(2) The Bank may make payment of any Defaulted Interest in
any other lawful manner not inconsistent with the requirements of any
securities exchange on which the Debentures may be listed, and upon
such notice as may be required by such exchange, if, after notice
given by the Bank to the Trustee of the proposed payment pursuant to
this clause (2), such manner of payment shall be deemed practicable
by the Trustee.
Subject to the foregoing provisions of this Section, each
Debenture delivered under this Indenture upon registration of transfer of in
exchange for or in lieu of any other Debenture shall carry the rights to
interest and principal accrued and unpaid, and to accrue, which were carried
by such other Debenture.
Section 3.07 Persons Deemed Owners.
Prior to due presentment of a Debenture for registration of
transfer, the Bank, the Trustee, any Paying Agent and any other agent of the
Bank or the Trustee may treat the Person in whose name any Debenture is
registered as the owner of such Debenture for the purpose of receiving payment
of principal of, premium, if any, and interest on such Debenture and for all
other purposes whatsoever, whether or not any payment of principal, premium, if
any, or interest is overdue, notwithstanding any notation of ownership or
other writing thereon, and neither the Bank, the Trustee, any Paying Agent nor
any other agent of the Bank or the Trustee shall be affected by notice to the
contrary.
Section 3.08 Cancellation.
All Debentures surrendered for payment, redemption or
registration of transfer or exchange shall, if surrendered to the Bank, any
Paying Agent or any other agent of the Bank, be delivered to the Trustee and,
if not already cancelled, shall be promptly cancelled by it. The Bank may at
any time deliver to the Trustee for cancellation any Debentures previously
authenticated and delivered hereunder which the Bank may have acquired in any
manner whatsoever, and all Debentures so delivered shall be promptly cancelled
by the Trustee. No Debentures shall be authenticated in lieu of or in exchange
for any Debentures cancelled as
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provided in this Section, except as expressly permitted by this Indenture. All
cancelled Debentures held by the Trustee shall be destroyed and a certificate
of such destruction shall be delivered to the Bank by the Trustee.
Section 3.09 Certain Limitations on Debentures.
Notwithstanding anything to the contrary in this Indenture,
the Debentures or in any related document:
(A) If the FDIC or Resolution Trust Corporation ("RTC")
shall be appointed receiver for the Bank and in its capacity as such
shall cause the Bank to merge with or into another financial
institution, or in such capacity shall sell or otherwise convey part
or all of the assets of the Bank to another financial institution or
shall arrange for the assumption of less than all of the liabilities
of the Bank by one or more other financial institutions, neither the
FDIC nor the RTC shall have any obligation either in its capacity as
receiver or in its corporate capacity, to contract for or to
otherwise arrange for the assumption of the obligations represented
by the Debentures in whole or in part by any financial institution or
institutions which results from any such merger or which has
purchased or otherwise acquired from FDIC or RTC as receiver for the
Bank, any of the assets of the Bank, or which, pursuant to any
arrangement with FDIC or RTC, has assumed less than all of the
liabilities of the Bank. To the extent that obligations represented
by the Debentures have not been assumed in full by a financial
institution with or into which the Bank may have been merged, as
described in this subparagraph (A), and/or by one or more financial
institutions which have succeeded to all or a portion of the assets
of the Bank, or which have assumed a portion but not all of the
liabilities of the Bank as a result of one or more transactions
entered into by FDIC or RTC as receiver for the Bank, then the
Holders of Debentures shall be entitled to payments on such
obligations in accordance with the procedures and priorities set
forth in any applicable receivership regulations or in orders of the
FDIC or RTC relating to such receivership.
(B) In the event that the obligations represented by the
Debentures are assumed in full by another financial institution,
which shall succeed by merger or otherwise to substantially all of
the assets and the business of the Bank, or which shall by
arrangement with the FDIC or RTC assume all or a portion of the
liabilities of the Bank, and payment or provision for
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payment shall have been made in respect of all matured installments
of interest upon the Debentures together with all matured
installments of principal on such Debentures which shall have become
due otherwise than by acceleration, then any default caused by the
appointment of a receiver for the Bank shall be deemed to have been
cured, and any declaration consequent upon such default declaring the
principal and interest on the Debentures to be immediately due and
payable shall be deemed to have been rescinded.
(C) The Debentures are not eligible to be purchased or held
by any savings association or corporate affiliate thereof except that
the Debentures may be purchased or held by a corporate affiliate of
the Bank or by a diversified savings and loan holding company and its
savings association subsidiaries. The Bank may not recognize on its
transfer books any transfer made to a savings association or any
corporate affiliate thereof (except as provided in the preceding
sentence) and will not be obligated to make any payments of principal
or interest on a Debenture if the owner of such Debenture is a
savings association or any corporate affiliate thereof (except as
provided in the preceding sentence).
(D) The Debentures are unsecured by the assets of the Bank
or any of its Affiliates or Subsidiaries, and are not eligible as
collateral for any loan by the Bank.
ARTICLE FOUR
SUBORDINATION OF DEBENTURES
Section 4.01 Indenture to Subordinate Debentures.
The Bank, for itself, its successors and assigns, covenants
and agrees, and each Holder of Debentures by his acceptance thereof, likewise
covenants and agrees, that all of the Debentures issued hereunder shall be
issued subject to the provisions of this Article Four; and each person holding
any Debenture, whether upon original issue or transfer or assignment thereof,
accepts and agrees to be bound by such provisions.
Section 4.02. Subordination.
The indebtedness evidenced by the Debentures shall be
subordinate and junior in right of payment to all Senior Indebtedness in that
in case of (i) any insolvency, receivership, conservatorship, reorganization,
readjustment
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of debt, marshalling of assets and liabilities or similar proceedings or any
liquidation relating to or winding up of the Bank as a whole, whether
voluntary or involuntary or (ii) the occurrence and continuance of a default
in any payment with respect to the Senior Indebtedness, or event of default
with respect to any Senior Indebtedness permitting the holders thereof to
accelerate the maturity thereof, or if any judicial proceeding shall be
pending with respect to any such default (each a "Specified Event" and
collectively the "Specified Events") all such Senior Indebtedness shall be
entitled to be paid in full before any payment shall be made on account of the
principal of, premium, if any, or interest on the Debentures. In the event of
any such Specified Event, after payment is full of all sums owing with respect
to the Senior Indebtedness, the Holders of the Debentures, together with the
holders of any Indebtedness or other obligation of the Bank Ranking on a
Parity with the Debentures, shall be entitled to be paid from the remaining
assets of the Bank. All principal of, premium, if any, and interest on the
Debentures which shall have become due and payable shall be paid in full to
the Holders entitled thereto before any payment or other distribution shall be
made on account of any capital stock or any Indebtedness or other obligation
of the Bank Ranking Junior to the Debentures.
The above subordination provisions shall in no way be
affected, modified, waived or revoked by the occurrence of any Event of
Default hereunder or any acceleration of the maturity of the Debentures in
consequence thereof.
Nothing in this Section 4.02 shall subordinate to Senior
Indebtedness the lien of, or payments to, the Trustee pursuant to Section
9.07.
Section 4.03 Notice to Trustee of Specified Events;
Reliance on Certificate of Liquidating Agent.
The Bank shall give prompt written notice to the Trustee of
any Specified Event in respect of the Bank, within the meaning of Section
4.02. The Trustee, subject to the provisions of Section 9.01, shall be
entitled to assume that no such Specified Event has occurred unless the Bank
has given such notice.
Upon any distribution of assets of the Bank or payment by or
on behalf of the Bank referred to in Section 4.02, the Trustee and the Holders
of the Debentures shall be entitled to rely upon any order or decree of a
court of competent jurisdiction in which any proceedings of
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the nature referred to in Section 4.02 are pending, and the Trustee, subject
to the provisions of Section 9.01 hereof, and the Holders of the Debentures
shall be entitled to rely upon a certificate of the liquidating trustee or
agent or other Person making any distribution, delivered to the Trustee or to
the Holders of the Debentures, for the purposes of ascertaining the persons
entitled to participate in such distribution, the holders of Senior
Indebtedness and other indebtedness of the Bank, the amount thereof or payable
thereon, the amount or amounts paid or distributed thereon and all other facts
pertinent thereto or to this Article Four.
Section 4.04 Certain Payments and Credits Permitted.
Subject to Section 3.09 hereof, nothing contained in this
Article Four or elsewhere in this Indenture, or in any of the Debentures,
shall prevent the Bank from making payment of or on account of the principal
of, premium, if any, or interest on the Debentures, or from depositing
with the Trustee or any Paying Agent moneys for such payments, or prevent
the application by the Trustee or any Paying Agent of any moneys deposited
with it hereunder to the payment of or on account of the principal of,
premium, if any, or interest on the Debentures, if such payment or deposit
is not contrary to the conditions described in Section 4.02 on the date of
such payment or deposit.
Section 4.05 Absolute Obligation to Pay.
Subject to Section 3.09 hereof, nothing contained in this
Indenture or in the Debentures is intended to or shall impair, as between the
Bank, its creditors other than the holders of Senior Indebtedness, and the
Holders of the Debentures, the obligation of the Bank, which is absolute and
unconditional, to pay to the Holders the principal of, premium, if any, and
interest on the Debentures, as and when the same shall become due and payable
in accordance with the terms of the Debentures, or is intended to or shall
affect the relative rights of the Holders and creditors of the Bank other than
the holders of Senior Indebtedness, nor shall anything herein or therein
prevent the Trustee or any Holder from exercising all remedies otherwise
permitted by applicable law upon default under this Indenture.
Section 4.06 Subrogation.
Subject to the payment in full of all Senior Indebtedness,
the Holders of the Indebtedness shall be subrogated to the rights of the
holders of Senior Indebtedness to receive payments or distributions of cash,
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property or securities of the Bank applicable to Senior Indebtedness until all
amounts owing on the Debentures shall be paid in full, and, as between the
Bank, its creditors other than holders of Senior Indebtedness, and the Holders
of the Debentures, no such payment or distribution made to the holders of
Senior Indebtedness by virtue of this Article which otherwise would have
been made to the Holders of the Debentures shall be deemed to be a payment by
the Bank on account of Senior Indebtedness, it being understood that the
provisions of this Article are and are intended solely for the purpose of
defining the relative rights of the Holders of Debentures, on the one hand,
and the holders of Senior Indebtedness, on the other hand.
Section 4.07 Trustee's Rights as Holder of Senior
Indebtedness.
The Trustee shall be entitled to all the rights set forth in
this Article Four in respect of any Senior Indebtedness at any time held by
it, to the same extent as any other holder of Senior Indebtedness, and nothing
in Section 9.13 or elsewhere in this Indenture shall be construed to deprive
the Trustee of any of its rights as such holder.
Section 4.08 No Implied Obligations to Holders of
Senior Indebtedness.
No implied covenants or obligations with respect to the
holders of Senior Indebtedness shall be read into this Indenture against the
Trustee. The Trustee shall not be deemed to owe any fiduciary duty to the
holders of Senior Indebtedness and shall not be liable to any such holder if
it shall pay over or distribute to or on behalf of Holders or the Bank moneys
or assets to which any holder of Senior Indebtedness shall be entitled.
Section 4.09 Enforceability of Subordination.
No right of any present or future holder of any Senior
Indebtedness of the Bank to enforce the subordination as herein provided shall
at any time in any way be prejudiced or impaired by any act or failure to act
on the part of the Bank or by any noncompliance by the Bank with the terms,
provisions and covenants of this Indenture, regardless of any knowledge
thereof any such holder may have or be otherwise charged with.
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Section 4.10 Trustee Authorized to Effectuate
Subordination.
Each Holder of any Debenture by his acceptance thereof
authorizes and directs the Trustee on his behalf to take such action as may be
necessary or appropriate to effectuate this subordination as provided in this
Article Four and appoints the Trustee his attorney-in-fact for any and all
such purposes.
Section 4.11 Amendments to Senior Indebtedness.
The holders of Senior Indebtedness may extend, renew,
refinance, modify or amend the terms of Senior Indebtedness or any
security therefor and may release, sell or exchange such security and
otherwise deal freely with the Bank, all without notice to or consent of the
Holders of the Debentures and without affecting the liabilities and
obligations of the parties to the Indenture or the Holders of the Debentures.
ARTICLE FIVE
REDEMPTION OF DEBENTURES
Section 5.01 Optional Redemption.
The Bank may, at its option, at any time after October 1,
2001 and prior to the Maturity Date, redeem the Debentures in whole or in part
at a Redemption Price equal to 100% of their principal amount, together with
accrued interest thereon from the most recent Interest Payment Date to the
Redemption Date.
Section 5.02 Election to Redeem; Notice to Trustee.
The election of the Bank to redeem any Debentures redeemable
at the option of the Bank shall be evidenced by an Officers' Certificate in
case of any redemption at the election of the Bank of less than all the
Debentures, the Bank shall, at least 45 days prior to the date fixed for the
redemption (the "Redemption Date"), unless a shorter notice shall be
satisfactory to the Trustee, notify the Trustee of such Redemption Date and of
the principal amount of Debentures to be redeemed. (The Bank shall specify in
such notice to Trustee whether the Trustee shall exclude from the selection
process Debentures held by the Bank or its affiliates, if any.)
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Section 5.03 Allocation of Debentures to be Redeemed.
If fewer than all the Debentures are to be redeemed pursuant
to Section 5.01, the Trustee shall select from the Outstanding Debentures not
previously called for redemption, not more than 60 days prior the Redemption
Date, by such method as the Trustee shall deem fair and appropriate, the
Debentures or portions thereof to be redeemed; provided, however, that the
Trustee shall select Debentures for redemption in such a manner that no single
Debenture to be outstanding following redemption shall be in a denomination of
less than $100.
The Trustee shall promptly notify the Bank in writing of the
Debentures selected for redemption and, in the case of any Debenture selected
for partial redemption, the principal amount thereof to be redeemed.
For all purposes of this Indenture, unless the context
otherwise requires, all provisions relating to the redemption of Debentures
shall relate, in the case of any Debenture redeemed or to be redeemed only in
part, to the portion of the principal of such Debenture which has been or is
to be redeemed.
Section 5.04 Notice of Redemption.
Notice of redemption shall be given in the manner provided
in Section 1.06, not less than 30 nor more than 60 days prior to the
Redemption Date to each Holder of Debentures to be redeemed.
All notices of redemption shall state:
(1) the Redemption Date;
(2) the Redemption Price;
(3) if less than all of the Debentures outstanding are to be
redeemed, the identification (and, in the case of partial redemption,
the respective principal amounts) of the Debentures to be redeemed
from the Holder to whom the notice is given;
(4) that on the Redemption Date, the Redemption Price shall
become due and payable upon such Debentures, and that interest
thereon shall cease to accrue on and after said date; and
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(5) the place or places where such Debentures may be
surrendered for payment, which shall include the office or agency of
the Bank in the Place of Payment.
Notice of redemption of Debentures to be redeemed at the
election of the Bank shall be given by the Bank or, at the request of the
Bank, by the Trustee in the name and at the expense of the Bank.
Section 5.05 Deposit of Redemption Price.
In connection with any redemption of any Debentures, on or
prior to the Redemption Date, the Bank shall deposit with the Trustee or with
the Paying Agent (or, if the Bank is acting as its own Paying Agent, segregate
and hold in trust as provided in Section 6.03) an amount of money sufficient
to pay the Redemption Price of all the Debentures which are to be redeemed on
that date.
Section 5.06 Debentures Payable on Redemption Date.
Notice of redemption having been given as aforesaid, the
Debentures so to be redeemed shall, on the Redemption Date, become due and
payable at the Redemption Price therein specified and on such date (unless the
Bank shall default in the payment of the Redemption Price) such Debentures
shall cease to bear interest. Upon surrender of such Debentures for redemption
in accordance with said notice, such Debentures shall be paid by the Bank at
the Redemption Price. Interest maturing on or prior to the Redemption Date
shall continue to be payable according to the terms herein in the customary
manner.
If any Debenture called for redemption shall not be so paid
upon surrender thereof for redemption, the principal shall, until paid, bear
interest from the Redemption Date at the rate borne by such Debenture.
Section 5.07 Debentures Redeemed in Part.
Any Debenture that is to be redeemed only in part shall be
surrendered at an office or agency of the Bank indicated in the notice of
redemption, which shall include the Place of Payment (with, if the Bank, the
Trustee or the Debenture Registrar so requires, due endorsement by, or a
written instrument of transfer in form satisfactory to the Bank, the Trustee
and the Debenture Registrar, duly executed by, the Holder of such Debenture or
his attorney duly authorized in writing), and the Bank shall execute and the
Trustee shall authenticate and deliver to the Holder of such Debenture without
service charge, a new Debenture or
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Debentures of any authorized denominations as requested by such Holder, with
an aggregate principal amount equal to and in exchange for the unredeemed
portion of the principal of the Debenture so surrendered.
Section 5.08 Approval of Redemption.
Notwithstanding any other provisions of this Article Five,
no Debentures may be called for redemption without the prior approval of the
OTS if the Bank is failing to meet its regulatory capital requirements under
Part 567 of the OTS Rules and Regulations or, if after giving effect to such
redemption, the Bank would fail to meet such regulatory capital requirements.
The Trustee has no duty to monitor compliance with this Section 5.08.
ARTICLE SIX
COVENANTS
Section 6.01 Payment of Principal and Interest.
The Bank will duly and punctually pay the principal of,
premium, if any, and interest on the Debentures in accordance with the terms
of the Debentures and this Indenture.
Section 6.02 Maintenance of Office or Agency.
The Bank will maintain an office or agency in the Place of
Payment where Debentures may be presented or surrendered for payment, where
Debentures may be surrendered for registration of transfer or exchange and
where notices and demands to or upon the Bank in respect of the Debentures and
this Indenture may be served. Until otherwise designated by the Bank in
written notice to the Trustee, such office or agency shall be the Corporate
Trust Office of the Trustee. The Bank will give prompt written notice to the
Trustee of any change in the location of such office or agency. If at any time
the Bank shall fail to maintain any such required office or agency or shall
fail to furnish the Trustee with the address thereof, such presentations,
surrenders, notices and demands may be made or served at the Corporate Trust
Office of the Trustee, and, effective at that time, the Bank hereby appoints
the Trustee as its agent to receive all such presentations, surrenders,
notices and demands under this Indenture.
In addition to such office or agency, the Bank may also from
time to time designate one or more other offices or agencies where the
Debentures may be presented or
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surrendered for any or all the purposes specified above in this Section and
may from time to time rescind such designations; provided, however, that no
such designation or rescission shall in any manner relieve the Bank of its
obligation to maintain an office or agency in the Borough of Manhattan, The
City of New York, New York, for such purposes. The Bank will give prompt
written notice to the Trustee of any such designation or rescission and of any
change in the location of any such other office or agency.
Section 6.03 Money for Debenture Payments to be Held in
Trust.
If the Bank shall at any time act as its own Paying Agent,
it will, on or before each due date of the principal of, premium, if any, or
interest on any of the Debentures, segregate and hold in trust for the benefit
of the Persons entitled thereto a sum sufficient to pay the principal,
premium, if any, or interest so becoming due until such sums shall be paid to
such Persons or otherwise disposed of as herein provided and will promptly
notify the Trustee of its action or failure so to act.
Whenever the Bank shall have one or more Paying Agents, it
will, on or prior to each due date of the principal of, premium, if any, or
interest on any of the Debentures, deposit with such Paying Agents a sum
sufficient to pay the principal, premium, if any, or interest so becoming due,
such sum to be held in trust for the benefit of the Persons entitled thereto,
and (unless such Paying Agent is the Trustee) the Bank will promptly notify
the Trustee of its failure so to act.
The Bank will cause each Paying Agent (other than the Bank
or the Trustee) to execute and deliver to the Trustee an instrument in which
such Paying Agent shall agree with the Trustee, subject to the provisions of
this Section, that such Paying Agent will:
(1) hold all sums held by it for the payment of the
principal of, premium, if any, or interest on Debentures in trust for
the benefit of the Persons entitled thereto until such sums shall be
paid to such Persons or otherwise disposed of as herein provided;
(2) give the Trustee notice of any default by the Bank (or
any other obligor upon the Debentures) in the making of any payment
of principal, premium, if any, or interest; and
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(3) at any time during the continuance of any such default,
upon the written request of the Trustee, forthwith pay to the Trustee
all sums so held in trust by such Paying Agent.
The Bank may at any time, for the purpose of obtaining the
satisfaction and discharge of this Indenture or for any other purpose, pay, or
by Order of the Bank direct any Paying Agent to pay, to the Trustee all sums
held in trust by the Bank or such Paying Agent, such sums to be held by the
Trustee upon the same trusts as those upon which such sums were held by the
Bank or such Paying Agent; and, upon such payment by any Paying Agent to the
Trustee, such Paying Agent shall be released from all further liability with
respect to such money.
Any money deposited with the Trustee or any Paying Agent, or
then held by the Bank, in trust for the payment of the principal of, premium,
if any, or interest on any Debenture and remaining unclaimed for two years
after such principal, premium, if any, or interest has become due and payable
shall be paid to the Bank on Request of the Bank, or (if then held by the
Bank) shall be discharged from such trust; and the Holder of such Debenture
shall thereafter, as an unsecured general creditor, look (as between the Bank
and the Trustee) only to the Bank for payment thereof, and all liability of
the Trustee or such Paying Agent with respect to such trust money, and all
liability of the Bank as trustee thereof, shall thereupon cease; provided,
however, that the Trustee or such Paying Agent, before being required to make
such repayment, may at the expense of the Bank mail or cause to be published
once, in a newspaper (which is expected to be The Wall Street Journal),
published in the English language, customarily published on each Business Day
and of general circulation in the Place of Payment, notice that such money
remains unclaimed and that, after a date specified therein, which shall not be
less than 30 days from the date of such publication, any unclaimed balance of
such money then remaining will be repaid to the Bank.
Section 6.04 Corporate Existence.
Subject to Section 6.10, the Bank will, and will cause each
of its Subsidiaries to, do or cause to be done all things necessary to
preserve and keep in full force and effect its corporate existence.
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Section 6.05 Payment of Taxes and Other Claims.
The Bank will pay and discharge, at or before maturity, (i)
all lawful taxes, assessments and governmental charges or levies upon it or
its property or assets, and (ii) all lawful claims or demands of materialmen,
mechanics, carriers, warehousemen, landlords and other like persons that, in
any such case, if unpaid, might by law give rise to a lien upon any of its
property or assets, except where the failure to pay or discharge such items in
(i) or (ii) would not in the aggregate materially adversely affect the
business or consolidated financial position of the Bank and except where any
of the items in (i) or (ii) may be contested in good faith by appropriate
proceedings, and the Bank shall have set aside on its books, in accordance
with generally accepted accounting principles, appropriate reserves for the
accrual of any such items.
Section 6.06 Maintenance of Property; Insurance.
The Bank will keep all property useful and necessary in its
business in good working order and condition; will maintain with responsible
insurance companies, insurance on all its property in at least such amounts
and against at least such risks (and with such risk retention) as are usually
insured against in the same general area by companies of established repute
engaged in the same or a similar business.
Section 6.07 Conduct of Business.
The Bank will do or cause to be done all things necessary to
preserve, renew and keep in full force and effect its rights, privileges and
franchises necessary or desirable in the normal conduct of business; provided,
however, that the Bank shall not be required to preserve any right or
franchise if the Board of Directors shall determine that the preservation
thereof is no longer desirable in the conduct of the business of the Bank and
that the loss thereof is not disadvantageous in any material respect to the
Holders; provided further, that nothing in this Section shall prevent the Bank
from consolidating, merging or disposing of its assets as permitted by Section
6.10.
The Bank shall comply with all statutes, laws, ordinances or
government rules and regulations to which it is subject where the failure to
so comply would adversely affect, or so far as the Bank can at the time
foresee is reasonably likely to adversely affect, in any material respect the
business, earnings, properties or financial condition of the Bank.
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Section 6.08 Maintenance of Books and Records.
The Bank will keep proper books of record and account in
which full, true and materially correct entries will be made of all its
business transactions, and will reflect in its financial statements adequate
accruals and appropriations to reserves. The Bank shall cause its books of
record and account to be examined by one or more firms of independent public
accountants not less frequently than annually and shall not make any change in
the accounting principles applied to its financial statements not concurred in
by such firm or firms. The Bank shall prepare its financial statements in
accordance with generally accepted accounting principles consistently applied.
Section 6.09 Maintenance of Status as an "Insured
Depository Institution".
The Bank shall operate at all times in accordance with the
regulations of the OTS and the FDIC and shall do all acts necessary to
maintain its good standing with the Federal Home Loan Bank of San Francisco,
the OTS and the FDIC.
The Bank will maintain its status as an "insured depository
institution" as defined in 12 U.S.C. [Section] 1813(c)(2), or a similar status
under any similar federal law hereinafter enacted, and do all things necessary
to ensure that savings accounts of the Bank are insured by the FDIC (or any
successor organization) up to the maximum amount permitted by the Home Owners'
Loan Act and regulations thereunder or the Federal Deposit Insurance
Corporations Act and any regulations thereunder (or any successor-legislation).
Section 6.10 Consolidations, Mergers and Sales of Assets.
Subject to Section 3.09, the Bank will not consolidate with,
merge into or sell or otherwise transfer (by lease or otherwise) its property
as an entirety or substantially as an entirety to any Person, unless:
(1) the entity formed by such consolidation or into
which the Bank is merged or the Person that acquires by conveyance or
transfer the properties and assets of the Bank substantially as an
entirety shall be a solvent corporation organized and existing under
the laws of the United States of America or one of the States
thereof, shall be an "insured depository institution" as defined in
12 U.S.C. [Section] 1813(c)(2) (or
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under any similar federal law hereinafter enacted) and shall
expressly assume all of the Bank's obligations on the Debentures and
under this Indenture, including, without limitation, the due and
punctual payment of the principal of, premium, if any, and interest
on all the Debentures and the performance and observance of every
covenant and term of this Indenture to be performed or observed by
the Bank; and
(2) immediately after giving effect to such
transaction, no Event of Default, and no event that, after notice or
lapse of time, or both, would become an Event of Default, shall have
happened and be continuing.
Upon and after the effectiveness of any such consolidation
or merger, or any conveyance, transfer or lease of the properties and assets
of the Bank, as an entirety or substantially as an entirety in accordance with
this Section, (i) such changes in phraseology and form (but not in substance)
as may be appropriate may be made in the Debentures thereafter to be issued by
the successor corporation formed by such consolidation or into which the Bank
is merged or to which such conveyance, transfer or lease is made; and (ii)
such successor corporation shall succeed to, and be substituted for, and may
exercise every right and power of, the Bank under this Indenture with the same
effect as if such successor corporation had been named as the Bank herein, and
thereafter, except in the case of a lease, the predecessor corporation shall
be relieved of all obligations and covenants under this Indenture and the
Debentures.
Nothing contained in this Indenture or in any of the
Debentures shall prevent the Bank from merging another entity or entities into
itself or acquiring by purchase or otherwise all or any part of the property
of any entity (whether or not affiliated with the Bank), provided that
immediately after giving effect to such transaction, no Event of Default, and
no event that, after notice or lapse of time, or both, would become an Event
of Default, shall have happened and be continuing. For purposes of this
Section 6.10, if the Bank is a party to a merger, consolidation or other
acquisition and in connection therewith, either (i) assumes certain
outstanding Indebtedness of another party to such merger, consolidation or
other acquisition that is by its terms subordinated in right of payment to the
Senior Indebtedness but which is senior in payment to the Debentures (whether
at maturity or through the operation of sinking fund or redemption (regardless
of whether mandatory or at the option of the Bank or the holders thereof)
provisions) to be made prior to
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the Maturity Date or (ii) incurs or suffers or permits to exist the same, such
assumption, incurrence, sufferance or prohibitance shall not violate Section
6.13, hereof, or constitute a default or Event of Default.
Section 6.11 Transactions with Affiliates.
The Bank shall not pay, directly or indirectly, any funds to
or for the account of, make any investment in, enter into any transaction
including, without limitation, the purchase, sale or exchange of property or
the rendering of any service, or effect any transaction in connection with any
joint enterprise or other joint arrangement (collectively and without
differentiation "Covered Transactions") with, any Affiliate if the effectuation
of such Covered Transactions would result in a violation of applicable
regulatory limitations imposed by the OTS or the FDIC.
Section 6.12 Dividends and Certain Other Payments.
The Bank shall not declare or pay or set apart any funds for
the payment of dividends on, or make any other distribution in respect of, any
shares of its capital stock (other than dividends or distributions payable
solely in shares of its capital stock) if at the time of such action and after
giving effect thereto the Bank would fail to meet the net worth or statutory
reserve requirements set forth in any rule, regulation or order of the OTS and
the FDIC applicable to the Bank.
Section 6.13 Limitation on Other Subordinated
Indebtedness.
Subject to Section 6.10, the Bank shall not incur or suffer
or permit to exist any Indebtedness that is by its terms subordinated in right
of payment to Senior Indebtedness and senior in right of payment to the
Debentures.
Section 6.14 Maintenance of Regulatory Capital.
As long as any of the Debentures are outstanding, the Bank
will maintain regulatory capital in an amount sufficient to prevent violation
of the applicable regulatory capital requirements.
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ARTICLE SEVEN
SATISFACTION AND DISCHARGE
Section 7.01 Satisfaction and Discharge of Indenture.
This Indenture shall cease to be of further effect (except
as to (i) any rights of registration of transfer or exchange of Debentures
herein expressly provided for, (ii) rights hereunder of Holders to receive
payments of principal of, premium, if any, and interest on the Debentures, and
(iii) the rights, obligations and immunities of the Trustee hereunder), and
the Trustee, on the demand and at the expense of the Bank, shall execute
proper instruments acknowledging satisfaction and discharge of this Indenture
when
(1) either
(A) all Debentures theretofore authenticated and
delivered (other than (i) Debentures which have been
destroyed, lost or stolen and which have been replaced or
paid as provided in Section 3.05, and (ii) Debentures for
the payment of which money has theretofore been deposited in
trust with the Trustee or segregated and held in trust by
the Bank and thereafter repaid to the Bank or discharged
from such trust, as provided in Section 6.03) have been
delivered to the Trustee cancelled or for cancellation; or
(B) all such Debentures not theretofore delivered to
the Trustee cancelled or for cancellation
(i) have become due and payable,
(ii) will become due and payable at the
Maturity Date within one year,
(iii) are to be called for redemption
within one year under arrangements satisfactory to
the Trustee for the giving of notice by the Trustee
in the name, and at the expense of, the Bank,
and the Bank, in the case of (i), (ii) or (iii)
above, has irrevocably deposited or caused to be
deposited in trust with the Trustee, solely for the
benefit of the Holders, funds in an amount
sufficient to pay
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and discharge the entire indebtedness on such
Debentures not theretofore delivered to the Trustee
cancelled or for cancellation, consisting of
principal, premium, if any, and interest to the
date of such deposit (in the case of Debentures which
have become due and payable) or to the Maturity
Date or Redemption Date, as the case may be;
(2) the Bank has paid or caused to be paid all other
sums payable hereunder by the Bank; and
(3) the Bank has delivered to the Trustee an
Officers' Certificate and an Opinion of Counsel, each
stating that all conditions precedent herein provided for to
be complied with by the Bank relating to the satisfaction
and discharge of this Indenture have been complied with.
Notwithstanding the satisfaction and discharge of this Indenture, the
obligations of the Bank to the Trustee under Section 9.07 shall survive until
discharged as provided herein.
Section 7.02 Application of Trust Money.
All money deposited with the Trustee pursuant to Section 7.01 shall
be held in trust and applied by it to the payment, either directly or through
any Paying Agent (including the Bank acting as its own Paying Agent) as the
Trustee may determine, to the Holders of the Debentures for whose payment or
redemption such money has been deposited with the Trustee, of all sums due and
to become due thereon for principal, premium, if any, and interest; but such
money need not be segregated from other funds except to the extent required by
law.
ARTICLE EIGHT
REMEDIES
Section 8.01 Events of Default.
"Event of Default", wherever used herein, means any one of the
following events (whatever the reason for such Event of Default and whether it
shall be voluntary or involuntary or be effected by operation of law pursuant
to any judgment, decree or order of any court or any order, rule or regulation
of any administrative or governmental body):
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(1) default shall be made by the Bank (i) in the payment of
principal of, or premium, if any, on, any Debenture, when and as the
same shall become due and payable, whether at the Maturity Date,
Redemption Date by acceleration or otherwise, or (ii) in the payment
of interest on any Debenture when and as the same shall become due
and payable and such default in the payment shall continue for a
period of 30 days; or
(2) default shall be made in the performance or observance
of (i) any of the covenants set forth in Sections 6.09 through 6.12,
or (ii) any of the other covenants or agreements in this Indenture,
and such default shall continue for a period of 60 days after written
notice to the Bank from the Trustee or to the Trustee from the
Holders of not less than 25% in aggregate principal amount of the
Outstanding Debentures stating the specific default or defaults; or
(3) the entry of a decree or order by a court having
jurisdiction in the premises adjudging the Bank a bankrupt or
insolvent, or approving as properly filed a petition seeking
reorganization, readjustment, arrangement, composition or similar
relief for the Bank under the federal bankruptcy laws, or any other
similar applicable law of any governmental unit, domestic or foreign,
and such decree or order shall have continued unstayed and in effect
for a period of 60 consecutive days; or the entry of a decree or
order or other decision of a court or agency or supervisory authority
having jurisdiction in the premises for the appointment of OTS or any
other Person to act as a receiver or conservator or liquidator or
trustee or assignee in bankruptcy or insolvency of the Bank or of a
substantial part of its property, or for the involuntary winding up
or liquidation of the affairs of the Bank, and such decree or order
shall have continued unstayed and in effect for a period of 60
consecutive days; or, under the provisions of any insolvency,
bankruptcy, or other law for the relief or aid of creditors or
depositors, any court, or agency or supervisory authority having
jurisdiction in the premises shall assume custody or control of the
Bank or of a substantial part of the property of the Bank, and such
custody and control shall not be terminated or stayed within 60
consecutive days from the date of assumption of such custody or
control; or any substantial part of the property of the Bank shall be
sequestered or attached and shall not be returned to the possession
of the Bank or released from such attachment within 60 consecutive
days thereafter; or
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(4) the Bank shall institute proceedings to be adjudicated
bankrupt or insolvent, or shall consent to the filing of a bankruptcy
proceeding against it, or shall file a petition or answer or consent
seeking reorganization, readjustment, arrangement, composition or
similar relief under the federal bankruptcy laws, or any other
similar applicable law of any governmental unit, domestic or foreign,
or shall consent to the filing of any such petition or shall consent
to the appointment of a receiver or conservator or liquidator or
trustee or assignee in bankruptcy or insolvency of it or of a
substantial part of its property, or shall make an assignment for the
benefit of creditors, or shall admit in writing its inability to pay
its debts generally as they become due, or if the Bank shall
voluntarily suspend transaction of a significant part of its business,
or if corporate action shall be taken by the Bank in furtherance of
any of the aforesaid purposes; or
(5) there shall be a default or any event which, with the
giving of notice or lapse of time or both, would constitute a default
under any mortgage, indenture or instrument under which there may be
issued or by which there may be secured or evidenced any Indebtedness
of the Bank, whether such Indebtedness now exists or shall hereafter
be created, which default shall have resulted in such Indebtedness in
an aggregate principal amount exceeding $15,000,000 becoming or being
declared due and payable prior to the date on which it would
otherwise have become due and payable, without such Indebtedness
having been rescinded or annulled, or there having been deposited in
trust a sum of money sufficient to discharge in full such
Indebtedness provided, that for the purposes of this clause (5),
Indebtedness shall not include non-recourse Indebtedness.
Section 8.02 Remedies: Limitation on Right to Accelerate.
Subject to the provisions of this Section 8.02, if an Event of
Default occurs and is continuing, then and in every such case the Trustee or
the Holders of not less than 25% in aggregate principal amount of the
outstanding Debentures may declare the unpaid principal of all Debentures to
be due and payable immediately, by a notice in writing to the Bank (and to
the Trustee if given by the Holders), and upon any such declaration such
principal amount shall become immediately due and payable.
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At any time after such declaration of acceleration has been made and
before a judgment or decree for payment of the money due has been obtained by
the Trustee as hereinafter in this Article provided, the Holders of not less
than a majority in principal amount of the outstanding Debentures, by written
notice to the Bank and the Trustee, may rescind and annul such declaration and
its consequences if
(1) the Bank has paid or deposited with the Trustee a sum
sufficient to pay
(A) all overdue installments of interest on all
Debentures,
(B) the unpaid principal of any Debentures which
have become due otherwise than by such declaration of
acceleration,
(C) to the extent that payment of such interest is
lawful, interest upon overdue installments of interest at
the rate borne by the Debentures, and
(D) all sums paid or advanced by the Trustee
hereunder and the reasonable compensation, expenses,
disbursements and advances of the Trustee, its agents and
counsel in connection with the acceleration or rescission
thereof;
and
(2) all Events of Default, other than the nonpayment of
principal of Debentures which have become due solely by such
declaration of acceleration have been cured or waived as provided in
Section 8.12.
No such rescission shall affect any subsequent default or impair any right
consequent thereon.
Anything to the contrary notwithstanding, this Indenture and the
indebtedness evidenced by the Debentures are subject to the requirement that
any payment of all or part of the principal of the Debentures upon
acceleration after an Event of Default specified in Section 8.01, by means of
set-off or otherwise, is subject to the specific prior approval of the OTS, if
the Bank is failing to meet its regulatory capital requirements under Part 567
of the OTS Rules and Regulations, or, if after giving effect to such payment,
the Bank would fail to meet such regulatory capital requirements.
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Subject to Section 8.07, in case any one or more of the Events of
Default specified in Section 8.01 shall have happened and be continuing, the
Holder of any Debenture may proceed to protect and enforce its rights by suit
in equity and/or by action at law, or by other appropriate proceedings,
whether for the specific performance (to the extent permitted by law) of any
covenant or agreement contained herein or in aid of the exercise of any power
granted herein, or proceed to enforce the payment of such Debenture or to
enforce any other legal or equitable right of such Holder. The parties
recognize that the right of Holders of Debentures to accelerate payment of the
Debentures is limited and in many cases money damages would not provide an
adequate remedy for a default hereunder, and therefore agree that in the event
of such a default, the Holders of any Debenture shall be entitled to obtain
appropriate equitable remedies.
No remedy herein conferred on the Holders of Debentures is intended
to be exclusive of any other remedy and each and every such remedy shall be
cumulative and shall be in addition to every other remedy given hereunder or
now or hereafter existing at law or in equity or by statute or otherwise.
Section 8.03 Collection of Indebtedness and Suits for Enforcement
by Trustee.
The Bank covenants that if
(1) default is made in the payment of the principal of,
or premium, if any, on, any Debenture when it becomes due and
payable, or
(2) default is made in the payment of any installment of
interest on any Debenture when such interest becomes due and payable
and such default continues for a period of 30 days,
the Bank will, upon demand of the Trustee, pay to it, for the benefit of the
Holders of such Debentures, the whole amount then due and payable on such
Debentures for principal (and premium, if any), and interest upon the overdue
principal, and, to the extent that payment of such interest shall be legally
enforceable, upon overdue interest, at the rate borne by the Debentures; and,
in addition thereto, such further amount as shall be sufficient to cover the
costs and expenses of collection, including the reasonable compensation,
expenses, disbursements and advances of the Trustee, its agents and counsel.
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If the Bank fails to pay such amounts forthwith upon such demand, the
Trustee, in its own name and as trustee of an express trust, may institute a
judicial proceeding for the collection of the sums so due and unpaid, may
prosecute such proceeding to judgment or final decree and may enforce the same
against the Bank or any other obligor upon the Debentures and collect the
moneys adjudged or decreed to be payable in the manner provided by law out of
the property of the Bank or any other obligor upon the Debentures, wherever
situated.
If an Event of Default occurs and is continuing, the Trustee may in
its discretion proceed to protect and enforce its rights and the rights of the
Holders by such appropriate judicial proceedings as the Trustee shall deem
most effectual to protect and enforce any such rights, whether for the
specific enforcement of any covenant or agreement in this Indenture or in aid
of the exercise of any power granted herein, or to enforce any other proper
remedy.
Section 8.04 Trustee May File Proofs of Claim.
In case of the pendency of any receivership, insolvency,
reorganization or liquidation proceeding (including proceedings where the OTS
is appointed conservator, receiver, liquidator or other legal custodian of the
Bank) or any voluntary or involuntary case under the Federal bankruptcy law,
as now or hereafter constituted, relative to the Bank or any other obligor
upon the Debentures or the property of the Bank or of such other obligor or
their creditors, the Trustee (irrespective of whether the principal of the
Debentures shall then be due and payable as therein expressed or by
declaration of acceleration or otherwise and irrespective of whether the
Trustee shall have made any demand on the Bank for the payment of overdue
principal of interest) shall be entitled and empowered, by intervention in
such proceeding or otherwise,
(1) to file and prove a claim for the whole amount of
principal, premium, if any, and interest owing and unpaid in respect
of the Debentures and to file such other papers or documents as may
be necessary or advisable in order to have the claims of the Trustee
(including any claim for the reasonable compensation, expenses,
disbursements and advances of the Trustee, its agents and counsel)
and of the Holders allowed in such judicial proceeding,
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(2) to collect and receive any moneys or other property
payable or deliverable on any such claims and to distribute
the same, and
(3) unless prohibited by law or applicable regulations, to
vote on behalf of the Holders in any election of a trustee in
bankruptcy or other person performing similar functions;
and any custodian, receiver, assignee, trustee, liquidator, sequestrator or
other similar official in any such judicial proceeding is hereby authorized by
each Holder to make such payments to the Trustees and, in the event that the
Trustee shall consent to the making of such payments directly to the Holders,
to pay to the Trustee any amount due it for the reasonable compensation,
expenses, disbursements and advances of the Trustee, its agents and counsel,
and any other amounts due the Trustee under Section 9.07.
Nothing herein contained shall be deemed to authorize the Trustee to
authorize or consent to or accept or adopt on behalf of any Holder any plan of
reorganization, arrangement, adjustment or composition affecting the
Debentures or the rights of any Holder thereof or to authorize the Trustee to
vote in respect of the claim of any Holder in any such proceeding, except as
aforesaid with respect to the election of a trustee in bankruptcy or other
person performing similar functions.
Section 8.05 Trustee May Enforce Claims Without Possession of
Debentures.
All rights of action and claims under this Indenture or the
Debentures may be prosecuted and enforced by the Trustee without the
possession of any of the Debentures or the production thereof in any
proceeding relating thereto, and any such proceeding instituted by the Trustee
shall be brought in its own name as trustee of an express trust, and any
recovery of judgment shall, after provision for the payment of reasonable
compensation, expenses, disbursements and advances of the Trustee, its agents
and counsel, be for the ratable benefit of the Holders in respect of which
such judgment has been recovered.
Section 8.06 Application of Money Collected.
Any money collected by the Trustee pursuant to this Article shall be
applied in the following order, at the date or dates fixed by the Trustee and,
in case of the distribution of such money on account of principal, premium,
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if any, or interest, upon presentation of the Debentures and the notation
thereon of the payment if only partially paid and upon surrender thereof if
fully paid:
FIRST: To the payment of all amounts due the Trustee (or
any predecessor Trustee) under Section 9.07;
SECOND: To the payment of all amounts then due and
payable for the principal of, premium, if any, and interest,
to repay Senior Indebtedness of the Bank;
THIRD: To the payment of the amounts then due and unpaid for
principal of, premium, if any, and interest on the Debentures in
respect of which or for the benefit of which such money has been
collected, ratably, without preference or priority of any kind,
according to the amounts due and payable on such Debentures for
principal, premium, if any, and interest, respectively, and
FOURTH: The balance, if any, to the Bank.
Section 8.07 Limitation on Suits.
No Holder shall have any right to institute any proceeding, judicial
or otherwise, with respect to this Indenture, or for the appointment of a
receiver or trustee, or for any other remedy hereunder, unless
(1) such Holder has previously given written notice to
the Trustee of a continuing Event of Default;
(2) the Holders of not less than 25% in aggregate principal
amount of the Outstanding Debentures have made written request to the
Trustee to institute proceedings in respect of such Event of Default
in its own name as Trustee hereunder;
(3) such Holder or Holders have offered to the Trustee
reasonable indemnity against the costs, expenses and liabilities to
be incurred in compliance with such request;
(4) the Trustee for 60 days after its receipt of such
notice, request and offer of indemnity has failed to institute any
such proceeding; and
(5) no direction inconsistent with such written request has
been given to the Trustee during such 60-day period by the Holders of
a majority in
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aggregate principal amount of the outstanding Debentures;
it being understood and intended that no one or more Holders shall have any
right in any manner whatever by virtue of, or by availing of, any provision of
this Indenture to affect, disturb or prejudice the rights of any other
Holders, or to obtain or to seek to obtain priority or preference over any
other Holders or to enforce any right under this Indenture, except in the
manner herein provided and for the equal and ratable benefit of all the
Holders.
Section 8.08 Unconditional Right of Holders to Receive Principal,
Premium and Interest.
Subject to the provision of Section 3.09, Article Four and Section
8.02, and notwithstanding any other provision in this Indenture, the Holder of
any Debenture shall have the right, which is absolute and unconditional, to
receive payment of the principal of, premium, if any, and (subject to Section
3.06) interest on such Debenture on the Maturity Date or the respective dates
when due expressed in such Debenture (or, in the case of redemption, on the
Redemption Date) and to institute suit for the enforcement of any such
payment, and such rights shall not be impaired without the consent of such
Holder.
Section 8.09 Restoration of Rights and Remedies.
If the Trustee or any Holder has instituted any proceeding to enforce
any right or remedy under this Indenture and such proceeding has been
discontinued or abandoned for any reason, or has been determined adversely to
the Trustee or to such Holder, then and in every such case, subject to any
determination in such proceeding, the Bank, the Trustee and the Holders shall
be restored severally and respectively, to their former positions hereunder and
thereafter all rights and remedies of the Trustee and the Holders shall
continue as though no such proceeding had been instituted.
Section 8.10 Rights and Remedies Cumulative.
Except as provided in Section 3.09, no right or remedy herein
conferred upon or reserved to the Trustee or to the Holders is intended to be
exclusive of any other right or remedy, and every right and remedy shall, to
the extent permitted by law, be cumulative and in addition to every other
right and remedy given hereunder or now or hereafter existing at law or in
equity or otherwise. The assertion or employment of any right or remedy
hereunder, or
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otherwise, shall not prevent the concurrent assertion or employment of any
other appropriate right or remedy.
Section 8.11 Delay or Omission Not Waiver.
No delay or omission of the Trustee or of any Holder to exercise any
right or remedy accruing upon any Event of Default shall impair any such right
or remedy or constitute a waiver of any such Event of Default or any
acquiescence therein. Every right and remedy given by this Article or by law
to the Trustee or to the Holders may be exercised from time to time, and as
often as may be deemed expedient, by the Trustee or by the Holders, as the
case may be.
Section 8.12 Control by Holders.
The Holders of not less than a majority in aggregate principal amount
of the outstanding Debentures shall have the right to direct the time, method
and place of conducting any proceeding for any remedy available to the Trustee
or exercising any trust or power conferred on the Trustee, provided, that
(1) such direction shall not be in conflict with any rule
or law or with this Indenture,
(2) the Trustee may take any other action deemed proper
by the Trustee which is not inconsistent with such direction,
and
(3) subject to the provisions of Section 9.01, the Trustee
shall have the right to decline to follow such direction if the
Trustee shall determine that such direction would be unjustly
prejudicial to the Holders not joining in such direction or would
involve the Trustee in any personal liability.
Section 8.13 Waiver of Past Defaults.
The Holders of not less than a majority in aggregate principal amount
of the then outstanding Debentures may on behalf of the Holders of all the
Debentures waive any past default hereunder and its consequences, and waive
compliance by the Bank with the provisions of this Indenture, except
(1) a default in the payment of the principal of,
premium, if any, or interest on any Debenture, or
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(2) a covenant hereof which under Section 11.02 cannot be modified or
amended without the consent of the Holder of each Outstanding Debenture
affected.
Upon any such waiver, such default shall cease to exist, and any Event of
Default arising therefrom shall be deemed to have been cured, for every
purpose of this Indenture, and the Trustee, the Bank and the Holders shall be
restored to their former positions and rights hereunder. Any such waiver
shall bind each then-existing Holder and every future Holder of any
Debenture, but no such waiver shall extend to any subsequent or other default
or impair any right consequent thereon.
Section 8.14 Undertaking for Costs.
All parties to this Indenture agree, and each Holder of any Debenture by
this acceptance thereof shall be deemed to have agreed, that any court may in
its discretion require, in any suit for the enforcement of any right or
remedy under this Indenture, or in any suit against the Trustee for any
action taken, suffered or omitted by it as Trustee, the filing by any party
litigant in such suit of an undertaking to pay the costs of such suit, and
that such court may in its discretion assess reasonable costs, including
reasonable attorneys' fees, against any party litigant in such suit, having
due regard to the merits and good faith of the claims or defenses made by such
party litigant; but the provisions of this Section shall not apply to any
suit instituted by the Trustee, to any suit instituted by any Holder, or
group of Holders, holding in the aggregate more than 10% in aggregate
principal amount of the outstanding Debentures, or to any suit instituted by
any Holder for the enforcement of the payment of the principal of, premium,
if any, or interest on any Debenture on or after, respectively, the Maturity
Date, the Redemption Date or the date such interest was due and payable.
Section 8.15 Waiver of Stay or Extension Laws.
The Bank covenants (to the extent that it may lawfully do so) that it will
not at any time insist upon, or plead, or in any manner whatsoever claim or
take the benefit or advantage of, any stay or extension law wherever enacted,
now or at any time hereafter in force, which may affect the covenants or the
performance of this Indenture; and the Bank (to the extent that it may
lawfully do so) hereby expressly waives all benefit or advantage of any such
law and covenants that it will not hinder, delay or impede the
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execution of any power herein granted to the Trustee, but will suffer and
permit the execution of every such power as though no such law had been
enacted.
ARTICLE NINE
THE TRUSTEE
Section 9.01 Certain Duties and Responsibilities.
(a) Except during the continuance of an Event of Default,
(1) the Trustee undertakes to perform such duties and only such duties as
are specifically set forth in this Indenture, and no implied covenants or
obligations shall be read into this Indenture against the Trustee; and
(2) In the absence of bad faith on its part, the Trustee may conclusively
rely, as to the truth of the statements and the correctness of the opinions
expressed therein, upon certificates or opinions furnished to the Trustee
and conforming to the requirements of this Indenture; but in the case of
any such certificates or opinions which by any provisions hereof are
specifically required to be furnished to the Trustee, the Trustee shall be
under a duty to examine the same to determine whether or not they conform
to the requirements of this Indenture.
(b) In case an Event of Default has occurred and is continuing, the
Trustee shall exercise such of the rights and powers vested in it by this
Indenture, and use the same degree of care and skill in their exercise, as a
prudent man would exercise or use under the circumstances in the conduct of
his own affairs.
(c) No provision of this Indenture shall be construed to relieve the
Trustee from liability for its own negligent action, its own negligent
failure to act, or its own willful misconduct, except that
(1) this Subsection shall not be construed to limit the effect of
Subsection (a) of this Section;
(2) the Trustee shall not be liable for any error of judgment made in
good faith by a Responsible Officer, unless it shall be provided that the
Trustee was negligent in ascertaining the pertinent facts;
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(3) the Trustee shall not be liable with respect to any action taken or
omitted to be taken by it in good faith in accordance with the direction
of the Holders of not less than a majority in aggregate principal amount of
the Outstanding Debentures relating to the time, method and place of
conducting any proceeding for any remedy available to the Trustee, or
exercising any trust or power conferred upon the Trustee, under this
Indenture.
(4) No provision of this Indenture shall require the Trustee to expend or
risk its own funds or otherwise incur any financial liability in the
performance of any of its duties hereunder, or in the exercise of its
rights or powers, if it shall have reasonable grounds for believing that
repayment of such funds or adequate indemnity against such risk or
liability is not reasonably assured to it.
(d) Whether or not therein expressly so provided, every provision of this
Indenture relating to the conduct or affecting the liability of or affording
protection to the Trustee shall be subject to the provisions of this Section.
Section 9.02 Notice of Defaults.
Within 90 days after the occurrence of any default hereunder, the Trustee
shall transmit by mail to all Holders, as their names and addresses appear in
the Debenture Register, notice of such default hereunder known to the
Trustee, unless such default shall have been cured or waived; provided,
however, that, except in the case of a default in the payment of the
principal of, premium, if any, or interest on any Debenture, the Trustee
shall be protected in withholding such notice if and so long as the board of
directors, the executive committee, or a trustee committee of directors
and/or Responsible Officers of the Trustee in good faith determine that the
withholding of such notice is in the interest of the Holders. For the purpose
of this section, the term "default" means any event which is, or after notice
or lapse of time or both would become, an Event of Default.
Section 9.03 Certain Rights of Trustee.
Subject to the provisions of Section 9.01:
(1) the Trustee may rely and shall be protected in acting or refraining
from acting upon any resolution, certificate, statement, instrument,
opinion, report, notice, request, direction, consent, order,
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bond, debenture, note or other paper or document believed by it to be
genuine and to have been signed or presented by the proper party or
parties;
(2) any request or direction of the Bank mentioned herein shall be
sufficiently evidenced by a Request of the Bank or Order of the Bank and
any resolution of the Board of Directors may be sufficiently evidenced by
the Board Resolution;
(3) whenever in the administration of this Indenture the Trustee shall
deem it desirable that a matter be provided or established prior to taking,
suffering or omitting any action hereunder, the Trustee (unless other
evidence be herein specifically prescribed) may, in the absence of bad
faith on its part, rely upon an Officers' Certificate;
(4) the Trustee may consult with counsel and the advice of such counsel
or any Opinion of Counsel shall be full and complete authorization and
protection in respect of any action taken, suffered or omitted by it
hereunder in good faith and in reliance thereon;
(5) the Trustee shall be under no obligation to exercise any of the
rights or powers vested in it by this Indenture at the request or
direction of any of the Holders pursuant to this Indenture, unless such
Holders shall have offered to the Trustee reasonable security or indemnity
against the costs, expenses and liabilities which might be incurred by it
in compliance with such request or direction;
(6) the Trustee shall not be bound to make any investigation into the
facts or matters stated in any resolution, certificate, statement,
instrument, opinion, report, notice, request, direction, consent, order,
bond, debenture, note or other paper or document, but the Trustee, in its
discretion, may make such further inquiry or investigation into such facts
or matters as it may see fit, and, if the Trustee shall determine to make
such further inquiry or investigation, it shall be entitled to examine the
books, records and premises of the Bank, personally or by agent or
attorney, directly relating to such facts or matters; and
(7) the Trustee may execute any of the trusts or powers hereunder or
perform any duties hereunder either directly or by or through agents or
attorneys and the Trustee shall not be responsible for any misconduct
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or negligence on the part of any agent or attorney appointed with due care
by it hereunder.
Section 9.04 Not Responsible for Recitals or Issuance of Debentures.
The recitals contained herein and in the Debentures, except in the
Trustee's certificates of authentication, shall be taken as the statements of
the Bank, and the Trustee assumes no responsibility for their correctness.
The Trustee makes no representations as to the validity or sufficiency of
this Indenture or of the Debentures. The Trustee shall not be accountable
for the use or application by the Bank of the Debentures or the proceeds
thereof.
Section 9.05 May Hold Debentures.
The Trustee, any Paying Agent, Debenture Registrar or any other agent of
the Bank, in its individual or any other capacity, may become the owner or
pledgee of Debentures and, subject to Sections 9.08 and 9.13, may otherwise
deal with the Bank with the same rights it would have if it were not Trustee,
Paying Agent, Debenture Registrar or such other agent.
Section 9.06 Money Held in Trust.
Money held by the Trustee or any Paying Agent in trust hereunder need not
be segregated from other funds except to the extent required by law. Neither
the Trustee nor any Paying Agent shall be under any liability for interest on
any money received by it hereunder except as otherwise agreed with the Bank.
Section 9.07 Compensation and Reimbursement.
The Bank agrees:
(1) to pay to the Trustee from time to time reasonable compensation for
all services rendered by it hereunder (which compensation shall not be
limited by any provision of law in regard to the compensation of a trustee
of an express trust);
(2) except as otherwise expressly provided herein, to reimburse the
Trustee upon its request and the receipt of appropriate documentation for
all reasonable expenses, disbursements and advances incurred or made by
the Trustee in accordance with any provision of this Indenture (including
the reasonable compensation
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and the expenses and disbursements of its agents and counsel), except any
such expense, disbursement or advance as may be attributable to its
negligence or bad faith; and
(3) to indemnify the Trustee (and any predecessor Trustee) for, and to
hold it harmless against, any loss, liability or expense incurred without
negligence or bad faith on its part, arising out of or in connection with the
acceptance or administration of this trust or its duties hereunder, including
the reasonable costs and expenses of defending itself against any claim or
liability in connection with the exercise of performance of any of its powers
or duties hereunder.
As security for the performance of the obligations of the Bank under this
Section, the Trustee shall have a lien prior to the Debentures upon all
property and funds held or collected by the Trustee as such, except funds
held in trust for the payment of principal of, premium, if any, or interest
on Debentures.
When the Trustee incurs expenses or renders services in connection with an
Event of Default specified in Section 8.01(3) or (4), the expenses and the
compensation for such services are intended to constitute expenses of
administration under any bankruptcy law.
Section 9.08 Disqualification; Conflicting Interests.
(a) If the Trustee has or shall acquire any conflicting interest, as
defined in this Section, it shall, within 90 days after ascertaining that it
has such conflicting interest, either eliminate such conflicting interest or
resign in the manner and with the effect hereinafter specified in this Article
Nine.
(b) In the event that the Trustee shall fail to comply with the provisions
of Subsection (a) of this Section, the Trustee shall, within 10 days after
the expiration of such 90-day period, transmit by mail to all Holders, as
their names and addresses appear in the Debenture Register, notice of such
failure.
(c) For the purposes of this Section, the Trustee shall be deemed to have
a conflicting interest if
(1) the Trustee is trustee under another indenture under which any other
securities, or certificates of interest or participation in any other
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securities, of the Bank are outstanding, unless such other indenture is a
collateral trust indenture under which the only collateral consists of
Debentures issued under this Indenture;
(2) the Trustee or any of its directors or executive officers is an
obligor upon the Debentures or an underwriter for the Bank;
(3) the Trustee directly or indirectly controls or is directly or
indirectly controlled by or is under direct or indirect common control with
the Bank or an underwriter for the Bank;
(4) the Trustee or any of its directors or executive officers is a
director, officer, partner, employee, appointee or representative of the
Bank, or of an underwriter (other than the Trustee itself) for the Bank who
is currently engaged in the business of underwriting, except that (i) one
individual may be a director or an executive officer, or both, of the Trustee
and a director or an executive officer, or both, of the Bank but may not be
at the same time an executive officer of both the Trustee and the Bank; (ii)
if and so long as the number of directors of the Trustee in office is more
than nine, one additional individual may be a director or an executive
officer, or both, of the Trustee and a director of the Bank; and (iii) the
Trustee may be designated by the Bank or by any underwriter for the Bank to
act in the capacity of transfer agent, registrar, custodian, paying agent,
fiscal agent, escrow agent or depositary, or in any other similar capacity,
or, subject to the provisions of paragraph (1) of this Subsection, to act as
trustee, whether under an indenture or otherwise;
(5) 10% or more of the voting securities of the Trustee is beneficially
owned either by the Bank or by any director, partner or executive officer
thereof, or 20% or more of such voting securities is beneficially owned,
collectively, by any two or more of such persons; or 10% or more of the
voting securities of the Trustee is beneficially owned either by an
underwriter for the Bank or by any director, partner or executive officer
thereof, or is beneficially owned, collectively, by any two or more such
persons;
(6) the Trustee is the beneficial owner of, or holds as collateral
security for an obligation which is in default (as hereinafter in this
Subsection defined), (i) 5% or more of the voting securities, or
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10% or more of any other class of security, of the Bank not including the
Debentures issued under this Indenture and securities issued under any other
indenture under which the Trustee is also trustee, or (ii) 10% or more of any
class of security of an underwriter for the Bank;
(7) the Trustee is the beneficial owner of, or holds as collateral
security for an obligation which is in default (as hereinafter in this
Subsection defined), 5% or more of the voting securities of any person who,
to the knowledge of the Trustee, owns 10% or more of the voting securities
of, or controls directly or indirectly or is under direct or indirect common
control with, the Bank;
(8) the Trustee is the beneficial owner of, or hold as collateral security
for an obligation which is in default (as hereinafter in this Subsection
defined), 10% or more of any class of security of any person who, to the
knowledge of the Trustee, owns 50% or more of the voting securities of the
Bank; or
(9) the Trustee owns, on January 15 in any calendar year, in the capacity
of executor, administrator, testamentary or inter vivos trustee, guardian,
committee or conservator, or in any other similar capacity, an aggregate of
25% or more of the voting securities, or of any class of security, of any
person, the beneficial ownership of a specified percentage of which would
have constituted a conflicting interest under paragraph (6), (7) or (8) of
this Subsection. As to any such securities of which the Trustee acquired
ownership through becoming executor, administrator or testamentary trustee of
an estate which included them, the provisions of the preceding sentence shall
not apply, for a period of two years from the date of such acquisition, to
the extent that such securities included in such estate do not exceed 25% of
such voting securities or 25% of any such class of security. Promptly after
January 15 in each calendar year, the Trustee shall make a check of its
holdings of such securities in any of the above-mentioned capacities as of
such date. If the Bank fails to make payment in full of the principal of,
premium, if any, or interest on any of the Debentures when and as the same
becomes due and payable, and such failure continues for 30 days thereafter,
the Trustee shall make a prompt check of its holdings of such securities in
any of the above-mentioned capacities as of the date of the expiration of
such 30-day period, and after such date, notwithstanding the foregoing
provisions of this paragraph, all such
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securities so held by the Trustee, with sole or joint control over such
securities vested in it, shall, but only so long as such failure shall
continue, be considered as though beneficially owned by the Trustee for the
purposes of paragraphs (6), (7) and (8) of this Subsection.
The specification of percentages in paragraph (5) to (9), inclusive, of
this Subsection shall not be construed as indicating that the ownership of
such percentages of the securities of a person is or is not necessary or
sufficient to constitute direct or indirect control for the purposes of
paragraph (3) or (7) of this Subsection.
For the purposes of paragraphs (6), (7), (8) and (9) of this Subsection
only, (i) the terms "security" and "securities" shall include only such
securities as are generally known as corporate securities, but shall not
include any note or other evidence or indebtedness issued to evidence an
obligation to repay moneys lent to a person by one or more banks, trust
companies or banking firms, or any certificate of interest or participation
in any such note or evidence of indebtedness; (ii) an obligation shall be
deemed to be "in default" when a default in payment of principal shall have
continued for 30 days or more and shall not have been cured; and (iii) the
Trustee shall not be deemed to be the owner or holder of (A) any security
which it holds as collateral security, as trustee or otherwise, for an
obligation which is not in default as defined in clause (ii) above, or (B)
any security which it holds as collateral security under this Indenture,
irrespective of any default hereunder, or (C) any security which it holds as
agent for collection, or as custodian, escrow agent or depositary, or in any
similar representative capacity.
(d) For the purposes of this Section:
(1) The term "underwriter," when used with reference to the Bank, means
every person who, within three years prior to the time as of which the
determination is made, has purchased from the Bank with a view to, or has
offered or sold for the Bank in connection with, the distribution of any
security of the Bank outstanding at such time, or has participated or has
had a direct or indirect participation in any such undertaking, or has
participated or has had a participation in the direct or indirect
underwriting of any such undertaking, but such term shall not include a
person whose interest was limited to a commission from an underwriter or
dealer not in excess of the usual and customary distributors' or sellers'
commission.
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(2) The term "director" means any director of a corporation, or any
individual performing similar functions with respect to any organization,
whether incorporated or unincorporated.
(3) The term "person" means an individual, a corporation, a partnership,
an association, a joint-stock company, a trust, an unincorporated
organization or a government or political subdivision thereof. As used in
this paragraph, the term "trust" shall include only a trust where the
interest or interests of the beneficiary or beneficiaries are evidenced by
a security.
(4) The term "voting security" means any security presently entitling the
owner or holder thereof to vote in the direction or management of the
affairs of a person, or any security issued under or pursuant to any
trust, agreement or arrangement whereby a trustee or trustees or agent or
agents for the owner or holder of such security are presently entitled to
vote in the direction or management of the affairs of a person.
(5) The term "Bank" means any obligor upon the Debentures.
(6) The term "executive officer" means the president, every vice
president, every trust officer, the cashier, the secretary and the
treasurer of a corporation, and any individual customarily performing
similar functions with respect to any organization whether incorporated or
unincorporated, but shall not include the chairman of the board of
directors.
(e) The percentages of voting securities and other securities specified in
this Section shall be calculated in accordance with the following provisions:
(1) A specified percentage of the voting securities of the Trustee, the
Bank or any other person referred to in this Section (each of whom is
referred to as a "person" in this paragraph) means such amount of the
outstanding voting securities of such person as entitles the holder or
holders thereof to cast such specified percentage of the aggregate votes
which the holders of all the outstanding voting securities of such person are
entitled to cast in the direction or management of the affairs of such
person.
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(2) A specified percentage of a class of securities of a person means such
percentage of the aggregate amount of securities of the class outstanding.
(3) The term "amount," when used in regard to securities, means the
principal amount if relating to evidences of indebtedness, the number of
shares if relating to capital shares and the number of units if relating to
any other kind of security.
(4) The term "outstanding" means issued and not held by or for the account
of the issuer. The following securities shall not be deemed outstanding
within the meaning of this definition:
(i) securities of an issuer held in a sinking fund relating to securities
of the issuer of the same class;
(ii) securities of an issuer held in a sinking fund relating to another
class of securities of the issuer, if the obligation evidenced by such
other class of securities is not in default as to principal or interest or
otherwise;
(iii) securities pledged by the issuer thereof as security for an
obligation of the issuer not in default as to principal or interest or
otherwise; and
(iv) securities held in escrow if placed in escrow by the issuer thereof;
provided, however, that any voting securities of an issuer shall be deemed
outstanding if any person other than the issuer is entitled to exercise the
voting rights thereof.
(5) A security shall be deemed to be of the same class as another security
if both securities confer upon the holder or holders thereof substantially
the same rights and privileges; provided, however, that in the case of
secured evidences of indebtedness, all of which are issued under a single
indenture, differences in the interest rates or maturity dates of various
series thereof shall not be deemed sufficient to constitute such series
different classes; and provided, further, that in the case of unsecured
evidence of indebtedness, differences in the interest rates or
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maturity dates thereof shall not be deemed sufficient to constitute them
securities of different classes, whether or not they are issued under a
single indenture.
Section 9.09 Corporate Trustee Required; Eligibility.
There shall at all items be a trustee hereunder which shall be a
corporation organized and doing business under the laws of the United States
of America, any State thereof or the District of Columbia, authorized under
such laws to exercise corporate trust powers, having a combined capital and
surplus of at least $50,000,000 subject to supervision or examination by
Federal, State or District of Columbia authority. If such corporation
publishes reports of condition at least annually, pursuant to law or to the
requirements of said supervising or examining authority, then for the
purposes of this Section, the combined capital and surplus of such
corporation shall be deemed to be its combined capital and surplus as set
forth in its most recent report of condition so published. If at any time the
Trustee shall cease to be eligible in accordance with the provisions of this
Section, it shall resign immediately in the manner and with the effect
hereinafter specified in this Article.
Section 9.10 Resignation and Removal; Appointment of Successor.
(a) No resignation or removal of the Trustee and no appointment of a
successor Trustee pursuant to this Article shall become effective until the
acceptance of appointment by the successor Trustee under Section 9.11.
(b) The Trustee may resign at any time by giving written notice thereof to
the Bank. If an instrument of acceptance by a successor Trustee shall not
have been delivered to the Trustee within 30 days after the giving of such
notice of resignation, the resigning Trustee may petition any court of
competent jurisdiction for the appointment of a successor Trustee.
(c) The Trustee may be removed at anytime by Act of the Holders of a
majority in aggregate principal amount of the Outstanding Debentures,
delivered to the Trustee and to the Bank.
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(d) If at any time:
(1) the Trustee shall fail to comply with Section 9.08(a) after written
request therefor by the Bank or by any Holder who has been a bona fide
Holder for at least six months, or
(2) The Trustee shall cease to be eligible under Section 9.09 and shall
fail to resign after written request therefor by the Bank or by any such
Holder, or
(3) the Trustee shall become incapable of acting with respect to the
Debentures or a decree or order for relief by a court having jurisdiction
in the premises shall have been entered for the appointment of a receiver,
custodian, liquidator, assignee, trustee, sequestrator (or other similar
official) of the Trustee or of its property or affairs or any public
officer shall take charge or control of the Trustee or of its property or
affairs for the purpose of rehabilitation, conservation, winding up or
liquidation, or
(4) the Trustee shall commence a voluntary case under the Federal
bankruptcy law, as now or hereafter constituted, or any other applicable
Federal or State bankruptcy, insolvency or similar law or shall consent to
the appointment of or taking possession by a receiver, custodian,
liquidator, assignee, trustee, sequestrator (or other similar official) of
the Trustee or its property or affairs, or shall make an assignment for
the benefit of creditors, or shall fail generally to pay its debts as they
become due, or shall take corporate action in furtherance of any such
action,
then, in any such case, (i) the Bank by a Board Resolution may remove the
Trustee, or (ii) subject to Section 8.13, any Holder who has been a bona fide
Holder for at least six months may, on behalf of himself and all others
similarly situated, petition any court of competent jurisdiction for the
removal of the Trustee and the appointment of a successor Trustee.
(e) If the Trustee shall resign, be removed or become incapable of acting,
or if a vacancy shall occur in the office of Trustee for any cause, the Bank,
by a Board Resolution, shall promptly appoint a successor Trustee. If, within
one year after such resignation, removal or incapability, or the occurrence
of such vacancy, a successor Trustee shall be appointed by Act of the Holders
of a
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majority in aggregate principal amount of the Outstanding Debentures
delivered to the Bank and the retiring Trustee, the successor Trustee so
appointed shall, forthwith upon its acceptance of such appointment, become
the successor Trustee and supersede the successor Trustee appointed by the
Bank. If no successor Trustee shall have been so appointed by the Bank or the
Holders and accepted appointment in the manner hereinafter provided, any
Holder who has been a bona fide Holder for at least six months may, on behalf
of himself and all others similarly situated, subject to Section 8.13,
petition any court of competent jurisdiction for the appointment of a
successor Trustee.
(f) The Bank shall give notice of each resignation and each removal of the
Trustee and each appointment of a successor Trustee by mailing written notice
of such event by first-class mail, postage prepaid, to the Holders as their
names and addresses appear in the Debenture Register. Each notice shall
include the name of the successor Trustee and the address of its Corporate
Trust Office.
Section 9.11 Acceptance of Appointment by Successor.
Every successor Trustee appointed hereunder shall execute, acknowledge and
deliver to the Bank and to the retiring Trustee an instrument accepting such
appointment, and thereupon the resignation or removal of the retiring Trustee
shall become effective and such successor Trustee, without any further act,
deed or conveyance, shall become vested with all the rights, powers, trusts
and duties of the retiring Trustee, but, on request of the Bank or the
successor Trustee, such retiring Trustee shall, upon payment of its charges
(including but not limited to those in Section 9.07), execute and deliver an
instrument transferring to such successor Trustee all the rights, powers and
trusts of the retiring Trustee and shall duly assign, transfer and deliver to
such successor Trustee all property and money held by such retiring Trustee
hereunder, subject, nevertheless, to its lien, if any, provided for in
Section 9.07. Upon request of any such successor Trustee, the Company shall
execute any and all instruments for more fully and certainly vesting in and
confirming to such successor Trustee all such rights, powers and trusts.
No successor Trustee shall accept its appointment unless at the time of
such acceptance such successor Trustee shall be qualified and eligible under
this Article.
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Section 9.12 Merger, Conversion, Consolidation or Succession to Business.
Any corporation into which the Trustee may be merged or converted or with
which it may be consolidated, or any corporation resulting from any merger,
conversion or consolidation to which the Trustee shall be a party, or any
corporation succeeding to all or substantially all the corporate trust
business of the Trustee, shall be the successor of the Trustee hereunder,
provided such corporation shall be otherwise qualified and eligible under
this Article Nine, without the execution or filing of any paper or any
further act on the part of any of the parties hereto. In case any Debentures
shall have been authenticated, but not delivered, by the Trustee then in
office, any successor by merger, conversion or consolidation to such
authenticating Trustee may adopt such authentication and deliver the
Debentures so authenticated with the same effect as if such successor Trustee
had itself authenticated such Debentures; and in case at that time any of the
Debentures shall not have been authenticated, any successor to the Trustee
may authenticate such Debentures either in the name of any predecessor
Trustee hereunder or in the name of the successor Trustee; and in all such
cases such certificate of authentication shall have the full force which it
is anywhere in the Debentures or in this Indenture provided that the
Trustee's certificate of authentication shall have.
Section 9.13 Preferential Collection of Claims Against Bank.
(a) Subject to Subsection (a) of this Section, if the Trustee shall be or
shall become a creditor, directly or indirectly, secured or unsecured, of the
Bank within three months prior to a default, as defined in Subsection (c) of
this Section, or subsequent to such a default, then, unless and until such
default shall be cured, the Trustee shall set apart and hold in a special
account for the benefit of the Trustee individually, the Holders and the
holders of other indenture securities, as defined in Subsection (c) of this
Section:
(1) an amount equal to any and all reductions in the amount due and owing
upon any claim as such creditor in respect of principal or interest,
effected after the beginning of such three months' period and valid as
against the Bank and its other creditors, except any such reduction
resulting from the receipt or
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disposition of any property described in paragraph (2) of this Subsection,
or from the exercise of any right of set-off which the Trustee could have
exercised if a voluntary or involuntary case had been commenced with
respect to the Bank under the Federal bankruptcy law, as now or hereafter
constituted, or any other applicable Federal or State bankruptcy,
insolvency or other similar law upon the date of such default; and
(2) all property received by the Trustee in respect of any claims as such
creditor, either as security therefor, or in satisfaction or composition
thereof, or otherwise, after the beginning of such three months' period,
or an amount equal to the proceeds of any such property, if disposed of,
subject, however, to the rights, if any, of the Bank and its other
creditors in such property or such proceeds.
Nothing herein contained, however, shall affect the right of the Trustee:
(A) to retain, for its own account (i) payments made on account of any
such claim by any Person (other than the Bank) who is liable thereon, and
(ii) the proceeds of the bona fide sale of any such claim by the Trustee
to a third person, and (iii) distributions made in cash, securities or
other property in respect of claims filed against the Bank in bankruptcy
or receivership or in proceedings for reorganization pursuant to the
Federal bankruptcy law, as now or hereafter constituted, or any other
applicable Federal or State bankruptcy, insolvency or other similar law;
(B) to realize, for its own account, upon any property held by it as
security for any such claim, if such property was so held prior to the
beginning of such three months' period;
(C) to realize, for its own account, but only to the extent of the claim
hereinafter mentioned, upon any property held by it as security for any
such claim, if such claim was created after the beginning of such three
months' period and such property was received as security therefor
simultaneously with the creation thereof, and if the Trustee shall sustain
the burden of proving that at the time such property was so received the
Trustee had no reasonable cause to believe that a default, as defined in
Subsection (c) of this Section, would occur within three months; or
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(D) to receive payment on any claim referred to in paragraph (B) or (C),
against the release of any property held as security for such claim as
provided in paragraph (B) or (C), as the case may be, to the extent of the
fair value of such property.
For the purposes of paragraphs (B), (C) and (D), property substituted
after the beginning of such three months' period for property held as
security at the time of such substitution shall, to the extent of the fair
value of the property released, have the same status as the property
released, and, to the extent that any claim referred to in any of such
paragraphs is created in renewal of or in substitution for or for the purpose
of repaying or refunding any preexisting claim of the Trustee as such
creditor, such claim shall have the same status as such pre-existing claim.
If the Trustee shall be required to account, the funds and property held
in such special account and the proceeds thereof shall be apportioned among
the Trustee, the Holders and the holders of other indenture securities in
such manner that the Trustee, the Holders and the holders of other indenture
securities realize, as a result of payments from such special account and
payments of dividends on claims filed against the Bank in bankruptcy or
receivership or in proceedings for reorganization pursuant to the Federal
bankruptcy law, as now or hereafter constituted, or any other applicable
Federal or State bankruptcy, insolvency or other similar law, the same
percentage of their respective claims, figured before crediting to the claim
of the Trustee anything on account of the receipt by it from the Bank of the
funds and property in such special account and before crediting to the
respective claims of the Trustee and the Holders and the holders of other
indenture securities dividends on claims filed against the Bank in bankruptcy
or receivership or in any such proceedings for reorganization, but after
crediting thereon receipts on account of the indebtedness represented by
their respective claims from all sources other than from such dividends and
from the funds and property so held in such special account. As used in this
paragraph, with respect to any claim, the term "dividends" shall include any
distribution with respect to such claim, in bankruptcy or receivership or any
such proceedings for reorganization, whether such distribution is made in
cash, securities or other property, but shall not include any such
distribution with respect to the secured portion, if any, of such claim. The
court in which such bankruptcy, receivership or proceedings for
reorganization is pending shall have jurisdiction (i) to apportion among the
Trustee, the Holders and the holders of other indenture securities, in
accordance with the provisions of this
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paragraph, the funds and property held in such special account and proceeds
thereof, or (ii) in lieu of such apportionment, in whole or in part, to give
to the provisions of this paragraph due consideration in determining the
fairness of the distributions to be made to the Trustee and the Holders and
the holders of other indenture securities with respect to their respective
claims, in which event it shall not be necessary to liquidate or to appraise
the value of any securities or other property held in such special account or
as security for any such claim, or to make a specific allocation of such
distributions as between the secured and unsecured portions of such claims,
or otherwise to apply the provisions of this paragraph as a mathematical
formula.
Any Trustee which has resigned or been removed after the beginning of such
three months' period shall be subject to the provisions of this Subsection as
though such resignation or removal had not occurred. If any Trustee has
resigned or been removed prior to the beginning of such three months' period,
it shall be subject to the provisions of this Subsection if and only if the
following conditions exist:
(i) the receipt of property or reduction of claim which would have given
rise to the obligation to account, if such Trustee had continued as
Trustee, occurred after the beginning of such three months' period; and
(ii) such receipt of property or reduction of claim occurred within three
months after such resignation or removal.
(b) There shall be excluded from the operation of Subsection (a) of this
Section a creditor relationship arising from:
(1) the ownership or acquisition of securities issued under any
indenture, or any security or securities having a maturity of one year or
more at the time of acquisition by the Trustee;
(2) advances authorized by a receivership or bankruptcy court of
competent jurisdiction or by this Indenture, for the purpose of preserving
any property which shall at any time be subject to the lien of this
Indenture or of discharging tax liens or other prior liens of encumbrances
thereon, if notice of such
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advances and of the circumstances surrounding the making thereof is given
to the Holders at the time and in the manner provided in this Indenture;
(3) disbursements made in the ordinary course of business in the capacity
of trustee under an indenture, transfer agent, registrar, custodian,
paying agent, fiscal agent or depositary, or other similar capacity;
(4) an indebtedness created as a result of services rendered or premises
rented; or an indebtedness created as a result of goods or securities sold
in a cash transaction, as defined in Subsection (3) of this section;
(5) the ownership of stock or of other securities of a corporation
organized under the provisions of Section 25(a) of the Federal Reserve
Act, as amended, which is directly or indirectly a creditor of the Bank;
and
(6) the acquisition, ownership, acceptance or negotiation of any drafts,
bills of exchange, acceptances or obligations which fall within the
classification of self-liquidating paper, as defined in Subsection (c) of
this Section.
(c) For the purposes of this Section only:
(1) the term "default" means any failure to make payment is full of the
principal of, premium, if any, or interest on any of the Debentures or
upon the other indenture securities when and as such principal, premium or
interest becomes due and payable;
(2) the term "other indenture securities" means securities upon which the
Bank is an obligor outstanding under any other indenture (i) under which
the Trustee is also trustee, (ii) which contains provisions substantially
similar to the provisions of this Section, and (iii) under which a default
exists at the time of the apportionment of the funds and property held in
such special account;
(3) the term "cash transaction" means any transaction in which full
payment for goods or securities sold is made within seven days after
delivery of the goods or securities in currency or in checks or other
orders drawn upon banks or bankers and payable upon demand;
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(4) the term "self-liquidating paper" means any draft, bill of exchange,
acceptance or obligation which is made, drawn, negotiated or incurred by
the Bank for the purpose of financing the purchase, processing,
manufacturing, shipment, storage or sale of goods, wares or merchandise and
which is secured by documents evidencing title to, possession of, or a
lien upon, the goods, wares or merchandise or the receivables or proceeds
arising from the sale of the goods, wares or merchandise previously
constituting the security, provided the security is received by the
Trustee simultaneously with the creation of the creditor relationship with
the Bank arising from the making, drawing, negotiating or incurring of the
draft, bill of exchange, acceptance or obligation; and
(5) the term "Bank" means any obligor upon the Debentures.
ARTICLE TEN
HOLDERS' LISTS AND REPORTS BY
TRUSTEE AND BANK
Section 10.01 Bank to Furnish Trustee Names and Addresses of Holders.
The Bank will furnish or cause to be furnished to the Trustee:
(a) semi-annually, not more than 15 days after each Regular Record Date, a
list, in such form as the Trustee may reasonably require, containing all the
information in the possession or control of the Bank, or any of its Paying
Agents other than the Trustee, as to the names and addresses of the Holders
as of such Regular Record Date, and
(b) at such other times as the Trustee may request in writing, within 30
days after the receipt by the Bank of any such request, a list of similar
form and content as of a date not more than 15 days prior to the time such
list is furnished; provided, however, that if and so long as the Trustee
shall be the Debenture Registrar, no such list need be furnished.
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Section 10.02 Preservation of Information; Communications to Holders.
(a) the Trustee shall preserve, in as current a form as is reasonably
practicable, the names and addresses of Holders contained in the most recent
list furnished to the Trustee as provided in Section 10.01 and the names and
addresses of Holders received by the Trustee in the capacity of Paying Agent
or Debenture Registrar (if so acting) hereunder. The Trustee may destroy any
list furnished to it as provided in Section 10.01 upon receipt of a new list
so furnished.
(b) If three or more Holders (herein referred to as "applicants") apply in
writing to the Trustee, and furnish to the Trustee reasonable proof that each
such applicant has owned a Debenture for a period of at least six months
preceding the date of such application, and such application states that the
applicants desire to communicate with other Holders with respect to their
rights under this Indenture or under the Debentures and is accompanied by a
copy of the form of proxy or other communication which such applicants
propose to transmit, then the Trustee shall, within five Business Days after
the receipt of such application, at its election, either
(i) afford such applicants access to the information preserved at the
time by the Trustee in accordance with Section 10.02(a), or
(ii) inform such applicants as to the approximate number of Holders whose
names and addresses appear in the information preserved at the time by the
Trustee in accordance with Section 10.02(a), and as to the approximate
cost of mailing to such Holders the form of proxy or other communication,
if any, specified in such application.
If the Trustee shall elect not to afford such applicants access to such
information, the Trustee shall, upon the written request of such applicants,
mail to each Holder whose name and address appear in the information
preserved at the time by the Trustee in accordance with Section 10.02(a) a
copy of the form of proxy or other communication which is specified in such
request, with reasonable promptness after a tender to the Trustee of the
material to be mailed and of payment, or provision for the payment, of the
reasonable expenses of mailing, unless within five days after such tender the
Trustee shall mail to such applicants and file with the OTS, together with a
copy
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of the material to be mailed, a written statement to the effect that, in the
opinion of the Trustee, such mailing would be contrary to the best interest
of the Holders or would be in violation of applicable law. Such written
statement shall specify the basis of such opinion. If the OTS, after
opportunity for a hearing upon the objections specified in the written
statement so filed, shall enter an order refusing to sustain any of such
objections or if, after the entry of an order sustaining one or more of such
objections, the OTS shall find, after notice and opportunity for hearing,
that all the objections so sustained have been met and shall enter an order
so declaring, the Trustee shall mail copies of such material to all such
Holders with reasonable promptness after the entry of such order and the
renewal of such tender; otherwise the Trustee shall be relieved of any
obligation or duty to such applicants respecting their application.
(c) Every Holder of Debentures, by receiving and holding the same, agrees
with the Bank and the Trustee that neither the Bank nor the Trustee nor any
Paying Agent nor any Debenture Registrar shall be held accountable by reason
of the disclosure of any such information as to the names and addresses of
the Holders in accordance with Section 10.02(b), regardless of the sources
from which such information was derived, and that the Trustee shall not be
held accountable by reason of mailing any material pursuant to a request made
under Section 10.02(b).
Section 10.03 Reports by Trustee.
(a) Within 60 days after May 15 of each year commencing with the year
1993, the Trustee shall transmit by mail to all Holders, as their names and
addresses appear in the Debenture Register, a brief report dated as of such
May 15 with respect to:
(1) its eligibility and qualifications under Section 9.09, or in lieu
thereof, if to the best of its knowledge it has continued to be eligible
and qualified under said Section, a written statement to such effect;
(2) the character and amount of any advances (and if the Trustee elects
so to state, the circumstances surrounding the making thereof) made by the
Trustee (as such) which remain unpaid on the date of such report, and for
the reimbursement of which it claims or may claim a lien or charge, prior
to that of the Debentures, on any property or funds held or collected by
it as Trustee, except that the Trustee shall not be required (but may
elect) to report such
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advances if such advances to remaining unpaid aggregate not more than 1/2
of 1% of the aggregate principal amount of the Debentures outstanding
on the date of such report;
(3) the amount, interest rate and maturity date of all other indebtedness
owing by the Bank (or by any other obligor on the Debentures) or the
Trustee in its individual capacity, on the date of such report, with a
brief description of any property held as collateral security therefor,
except an indebtedness based upon a creditor relationship arising in any
manner described in Section 9.13(b)(2), (3), (4) or (6);
(4) the property and funds, if any, physically in the possession of the
Trustee (as such) on the date of such report;
(5) any additional issue of Debentures which the Trustee has not
previously reported; and
(6) any action taken by the Trustee in the performance of its duties
hereunder which it has not previously reported and which in its opinion
materially affects the Debentures, except action in respect of a default,
notice of which has been or is to be withheld by the Trustee in accordance
with Section 9.02.
(b) The Trustee shall transmit by mail to all Holders, as their names and
addresses appear in the Debenture Register, a brief report with respect to
the character and amount of any advances (and if the Trustee elects so to
state, the circumstances surrounding the making thereof) made by the Trustee
(as such) since the date of the last report transmitted pursuant to
Subsection (a) of this Section (or if no such report has yet been so
transmitted, since the date of execution of this Indenture) for the
reimbursement of which it claims or may claim a lien or charge, prior to that
of the Debentures, on property or funds held or collected by it as Trustee
and which it has not previously reported pursuant to this Subsection, except
that the Trustee shall not be required (but may elect) to report such
advances if such advances remaining unpaid at any time aggregate 10% or less
of the aggregate principal amount of the Debentures Outstanding at such time,
such report to be transmitted within 90 days after such time.
(c) A copy of each such report shall, at the time of such transmission, be
filed by the Trustee with the OTS and with the Bank.
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Section 10.04 Reports by Bank.
The Bank shall:
(1) file with the Trustee, within 15 days after the Bank is required to
file the same with the OTS of FDIC, copies of any reports, documents or other
information which the Bank may be required to file with the OTS or FDIC;
(2) file with the Trustee and the OTS, in accordance with rules and
regulations prescribed from time to time by the OTS, such additional
information, documents and reports with respect to compliance by the Bank
with the conditions and covenants of this Indenture as may be required from
time to time by such rules and regulations;
(3) if required by rules and regulations prescribed from time to time by
the OTS or FDIC, transmit by mail to all Holders, as their names and
addresses appear in the Debenture Register, within 30 days after the filing
thereof with the Trustee, such summaries of any information, documents and
reports required to be filed by the Bank pursuant to paragraphs (1) and (2)
of this Section;
(4) deliver to the Trustee, forthwith upon becoming aware of any default
or defaults in the performance of any convenant, agreement or condition
contained in this Indenture, an Officers' Certificate specifying such default
or defaults, and the extent to which principal may be accelerated without
causing the Bank to fail to make the net worth or statutory reserve
requirements set forth in any rule, regulation or order of the OTS or the
FDIC applicable to the Bank; and
(5) deliver to the Trustee within 120 days after the end of each fiscal
year of the Bank ending after the date hereof, an Officers' Certificate,
which Officers' Certificate shall be signed by one of (i) the principal
financial officer, (ii) the principal executive officer, or (iii) the
principal accounting officer, to the effect that:
(a) a review of the activities' of the Bank during such year and of
performance under this Indenture has been made under their supervision;
and
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(b) to the best of their knowledge, based on such review, the Bank has
fulfilled all its obligations under this Indenture throughout such year,
or, if there has been a default in the fulfillment of any such obligation,
specifying each such default known to them and to the nature and status
thereof.
ARTICLE ELEVEN
SUPPLEMENTAL INDENTURES
Section 11.01 Supplemental Indenture without Consent of Holders.
Without the consent of any Holders, the Bank, when authorized by a Board
Resolution, and the Trustee, at any time and from time to time, may enter
into one or more indentures supplemental hereto, in form satisfactory to the
Trustee, for any of the following purposes:
(1) to evidence the succession of another corporation to the Bank, and
the assumption by any successor of the covenants of the Bank herein and in
the Debentures; or
(2) to add to the covenants of the Bank, for the benefit of the Holders,
or to surrender any right or power herein conferred upon the Bank; or
(3) to cure any ambiguity, to correct or supplement any provision herein
which may be inconsistent with any other provision herein, or to make any
other provisions with respect to matters or questions arising under this
Indenture, provided such action shall not adversely affect the interests
of the Holders.
Section 11.02 Supplemental Indentures with Consent of Holders
With the consent of the Holders of not less than a majority in aggregate
principal amount of the then Outstanding Debentures, by Act of said Holders
delivered to the Bank and the Trustee, the Bank, when authorized by a Board
Resolution, and the Trustee may enter into an indenture or indentures
supplemental hereto for the purpose of adding any provisions to or changing
in any manner or eliminating any of the provisions of this Indenture, of
modifying in any manner the rights or obligations of the Bank or of modifying
in any manner the rights of the Holders
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under this Indenture; provided, however, that no such supplemental indenture
shall, without the consent of the Holder of each Outstanding Debenture
affected thereby.
(1) change the Maturity Date of the principal of, or the due date of any
installment of interest on, any Debenture, or reduce the principal amount
thereof, the premium, if any, with respect thereto or the rate of interest
thereon, or change the Place of Payment where, or the coin or currency in
which, any portion of the principal of, premium, if any, or the interest on,
any Debenture is payable, or impair the right to institute suit for the
enforcement of any such payment (subject to Section 3.06) on or after the
Maturity Date or due date thereof (or, in the case of redemption, on or after
the Redemption Date), or modify the provisions of this Indenture with respect
to the subordination of the Debentures in a manner adverse to the Holders, or
(2) reduce the requirements of Section 12.04 for quorum or voting, or
reduce the percentage in aggregate principal amount of the Outstanding
Debentures, the consent of the Holders of which is required for any such
supplemental indenture, or the consent of the Holders of which is required
for any waiver (of compliance with certain provisions of this Indenture or
certain defaults hereunder and their consequences) provided for in this
Indenture, or
(3) modify any of the provisions of this Section or Section 8.13, except
to increase any such percentage or to provide that certain other
provisions of this Indenture cannot be modified or waived without the
consent of the Holder of each Outstanding Debenture affected thereby.
It shall not be necessary for any Act of Holders under this Section to
approve the particular form of any proposed supplemental indenture, but it
shall be sufficient if such Act shall approve the substance thereof.
Section 11.03 Execution of Supplemental Indentures.
In executing, or accepting the additional trusts created by, any
supplemental indenture permitted by this Article or the modifications thereby
of the trust created by this Indenture, the Trustee shall be entitled to
receive, and (subject to Section 9.01) shall be fully protected in relying
upon, an Officers' Certificate and an Opinion of Counsel stating that the
execution of such supplemental indenture is authorized or permitted by this
Indenture. The Trustee may, but shall not be obligated to, enter into any
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such supplemental indenture which affects the Trustee's own rights, duties or
immunities under this Indenture or otherwise.
Section 11.04 Effect of Supplemental Indentures.
Upon the execution of any supplemental indenture under this Article, this
Indenture shall be modified in accordance therewith, and such supplemental
indenture shall form a part of this Indenture for all purposes; and every
Holder of Debentures theretofore or thereafter authenticated and delivered
hereunder shall be bound thereby.
Section 11.05 Reference in Debentures to Supplemental Indentures.
Debentures authenticated and delivered after the execution of any
supplemental indenture pursuant to this Article may, and shall if required by
the Trustee, bear a notation in form approved by the Trustee as to any matter
provided for in such supplemental indenture. If the Bank shall so determine,
new Debentures so modified as to conform, in the opinion of the Trustee and
the Board of Directors, to any such supplemental indenture may be prepared
and executed by the Bank and authenticated and delivered by the Trustee in
exchange for Outstanding Debentures.
Section 11.06 Notice of Supplemental Indenture.
Promptly after the execution by the Bank and the Trustee of any
supplemental indenture pursuant to the provisions of Section 11.02, the Bank
shall give notice, setting forth in general terms the substance of such
supplemental indenture, in the manner provided in Section 1.06. Any failure
of the Bank to give such notice, or any defect therein, shall not in any way
impair or affect the validity of any such supplemental indenture.
Section 11.06 OTS Approval of Supplemental Indenture.
Notwithstanding any provision of this Article, if required by the OTS
Rules and Regulations then in effect, any supplemental indenture proposed to
be entered into pursuant to this Article, whether with or without the consent
of the Holders, the Bank shall submit such supplemental indenture to the OTS
for its approval prior to the execution and delivery of said supplemental
indenture by the Bank and the Trustee. The supplemental indenture shall not
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be executed and delivered by the Bank and the Trustee, and shall not become
effective, until any required approvals of the OTS have been obtained.
ARTICLE TWELVE
MEETINGS OF HOLDERS OF DEBENTURES
Section 12.01 Purposes For Which Meetings May Be Called.
A meeting of the Holders may be called at any time and from time to time
pursuant to this Article to make, give or take any request, demand,
authorization, direction, notice, consent, election, waiver or other action
provided by this Indenture to be made, given or taken by the Holders.
Section 12.02 Call, Notice and Place of Meetings.
(a) The Trustee may at any time call a meeting of the Holders for any
purpose specified in Section 12.01, to be held at such time and at such place
in any Place of Payment as the Trustee or, in case of its failure to act, the
Bank, or the Holders calling the meeting shall from time to time determine.
Notice of every meeting of the Holders, setting forth the time and the place
of such meeting and in general terms the action proposed to be taken at such
meeting, shall be given, in the manner provided in Section 1.06, not less
than 20 nor more than 180 days prior to the date fixed for the meeting.
(b) In case at any time the Bank, pursuant to a Board Resolution, or the
Holders of at least 10% in principal amount of the then Outstanding
Debentures shall have requested the Trustee to call a meeting of the Holders
of Debentures for any purpose specified in Section 12.01, by written request
setting forth in reasonable detail the action proposed to be taken at the
meeting, and the Trustee shall not have given notice of such meeting
specified in Section 12.02(a) within 20 days after receipt of such request
or shall not thereafter proceed to cause the meeting to be held as provided
herein, then the Bank or the Holders of Debentures in the amount above
specified, as the case may be, may determine the time and the place in the
location designated in subsection (a) above for such meeting and may call such
meeting for such purposes by giving notice thereof as provided in subsection
(a) of this Section.
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Section 12.03 Persons Entitled to Vote at Meetings.
To be entitled to vote at any meeting of the Holders, a Person shall be
(1) a Holder of one or more Outstanding Debentures, or (2) a Person appointed
by an instrument in writing as proxy for a Holder or Holders of one or more
Outstanding Debentures by such Holder or Holders. The only Persons who shall
be entitled to be present or to speak at any meeting of Holders shall be the
Persons entitled to vote at such meeting and their counsel, any
representatives of the Trustee and its counsel and any representative of the
Bank and its counsel.
Section 12.04 Quorum; Action.
The Persons entitled to vote a majority in principal amount of the
Outstanding Debentures shall constitute a quorum. In the absence of a quorum
within 30 minutes of the time appointed for any such meeting, the meeting
shall, if convened at the request of the Holders, be dissolved. In any other
case the meeting may be adjourned for a period of not less than 10 days as
determined by the chairman of the meeting prior to the adjournment of such
meeting. In the absence of a quorum at any such adjourned meeting, such
adjourned meeting may be further adjourned for a period of not less than 10
days as determined by the chairman of the meeting prior to the adjournment of
such adjourned meeting. Notice of the reconvening of any adjourned meeting
shall be given as provided in Section 12.0, except that such notice need be
given not less than five days prior to the date on which the meeting is
scheduled to be reconvened. Notice of the reconvening of an adjourned meeting
shall state expressly the percentage of the principal amount of the
Outstanding Debentures which shall constitute a quorum.
Subject to the foregoing, at the reconvening of any meeting adjourned for
a lack of a quorum the Persons entitled to vote 25% in principal amount of
the Outstanding Debentures at the time shall constitute a quorum for the
taking of any action set forth in the notice of the original meeting.
At a meeting or an adjourned meeting duly reconvened and at which a quorum
is present as aforesaid, any resolution and all matters (except as limited by
the proviso to Section 11.02), shall be effectively passed and decided if
passed or decided by the Persons entitled to vote a majority in principal
amount of Outstanding Debentures represented and voting at such meeting.
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Any resolution passed or decision taken at any meeting of the Holders duly
held in accordance with this Section shall be binding on all the Holders,
whether or not present or represented at the meeting.
Section 12.05 Determination of Voting Rights; Conduct and Adjournment of
Meetings.
(a) Notwithstanding any other provisions of this Indenture, the Trustee
may make such reasonable regulations as it may deem advisable for any meeting
of the Holders in regard to proof of the Holding of Debentures and of the
appointment of proxies and in regard to the appointment and duties of
inspectors of votes, the submission and examination of proxies, certificates
and other evidence of the right to vote, and such other matters concerning
the conduct of the meeting as it shall deem appropriate. Except as otherwise
permitted or required by any such regulations, the holder of Debentures shall
be proved in the manner specified in Section 1.04 and the appointment of any
proxy shall be proved in the manner specified in Section 1.04. Such
regulations may provide that written instruments appointing proxies, regular
on their face, may be presumed valid and genuine without the proof specified
in Section 1.04 or other proof.
(b) The Trustee shall, by an instrument in writing, appoint a temporary
chairman of the meeting, unless the meeting shall have been called by the
Bank or by the Holders as provided in Section 12.02(b), in which case the
Bank or the Holders calling the meeting, as the case may be, shall in like
manner appoint a temporary chairman. A permanent chairman and a permanent
secretary of the meeting shall be elected by vote of the Persons entitled to
vote a majority in principal amount of the Outstanding Debentures represented
at the meeting.
(c) At any meeting each Holder or proxy shall be entitled to one vote for
each U.S. $100 principal amount of Debentures held or represented by him
provided, however, that no vote shall be cast or counted at any meeting in
respect of any Debenture challenged as not Outstanding and ruled by the
chairman of the meeting to be not outstanding. The chairman of the meeting
shall have no right to vote, except as a Holder of a Debenture or proxy.
(d) Any meeting of the Holders duly called pursuant to Section 12.02 at
which a quorum is present may be adjourned from time to time by Persons
entitled to vote a majority in principal amount of the Outstanding Debentures
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represented at the meeting; and the meeting may be held as so adjourned
without further notice.
Section 12.06 Counting Votes and Recording Action of Meetings.
The vote upon any resolution submitted to any meeting of the Holder shall
be by written ballots on which shall be subscribed the signatures of the
Holders or of their representatives by proxy and the principal amounts and
serial numbers of the Outstanding Debentures held or represented by them. The
permanent chairman of the meeting shall appoint two inspectors of votes who
shall count all votes cast at the meeting for or against any resolution and
who shall make and file with the secretary of the meeting their verified
written reports in duplicate of all votes cast at the meeting. A record, at
least in duplicate, of the proceedings of each meeting of the Holders shall
be prepared by the secretary of the meeting and there shall be attached to
said record the original reports of the inspectors of votes on any vote by
ballot taken thereat and affidavits by one or more persons having knowledge
of the facts setting forth a copy of the notice of the meeting and showing
that said notice was given as provided in Section 12.02 and, if applicable,
Section 12.04. Each copy shall be signed and verified by the affidavits of
the permanent chairman and secretary of the meeting and one such copy shall
be delivered to the Bank and another to the Trustee to be preserved by the
Trustee, the latter to have attached thereto the ballots voted at the
meeting. Any record so signed and verified shall be conclusive evidence of
the matters therein stated.
This Indenture may be executed in any number of counterparts, each of
which so executed shall be deemed to be an original, but all such
counterparts shall together constitute but one and the same instrument.
(the next page is the signature page)
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SIGNATURES
IN WITNESS WHEREOF, the parties hereto have caused this Indenture to be
duly executed, and their respective corporate seals to be hereunder affixed
and attested, all as of the day and year first above written.
CALIFORNIA FEDERAL BANK,
A FEDERAL SAVINGS BANK
By: /s/ William L. Callender
-----------------------------
Name: William L. Callender
---------------------------
Title: President
--------------------------
Seal
Attest:
/s/ Lourdes Wallis
Name: Lourdes Wallis
CHEMICAL BANK, as Trustee
By:
-----------------------------
Name:
---------------------------
Title:
--------------------------
Seal
Attest:
Assistant Secretary
76(a)
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IN WITNESS WHEREOF, the parties hereto have caused this Indenture to be
duly executed, and their respective corporate seals to be hereunder affixed
and attested, all as of the day and year first above written.
CALIFORNIA FEDERAL BANK,
A FEDERAL SAVINGS BANK
By:
-----------------------------
Name:
---------------------------
Title:
--------------------------
Seal
Attest:
CHEMICAL BANK, as Trustee
- -----------------------------
By: /s/ F. J. Grippe
-----------------------------
Name: F. J. Grippe
---------------------------
Title: Vice President
--------------------------
Seal
Attest:
/s/ Yvonne Semn
- -----------------------------
Trust Officer
76(b)
<PAGE>
STATE OF CALIFORNIA )
) ss.
COUNTY OF LOS ANGELES )
On the 14th day of December, 1992, before me personally came William L.
Callender, to me known, who, being by me duly sworn did depose and say that
he resides at Encino, California; that he is President & C.E.O. of CALIFORNIA
FEDERAL BANK, A FEDERAL SAVINGS BANK, one of the corporations described in
and which executed the foregoing instrument; that he knows the seal of said
corporation; that the seal affixed to said instrument is such corporate seal;
that it was so affixed by order of the Board of Directors of said
corporation, and that he signed his name thereto by like order.
NOTARIAL SEAL
/s/ Leslie A. Lorden
----------------------------
Leslie A. Lorden
Notary Public
State of California
[Artwork omitted] Qualified in California
Commission Expires
August 16, 1995
77
<PAGE>
STATE OF NEW YORK )
) ss.
COUNTY OF NEW YORK )
On the 14th day of December, 1992, before me personally came F.J. Grippo,
to me known, who, being by me duly sworn did depose and say that he resides
at 213 ??? St., Montgomery, N.Y. 12540; that he is Vice President of CHEMICAL
BANK, a New York banking corporation, one of the corporations described in
and which executed the foregoing instrument; that he knows the seal of said
corporation; that the seal affixed to said instrument is such corporate seal;
that it was so affixed by order of the Board of Directors of said
corporation, and that he signed his name thereto by like order.
NOTARIAL SEAL
/s/ Yvonne D. Semn
----------------------------
Yvonne D. Semn
Notary Public
State of New York
Qualified in New York County
Commission Expires
October 1993
78
<PAGE>
EXHIBIT A
(FORM OF FACE OF DEBENTURE)
THIS DEBENTURE IS NOT A SAVINGS ACCOUNT OR DEPOSIT AND IT IS NOT INSURED BY
THE UNITED STATES OR ANY AGENCY OR FUND OF THE UNITED STATES.
ABSENT PRIOR WRITTEN APPROVAL BY THE OFFICE OF THRIFT SUPERVISION, THIS
DEBENTURE IS NOT ELIGIBLE FOR PURCHASE BY ANY SAVINGS ASSOCIATION OR A
CORPORATE AFFILIATE THEREOF, EXCEPT THAT THIS DEBENTURE MAY BE PURCHASED BY A
CORPORATE AFFILIATE OF THE ISSUER OR BY ANY DIVERSIFIED SAVINGS AND LOAN
HOLDING COMPANY AND ANY NON-SAVINGS ASSOCIATION SUBSIDIARY THEREOF.
CALIFORNIA FEDERAL BANK,
A FEDERAL SAVINGS BANK
10% SUBORDINATED DEBENTURE DUE JANUARY 3, 2003
No. ___________ $ ____________
(Minimum $100)
California Federal Bank, a Federal Savings Bank (the "Bank"), for value
received, hereby promises to pay to or registered
assigns, the principal sum of Dollars ($ ) on January 3, 2003, and to
pay interest from the most recent Interest Payment Date to which interest
shall have been paid or duly provided for, or, if no interest has been paid,
from the Issue Date, semi-annually in arrears on July 15 and January 15 in
each year, commencing July 15, 1993, and the Maturity Date at the rate of 10%
per annum, until the principal hereof is paid or duly provided for. The
interest so payable, and punctually paid or duly provided for, on an Interest
Payment Date will, as provided in the Indenture referred to on the reverse
hereof, be paid to the Person in whose name this Debenture (or one or more
Predecessor Debentures) is registered at the close of business on the Regular
Record Date (whether or not a Business Day) next preceding such Interest
Payment Date. Any such interest not so punctually paid or duly provided for
shall forthwith cease to be payable to the registered Holder on such Regular
Record Date, and may be paid to the Person in whose name this Debenture (or
one or more Predecessor Debentures) is registered at the close of business on
a Special Record Date for the payment of such Defaulted Interest to be fixed
by the Trustee, notice
A-1
<PAGE>
whereof shall be given to Holders of Debentures not less than 10 days prior
to such Special Record Date, or may be paid at any time in any other lawful
manner, as more fully provided in such Indenture. Payment of the principal
of, premium, if any, and interest on this Debenture will be made at the
Corporate Trust Office of the Trustee, in New York, New York, in such coin or
currency of the United States of America as at the time of payment is legal
tender for payment of public and private debts; provided, however, that
payment of interest shall be made by check mailed to the address of the
Person entitled thereto as such address shall appear on the Debenture
Register.
Reference is hereby made to the further provisions of this Debenture set
forth on the reverse hereof, which further provisions shall for all purposes
have the same effect as if set forth at this place. ALL OF THE PROVISIONS OF
THIS DEBENTURE ARE SUBJECT TO THE PROVISIONS OF THE FINAL PARAGRAPH OF THE
REVERSE HEREOF.
Unless the certificate of authentication hereon has been duly executed by
the Trustee referred to on the reverse hereof, by manual signature of one of
its authorized officers, this Debenture shall not be entitled to any benefit
under said Indenture, or be valid or obligatory for any purpose.
IN WITNESS WHEREOF, the Bank has caused this Debenture to be duly executed
by the facsimile signatures of its duly authorized officers and a facsimile
of its corporate seal to be imprinted hereon.
Dated:
------------------
CALIFORNIA FEDERAL BANK,
A FEDERAL SAVINGS BANK
By:
------------------------
Title:
[SEAL]
By:
------------------------
Title:
A-2
<PAGE>
CERTIFICATE OF AUTHENTICATION
This is one of the Securities of the Series provided for under the
within-mentioned Indenture.
CHEMICAL BANK, as Trustee
By:
------------------------
Authorized Officer
A-3
<PAGE>
[Form of Reverse of Debenture]
CALIFORNIA FEDERAL BANK,
A FEDERAL SAVINGS BANK
10% SUBORDINATED DEBENTURE DUE JANUARY 3, 2003
This Debenture is one of a duly authorized issue of Debentures of the Bank
designated as its 10% Subordinated Debentures Due January 3, 2003 (herein
called the "Debentures"), limited in aggregate principal amount to
$17,718,000 issued and to be issued under an indenture (herein called the
"Indenture") dated as of December 1, 1992 between the Bank and Chemical Bank,
as trustee (herein called the "Trustee", which term includes any successor
Trustee under the Indenture), to which Indenture and all indentures
supplemental thereto reference is hereby made for a statement of the
respective rights, limitations of rights, duties and obligations thereunder
of the Bank, the Trustee and the Holders of the Debentures, and of the terms
upon which the Debentures are, and are to be, authenticated and delivered.
The principal of, premium, if any, and interest on this Debenture is, to
the extent set forth in the Indenture, expressly subordinated and subject in
right of payment to the prior payment in full of Senior Indebtedness upon the
occurrence of any Specified Event, and this Debenture is issued subject to
such provisions, and each Holder of this Debenture, by accepting the same,
agrees to and shall be bound by such provisions and authorizes and directs
the Trustee on his behalf to take such action as may be necessary or
appropriate to acknowledge or effectuate the subordination as provided, in
the Indenture and appoints the Trustee his attorney-in-fact for any and all
such purposes. "Senior Indebtedness" means with respect to the Bank, the
principal of, premium, if any, and unpaid interest on (a) all savings
accounts, other deposits and customer repurchase agreements held by the Bank,
including instruments and categories of accounts which are authorized after
the issuance of the Debentures by law or by regulatory agencies and which
carry the same priority as currently authorized instruments, whether existing
on the date of execution of this Indenture or arising thereafter, (b) all
Indebtedness of the Bank, including without limitation the Bank's 10.668%
Senior Subordinated Notes Due December 22, 1998; provided, however, that
"Senior Indebtedness" shall not include the Debentures and any other
obligation of the
A-4
<PAGE>
Bank which by its terms is made pari passu or subordinate in right of payment
to the Debentures. "Indebtedness" with respect to any Person, or the Bank,
means any liability of the Bank or any Person for (a) all indebtedness of the
Bank, whether outstanding on the date of execution of the Indenture or
thereafter created, incurred or assumed, which is (i) for money borrowed or
(ii) evidenced by a note or similar instrument given in connection with the
acquisition of any business, properties or assets (including securities),
including the purchase price of real property and all obligations of the Bank
under capitalized leases or purchase money mortgages, (b) all claims
(including post-default interest) against the Bank having the same priority
as savings account holders or any higher priority, (c) any indebtedness of
others of the kinds described in the preceding clauses (a) and (b) for the
payment of which the Bank is responsible or liable as guarantor or otherwise
and (d) amendments, renewals, extensions and refundings of any such
indebtedness, unless in any case in any instrument or instruments evidencing
or securing such indebtedness or pursuant to which the same is outstanding,
or in any such amendment, renewal, extension or refunding, it is provided
that such indebtedness is not superior in right of payment to the Debentures.
"Specified Event" is defined in the Indenture as any insolvency,
receivership, conservatorship, reorganization, readjustment of debt,
marshalling of assets and liabilities or similar proceedings or any
liquidation relating to or winding up of the Bank as a whole, whether
voluntary or involuntary.
The Bank may, at its option, at any time after October 1, 2001, redeem the
Debentures in whole or in part at a price equal to 100% of the principal
amount of the applicable Debentures, in each case together with accrued
interest thereon from the most recent Interest Payment Date to the Redemption
Date.
If the Bank shall elect to redeem any Debenture or any portion thereof,
the Bank shall give notice of such redemption to the Holder of such Debenture
not fewer than 30 nor more than 60 days prior to the Redemption Date. If
fewer than all of the Debentures are to be redeemed, the Trustee shall select
from the Outstanding Debentures, by such method as the Trustee shall deem
fair and appropriate, the Debentures or portions thereof to be redeemed, all
as provided in the Indenture. In the event of a redemption of this Debenture
in part only, a new Debenture or Debentures for the unredeemed portion hereof
will be issued in the name of the Holder hereof upon the cancellation hereof.
Debentures (or portions thereof as aforesaid) for whose redemption and
payment provision is made in accordance with
A-5
<PAGE>
the Indenture shall thereupon cease to be entitled to the benefits of the
Indenture and shall cease to bear interest from and after the Redemption
Date.
If an Event of Default shall occur and be continuing, the principal of the
Debentures may be declared due and payable in the manner and with the effect
provided in the Indenture.
Notwithstanding anything to the contrary in this Debenture or the
Indenture, no Debentures may be called for redemption and the payment of
principal of the Debentures may not be accelerated without the prior approval
of the OTS, if the Bank is failing to meet its regulatory capital
requirements under Part 567 of the OTS Rules and Regulations or, if after
giving effect to such redemption or acceleration, the Bank would fail to meet
such regulatory capital requirements.
The Indenture permits, with certain exceptions as therein provided, the
amendment thereof and the modification of the rights and obligations of the
Bank and the rights of the Holders of the Debentures under the Indenture at
any time by the Bank and the Trustee with the consent of the Holders of a
majority in aggregate principal amount of the Debentures at the time
Outstanding. The Indenture also contains provisions permitting the Holders of
a majority in aggregate principal amount of the Debentures at the time
outstanding, on behalf of the Holders of all the Debentures, to waive
compliance by the Bank with certain provisions of the Indenture and certain
past defaults under the Indenture and their consequences. Any such consent or
waiver by the Holder of this Debenture shall be conclusive and binding upon
such Holder and upon all future holders of this Debenture and of any
Debenture issued upon the registration of transfer hereof or in exchange
herefor or in lieu hereof whether or not notation of such consent or waiver
is made upon this Debenture.
Holders of Debentures may not enforce their rights pursuant to the
Indenture or the Debentures except as provided in the Indenture. Subject to
the last paragraph hereof, no reference herein to the Indenture and no
provision of this Debenture or of the Indenture shall alter or impair the
obligation of the Bank, which is absolute and unconditional, to pay the
principal of, premium, if any, and interest on this Debenture at the times,
place and rate, and in the coin or currency, herein prescribed.
A-6
<PAGE>
As provided in the Indenture and subject to certain limitations therein
set forth, the transfer of this Debenture is registerable on the Debenture
Register of the Bank, upon surrender of this Debenture for registration of
transfer at the Corporate Trust Office of the Trustee, in New York, New York,
and (if so required by the Bank, the Trustee, or the Debenture Registrar) be
duly endorsed by, or accompanied by a written instrument of transfer in form
satisfactory to the Bank, the Debenture Registrar and the Trustee duly
executed by, the Holder hereof or his attorney duly authorized in writing,
additional certification as may be required by the Bank, Trustee or Debenture
Registrar that the transferee is eligible to hold such Debentures under
Section 3.09(c) of the Indenture, and thereupon one or more new Debentures
containing identical terms and provisions, of authorized denominations and
for the same aggregate principal amount, which will be issued to the
designated transferee or transferees.
The Debentures are issuable only in registered form without coupons in
denominations of $100 or any greater integral multiple thereof. As provided
in the Indenture and subject to certain limitations therein set forth,
Debentures are exchangeable for a like aggregate principal amount of
Debentures of different authorized denominations, as requested by the Holder
surrendering the same.
No service charge shall be made for any such registration of transfer or
exchange, but the Bank may require payment of a sum sufficient to cover any
tax or other governmental charge payable in connection therewith.
Prior to due presentment of this Debenture for registration of transfer,
the Bank, the Trustee and any agent of the Bank or the Trustee may treat the
Person in whose name this Debenture is registered as the owner hereof for all
purposes, whether or not this Debenture be overdue, and neither the Bank, the
Trustee nor any such agent shall be affected by notice to the contrary.
This Debenture is not secured by the assets of the Bank or any of its
Affiliates or Subsidiaries, and is not eligible as collateral for any loan by
the Bank.
All terms used in this Debenture which are defined in the Indenture shall
have the meanings assigned to them in the Indenture.
A-7
<PAGE>
Notwithstanding anything to the contrary in this Debenture, the Indenture
or in any related document:
(A) If the FDIC or Resolution Trust Corporation ("RTC") shall be
appointed receiver for the Bank and in its capacity as such shall cause
the Bank to merge with or into another financial institution, or in such
capacity shall sell or otherwise convey part or all of the assets of the
Bank to another financial institution or shall arrange for the assumption
of less than all of the liabilities of the Bank by one or more other
financial institutions, neither the FDIC nor the RTC shall have any
obligation, either in its capacity as receiver or in its corporate
capacity, to contract for or to otherwise arrange for the assumption of
the obligation represented by the Debenture in whole or in part by any
financial institution or institutions which results from any such merger
or which has purchased or otherwise acquired from the FDIC or RTC as
receiver for the Bank, any of the assets of the Bank, or which, pursuant
to any arrangement with the FDIC or RTC, has assumed less than all of the
liabilities of the Bank. To the extent that obligations represented by
this Debenture have not been assumed in full by a financial institution
with or into which the Bank may have been merged, as described in this
subparagraph (A), and/or by one or more financial institutions which have
succeeded to all or a portion of the assets of the Bank, or which have
assumed a portion but not all of the liabilities of the Bank as a result
of one or more transactions entered into by the FDIC or RTC as receiver
for the Bank, then the holder of this Debenture shall be entitled to
payments hereon in accordance with the procedures and priorities set forth
in any applicable receivership regulations or in orders of the FDIC or RTC
relating to such receivership.
(B) In the event that the obligation represented by this Debenture is
assumed in full by another financial institution, which shall succeed by
merger or otherwise to substantially all of the assets and the business of
the Bank, or which shall by arrangement with the FDIC or RTC assume all or
a portion of the liabilities of the Bank, and payment or provision for
payment shall have been made in respect of all matured installments of
interest upon this Debenture together with all matured installments of
principal on this Debenture which shall have become due otherwise than by
acceleration, then any default caused by the appointment of a receiver for
the Bank shall be deemed to have been cured, and any declaration
consequent upon such default declaring the
A-8
<PAGE>
principal and interest on this Debenture to be immediately due and payable
shall be deemed to have been rescinded.
(C) This Debenture is not eligible to be purchased or held by any savings
association or corporate affiliate thereof except that this Debenture may
be purchased or held by a corporate affiliate of the Bank or by a
diversified savings and loan holding company and its non-savings
association subsidiaries. The Bank may not recognize on its transfer books
any transfer made to a savings association or any corporate affiliate
thereof (except as provided in the preceding sentence) and will not be
obligated to make any payments of principal or interest on this Debenture
if the owner hereof is a savings association or any corporate affiliate
thereof (except as provided in the preceding sentence).
A-9
<PAGE>
- -------------------------------------------------------------------------------
CALIFORNIA FEDERAL BANK,
A Federal Savings Bank
and
Chemical Trust Company of California,
Interest Agent
---------------------------
AGREEMENT REGARDING CONTINGENT LITIGATION RECOVERY
PARTICIPATION INTERESTS
Dated as of June 30, 1995
- -------------------------------------------------------------------------------
<PAGE>
AGREEMENT REGARDING CONTINGENT LITIGATION RECOVERY
PARTICIPATION INTERESTS
This Agreement Regarding Contingent Litigation Recovery Participation
Interests (the "Agreement") dated as of June 30, 1995, is made between
California Federal Bank, A Federal Savings Bank (the "Bank"), and Chemical
Trust Company of California, a California trust corporation ("Interest
Agent"), with reference to the following facts:
A. The Bank has brought suit against the United States, California
Federal Bank v. The United States of America, Civil Action No. 92-138C, filed
on February 28, 1992, in the United States Court of Federal Claims (the
"Litigation"), alleging that the United States breached certain contracts
entered into with the Bank and deprived the Bank of certain of its property
without just compensation in violation of the United States Constitution.
B. The Board of Directors of the Bank has determined that it is in
the best interests of the Bank to distribute to the registered holders of its
common stock, $1.00 par value ("Common Stock"), as of July 14, 1995
("Shareholders"), and reserve for management employees and directors who are
holders as of that date of options or warrants to purchase Common Stock
("Management"), the right to receive up to 25.377745% of the Litigation
Recovery, if any (as defined below).
C. Such distribution shall be effected by the issuance and delivery
of (a) an aggregate of 4,919,904 certificates to Shareholders, each
certificate representing the right to receive in cash five millionths of one
percent (0.000005%) of the Litigation Recovery, if any (such payment, the
"Recovery Payment"), and (b) an aggregate of 155,645 such certificates to
Management, subject to the vesting requirements of the corresponding option or
warrant agreements (collectively, the certificates referred to in clauses (a)
and (b) are hereinafter referred to as the "Participation Interests" and the
holders of such Participation Interests as the "Interest Holders").
D. For purposes of this Agreement, the term "Litigation Recovery"
shall mean the cash payment, if any, actually received by the Bank in respect
of a final, nonappealable judgment in or final settlement of the Litigation
after deduction of (i) the aggregate expenses incurred previously and
hereafter by the Bank in prosecuting the Litigation and obtaining such cash
payment, (ii) any income tax liability of the Bank as a result of the Bank's
receipt of such cash payment (net of any income tax benefit to the Bank from
the Recovery Payment to the Interest Holders 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 Participation Interests, including,
without limitation, legal and accounting fees and the fees and expenses of the
Interest Agent.
NOW, THEREFORE, in consideration of these premises and the mutual
agreements herein set forth, the parties hereby agree as follows:
-1-
<PAGE>
Section 1. Appointment of Interest Agent. The Bank hereby appoints
the Interest Agent to act as agent for the Bank in accordance with the terms
and conditions hereinafter set forth, and the Interest Agent hereby accepts
such appointment. The Bank may from time to time appoint such co-certificate
agents as it may deem necessary or desirable.
Section 2. Form of Participation Interests. The Participation
Interests and the form of assignment to be printed on the reverse thereof
shall be substantially in the form of Exhibit A hereto and may have such
letters, numbers or other marks of identification or designation and such
legends (including, without limitation, a legend referring to restrictions on
resale by statutory underwriters, a legend referring to any restrictions on
ownership by certain individuals and a legend referring to any applicable
vesting requirements), summaries or endorsements printed, lithographed or
engraved thereon as the Bank may deem appropriate and as are not inconsistent
with the provisions of this Agreement, or as may be required to comply with
any law or with any rule or regulation made pursuant thereto or with any rule
or regulation of any stock exchange or securities trading system on which the
Participation Interests may from time to time be listed or traded. The Bank
shall furnish to the Interest Agent, in writing, any such legend or
endorsement. Each Participation Interest shall be dated as of the date on
which countersigned by the Interest Agent, either upon initial issuance or
upon transfer or exchange, and on its face shall entitle the holder thereof to
receive, in cash, five millionths of one percent (0.000005%) or a whole
multiple thereof of the Litigation Recovery, if any.
Section 3. Issuance, Countersignature and Registration. The
Participation Interests shall originally be issued and dated as of July 28,
1995, or at such other time or times and with such date or dates as the Bank
may decide in its sole discretion. The Interest Agent shall, upon the Bank's
written instructions, issue, countersign and deliver Participation Interests
to, or on written order of, the Bank. The Participation Interests shall have
been executed on behalf of the Bank by its Chairman of the Board, the
President or a Senior Vice President, by facsimile signature, and have affixed
thereto a facsimile of the Bank's seal which shall be attested to by the
Secretary or an Assistant Secretary of the Bank by facsimile signature. The
Participation Interests shall be manually countersigned by the Interest Agent
and shall not be valid for any purpose unless so countersigned. In case any
officer of the Bank who shall have signed any of the Participation Interests
shall cease to be such officer of the Bank before counter-signature by the
Interest Agent and issuance and delivery by the Bank, such Participation
Interests, nevertheless, may be countersigned by the Interest Agent, issued
and delivered with the same force and effect as though the person who signed
such Participation Interests had not ceased to be such officer of the Bank;
and any Participation Interest may be signed on behalf of the Bank by any
person who, at the actual date of the execution of such Participation
Interest, shall be a proper officer of the Bank to sign such Participation
Interest, although at the date of the execution of this Agreement any such
person was not such an officer.
-2-
<PAGE>
The Interest Agent will maintain books for registration and transfer
of the Participation Interests issued hereunder. Such books shall show the
names and addresses of the respective Interest Holders and the date of
issuance of each of the Participation Interests.
Notwithstanding any other provision of this Agreement, the Interest
Agent shall comply with all applicable requirements and rules of each
securities exchange or securities trading system on which the Bank shall
determine to list or trade the Participation Interests in connection with the
listing or trading of the Participation Interests on each such exchange or
securities trading system. The Bank shall advise the Interest Agent of each
securities exchange or securities trading system on which listing is effected.
Section 4. Transfer, Split Up, Combination and Exchange of
Participation Interests; Mutilated, Destroyed, Lost or Stolen Participation
Interests. Any Participation Interest may be transferred, split up, combined
or exchanged for another Participation Interest or Participation Interests,
entitling the registered holder to receive that percentage of the Litigation
Recovery as the Participation Interest or Participation Interests surrendered
then entitled him to receive; provided, however, that the Bank and Interest
Agent shall not be required to effect any such transfer, split up, combination
or exchange if any of the resulting Participation Interest(s) would represent
a right to receive any percentage of the Litigation Recovery other than five
millionths of one percent (0.000005%) or a whole multiple thereof. Any
registered holder desiring to transfer, split up, combine or exchange any
Participation Interest shall make such request in writing delivered to the
Interest Agent, and shall surrender the Participation Interest or
Participation Interests to be transferred, split up, combined or exchanged at
the principal office of the Interest Agent or at its facility retained for
such purpose at one of the following two addresses:
Chemical Trust Company of California
300 South Grand Avenue, Fourth Floor
Los Angeles, California 90071
Chemical Bank
Securities Window, Room 234
55 Water Street
New York, New York 10041
Thereupon, the Bank shall have such Participation Interest signed as provided
in Section and the Interest Agent shall countersign and deliver to the person
entitled thereto a Participation Interest or Participation Interests, as the
case may be, as so requested. The Bank may require payment by the Interest
Holder of a sum sufficient to cover any tax or governmental charge that may be
imposed in connection with any transfer, split up, combination or exchange of
Participation Interests.
-3-
<PAGE>
Upon receipt by the Bank and the Interest Agent of evidence
satisfactory to them of the loss, theft, destruction or mutilation of a
Participation Interest, and, in case of loss, theft or destruction, of
indemnity or security reasonably satisfactory to them (including with respect
to the amount of such indemnity or security), and reimbursement by the
Interest Holder to the Bank and the Interest Agent of all reasonable expenses
incidental thereto, and upon surrender and cancellation of the Participation
Interest if mutilated, the Bank will make and deliver a new Participation
Interest of like tenor to the Interest Agent for countersignature and delivery
to the registered owner in lieu of the Participation Interest so lost, stolen,
destroyed or mutilated. Applicants for substitute Participation Interests
shall also comply with such other regulations and pay such other reasonable
charges as the Bank may prescribe.
Section 5. Subsequent Issuances of Participation Interests. Nothing
contained in this Agreement shall prohibit the Bank from issuing from time to
time additional Participation Interests containing terms similar to or
different from the Participation Interests issued hereunder. Furthermore, no
Interest Holder shall have any preemptive rights with respect to any other
issuance of Participation Interests or any other securities by the Bank.
Section 6. Payment of Litigation Recovery.
6.1. Promptly following receipt by the Bank of the full cash payment
in respect of a final, nonappealable judgment in or a final settlement of the
Litigation and the determination by the Bank of the amount of the Litigation
Recovery, if any, and the Recovery Payment, if any (which determination shall
be binding and conclusive on all persons), the Bank shall promptly, at its
election, either (i) cause notice of the amount of the Litigation Recovery and
the Recovery Payment, as well as the Payment Record Date (as defined below),
to be published in The Wall Street Journal or in another newspaper or
newspapers of general circulation in the New York and Los Angeles metropolitan
areas, or (ii) cause such notice to be mailed to each registered holder of
Participation Interests at the time of such mailing (either such notice, the
"Payment Notice"). The Bank shall also promptly give written notice of the
Litigation Recovery and the Recovery Payment to the Interest Agent. The
Payment Notice shall also state the date by which registered Interest Holders
must surrender Participation Interests in order to receive payment thereon,
which date (the "Final Payment Date") shall be six months following the date
of the Payment Record Date. Subject to Section 8, payments in respect of the
Litigation Recovery shall be made to the registered holders of Participation
Interests as of the Payment Record Date, which shall be a date not less than
fifteen days and no later than thirty days following the date of the Payment
Notice.
-4-
<PAGE>
6.2. Following the Payment Record Date, the registered holder (as
described in Section 3) of a Participation Interest may receive payment thereon
only by surrendering such Participation Interest to the Interest Agent at its
facility maintained for such purpose at Chemical Bank, Securities Window, Room
234, 55 Water Street, New York, New York 10041, or at the principal office of
the Interest Agent, if then different, at or prior to 5:00 p.m. (New York
time) on the Final Payment Date. No Interest Holder shall be entitled to
receive any payment with respect thereto until the Participation Interest
shall have been surrendered as provided in this Section 6. Any and all
Participation Interests not delivered in accordance with this Section shall be
null and void, and following the Final Payment Date, the Bank and Interest
Agent shall have no obligation to make any payment thereon.
6.3. Upon receipt of Participation Interests, and from time to time
following the Payment Record Date and prior to the Final Payment Date, the
Interest Agent shall requisition from the Bank the amount of cash to be paid
to or upon the order of the registered holders of such Participation
Interests, and subject to Section 8, such payment shall be made as soon as
practicable thereafter.
6.4. No Interest Holder shall be entitled to any interest for the
period of time between the date on which the Bank receives any cash payment in
connection with the Litigation and the date on which payment is made to such
holder in respect of such Participation Interest in accordance with the terms
of this Agreement.
Section 7. Cancellation and Destruction of Participation Interest.
All Participation Interests surrendered for the purpose of payment, exchange,
substitution or transfer shall, if surrendered to the Bank or to any of its
agents, be delivered to the Interest Agent for cancellation or in cancelled
form, or if surrendered to the Interest Agent shall be cancelled by it, and no
Participation Interests shall be issued in lieu thereof except as expressly
permitted by any of the provisions of this Agreement. If the Bank purchases or
acquires Participation Interests and if the Bank so chooses, the Bank may
deliver to the Interest Agent for cancellation and retirement, and the
Interest Agent shall so cancel and retire, the Participation Interests
evidencing said Participation Interests. The Interest Agent shall destroy such
cancelled Participation Interests, and in such case shall upon the written
request of the Bank deliver a certificate of destruction thereof to the Bank.
Section 8. No Rights in the Litigation or to Other Funds. The
Interest Agent hereby acknowledges and agrees, and each Interest Holder by
acceptance of a Participation Interest shall also acknowledge and agree, that
(i) the Bank retains sole and exclusive control of the Litigation and may,
among other things, dismiss, settle or cease prosecuting the Litigation at any
time without obtaining any cash or other recovery, and (ii) the Interest Agent
and each Interest Holder shall have no rights against the Bank for any
decision regarding the conduct or disposition of the Litigation, including,
without limitation, any decision to dispose of the Litigation without a cash
recovery by the Bank. In addition, in the event that applicable laws, rules or
regulations limit or prevent the distribution of all or any portion of the
Litigation Recovery, the Bank shall have no
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<PAGE>
obligation whatsoever to make any payment in excess of the allowable amount,
if any. Consequently, should all or a portion of the Recovery Payment be in
excess of the allowable amount at the time such payment is to be made, the
Bank will not make all or a portion of the payment, as the case may be, in
excess of the allowable amount at such time or at any future time.
In the event of a corporate reorganization to create a holding
company, the Participation Interests will remain as outstanding securities of
the Bank. Similarly, in the event of an acquisition of the Bank or a merger in
which the Bank is the surviving separate entity, the rights of Interest
Holders shall be unchanged. In the event of a merger in which the Bank is not
the surviving entity, the rights of Interest Holders will be determined by the
terms of the merger in accordance with applicable laws. To the extent that the
surviving entity is the successor to the Bank's claims against the Government,
the rights of Interest Holders shall be unchanged.
Section 9. Covenants of the Bank. The Bank covenants and agrees as
follows:
9.1. The Bank shall use its reasonable best efforts to cause the
Participation Interests to be listed or included for trading on the National
Association of Securities Dealers Automated Quotation System or another
trading system.
9.2. The Bank will pay when due and payable any and all federal and
state transfer taxes and charges which may be payable in respect of the
initial issuance or delivery of the Participation Interests. The Bank shall
not, however, be required to pay any tax or taxes which may be payable in
respect of any subsequent transfer or delivery of Participation Interests.
Section 10. Right of Action. All rights of action in respect of this
Agreement are vested in the respective registered holders of the Participation
Interests; provided, however, that no registered holder of any Participation
Interest shall have the right to enforce, institute or maintain any suit,
action or proceeding against the Bank to enforce, or otherwise act in respect
of, the Participation Interests, unless (a) such registered holder shall have
previously given written notice to the Bank of the substance of such dispute,
and registered holders of at least one-quarter in interest of the issued and
outstanding Participation Interests shall have given written notice to the
Bank of their support for the institution of such proceeding to resolve such
dispute, (b) written notice of the substance of such dispute and of the
support for the institution of such proceeding by such holders shall have been
provided by the Bank to the Interest Agent, and (c) the Interest Agent shall
not have instituted appropriate proceedings with respect to such dispute
within 30 days following the date of such written notice to the Interest
Agent, it being understood and intended that no one or more registered holders
of Participation Interests shall have the right in any manner whatever by
virtue of, or by availing of, any provision of this Agreement to affect,
disturb or prejudice the rights of any other registered holders of
Participation Interests, or to obtain or to seek to obtain priority in
preference over any other holders or to enforce any right under this
Agreement, except in the manner herein provided for the equal and ratable
benefit of all registered holders
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<PAGE>
of Participation Interests. Except as provided in this Section, no holder of a
Participation Interest shall have the right to enforce, institute or maintain
any suit, action or proceeding to enforce, or otherwise act in respect of, the
Participation Interests.
Section 11. Agreement of Interest Holders. Every Interest Holder by
accepting a Participation Interest consents and agrees with the Bank and the
Interest Agent and with every other Interest Holder that:
11.1. The Participation Interests are transferable only on the
registry books of the Interest Agent if surrendered at the principal office of
the Interest Agent or at its facility retained for such purpose at Chemical
Bank, Securities Window, Room 234, 55 Water Street, New York, New York 10041,
duly endorsed or accompanied by an instrument of transfer in form and
substance satisfactory to the Bank and the Interest Agent;
11.2. The Bank and the Interest Agent may deem and treat the person
in whose name each Participation Interest is registered as the absolute owner
thereof (notwithstanding any notations of ownership or writing on the
Participation Interests made by anyone other than the Bank or the
Participation Agent) for all purposes whatsoever, and neither the Bank nor the
Interest Agent shall be affected by any notice to the contrary, including,
without limitation, any notice or determination that such holder may be
prohibited by statute or other law from owning the Participation Interests;
11.3. Except as provided in Section , no holder of a Participation
Interest shall have the right to enforce, institute or maintain any suit,
action or proceeding to enforce, or otherwise act in respect of, the
Participation Interests; and
11.4. The Interest Agent is solely the agent of the Bank hereunder.
Section 12. Concerning the Interest Agent. The Bank agrees to pay to
the Interest Agent from time to time compensation for all services rendered by
it hereunder as the Bank and Interest Agent may agree from time to time, and,
from time to time, on demand of the Interest Agent, its reasonable expenses
and counsel fees and other disbursements reasonably incurred in the
administration and execution of this Agreement and the exercise and
performance of its duties hereunder. The Bank also agrees to indemnify the
Interest Agent for, and to hold it harmless against, any loss, claim,
liability, or expense, incurred without gross negligence on the part of the
Interest Agent, arising out of or in connection with the acceptance and
administration of this Agreement, including the costs and expenses of
defending against any claim or liability arising out of or resulting from the
acceptance and administration of this Agreement or in connection with the
exercise or performance of any of its powers or duties hereunder. In no event
shall the Interest Agent be liable for special, indirect or consequential loss
or damage of any kind whatsoever (including but not limited to lost profits),
even if the Interest Agent has been advised of the likelihood of such loss or
damage and regardless of form of action.
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The Interest Agent shall be protected and shall incur no liability
for or in respect of any action taken, suffered, or omitted by it in
connection with its administration of this Agreement in reliance upon any
Participation Interest, instrument of assignment or transfer, power of
attorney, endorsement, affidavit, letter, notice, direction, consent,
certificate, statement, or other paper or document in good faith believed by
it to be genuine and to be signed, executed and, where necessary, verified and
acknowledged, by the proper person or persons.
Section 13. Merger or Consolidation or Change of Name of Interest
Agent. Any corporation into which the Interest Agent or any successor Interest
Agent may be merged or with which it may be consolidated, or any corporation
resulting from any merger or consolidation to which the Interest Agent or any
successor Interest Agent shall be a party, or any corporation succeeding to
the corporate trust business of the Interest Agent or any successor Interest
Agent, shall be the successor to the Interest Agent under this Agreement
without the execution or filing of any paper or any further act on the part of
any of the parties hereto, provided that such corporation would be eligible
for appointment as successor Interest Agent under the provisions of Section 15
hereof. In case at the time such successor Interest Agent shall succeed to the
agency created by this Agreement, any of the Participation Interests shall
have been countersigned but not delivered, any such successor Interest Agent
may adopt the countersignature of the predecessor Interest Agent and deliver
such Participation Interests countersigned; and in case at that time any of
the Participation Interests shall not have been countersigned, any successor
Interest Agent may countersign such Participation Interests either in the name
of the predecessor Interest Agent or in the name of the successor Interest
Agent; and in all such cases such Participation Interests shall have the full
force provided in the Participation Interests and in this Agreement.
In case at any time the name of the Interest Agent shall be changed
and at such time any of the Participation Interests shall have been
countersigned but not delivered, the Interest Agent may adopt the
countersignature under its prior name and deliver Participation Interests so
countersigned; and in case at that time any of the Participation Interests
shall not have been countersigned, the Interest Agent may countersign such
Participation Interests either in its prior name or in its changed name; and
in all such cases such Participation Interests shall have the full force
provided in the Participation Interests and in this Agreement.
Section 14. Duties of Interest Agent. The Interest Agent undertakes
only the specific duties and obligations imposed by this Agreement upon the
following terms and conditions, by all of which the Bank and the holders of
Participation Interests, by their acceptance thereof, shall be bound:
14.1. The Interest Agent may consult with legal counsel (who may be
legal counsel for the Bank), and the opinion of such counsel shall be full and
complete authorization and protection to the Interest Agent as to any action
taken or omitted by it in good faith and in accordance with such opinion,
provided the Interest Agent shall have exercised reasonable care in the
selection by it of such counsel.
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<PAGE>
14.2. Whenever in the performance of its duties under this Agreement,
the Interest Agent shall deem it necessary or desirable that any fact or
matter be proved or established by the Bank prior to taking or suffering any
action hereunder, such fact or matter may be deemed to be conclusively proved
and established by a certificate signed by the Chairman of the Board, the
President or a Senior Vice President of the Bank and delivered to the Interest
Agent; and such certificate shall be full authorization to the Interest Agent
for any action taken or suffered in good faith by it under the provisions of
this Agreement in reliance upon such certificate.
14.3. The Interest Agent shall be liable hereunder only for its own
gross negligence or willful misconduct.
14.4. The Interest Agent shall not be liable for or by reason of any
of the statements of fact or recitals contained in this Agreement or in the
Participation Interests (except such as describe the Interest Agent and its
countersignature thereof) or be required to verify the same, but all such
statements and recitals are and shall be deemed to have been made by the Bank
only.
14.5. The Interest Agent shall not be under any responsibility in
respect of and makes no representation as to the validity of this Agreement or
the execution and delivery hereof (except the due execution hereof by the
Interest Agent) or in respect of the validity or execution of any
Participation Interest (except its countersignature thereof); nor shall it be
responsible for any breach by the Bank of any covenant or condition contained
in this Agreement or in any Participation Interest.
14.6. The Interest Agent is hereby authorized and directed to accept
instructions with respect to the performance of its duties hereunder from the
Chairman of the Board, the President, a Senior Vice President, the Secretary,
an Assistant Secretary, the Treasurer or an Assistant Treasurer of the Bank,
and to apply to such officers for advice or instructions in connection with
its duties, and it shall not be liable for any action taken or suffered to be
taken by it in good faith in accordance with instructions of any such officer.
14.7. The Interest Agent and any shareholder, director, officer or
employee of the Interest Agent may buy, sell or deal in any of the
Participation Interests or other securities of the Bank or become pecuniarily
interested in any transaction in which the Bank may be interested, or contract
with or lend money to the Bank or otherwise act as fully and freely as though
it were not Interest Agent under this Agreement, so long as such persons do so
in full compliance with all applicable laws. Nothing herein shall preclude the
Interest Agent from acting in any other capacity for the Bank or for any other
legal entity.
14.8. The Interest Agent may execute and exercise any of the rights
or powers hereby vested in it or perform any duty hereunder either itself or
by or through its attorneys or agents.
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<PAGE>
14.9. The Interest Agent shall act solely as the agent of the Bank
hereunder. The Interest Agent shall not be liable except for the failure to
perform such duties as are specifically set forth herein, and no implied
covenants or obligations shall be read into this Agreement against the
Interest Agent, whose duties shall be determined solely by the express
provisions hereof.
14.10. The Interest Agent shall not be responsible for any failure on
the part of the Bank to comply with any of its covenants and obligations
contained in this Agreement or in the Participation Interests.
14.11. The Interest Agent shall not be under any obligation or duty
to institute, appear in or defend any action, suit or legal proceeding in
respect hereof, unless first indemnified to its satisfaction, but this
provision shall not affect the power of the Interest Agent to take such action
as the Interest Agent may consider proper, whether with or without such
indemnity. The Interest Agent shall promptly notify the Bank in writing of any
claim made or action, suit or proceeding instituted against it arising out of
or in connection with this Agreement.
14.12. The Bank will perform, execute, acknowledge and deliver or
cause to be performed, executed, acknowledged and delivered all such further
acts, instruments and assurances as may be required by the Interest Agent in
order to enable it to carry out or perform its duties under this Agreement.
Section 15. Change of Interest Agent. The Interest Agent may resign
and be discharged from its duties under this Agreement upon 30 days' notice in
writing mailed to the Bank by registered or certified mail, and to the holders
of the Participation Interests by first-class mail at the expense of the Bank.
The Bank may remove the Interest Agent or any successor Interest Agent upon 30
days' notice in writing, mailed to the Interest Agent or successor Interest
Agent, as the case may be, and to the holders of the Participation Interests
by first-class mail. If the Interest Agent shall resign or be removed or shall
otherwise become incapable of acting, the Bank shall promptly appoint a
successor to the Interest Agent, which the Bank may designate as an interim
Interest Agent. If the Bank appoints an interim Interest Agent, the Bank shall
then appoint a permanent successor to the Interest Agent, which may be the
interim Interest Agent. If the Bank shall fail to make such appointment of a
permanent successor within a period of 30 days after such removal or within 60
days after it has been notified in writing of such resignation or incapacity
by the resigning or incapacitated Interest Agent or by the holder of a
Participation Interest (who shall, with such notice, submit his Participation
Interest for inspection by the Bank), then the Interest Agent or registered
holder of any Participation Interest may apply to any court of competent
jurisdiction for the appointment of a new Interest Agent. Any successor
Interest Agent, whether appointed by the Bank or by such a court, shall be a
corporation organized and doing business under the laws of the United States
or of any State of the United States, in good standing, which is authorized
under such laws to exercise corporate trust powers and is subject to
supervision or examination by federal or state authority and which has at the
time of its appointment as Interest Agent a combined capital and surplus of at
least
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$10,000,000. After appointment, the successor Interest Agent shall be vested
with the same powers, rights, duties and responsibilities as if it had been
originally named as Interest Agent without further act or deed; but the
predecessor Interest Agent shall deliver and transfer to the successor
Interest Agent any property at the time held by it hereunder, and execute and
deliver any further assurance, conveyance, act or deed deemed necessary by the
Bank. No later than the effective date of any such appointment, the Bank shall
file notice thereof in writing with the predecessor Interest Agent, and mail a
notice thereof in writing to the registered holders of the Participation
Interests. Failure to give any notice provided for in this Section 15, however,
or any defect therein, shall not affect the legality or validity of the
resignation or removal of the Interest Agent or the appointment of the
successor Interest Agent, as the case may be.
Section 16. Notices. Notices or demands authorized by this Agreement
to be given or made by the Interest Agent or by the holder of any
Participation Interest to or on the Bank shall be sufficiently given or made
if sent by first-class mail, postage prepaid, addressed (until another address
is filed in writing with the Interest Agent) as follows:
California Federal Bank
5700 Wilshire Boulevard
Los Angeles, California 90036
Attn: Executive Vice President and General Counsel
Subject to the provisions of Section 17, any notice or demand authorized by
this Agreement to be given or made by the Bank or by the holder of any
Participation Interest to or on the Interest Agent shall be sufficiently given
or made if sent by first-class mail, postage prepaid, addressed (until another
address is filed in writing with the Bank) as follows:
Chemical Trust Company of California
300 South Grand Avenue, Fourth Floor
Los Angeles, California 90071
Attn: Administration
Notices or demands authorized by this Agreement to be given or made by the
Bank or the Interest Agent to the holder of any Participation Interest shall
be sufficiently given or made if sent by first-class mail, postage prepaid,
addressed to such holder at the address of such holder as shown on the
registry books of the Bank maintained by the Interest Agent pursuant to
Section 3 hereof.
Section 17. Supplements and Amendments. The Bank and the Interest
Agent may from time to time supplement or amend this Agreement without the
approval of any holders of Participation Interests in order to (i) cure any
ambiguity, (ii) correct or supplement any provision contained herein which may
be defective or inconsistent with any provisions herein, or (iii) make any
other provisions in regard to matters or questions arising hereunder or
otherwise which the Bank and the Interest Agent may
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deem necessary or desirable, provided that without the consent of at least
three-quarters in interest of the then outstanding Participation Interests, no
such provision described in this clause (iii) shall, on the whole, adversely
affect in any material respect the interests of the registered holders of
Participation Interests.
The provisions of this Agreement may otherwise from time to time be
supplemented or amended by written agreement of the parties hereto and the
record holders of the outstanding Participation Interests, subject to the
limitations provided in the balance of this paragraph and elsewhere in this
Agreement. The record holders of at least three-quarters in interest of the
then outstanding Participation Interests, may, on behalf of all of the record
holders of then outstanding Participation Interests, act to amend or
supplement this Agreement in any respect, which Agreement as so amended or
supplemented shall be binding on and shall inure to the benefit of all record
holders of the then outstanding Participation Interests; provided that the
record holders shall not be entitled to make any change in the aggregate
interest in the Litigation which registered holders of the outstanding
Participation Interests shall receive.
The Bank shall mail notice to each holder of a Participation
Interest, in accordance with Section hereof, of any amendment affecting the
rights of the holders of Participation Interests effected pursuant to this
Section 17, within 60 days of any such amendment.
Section 18. Successors. All the covenants and provisions of this
Agreement by or for the benefit of the Bank or the Interest Agent shall bind
and inure to the benefit of their respective successors and assigns hereunder.
Section 19. Benefits of This Agreement. Nothing in this Agreement
shall be construed to give to any person or corporation other than the Bank,
the Interest Agent and the registered holders of the Participation Interests
any legal or equitable right, remedy or claim under this Agreement; and this
Agreement shall be for the sole and exclusive benefit of the Bank, the
Interest Agent and the registered holders of the Participation Interests.
Section 20. Governing Law. The laws of the State of California shall
govern this Agreement and each Participation Interest without regard to
principles of conflicts of law.
Section 21. Counterparts. This Agreement may be executed in any
number of counterparts and each of such counterparts shall for all purposes be
deemed to be an original, and all such counterparts shall together constitute
but one and the same instrument.
Section 22. Descriptive Headings. Descriptive headings of the several
Sections of this Agreement are inserted for convenience only and shall not
control or affect the meaning or construction of any of the provisions hereof.
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IN WITNESS WHEREOF, the parties hereto have caused this Agreement to
be duly executed and their respective corporate seals to be hereunto affixed
and attested, all as of the day and year first above written.
CALIFORNIA FEDERAL BANK,
A Federal Savings Bank
By: /s/ Douglas J. Wallis
Its: Executive Vice President
Attest:
By: /s/ Trude A. Tsujimoto
Its: Senior Vice President
CHEMICAL TRUST COMPANY
OF CALIFORNIA,
as Interest Agent
By: /s/ Sharon Magidson
Its: Vice President
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EXHIBIT A
THE CONTINGENT LITIGATION RECOVERY PARTICIPATION INTERESTS ARE NOT SAVINGS
ACCOUNTS OR SAVINGS DEPOSITS AND ARE NOT INSURED BY THE FEDERAL DEPOSIT
INSURANCE CORPORATION OR ANY OTHER GOVERNMENT AGENCY. THE PARTICIPATION
INTERESTS ARE BEING DISTRIBUTED PURSUANT TO AN EXEMPTION FROM REGISTRATION
UNDER THE SECURITIES ACT OF 1933, AS AMENDED, AND APPLICABLE STATE SECURITIES
STATUTES, AND HAVE NOT BEEN REGISTERED WITH THE SECURITIES AND EXCHANGE
COMMISSION OR APPLICABLE STATE SECURITIES AGENCIES. THE RECOVERY PAYMENT MAY
BE SUBJECT TO APPLICABLE CAPITAL DISTRIBUTION REGULATIONS.
[Form of Contingent Litigation Recovery Participation Interest]
No. PC- ____ Participation Interests
Contingent Litigation Recovery Participation Interest
THIS CERTIFIES THAT ___________________, or registered assigns, is
the registered owner of the right to receive from California Federal Bank, A
Federal Savings Bank (the "Bank") five millionths of one percent (0.000005%)
of the Litigation Recovery, if any (as hereinafter defined) for each
Contingent Litigation Recovery Participation Interest set forth above. As used
throughout this Contingent Litigation Recovery Participation Interest (the
"Participation Interest"), "Litigation Recovery" means the cash payment, if
any, actually received by the Bank in respect of a final, nonappealable
judgment in or final settlement of California Federal Bank v. The United
States of America, Civil Action No. 92-138C, filed on February 28, 1992, in
the United States Court of Federal Claims (the "Litigation"), after deduction
of (i) the aggregate expenses incurred previously and hereafter by the Bank in
prosecuting the 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
from the payment of a portion of the Litigation Recovery to the holders of
Participation Interests (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 Participation Interests, including,
without limitation, legal and accounting fees and the fees and expenses of the
Interest Agent (as hereinafter defined). Payment hereunder shall occur upon
presentation and surrender of this Participation Interest in the manner
specified in the Participation Agreement at or prior to 5:00 P.M. (New York
time) on the Final Payment Date (hereinafter defined) at the principal office
of Chemical Trust Company of California, a California trust corporation (the
"Interest Agent"), or at the
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Interest Agent's facility designated for such purpose at Chemical Bank,
Securities Window, Room 234, 55 Water Street, New York, New York 10041, or
Chemical Trust Company of California, 300 South Grand Avenue, Fourth Floor,
Los Angeles, California 90071, or its successor as Interest Agent.
Payment, if any, on this Participation Interest shall be made to the
registered holder hereof as of a date (the "Payment Record Date") that is not
less than fifteen days and not later than thirty days following the date of
the Payment Notice (as hereinafter defined). The "Payment Notice" shall be
notice of the amount of the Litigation Recovery and the Recovery Payment, as
well as the Payment Record Date, which notice shall be published or mailed to
registered holders of Participation Interests by the Bank. The "Final Payment
Date" will be the date that is six months following the date of the Payment
Record Date.
This Participation Interest is subject to all of the terms,
provisions and conditions of that certain Agreement Regarding Participation
Interests, dated as of June 30, 1995 (the "Participation Agreement"), by and
between the Bank and the Interest Agent, which Participation Agreement is
hereby incorporated herein by reference and made a part hereof and to which
Participation Agreement reference is hereby made for a full description of the
rights, limitations of rights, obligations, duties and immunities hereunder of
the Interest Agent, the Bank and the holders of the Participation Interests.
Copies of the Participation Agreement are on file at the above-mentioned
principal office of the Interest Agent.
This Participation Interest, upon surrender at the principal office
of the Interest Agent or at its facility designated for such purpose at
Chemical Bank, Securities Window, Room 234, 55 Water Street, New York, New
York 10041, or Chemical Trust Company of California, 300 South Grand Avenue,
Fourth Floor, Los Angeles, California 90071, may be transferred, split up,
combined or exchanged for another Participation Interest or Participation
Interests of like tenor entitling the holder to receive a like aggregate
percentage of the Litigation Recovery as the Participation Interest or
Participation Interests surrendered shall have entitled such holder to
receive; provided, however, that the Bank and Interest Agent shall not be
required to effect any such transfer, split up, combination or exchange if any
of the resulting Participation Interest(s) would represent a right to receive
any percentage of the Litigation Recovery other than five millionths of one
percent (0.000005%) or a whole multiple thereof.
Following the Payment Record Date, the registered holder hereof may
receive payment in respect of this Participation Interest only by surrendering
this Participation Interest to the Interest Agent at its facility maintained
for such purpose at Chemical Bank, Securities Window, Room 234, 55 Water
Street, New York, New York 10041, or at the principal office of the Interest
Agent, if then different, at or prior to 5:00 p.m. (New York time) on the
Final Payment Date. No holder of a Participation Interest shall be entitled to
receive any payment with respect thereto until the Participation Interest
shall have been surrendered as provided in the preceding sentence and the
Participation Agreement. A holder of a Participation Interest shall not be
entitled to any interest for
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the period of time between the date on which the Bank receives any cash
payment in connection with the Litigation and the date on which payment is
made to such holder in respect of such Participation Interest in accordance
with the terms of the Participation Agreement. Any and all Participation
Interests not delivered in accordance with the Participation Agreement shall
be null and void, and following the Final Payment Date, the Bank and Interest
Agent shall have no obligation to make any payment thereon.
Each holder of a Participation Interest by acceptance of the same
acknowledges and agrees that (i) the Bank retains sole and exclusive control
of the Litigation and may, among other things, dismiss, settle or cease
prosecuting the Litigation at any time without obtaining any cash or other
recovery, and (ii) no holder of a Participation Interest shall have any rights
against the Bank for any decision regarding the conduct or disposition of the
Litigation, including, without limitation, any decision to dispose of the
Litigation without a cash recovery by the Bank. In addition, in the event that
applicable laws, rules or regulations limit or prevent the distribution of all
or any portion of the Litigation Recovery, the Bank shall have no obligation
whatsoever to make any payment in excess of the allowable amount, if any.
All rights of action in respect of the Participation Agreement are
vested in the respective registered holders of the Participation Interests;
provided, however, that no registered holder of any Participation Interest
shall have the right to enforce, institute or maintain any suit, action or
proceeding against the Bank to enforce, or otherwise act in respect of, the
Participation Interests, unless (a) such registered holder shall have
previously given written notice to the Bank of the substance of such dispute,
and registered holders of at least one-quarter in interest of the issued and
outstanding Participation Interests shall have given written notice to the
Bank of their support for the institution of such proceeding to resolve such
dispute, (b) written notice of the substance of such dispute and of the
support for the institution of such proceeding by such holders shall have been
provided by the Bank to the Interest Agent, and (c) the Interest Agent shall
not have instituted appropriate proceedings with respect to such dispute
within 30 days following the date of such written notice to the Interest
Agent, it being understood and intended that no one or more registered holders
of Participation Interests shall have the right in any manner whatever by
virtue of, or by availing of, any provision of the Participation Agreement to
affect, disturb or prejudice the rights of any other registered holders of
Participation Interests, or to obtain or to seek to obtain priority in
preference over any other holders or to enforce any right under the
Participation Agreement, except in the manner herein provided for the equal
and ratable benefit of all registered holders of Participation Interests.
Except as provided in this paragraph, no holder of a Participation Interest
shall have the right to enforce, institute or maintain any suit, action or
proceeding to enforce, or otherwise act in respect of, the Participation
Interests.
This Participation Interest shall not be valid or obligatory for any
purpose until it shall have been countersigned by the Interest Agent.
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WITNESS the facsimile signature of the proper officers of the Bank
and its corporate seal.
Dated:
CALIFORNIA FEDERAL BANK,
A Federal Savings Bank
By:
---------------------------
Its:
--------------------------
ATTEST
Countersigned
- ------------------------
Interest Agent
By:
--------------------------
Authorized Signature
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[Form of Reverse Side of Contingent Litigation Recovery Participation Interest]
ASSIGNMENT
(To be executed by the registered holder if such
holder desires to transfer the Participation Interest.)
FOR VALUE RECEIVED ______________________________________ hereby
sells, assigns and transfers unto _____________________
(Please print name and address of transferee)
_____________________________________________________________________________
this Participation Interest, together with all right, title and interest
therein, and does hereby irrevocably constitute and appoint
_____________________________________ attorney, to transfer the within
Participation Interest on the books of the within-named Bank, with full power
of substitution.
Dated:
------------------
Signature
--------------------------
Signature Guaranteed:
NOTICE
The signature to the foregoing Assignment must correspond to the name
as written upon the face of this Participation Interest in every particular,
without alteration or enlargement or any change whatsoever.
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<PAGE>
- -------------------------------------------------------------------------------
CALIFORNIA FEDERAL BANK,
A Federal Savings Bank
and
CHASEMELLON SHAREHOLDER SERVICES, L.L.C.,
as Interest Agent
-----------------------
AGREEMENT REGARDING SECONDARY CONTINGENT LITIGATION
RECOVERY PARTICIPATION INTERESTS
Dated as of December 2, 1996
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AGREEMENT REGARDING SECONDARY CONTINGENT LITIGATION
RECOVERY PARTICIPATION INTERESTS
This Agreement Regarding Secondary Contingent Litigation Recovery
Participation Interests (the "Agreement") dated as of December 2, 1996, is
made between California Federal Bank, A Federal Savings Bank (the "Bank"), and
ChaseMellon Shareholder Services, L.L.C., a New Jersey limited liability
company, ("Interest Agent"), with reference to the following facts:
A. The Bank has brought suit against the United States, California
Federal Bank v. The United States of America, Civil Action No. 92-138C, filed
on February 28, 1992, in the United States Court of Federal Claims (the
"Litigation"), alleging that the United States breached certain contracts
entered into with the Bank and deprived the Bank of certain of its property
without just compensation in violation of the United States Constitution.
B. Pursuant to that certain Amended and Restated Agreement and Plan
of Merger dated as of July 27, 1996 (the "Merger Agreement") by and among the
Bank, its corporate parent, Cal Fed Bancorp Inc., a Delaware corporation
("Bancorp"), and First Nationwide Holdings Inc., a Delaware corporation
("FNH"), and subject to the conditions therein, the Bank has agreed that,
prior to the Effective Time (as defined in the Merger Agreement), it will
distribute to Bancorp an aggregate of 5,080,964 Secondary Contingent
Litigation Recovery Participation Interests (collectively, the "Secondary
Participation Interests," and each, a "Secondary Participation Interest");
and, following the consummation of the proposed merger between Bancorp and a
subsidiary of FNH (the "Merger"), Bancorp will: (i) distribute approximately
4,941,361 Secondary Participation Interests to the registered holders, as of
the effective time of the Merger, of the common stock, $1.00 par value, of
Bancorp (the "Bancorp Common Stock"), other than the holders of Excluded
Shares (as defined in the Merger Agreement); (ii) distribute approximately
137,763 Secondary Participation Interests to certain management employees and
directors of Bancorp ("Bancorp Management") in connection with the
termination, at the effective time of the Merger, of options or warrants to
purchase Bancorp Common Stock held by Bancorp Management; and (iii) reserve
approximately 1,840 Secondary Participation Interests for issuance upon
conversion of the 6 1/2% Convertible Subordinated Debentures Due 2001 (the "6
1/2% Notes") of XCF Acceptance Corporation, a California corporation and a
wholly-owned subsidiary of the Bank.
C. Each Secondary Participation Interest will entitle the holder
thereof to receive twenty millionths of one percent (0.00002%) of the Adjusted
Litigation Recovery (as defined below), if any. Collectively, the holders of
such Secondary Participation Interests are referred to herein as the
"Secondary Interest Holders".
D. For purposes of this Agreement, the term "Adjusted Litigation
Recovery" shall mean sixty percent (60%) of the amount obtained from the
following equation: (A) the cash payment, if any (the "Cash Payment"),
actually received by the Bank pursuant to a final, nonappealable judgment in
or final settlement of the Litigation minus (B) the
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sum of the following: (i) the aggregate expenses incurred previously and
hereafter by the Bank in prosecuting the Litigation and obtaining the 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 the Adjusted Litigation Recovery to the Secondary Interest
Holders), (iii) the expenses incurred by the Bank in connection with the
creation, issuance and trading of the Bank's Contingent Litigation Recovery
Participation Interests (trading symbol: CALGZ) (the "CALGZ Interests") and
the Secondary Participation 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 CALGZ Interests and (v) one-hundred
twenty-five million dollars ($125,000,000). For purposes of the Secondary
Participation Interests, (1) "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; and (2) "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
Adjusted Litigation Recovery 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.
NOW, THEREFORE, in consideration of these premises and the mutual
agreements herein set forth, the parties hereby agree as follows:
Section 1. Appointment of Interest Agent. The Bank hereby appoints
the Interest Agent to act as agent for the Bank in accordance with the terms
and conditions hereinafter set forth, and the Interest Agent hereby accepts
such appointment. The Bank may from time to time appoint such co-certificate
agents as it may deem necessary or desirable.
Section 2. Form of Secondary Participation Interests. The Secondary
Participation Interests and the form of assignment to be printed on the
reverse thereof shall be substantially in the form of Exhibit A hereto and may
have such letters, numbers or other marks of identification or designation and
such legends (including, without limitation, a legend referring to
restrictions on resale by statutory underwriters, a legend referring to any
restrictions on ownership by certain individuals and a legend referring to any
applicable vesting requirements), summaries or endorsements printed,
lithographed or engraved thereon as the Bank may deem appropriate and as are
not inconsistent with the provisions of this Agreement, or as may be required
to comply with any law or with any rule or regulation made pursuant thereto or
with any rule or regulation of any stock exchange or securities trading system
on which the Secondary Participation Interests may from time to time be listed
or traded. The Bank shall furnish to the Interest Agent, in
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writing, any such legend or endorsement. Each Secondary Participation Interest
shall be dated as of the date on which countersigned by the Interest Agent,
either upon initial issuance or upon transfer or exchange, and on its face
shall entitle the holder thereof to receive, in cash, twenty millionths of one
percent (0.00002%) or a whole multiple thereof of the Adjusted Litigation
Recovery, if any.
Section 3. Issuance, Countersignature and Registration. The Secondary
Participation Interests shall originally be issued and dated as of January 2,
1997, or at such other time or times and with such date or dates as the Bank
may decide in its sole discretion. The Interest Agent shall, upon the Bank's
written instructions, issue, countersign and deliver Secondary Participation
Interests to, or on written order of, the Bank. The Secondary Participation
Interests shall have been executed on behalf of the Bank by its Chairman of
the Board, the President, an Executive Vice President or a Senior Vice
President, by original or facsimile signature, and have affixed thereto a
facsimile of the Bank's seal which shall be attested to by the Secretary or an
Assistant Secretary of the Bank by original or facsimile signature. The
Secondary Participation Interests shall be manually countersigned by the
Interest Agent and shall not be valid for any purpose unless so countersigned.
In case any officer of the Bank who shall have signed any of the Secondary
Participation Interests shall cease to be such officer of the Bank before
countersignature by the Interest Agent and issuance and delivery by the Bank,
such Secondary Participation Interests, nevertheless, may be countersigned by
the Interest Agent, issued and delivered with the same force and effect as
though the person who signed such Secondary Participation Interests had not
ceased to be such officer of the Bank; and any Secondary Participation
Interest may be signed on behalf of the Bank by any person who, at the actual
date of the execution of such Secondary Participation Interest, shall be a
proper officer of the Bank to sign such Secondary Participation Interest,
although at the date of the execution of this Agreement any such person was
not such an officer.
The Interest Agent will maintain books for registration and transfer
of the Secondary Participation Interests issued hereunder. Such books shall
show the names and addresses of the respective Secondary Interest Holders and
the date of issuance of each of the Secondary Participation Interests.
Notwithstanding any other provision of this Agreement, the Interest
Agent shall comply with all applicable requirements and rules of each
securities exchange or securities trading system on which the Bank shall
determine to list or trade the Secondary Participation Interests in connection
with the listing or trading of the Secondary Participation Interests on each
such exchange or securities trading system. The Bank shall advise the Interest
Agent of each securities exchange or securities trading system on which
listing is effected.
Section 4. Transfer, Split Up, Combination and Exchange of Secondary
Participation Interests; Mutilated, Destroyed, Lost or Stolen Secondary
Participation Interests. Any certificate representing a Secondary
Participation Interest may be transferred, split up, combined or exchanged for
another certificate representing a
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Secondary Participation Interest(s), entitling the registered holder to
receive that percentage of the Adjusted Litigation Recovery as the certificate
representing the Secondary Participation Interest(s) surrendered then entitled
him to receive; provided, however, that the Bank and Interest Agent shall not
be required to effect any such transfer, split up, combination or exchange if
any of the resulting certificates representing the Secondary Participation
Interest(s) would represent a right to receive any percentage of the Adjusted
Litigation Recovery other than twenty millionths of one percent (0.00002%) or
a whole multiple thereof. Any registered holder desiring to transfer, split
up, combine or exchange any Secondary Participation Interest shall make such
request in writing delivered to the Interest Agent, and shall surrender the
certificates representing the Secondary Participation Interest(s) to be
transferred, split up, combined or exchanged at the principal office of the
Interest Agent or at its facility retained for such purpose at one of the
following two addresses:
ChaseMellon Shareholder Services, L.L.C.
400 South Hope Street, 4th Floor
Los Angeles, California 90071
ChaseMellon Shareholder Services, L.L.C.
Securities Window
120 Broadway, 13th Floor
New York, New York 10071
Thereupon, the Bank shall have such certificate representing the Secondary
Participation Interest signed as provided in Section and the Interest Agent
shall countersign and deliver to the person entitled thereto a certificate
representing the Secondary Participation Interest(s) as so requested. The Bank
may require payment by the Secondary Interest Holder of a sum sufficient to
cover any tax or governmental charge that may be imposed in connection with
any transfer, split up, combination or exchange of Secondary Participation
Interests.
Upon receipt by the Bank and the Interest Agent of evidence
satisfactory to them of the loss, theft, destruction or mutilation of a
certificate representing a Secondary Participation Interest, and, in case of
loss, theft or destruction, of indemnity or security reasonably satisfactory
to them (including with respect to the amount of such indemnity or security),
and reimbursement by the Secondary Interest Holder to the Bank and the
Interest Agent of all reasonable expenses incidental thereto, and upon
surrender and cancellation of the certificate representing the Secondary
Participation Interest if mutilated, the Bank will make and deliver a new
certificate representing the Secondary Participation Interest of like tenor to
the Interest Agent for countersignature and delivery to the registered owner
in lieu of the certificate representing the Secondary Participation Interest
so lost, stolen, destroyed or mutilated. Applicants for substitute
certificates representing Secondary Participation Interests shall also comply
with such other regulations and pay such other reasonable charges as the Bank
may prescribe.
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Section 5. Subsequent Issuances of Secondary Participation
Interests. Nothing contained in this Agreement shall prohibit the Bank from
issuing from time to time additional Secondary Participation Interests
containing terms similar to or different from the Secondary Participation
Interests issued hereunder. Furthermore, no Secondary Interest Holder shall
have any preemptive rights with respect to any other issuance of Secondary
Participation Interests or any other securities by the Bank.
Section 6. Payment of Adjusted Litigation Recovery.
6.1. Promptly following receipt by the Bank of the full cash payment
in respect of a final, nonappealable judgment in or a final settlement of the
Litigation and the determination by the Bank of the amount of the Adjusted
Litigation Recovery, if any (which determination shall be binding and
conclusive on all persons), the Bank shall promptly, at its election, either
(i) cause notice of the amount of the Adjusted Litigation Recovery, as well as
the Payment Record Date (as defined below), to be published in The Wall Street
Journal or in another newspaper or newspapers of general circulation in the
New York and Los Angeles metropolitan areas, or (ii) cause such notice to be
mailed to each registered holder of Secondary Participation Interests at the
time of such mailing (either such notice, the "Payment Notice"). The Bank
shall also promptly give written notice of the Adjusted Litigation Recovery to
the Interest Agent. The Payment Notice shall also state the date by which
registered Secondary Interest Holders must surrender Secondary Participation
Interests in order to receive payment thereon, which date (the "Final Payment
Date") shall be six months following the date of the Payment Record Date.
Subject to Section 8, payments in respect of the Adjusted Litigation Recovery
shall be made to the registered holders of Secondary Participation Interests
as of the Payment Record Date, which shall be a date not less than fifteen
days and no later than thirty days following the date of the Payment Notice.
ANY PAYMENT WITH RESPECT TO THE SECONDARY PARTICIPATION INTERESTS WILL BE A
CAPITAL DISTRIBUTION THAT IS SUBJECT TO THE OTS CAPITAL DISTRIBUTION
REGULATIONS.
6.2. Following the Payment Record Date, the registered holder (as
described in Section 3) of a Secondary Participation Interest may receive
payment thereon only by surrendering such Secondary Participation Interest to
the Interest Agent at its facility maintained for such purpose at Securities
Window, 120 Broadway, 13th Floor, New York, New York 10071, or at the
principal office of the Interest Agent, if then different, at or prior to 5:00
p.m. (New York time) on the Final Payment Date. No Secondary Interest Holder
shall be entitled to receive any payment with respect thereto until the
Secondary Participation Interest shall have been surrendered as provided in
this Section . Any and all Secondary Participation Interests not delivered in
accordance with this Section shall be null and void, and following the Final
Payment Date, the Bank and Interest Agent shall have no obligation to make any
payment thereon.
6.3. Upon receipt of Secondary Participation Interests, and from time
to time following the Payment Record Date and prior to the Final Payment Date,
the Interest Agent shall requisition from the Bank the amount of cash to be
paid to or upon the order
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of the registered holders of such Secondary Participation Interests, and
subject to Section 8, such payment shall be made as soon as practicable
thereafter.
6.4. No Secondary Interest Holder shall be entitled to any interest
for the period of time between the date on which the Bank receives any cash
payment in connection with the Litigation and the date on which payment is
made to such holder in respect of such Secondary Participation Interest in
accordance with the terms of this Agreement.
Section 7. Cancellation and Destruction of Secondary Participation
Interest. All Secondary Participation Interests surrendered for the purpose of
payment, exchange, substitution or transfer shall, if surrendered to the Bank
or to any of its agents, be delivered to the Interest Agent for cancellation
or in cancelled form, or if surrendered to the Interest Agent shall be
cancelled by it, and no Secondary Participation Interests shall be issued in
lieu thereof except as expressly permitted by any of the provisions of this
Agreement. If the Bank purchases or acquires Secondary Participation Interests
and if the Bank so chooses, the Bank may deliver to the Interest Agent for
cancellation and retirement, and the Interest Agent shall so cancel and
retire, the certificates evidencing said Secondary Participation Interests.
The Interest Agent shall destroy such cancelled Secondary Participation
Interests, and in such case shall upon the written request of the Bank deliver
a certificate of destruction thereof to the Bank.
Section 8. No Rights in the Litigation or to Other Funds. The
Interest Agent hereby acknowledges and agrees, and each Secondary Interest
Holder by acceptance of a Secondary Participation Interest shall also
acknowledge and agree, that (i) the Bank retains sole and exclusive control of
the Litigation and may, among other things, dismiss, settle or cease
prosecuting the Litigation at any time without obtaining any cash or other
recovery, and (ii) the Interest Agent and each Secondary Interest Holder shall
have no rights against the Bank for any decision regarding the conduct or
disposition of the Litigation, including, without limitation, any decision to
dispose of the Litigation without a cash recovery by the Bank. In addition, in
the event that applicable laws, rules or regulations limit or prevent the
distribution of all or any portion of the Adjusted Litigation Recovery, the
Bank shall have no obligation whatsoever to make any payment in excess of the
allowable amount, if any. Consequently, should all or a portion of the
Recovery Payment be in excess of the allowable amount at the time such payment
is to be made, the Bank will not make all or a portion of the payment, as the
case may be, in excess of the allowable amount at such time or at any future
time.
In the event of an acquisition of the Bank or a merger in which the
Bank is the surviving separate entity, the rights of Secondary Interest
Holders shall be unchanged. In the event of a merger in which the Bank is not
the surviving entity, the rights of Secondary Interest Holders will be
determined by the terms of the merger in accordance with applicable laws. To
the extent that the surviving entity is the successor to the Bank's claims
against the Government, the rights of Secondary Interest Holders shall be
unchanged.
Section 9. Covenants of the Bank. The Bank covenants and agrees as
follows:
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9.1. The Bank shall use its reasonable best efforts to cause the
Secondary Participation Interests to be listed or included for trading on the
National Association of Securities Dealers Automated Quotation System or
another trading system.
9.2. The Bank will pay when due and payable any and all federal and
state transfer taxes and charges which may be payable in respect of the
initial issuance or delivery of the Secondary Participation Interests. The
Bank shall not, however, be required to pay any tax or taxes which may be
payable in respect of any subsequent transfer or delivery of Secondary
Participation Interests.
Section 10. Right of Action. All rights of action in respect of this
Agreement are vested in the respective registered holders of the Secondary
Participation Interests; provided, however, that no registered holder of any
Secondary Participation Interest shall have the right to enforce, institute or
maintain any suit, action or proceeding against the Bank to enforce, or
otherwise act in respect of, the Secondary Participation Interests, unless (a)
such registered holder shall have previously given written notice to the Bank
of the substance of such dispute, and registered holders of at least
one-quarter in interest of the issued and outstanding Secondary Participation
Interests shall have given written notice to the Bank of their support for the
institution of such proceeding to resolve such dispute, (b) written notice of
the substance of such dispute and of the support for the institution of such
proceeding by such holders shall have been provided by the Bank to the
Interest Agent, and (c) the Interest Agent shall not have instituted
appropriate proceedings with respect to such dispute within 30 days following
the date of such written notice to the Interest Agent, it being understood and
intended that no one or more registered holders of Secondary Participation
Interests shall have the right in any manner whatever by virtue of, or by
availing of, any provision of this Agreement to affect, disturb or prejudice
the rights of any other registered holders of Secondary Participation
Interests, or to obtain or to seek to obtain priority in preference over any
other holders or to enforce any right under this Agreement, except in the
manner herein provided for the equal and ratable benefit of all registered
holders of Secondary Participation Interests. Except as provided in this
Section, no holder of a Secondary Participation Interest shall have the right
to enforce, institute or maintain any suit, action or proceeding to enforce,
or otherwise act in respect of, the Secondary Participation Interests.
Section 11. Agreement of Secondary Interest Holders. Every Secondary
Interest Holder by accepting a Secondary Participation Interest consents and
agrees with the Bank and the Interest Agent and with every other Secondary
Interest Holder that:
11.1. The Secondary Participation Interests are transferable only on
the registry books of the Interest Agent if surrendered at the principal
office of the Interest Agent or at its facility retained for such purpose at
Securities Window, 120 Broadway, 13th Floor, New York, New York 10071, duly
endorsed or accompanied by an instrument of transfer in form and substance
satisfactory to the Bank and the Interest Agent;
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11.2. The Bank and the Interest Agent may deem and treat the person
in whose name each Secondary Participation Interest is registered as the
absolute owner thereof (notwithstanding any notations of ownership or writing
on the Secondary Participation Interests made by anyone other than the Bank or
the Interest Agent) for all purposes whatsoever, and neither the Bank nor the
Interest Agent shall be affected by any notice to the contrary, including,
without limitation, any notice or determination that such holder may be
prohibited by statute or other law from owning the Secondary Participation
Interests;
11.3. Except as provided in Section 10, no holder of a Secondary
Participation Interest shall have the right to enforce, institute or maintain
any suit, action or proceeding to enforce, or otherwise act in respect of, the
Secondary Participation Interests; and
11.4. The Interest Agent is solely the agent of the Bank hereunder.
Section 12. Concerning the Interest Agent. The Bank agrees to pay to
the Interest Agent from time to time compensation for all services rendered by
it hereunder as the Bank and Interest Agent may agree from time to time, and,
from time to time, on demand of the Interest Agent, its reasonable expenses
and counsel fees and other disbursements reasonably incurred in the
administration and execution of this Agreement and the exercise and
performance of its duties hereunder. The Bank also agrees to indemnify the
Interest Agent for, and to hold it harmless against, any loss, claim,
liability, or expense, incurred without gross negligence on the part of the
Interest Agent, arising out of or in connection with the acceptance and
administration of this Agreement, including the costs and expenses of
defending against any claim or liability arising out of or resulting from the
acceptance and administration of this Agreement or in connection with the
exercise or performance of any of its powers or duties hereunder. In no event
shall the Interest Agent be liable for special, indirect or consequential loss
or damage of any kind whatsoever (including but not limited to lost profits),
even if the Interest Agent has been advised of the likelihood of such loss or
damage and regardless of form of action.
The Interest Agent shall be protected and shall incur no liability
for or in respect of any action taken, suffered, or omitted by it in
connection with its administration of this Agreement in reliance upon any
Secondary Participation Interest, instrument of assignment or transfer, power
of attorney, endorsement, affidavit, letter, notice, direction, consent,
certificate, statement, or other paper or document in good faith believed by
it to be genuine and to be signed, executed and, where necessary, verified and
acknowledged, by the proper person or persons.
Section 13. Merger or Consolidation or Change of Name of Interest
Agent. Any corporation into which the Interest Agent or any successor Interest
Agent may be merged or with which it may be consolidated, or any corporation
resulting from any merger or consolidation to which the Interest Agent or any
successor Interest Agent shall be a party, or any corporation succeeding to
the corporate trust business of the Interest Agent
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or any successor Interest Agent, shall be the successor to the Interest Agent
under this Agreement without the execution or filing of any paper or any
further act on the part of any of the parties hereto, provided that such
corporation would be eligible for appointment as successor Interest Agent
under the provisions of Section 15 hereof. In case at the time such successor
Interest Agent shall succeed to the agency created by this Agreement, any of
the Secondary Participation Interests shall have been countersigned but not
delivered, any such successor Interest Agent may adopt the countersignature of
the predecessor Interest Agent and deliver such Secondary Participation
Interests countersigned; and in case at that time any of the Secondary
Participation Interests shall not have been countersigned, any successor
Interest Agent may countersign such Secondary Participation Interests either
in the name of the predecessor Interest Agent or in the name of the successor
Interest Agent; and in all such cases such Secondary Participation Interests
shall have the full force provided in the Secondary Participation Interests
and in this Agreement.
In case at any time the name of the Interest Agent shall be changed
and at such time any of the Secondary Participation Interests shall have been
countersigned but not delivered, the Interest Agent may adopt the
countersignature under its prior name and deliver Secondary Participation
Interests so countersigned; and in case at that time any of the Secondary
Participation Interests shall not have been countersigned, the Interest Agent
may countersign such Secondary Participation Interests either in its prior
name or in its changed name; and in all such cases such Secondary
Participation Interests shall have the full force provided in the Secondary
Participation Interests and in this Agreement.
Section 14. Duties of Interest Agent. The Interest Agent undertakes
only the specific duties and obligations imposed by this Agreement upon the
following terms and conditions, by all of which the Bank and the holders of
Secondary Participation Interests, by their acceptance thereof, shall be
bound:
14.1. The Interest Agent may consult with legal counsel (who may be
legal counsel for the Bank), and the opinion of such counsel shall be full and
complete authorization and protection to the Interest Agent as to any action
taken or omitted by it in good faith and in accordance with such opinion,
provided the Interest Agent shall have exercised reasonable care in the
selection by it of such counsel.
14.2. Whenever in the performance of its duties under this Agreement,
the Interest Agent shall deem it necessary or desirable that any fact or
matter be proved or established by the Bank prior to taking or suffering any
action hereunder, such fact or matter may be deemed to be conclusively proved
and established by a certificate signed by the Chairman of the Board, the
President or a Senior Vice President of the Bank and delivered to the Interest
Agent; and such certificate shall be full authorization to the Interest Agent
for any action taken or suffered in good faith by it under the provisions of
this Agreement in reliance upon such certificate.
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14.3. The Interest Agent shall be liable hereunder only for its own
gross negligence or willful misconduct.
14.4. The Interest Agent shall not be liable for or by reason of any
of the statements of fact or recitals contained in this Agreement or in the
Secondary Participation Interests (except such as describe the Interest Agent
and its countersignature thereof) or be required to verify the same, but all
such statements and recitals are and shall be deemed to have been made by the
Bank only.
14.5. The Interest Agent shall not be under any responsibility in
respect of and makes no representation as to the validity of this Agreement or
the execution and delivery hereof (except the due execution hereof by the
Interest Agent) or in respect of the validity or execution of any Secondary
Participation Interest (except its counter-signature thereof); nor shall it be
responsible for any breach by the Bank of any covenant or condition contained
in this Agreement or in any Secondary Participation Interest.
14.6. The Interest Agent is hereby authorized and directed to accept
instructions with respect to the performance of its duties hereunder from the
Chairman of the Board, the President, a Senior Vice President, the Secretary,
an Assistant Secretary, the Treasurer or an Assistant Treasurer of the Bank,
and to apply to such officers for advice or instructions in connection with
its duties, and it shall not be liable for any action taken or suffered to be
taken by it in good faith in accordance with instructions of any such officer.
14.7. The Interest Agent and any shareholder, director, officer or
employee of the Interest Agent may buy, sell or deal in any of the Secondary
Participation Interests or other securities of the Bank or become pecuniarily
interested in any transaction in which the Bank may be interested, or contract
with or lend money to the Bank or otherwise act as fully and freely as though
it were not Interest Agent under this Agreement, so long as such persons do so
in full compliance with all applicable laws. Nothing herein shall preclude the
Interest Agent from acting in any other capacity for the Bank or for any other
legal entity.
14.8. The Interest Agent may execute and exercise any of the rights
or powers hereby vested in it or perform any duty hereunder either itself or
by or through its attorneys or agents.
14.9. The Interest Agent shall act solely as the agent of the Bank
hereunder. The Interest Agent shall not be liable except for the failure to
perform such duties as are specifically set forth herein, and no implied
covenants or obligations shall be read into this Agreement against the
Interest Agent, whose duties shall be determined solely by the express
provisions hereof.
14.10. The Interest Agent shall not be responsible for any failure on
the part of the Bank to comply with any of its covenants and obligations
contained in this Agreement or in the Secondary Participation Interests.
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14.11. The Interest Agent shall not be under any obligation or duty
to institute, appear in or defend any action, suit or legal proceeding in
respect hereof, unless first indemnified to its satisfaction, but this
provision shall not affect the power of the Interest Agent to take such action
as the Interest Agent may consider proper, whether with or without such
indemnity. The Interest Agent shall promptly notify the Bank in writing of any
claim made or action, suit or proceeding instituted against it arising out of
or in connection with this Agreement.
14.12. The Bank will perform, execute, acknowledge and deliver or
cause to be performed, executed, acknowledged and delivered all such further
acts, instruments and assurances as may be required by the Interest Agent in
order to enable it to carry out or perform its duties under this Agreement.
Section 15. Change of Interest Agent. The Interest Agent may resign
and be discharged from its duties under this Agreement upon 30 days' notice in
writing mailed to the Bank by registered or certified mail, and to the holders
of the Secondary Participation Interests by first-class mail at the expense of
the Bank. The Bank may remove the Interest Agent or any successor Interest
Agent upon 30 days' notice in writing, mailed to the Interest Agent or
successor Interest Agent, as the case may be, and to the holders of the
Secondary Participation Interests by first-class mail. If the Interest Agent
shall resign or be removed or shall otherwise become incapable of acting, the
Bank shall promptly appoint a successor to the Interest Agent, which the Bank
may designate as an interim Interest Agent. If the Bank appoints an interim
Interest Agent, the Bank shall then appoint a permanent successor to the
Interest Agent, which may be the interim Interest Agent. If the Bank shall
fail to make such appointment of a permanent successor within a period of 30
days after such removal or within 60 days after it has been notified in
writing of such resignation or incapacity by the resigning or incapacitated
Interest Agent or by the holder of a Secondary Participation Interest (who
shall, with such notice, submit his Secondary Participation Interest for
inspection by the Bank), then the Interest Agent or registered holder of any
Secondary Participation Interest may apply to any court of competent
jurisdiction for the appointment of a new Interest Agent. Any successor
Interest Agent, whether appointed by the Bank or by such a court, shall be a
corporation organized and doing business under the laws of the United States
or of any State of the United States, in good standing, which is authorized
under such laws to exercise corporate trust powers and is subject to
supervision or examination by federal or state authority and which has at the
time of its appointment as Interest Agent a combined capital and surplus of at
least $10,000,000. After appointment, the successor Interest Agent shall be
vested with the same powers, rights, duties and responsibilities as if it had
been originally named as Interest Agent without further act or deed; but the
predecessor Interest Agent shall deliver and transfer to the successor
Interest Agent any property at the time held by it hereunder, and execute and
deliver any further assurance, conveyance, act or deed deemed necessary by the
Bank. No later than the effective date of any such appointment, the Bank shall
file notice thereof in writing with the predecessor Interest Agent, and mail a
notice thereof in writing to the registered holders of the Secondary
Participation Interests. Failure to give any notice provided for in this
Section , however, or any defect therein, shall not affect the
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<PAGE>
legality or validity of the resignation or removal of the Interest Agent or
the appointment of the successor Interest Agent, as the case may be.
Section 16. Notices. Notices or demands authorized by this Agreement
to be given or made by the Interest Agent or by the holder of any Secondary
Participation Interest to or on the Bank shall be sufficiently given or made
if sent by first-class mail, postage prepaid, addressed (until another address
is filed in writing with the Interest Agent) as follows:
California Federal Bank
5700 Wilshire Boulevard
Los Angeles, California 90036
Attn: Executive Vice President and General Counsel
Subject to the provisions of Section 17, any notice or demand authorized by
this Agreement to be given or made by the Bank or by the holder of any
Secondary Participation Interest to or on the Interest Agent shall be
sufficiently given or made if sent by first-class mail, postage prepaid,
addressed (until another address is filed in writing with the Bank) as follows:
ChaseMellon Shareholder Services, L.L.C.
15821 Ventura Blvd., Suite 670
Encino, California 91436
Attn: Ms. Sharon Magidson
Notices or demands authorized by this Agreement to be given or made by the
Bank or the Interest Agent to the holder of any Secondary Participation
Interest shall be sufficiently given or made if sent by first-class mail,
postage prepaid, addressed to such holder at the address of such holder as
shown on the registry books of the Bank maintained by the Interest Agent
pursuant to Section 3 hereof.
Section 17. Supplements and Amendments. The Bank and the Interest
Agent may from time to time supplement or amend this Agreement without the
approval of any holders of Secondary Participation Interests in order to (i)
cure any ambiguity, (ii) correct or supplement any provision contained herein
which may be defective or inconsistent with any provisions herein, or (iii)
make any other provisions in regard to matters or questions arising hereunder
or otherwise which the Bank and the Interest Agent may deem necessary or
desirable, provided that without the consent of at least three-quarters in
interest of the then outstanding Secondary Participation Interests, no such
provision described in this clause (iii) shall, on the whole, adversely affect
in any material respect the interests of the registered holders of Secondary
Participation Interests.
The provisions of this Agreement may otherwise from time to time be
supplemented or amended by written agreement of the parties hereto and the
record holders of the outstanding Secondary Participation Interests, subject
to the limitations
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<PAGE>
provided in the balance of this paragraph and elsewhere in this Agreement. The
record holders of at least three-quarters in interest of the then outstanding
Secondary Participation Interests, may, on behalf of all of the record holders
of then outstanding Secondary Participation Interests, act to amend or
supplement this Agreement in any respect, which Agreement as so amended or
supplemented shall be binding on and shall inure to the benefit of all record
holders of the then outstanding Secondary Participation Interests; provided
that the record holders shall not be entitled to make any change in the
aggregate interest in the Litigation which registered holders of the
outstanding Secondary Participation Interests shall receive.
The Bank shall mail notice to each holder of a Secondary
Participation Interest, in accordance with Section 16 hereof, of any amendment
affecting the rights of the holders of Secondary Participation Interests
effected pursuant to this Section 17, within 60 days of any such amendment.
Section 18. Successors. All the covenants and provisions of this
Agreement by or for the benefit of the Bank or the Interest Agent shall bind
and inure to the benefit of their respective successors and assigns hereunder.
Section 19. Benefits of This Agreement. Nothing in this Agreement
shall be construed to give to any person or corporation other than the Bank,
the Interest Agent and the registered holders of the Secondary Participation
Interests any legal or equitable right, remedy or claim under this Agreement;
and this Agreement shall be for the sole and exclusive benefit of the Bank,
the Interest Agent and the registered holders of the Secondary Participation
Interests.
Section 20. Governing Law. The laws of the State of California shall
govern this Agreement and each Secondary Participation Interest without regard
to principles of conflicts of law.
Section 21. Counterparts. This Agreement may be executed in any
number of counterparts and each of such counterparts shall for all purposes be
deemed to be an original, and all such counterparts shall together constitute
but one and the same instrument.
Section 22. Descriptive Headings. Descriptive headings of the several
Sections of this Agreement are inserted for convenience only and shall not
control or affect the meaning or construction of any of the provisions hereof.
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<PAGE>
IN WITNESS WHEREOF, the parties hereto have caused this Agreement to
be duly executed and their respective corporate seals to be hereunto affixed
and attested, all as of the day and year first above written.
CALIFORNIA FEDERAL BANK,
A Federal Savings Bank
By:
Its:
Attest:
By:
Its:
CHASEMELLON SHAREHOLDER
SERVICES, L.L.C,
as Interest Agent
By:
Its:
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<PAGE>
EXHIBIT A
THE SECONDARY CONTINGENT LITIGATION RECOVERY PARTICIPATION INTERESTS (THE
"SECONDARY PARTICIPATION INTERESTS") ARE NOT SAVINGS ACCOUNTS OR SAVINGS
DEPOSITS AND ARE NOT INSURED BY THE FEDERAL DEPOSIT INSURANCE CORPORATION OR
ANY OTHER GOVERNMENT AGENCY. THE SECONDARY PARTICIPATION INTERESTS ARE BEING
DISTRIBUTED PURSUANT TO AN EXEMPTION FROM REGISTRATION UNDER THE SECURITIES
ACT OF 1933, AS AMENDED, AND APPLICABLE STATE SECURITIES STATUTES, AND HAVE
NOT BEEN REGISTERED WITH THE SECURITIES AND EXCHANGE COMMISSION OR APPLICABLE
STATE SECURITIES AGENCIES. THE RECOVERY PAYMENT MAY BE SUBJECT TO APPLICABLE
CAPITAL DISTRIBUTION REGULATIONS.
[Form of Secondary Contingent Litigation Recovery Participation Interest]
No. PC- ____ Secondary Participation Interests
Secondary Contingent Litigation Recovery Participation Interest
THIS CERTIFIES THAT ___________________, or registered assigns, is
the registered owner of the right to receive from California Federal Bank, A
Federal Savings Bank (the "Bank") twenty millionths of one percent (0.00002%)
of the Adjusted Litigation Recovery, if any (as hereinafter defined) for each
Secondary Contingent Litigation Recovery Participation Interest set forth
above. As used throughout this Secondary Contingent Litigation Recovery
Participation Interest (the "Secondary Participation Interest"), (I) "Adjusted
Litigation Recovery" means sixty percent (60%) of the amount obtained from the
following equation: (A) the cash payment, if any (the "Cash Payment"),
actually received by the Bank pursuant to a final, nonappealable judgment in
or final settlement of California Federal Bank v. The United States of
America, Civil Action No. 92-138C, filed on February 28, 1992, in the United
States Court of Federal Claims (the "Litigation") minus (B) the sum of the
following: (i) the aggregate expenses incurred previously and hereafter by the
Bank in prosecuting the Litigation and obtaining the 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 the Adjusted
Litigation Recovery to the Secondary Interest Holders), (iii) the expenses
incurred by the Bank in connection with the creation, issuance and trading of
the Bank's Contingent Litigation Recovery Participation Interests (trading
symbol: CALGZ) (the "CALGZ Interests") and the Secondary Participation
Interests, including, without limitation, legal and accounting fees and the
fees and expenses of the Interest Agent (as defined below), (iv) the payment
due to the holders of the CALGZ Interests and (v) one-hundred twenty-five
million dollars ($125,000,000); (II) "Income tax liability
A-1
<PAGE>
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; and (III) "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 Adjusted Litigation Recovery 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. Payment hereunder shall occur
upon presentation and surrender of this Secondary Participation Interest in
the manner specified in the Secondary Participation Agreement (hereinafter
defined) at or prior to 5:00 P.M. (New York time) on the Final Payment Date
(hereinafter defined) at the principal office of ChaseMellon Shareholder
Services, L.L.C., a New Jersey limited liability company (the "Interest
Agent"), or at the Interest Agent's facility designated for such purpose at
Securities Window, 120 Broadway, 13th Floor, New York, New York 10071, or at
15821 Ventura Blvd., Suite 670, Encino, California 91436, or its successor as
Interest Agent.
ANY PAYMENT WITH RESPECT TO THE SECONDARY PARTICIPATION INTERESTS
WILL BE A CAPITAL DISTRIBUTION THAT IS SUBJECT TO THE OTS CAPITAL DISTRIBUTION
REGULATIONS.
Payment, if any, on this Secondary Participation Interest shall be
made to the registered holder hereof as of a date (the "Payment Record Date")
that is not less than fifteen days and not later than thirty days following
the date of the Payment Notice (as hereinafter defined). The "Payment Notice"
shall be notice of the amount of the Adjusted Litigation Recovery, as well as
the Payment Record Date, which notice shall be published or mailed to
registered holders of Secondary Participation Interests by the Bank. The
"Final Payment Date" will be the date that is six months following the date of
the Payment Record Date.
This Secondary Participation Interest is subject to all of the terms,
provisions and conditions of that certain Agreement Regarding Secondary
Contingent Litigation Recovery Participation Interests, dated as of December
2, 1996 (the "Secondary Participation Agreement"), by and between the Bank and
the Interest Agent, which Secondary Participation Agreement is hereby
incorporated herein by reference and made a part hereof and to which Secondary
Participation Agreement reference is hereby made for a full description of the
rights, limitations of rights, obligations, duties and immunities hereunder of
the Interest Agent, the Bank and the holders of the Secondary Participation
Interests. Copies of the Secondary Participation Agreement are on file at the
above-mentioned principal office of the Interest Agent.
A-2
<PAGE>
This Secondary Participation Interest, upon surrender at the
principal office of the Interest Agent or at its facility designated for such
purpose at Securities Window, 120 Broadway, 13th Floor, New York, New York
10071, or at 15821 Ventura Blvd., Suite 670, Encino, California 91436, may be
transferred, split up, combined or exchanged for another Secondary
Participation Interest(s) of like tenor entitling the holder to receive a like
aggregate percentage of the Adjusted Litigation Recovery as the Secondary
Participation Interest(s) surrendered shall have entitled such holder to
receive; provided, however, that the Bank and Interest Agent shall not be
required to effect any such transfer, split up, combination or exchange if any
of the resulting Secondary Participation Interest(s) would represent a right
to receive any percentage of the Adjusted Litigation Recovery other than
twenty millionths of one percent (0.00002%) or a whole multiple thereof.
Following the Payment Record Date, the registered holder hereof may
receive payment in respect of this Secondary Participation Interest only by
surrendering this Secondary Participation Interest to the Interest Agent at
its facility maintained for such purpose at Securities Window, 120 Broadway,
13th Floor, New York, New York 10071, or at the principal office of the
Interest Agent, if then different, at or prior to 5:00 p.m. (New York time) on
the Final Payment Date. No holder of a Secondary Participation Interest shall
be entitled to receive any payment with respect thereto until the Secondary
Participation Interest shall have been surrendered as provided in the
preceding sentence and the Secondary Participation Agreement. A holder of a
Secondary Participation Interest shall not be entitled to any interest for the
period of time between the date on which the Bank receives any cash payment in
connection with the Litigation and the date on which payment is made to such
holder in respect of such Secondary Participation Interest in accordance with
the terms of the Secondary Participation Agreement. Any and all Secondary
Participation Interests not delivered in accordance with the Secondary
Participation Agreement shall be null and void, and following the Final
Payment Date, the Bank and Interest Agent shall have no obligation to make any
payment thereon.
Each holder of a Secondary Participation Interest by acceptance of
the same acknowledges and agrees that (i) the Bank retains sole and exclusive
control of the Litigation and may, among other things, dismiss, settle or
cease prosecuting the Litigation at any time without obtaining any cash or
other recovery, and (ii) no holder of a Secondary Participation Interest shall
have any rights against the Bank for any decision regarding the conduct or
disposition of the Litigation, including, without limitation, any decision to
dispose of the Litigation without a cash recovery by the Bank. In addition, in
the event that applicable laws, rules or regulations limit or prevent the
distribution of all or any portion of the Adjusted Litigation Recovery, the
Bank shall have no obligation whatsoever to make any payment in excess of the
allowable amount, if any.
All rights of action in respect of the Secondary Participation
Agreement are vested in the respective registered holders of the Secondary
Participation Interests; provided, however, that no registered holder of any
Secondary Participation Interest shall have the right to enforce, institute or
maintain any suit, action or proceeding against the Bank to enforce, or
otherwise act in respect of, the Secondary Participation Interests,
A-3
<PAGE>
unless (a) such registered holder shall have previously given written notice
to the Bank of the substance of such dispute, and registered holders of at
least one-quarter in interest of the issued and outstanding Secondary
Participation Interests shall have given written notice to the Bank of their
support for the institution of such proceeding to resolve such dispute, (b)
written notice of the substance of such dispute and of the support for the
institution of such proceeding by such holders shall have been provided by the
Bank to the Interest Agent, and (c) the Interest Agent shall not have
instituted appropriate proceedings with respect to such dispute within 30 days
following the date of such written notice to the Interest Agent, it being
understood and intended that no one or more registered holders of Secondary
Participation Interests shall have the right in any manner whatever by virtue
of, or by availing of, any provision of the Secondary Participation Agreement
to affect, disturb or prejudice the rights of any other registered holders of
Secondary Participation Interests, or to obtain or to seek to obtain priority
in preference over any other holders or to enforce any right under the
Secondary Participation Agreement, except in the manner herein provided for
the equal and ratable benefit of all registered holders of Secondary
Participation Interests. Except as provided in this paragraph, no holder of a
Secondary Participation Interest shall have the right to enforce, institute or
maintain any suit, action or proceeding to enforce, or otherwise act in
respect of, the Secondary Participation Interests.
This Secondary Participation Interest shall not be valid or
obligatory for any purpose until it shall have been countersigned by the
Interest Agent.
A-4
<PAGE>
WITNESS the facsimile signature of the proper officers of the Bank
and its corporate seal.
Dated:
CALIFORNIA FEDERAL BANK,
A Federal Savings Bank
By:
----------------------------
Its:
---------------------------
ATTEST
Countersigned
- ------------------------
Interest Agent
By:
--------------------------
Authorized Signature
A-5
<PAGE>
[Form of Reverse Side of Secondary Contingent Litigation Recovery
Participation Interest]
ASSIGNMENT
(To be executed by the registered holder if such
holder desires to transfer the Secondary Participation Interest.)
FOR VALUE RECEIVED ______________________________________ hereby
sells, assigns and transfers unto _____________________
(Please print name and address of transferee)
_____________________________________________________________________________
this Secondary Participation Interest, together with all right, title and
interest therein, and does hereby irrevocably constitute and appoint
_____________________________ attorney, to transfer the within Secondary
Participation Interest on the books of the within-named Bank, with full power
of substitution.
Dated: _________________
Signature
-----------------------------
Signature Guaranteed:
NOTICE
The signature to the foregoing Assignment must correspond to the name
as written upon the face of this Secondary Participation Interest in every
particular, without alteration or enlargement or any change whatsoever.
A-6
<PAGE>
THIS SECURITY IS NOT A SAVINGS ACCOUNT OR DEPOSIT AND IT IS NOT INSURED BY THE
FEDERAL SAVINGS AND LOAN INSURANCE CORPORATION.
THIS SECURITY IS NOT ELIGIBLE FOR PURCHASE BY ANY INSTITUTION WHOSE ACCOUNTS
ARE INSURED BY THE FEDERAL SAVINGS AND LOAN INSURANCE CORPORATION OR A
CORPORATE AFFILIATE THEREOF, EXCEPT THAT THIS SECURITY MAY BE PURCHASED BY A
CORPORATE AFFILIATE OF THE ISSUER OR BY ANY DIVERSIFIED SAVINGS AND LOAN
HOLDING COMPANY AND ANY NON-INSURED INSTITUTION SUBSIDIARY THEREOF. BY
ACCEPTING THIS SECURITY, THE HOLDER REPRESENTS THAT IT IS NOT, AND IF THE
BENEFICIAL OWNER IS NOT THE REGISTERED HOLDER, THAT THE BENEFICIAL OWNER IS
NOT, SUCH AN INSURED INSTITUTION OR CORPORATE AFFILIATE THEREOF (EXCEPT AS
PROVIDED IN THE PRECEDING SENTENCE).
CALIFORNIA FEDERAL SAVINGS AND LOAN ASSOCIATION
5670 Wilshire Boulevard
Los Angeles, California 90036
------------------------------------------------
NOTE AGREEMENT
$50,000,000
10.668% Senior Subordinated Notes Due December 22, 1998
-------------------------------------------------------
December 12, 1988
County of Los Angeles
Hall of Administration
500 West Temple Street, Room 432
Los Angeles, California 90012
Attention: Treasurer and Tax
Collector/Public Finance
Ladies and Gentlemen:
California Federal Savings and Loan Association, a
federally-chartered savings and loan association (the "Association") hereby
agrees with you as follows:
<PAGE>
SECTION 1. PURCHASE AND SALE OF NOTES
1.1 Issuance of Notes.
The Association will authorize the issuance of $50,000,000
aggregate principal amount of its 10.668% Senior Subordinated Notes Due
December 22, 1998 (the "Notes") which may be issuable in denominations of
$5,000,000 and integral multiples of $5,000,000. The form of the Note will be
as set out in Attachment A.
1.2 The Closing.
The Association agrees to sell to you and you agree to
purchase from the Association, in accordance with the provisions of this
Agreement, Notes in the principal amount of $50,000,000. The closing of your
purchase will be held at 11:00 a.m. local Los Angeles time on December 22, 1988
(the "Closing Date") at the offices of The First Boston Corporation, 333 South
Grand Avenue, Suite 2200, Los Angeles, California 90071, or on such other date
as has been agreed by all of the parties hereto. On the Closing Date, the
Association will deliver to you, unless you otherwise request, Notes in the
principal amount of $50,000,000, dated the Closing Date and payable to you,
against payment in Los Angeles by wire transfer of immediately available
funds.
1.3 Expenses.
If the Notes are sold, the Association will pay all expenses
relating to the preparation of this Agreement, including the cost of
reproducing this Agreement and the Notes, the fees and disbursements of your
counsel and out-of-pocket expenses incurred by The First Boston Corporation in
its capacity as the placement agent of the Notes (the "Placement Agent");
provided, however, that the Association shall not be liable for the payment of
the fees of your counsel and the out-of-pocket expenses incurred by the
Placement Agent which exceed, in the aggregate, $25,000.
1.4 Representations.
To induce you to enter into this Agreement and to purchase
the Notes, the Association warrants and represents to you that:
2
<PAGE>
(a) Organization, etc. The Association is a
federally-chartered savings and loan association duly organized, validly
existing and in good standing under the laws of the United States and is duly
authorized, qualified, and licensed to do business in the jurisdictions in which
its ownership of property or conduct of business legally requires such
authorization, qualification, or license except where the consequence of
failure of such authorization, qualification, or license would not materially
adversely affect the business, assets or condition (financial or otherwise) of
the Association and subject to the preceding qualification, has full corporate
power to own its properties and assets and to conduct its business as
presently conducted. The Association's deposits are insured up to the
prescribed limits by the FSLIC, and it is a member of the Federal Home Loan
Bank of San Francisco.
(b) Capacity; No Defaults. The Association has full
corporate power to execute and deliver, and to perform and observe the
provisions of this Agreement and the Notes and to carry out the transactions
contemplated hereby and thereby. No event has occurred and no condition exists
which, upon the issuance of the Notes, would constitute an Event of Default or
any other violation of this Agreement.
(c) Authority and Enforceability. The execution, delivery
and performance by the Association of this Agreement and the Notes have been
duly authorized by all necessary corporate action, and when executed and
delivered by the Association hereunder, this Agreement and the Notes will
constitute legal, valid and binding obligations of the Association enforceable
against the Association in accordance with their respective terms. No approval
of any court or governmental agency with respect to the execution and delivery
by the Association of this Agreement and the Notes is required except the
approval of the FHLBB pursuant to FHLBB Regulation 563.8-1 (12 C.F.R. Section
563.8-1), which approval has been sought by the Association. It is
acknowledged that this approval will not be obtained prior to the Closing Date
and that it is not a condition to closing.
(d) Compliance with Other Instruments. The execution and
delivery of this Agreement and the Notes and compliance with their terms will
not result in a breach of any of the terms or conditions of, or result in the
imposition of any lien, charge or encumbrance upon any assets of the
Association pursuant to, or constitute a default (with due notice or lapse of
time or both) or
3
<PAGE>
result in the occurrence of an event for which any holder or holders of any
Indebtedness may declare the same due and payable under, any indenture,
agreement, order, judgment or instrument under which the Association is a
party or by which the Association or its Property may be bound or affected, or
under the charter documents or bylaws of the Association, and will not violate
any existing law, decree, judgment, order, rule, or regulation applicable to
the Association.
(e) Financial Statements.
A. The Association has furnished to you (i) the
audited consolidated financial data for the Association for fiscal years 1985
through 1987, (ii) the Association's Form 10 filed with the FHLBB and declared
effective November 7, 1988 and (iii) the Association's unaudited interim
financial reports for the periods ending March 31, 1988, June 30, 1988 and
September 30, 1988. Such financial information is complete and correct and,
except that the unaudited financial statements referred to in clause
(iii) above are subject to normal year-end audit adjustments, have been
prepared in accordance with generally accepted accounting principles applied
on a consistent basis for the periods involved and fairly present the
financial condition of the Association and its Subsidiaries as a whole as of
the dates set forth therein and the results of their operations for the periods
covered thereby.
B. Neither the Association nor any of its
Subsidiaries has any material contingent or secondary Indebtedness other than
as indicated on the consolidated balance sheets of the Association.
(f) Changes in Condition. Since September 30, 1988, there has
been no material adverse change in the business, assets or financial condition
of the Association and its Subsidiaries taken as a whole and, since such date,
the Association and its Subsidiaries taken as a whole have not been materially
adversely affected as the result of any fire, explosion, accident, flood,
strike, lockout, riot, civil disturbance, sabotage, confiscation, condemnation
or purchase of any Property by governmental authority, activities of armed
forces or acts of God or the public enemy, or other event or development.
Since September 30, 1988, neither the Association nor any of its Subsidiaries
has entered into any transaction outside the ordinary course of business that
materially adversely affects the business, assets or financial condition of
the Association, and since that date the Association has not
4
<PAGE>
declared or paid any dividend on, or made any distribution with
respect to its capital stock.
(g) Litigation, Etc. There are no actions, suits or
proceedings pending, or to the knowledge of the Association threatened,
against or affecting the Association, at law or in equity, which will have a
material adverse effect upon the financial condition or results of operation
of the Association when taken as a whole and the disposition of all litigation
currently pending (or, to the knowledge of the Association, threatened) to
which the Association is (or could be) a party or of which any of its property
or assets is subject will not have a material adverse effect upon the
financial condition or results of operation of the Association when taken as a
whole. The Association is not in violation or default with respect to any
applicable laws or regulations which materially affect the operations or
financial condition of the Association, nor is it in violation or default with
respect to any order, writ, injunction, demand or decree of any Person or in
violation or default (nor is there a waiver in effect which, if not in effect,
would result in a violation or default) in any material respect under any
indenture, agreement or other instrument under which the Association is a
party or may be bound, upon a default under which there could be consequences
that would materially and adversely affect the business, assets or financial
condition of the Association.
(h) Taxes. The Association has filed or caused to be filed
all tax returns which are required to be filed by it, pursuant to the laws,
regulations or orders of each Person with taxing power over the Association and
its assets. The Association has paid, or made provision for the payment of, all
taxes, assessments, fees and other governmental charges which have or may have
become due pursuant to said returns, or otherwise or pursuant to any
assessment received by the Association, except such taxes, if any, as are
being contested in good faith and as to which adequate reserves (determined in
accordance with generally accepted accounting principles) have been provided.
Federal income tax returns of the Association have been audited by the
Internal Revenue Service or the statute of limitations has expired for all
years to and including the fiscal year ended 1981, and the results of such
settlement are or will be properly reflected in the consolidated financial
statements referred to in Section 1.4(e). The charges, accruals and reserves
in respect of taxes on the books of the Association are sufficient to comply
with generally accepted accounting principles. The Association knows of no
proposed material
5
<PAGE>
tax assessment against it, and no extension of time for the assessment of
federal, state or local taxes of the Association is in effect or has been
requested.
(i) Lawful Use of Proceeds; Regulations. All proceeds
of the Notes shall be used by the Association for general corporate
purposes.
(j) Private Sale. Except for having offered to sell the
Notes to you, neither the Association nor anyone authorized to act on its
behalf has, either directly or indirectly, sold, offered to sell, or solicited
offers to purchase any of the Notes or similar instruments or taken or allowed
to be taken any other action on behalf of the Association which would subject
the Notes to the registration and prospectus requirements of the Securities
Act of 1933 as amended, FHLBB regulations, and any applicable state securities
or "Blue Sky" laws were the Notes not exempt thereunder, nor will the
Association make or allow to be made on its behalf such a sale, offer or
solicitation or take or allow to be taken on its behalf any such other action.
1.5 Closing Conditions.
Your obligation to purchase the Notes is subject to the
satisfaction of each of the following conditions precedent.
(a) Note Purchase Agreement; Notes. You shall have
received the Agreement and the pertinent Notes duly executed,
appropriately completed and delivered by the Association.
(b) Opinions of Counsel. You shall have received an opinion
of counsel for the Association, that may be in-house counsel, addressed to you
and dated the Closing Date and substantially in the form and substance of
Attachment B to the Agreement.
(c) Representations and Warranties. The representations and
warranties contained in Section 1.4 shall be true and correct in all material
respects on the Closing Date with the same effect as though made on and as of
that date.
(d) Compliance with the Agreement. The Association shall
have performed and complied with all agreements and conditions contained in
the Agreement which are required to be performed or complied with by the
Association before or on the Closing Date.
6
<PAGE>
(e) Officers' Certificate. You shall have received a
certificate dated the Closing Date and signed by the Chief Executive Officer
or the Chief Financial Officer of the Association, certifying that the
conditions specified in Sections 1.5(c) and 1.5(d) have been fulfilled.
SECTION 2. PAYMENTS
2.1 Required Payments.
(a) Principal. The principal amount of each Note shall
be due in full on the Maturity Date.
(b) Interest. Each Note shall bear interest on its unpaid
principal amount from the Closing Date to the date on which the full amount
thereof is repaid at the interest rate for such Note provided in Section 1.1
above. Interest in respect of each of the Notes shall be payable semiannually
in arrears on each June 22 and December 22 (or, if any such day is not a
Domestic Business Day, on the next succeeding Domestic Business Day unless
such succeeding Domestic Business Day falls in a different calendar month, in
which case on the immediately preceding Domestic Business Day), commencing on
June 22, 1989, and at maturity (whether by acceleration or otherwise),
computed on the basis of a 360-day year consisting of twelve (12) months of
thirty (30) days each.
If the Association defaults in the payment when due (whether
by acceleration or otherwise, and before as well as after judgment) of any
amount hereunder or under any Note, the Association shall pay interest on
such past due unpaid amount, on and after such due date, payable on demand, at
a rate per annum with respect to each Note equal to the applicable interest
rate for such Note plus one percent.
2.2 No Optional Prepayments.
The Association may not make any prepayments of principal on
the Notes.
2.3 Payment Pro Rata.
The amount of each required payment of the Notes will be
allocated among all Notes at the time outstanding with respect to which
payment is then due in proportion, as nearly as practicable, to the respective
outstanding principal amounts of such Notes. You agree that, if you shall
obtain payment with respect to any Note held by you
7
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in excess of your rightful portion as set forth above through the exercise
(subject to Section 8.11 herein) of a right of set-off, banker's lien or
counterclaim, or from any other source, you shall promptly purchase from any
other Holders of participations in the Notes held by any other Holders in such
amounts, and make such other adjustments from time to time, as shall be
equitable to the end that all Holders shall share the benefit of such payment
pro rata as specified in the preceding sentence; provided, however, that if all
or any portion of such excess payment is thereafter recovered from such
purchasing Holder, the purchase shall be rescinded and the purchase price
restored to the extent of such recovery, but without interest. You further
agree that for the purpose of this Section 2.3, all exercises of right of
set-off, banker's lien or counterclaim by any Holder shall be deemed to have
been made against and in respect of the Note or Notes held by such Holder and
not against any other obligation of the Association to it.
2.4 Subordination.
(a) The Indebtedness of the Association evidenced by the
Notes is subordinate and junior in right of payment to the Association's
obligations to its depositors and to all of the Association's other
obligations to its Senior Creditors. The Notes do not limit the creation of
additional liabilities of the Association, including Senior Liabilities;
provided, however, that the Association may not create liabilities that are
both junior to Senior Liabilities and senior in right to payment of the Notes.
No payments on the Notes may be made if there shall have occurred and be
continuing a default in any payment with respect to Senior Liabilities, or an
event of default with respect to any Senior Liabilities permitting the holders
thereof to accelerate the maturity thereof, or if any judicial proceeding shall
be pending with respect to any such default. In the event of liquidation of the
Association, all such obligations (other than Capital Debt) shall be entitled to
be paid in full with such interest as may be provided by law before any payment
shall be made on account of the principal of or interest on the Notes. After
payment in full of all sums owing to depositors and Senior Creditors, the
Holders shall be entitled to be paid from the remaining assets of the
Association before any payment or other distribution, whether in cash, property
or otherwise, shall be made on account of any shares of the Association.
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(b) In the event of the liquidation of the Association, upon
the payment in full of all Senior Liabilities, the holder of the Notes shall be
subrogated to the rights of the Senior Creditors to receive payments or
distributions, of assets of the Association applicable to Senior Liabilities
until the principal of and accrued interest on the Notes shall have been paid
in full. No such payments or distributions applicable to Senior Liabilities
shall, as among the Association, its creditors (other than the Senior Creditors)
and the Holders, be deemed to be a payment by the Association to or on account
of the Notes until received by the Holders.
(c) These subordination provisions are solely for the
purpose of defining the relative rights of the Holders, on the one hand, and
the Senior Creditors, on the other hand, and nothing contained herein or
elsewhere in this Agreement (other than Section 2.4(a) hereof) or in the Notes
is intended to or shall (i) impair as between the Association, its creditors
(other than Senior Creditors) and the Holders, the obligation of the
Association, which is unconditional and absolute, to pay to the Holders the
principal of and interest on the Notes as and when the same shall become due
and payable in accordance with their terms, or (ii) affect the relative rights
of the Holders and the Senior Creditors, as a group, and other creditors of
the Association, or (iii) prevent the Holders, except subject to Section 2.4(a)
hereof, from exercising all remedies otherwise permitted by applicable law
upon default under the Notes or under this Agreement, subject only to the
rights, if any, under California or federal law, of the Senior Creditors in
respect of cash, property or securities of the Association payable upon the
exercise of any such remedy.
2.5 Unsecured Obligation.
The obligation evidenced by the Notes is unsecured by the
assets of the Association, or any of its Affiliates and is ineligible as
collateral for any loan by the Association.
SECTION 3. INFORMATION AS TO ASSOCIATION
3.1 Financial and Business Information.
The Association will deliver to you, if at the time you or
your nominee hold, any Notes, and to any other Holder:
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(a) Financial Statements -- promptly upon their becoming
available, one copy of the Forms 10-K and 10-Q filed by the Association with
the FHLBB and one copy of the Forms 10-K, 10-Q and 8-K filed by CalFed Inc.,
the owner of all of the outstanding capital stock of the Association
("CalFed"), with the Securities and Exchange Commission and CalFed's proxy
statements distributed to CalFed's stockholders;
(b) Notice of Default -- immediately upon becoming aware
of the existence of any Incipient Default or Event of Default, a
notice describing its nature;
(c) Notice of Claimed Default -- immediately upon becoming
aware that the holder of any Note or of any other evidence of Indebtedness of
the Association has given notice (whether written or oral) with respect to a
claimed default, breach, or Event of Default, a notice describing the notice
given (whether written or oral) and the nature of the claimed default, breach,
or Event of Default; and
(d) Requested Information -- with reasonable promptness, any
other data and information which may be reasonably requested related to the
Association's financial position from time to time by any Person or Persons
holding Notes.
3.2 Officer's Certificates.
With each set of financial statements delivered pursuant to
Section 3.1(a) and 3.1(b), the Association will deliver a certificate, signed
by its Chief Executive Officer, or its Chief Financial Officer or any Executive
or Senior Vice President, setting forth:
(a) Covenant Compliance -- the information required in order
to establish compliance with Section 4 during the period covered by the income
statements then being furnished; and
(b) Event of Default -- that the signer has reviewed the
relevant terms of this Agreement and has made, or caused to be made, under the
signer's supervision, a review of the transactions and conditions of the
Association during the period covered by the income statements then being
furnished and that the review has not disclosed the existence of any Incipient
Default or Event of Default or, if an Incipient Default or Event of Default
exists, describing its nature.
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SECTION 4. ASSOCIATION BUSINESS COVENANTS
The Association covenants that on and after the date of this
Agreement until the Notes are paid in full:
4.1 Payment of Notes.
The Association shall duly and punctually pay, or cause to
be paid, the principal of and interest on the Notes at the times and places
and in the manner provided in this Agreement and in the Notes. The Association
shall take any and all action which may be necessary to enable it lawfully to
pay the principal of and interest on the Notes when the same shall become due,
whether at maturity or upon declaration as authorized by the Agreement.
4.2 Dividends and Certain Other Payments.
The Association shall not pay any dividends which would be
in violation of applicable regulatory limitations imposed by the FHLBB or the
FSLIC.
4.3 Transactions with Affiliates.
The Association shall not pay, directly or indirectly, any
funds to or for the account of, make any investment in, enter into any
transaction including, without limitation, the purchase, sale or exchange of
Property or the rendering of any service, or effect any transaction in
connection with any joint enterprise or other joint arrangement (collectively
and without differentiation "Covered Transactions") with, any Affiliate if the
effectuation of such Covered Transactions would result in a violation of
applicable regulatory limitations imposed by the FHLBB or the FSLIC.
4.4 Maintenance of Regulatory Capital.
As long as any of the Notes is outstanding, the Association
will maintain regulatory capital in an amount sufficient to prevent violation
of the applicable regulatory capital requirements.
4.5 Maintenance of Books and Records.
The Association will keep proper books of record and account
in which full and materially correct entries will be made of all its business
transactions, and will reflect in its financial statements adequate accruals
and appropriations to reserves. The Association shall cause its books of
record and account to be examined by one or more firms of independent public
accountants not less frequently than annually and shall not make any change in
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the accounting principles applied to its financial statements not concurred in
by such firm or firms. The Association shall prepare its financial statements
in accordance with generally accepted accounting principles consistently
applied.
4.6 Conduct of Business.
The Association shall comply with all statutes, laws,
ordinances, or government rules and regulations to which it is subject where
the failure to so comply would adversely affect, or so far as the Association
can at the time foresee is reasonably likely to adversely affect, in any
material respect the business, earnings, Properties or financial condition of
the Association.
4.7 Taxes and Claims.
The Association shall pay prior to delinquency:
(1) all taxes, assessments and governmental charges
or levies imposed upon it or its Property, and
(2) all claims or demands of materialmen,
mechanics, carriers, warehousemen, landlords and other like
Persons which, if unpaid, might result in the creation of a
lien upon its Property which would have a material adverse
effect upon the business and affairs of the Association.
provided that items of the foregoing description need not be paid while being
contested in good faith by appropriate proceedings, and provided further, that
adequate book reserves have been established with respect thereto.
4.8 Consolidation and Merger.
The Association may, without the consent of the Holders of
the Notes, consolidate with or merge into any other person, or convey,
transfer or lease its properties and assets substantially as an entirety to
any person, provided that in any such case (i) the successor person shall be a
domestic corporation, association, partnership or trust and such corporation,
association, partnership or trust shall assume the Association's obligations
and (ii) immediately after giving effect to such transaction, no default
hereunder shall have occurred and be continuing. For purposes of this Section
4.8, if the Association is a party to a merger, consolidation or other
acquisition and in connection therewith, either (i) assumes certain
outstanding Indebtedness of another party to such merger, consolidation or
other acquisition
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that is by its terms subordinated in right of payment to the Senior
Liabilities but which is senior in payment to the Notes (whether at maturity
or through the operation of sinking fund or redemption (regardless of whether
mandatory or at the option of the Association or the Holders thereof)
provisions) to be made prior to the Maturity Date or (ii) incurs or suffers or
permits to exist the same, such assumption, incurrence, sufferance or
prohibitance shall not violate Section 2.4(a) or 4.10, hereof, or constitute a
default or event of default.
4.9 Continued Existence; Maintenance of Status as an "Insured
Institution."
The Association will do or cause to be done all things
necessary to preserve and keep in full force and effect its corporate
existence; provided, however, that nothing in this Section 4.9 shall prevent
any consolidation, merger or conversion of the Association as permitted under
Section 4.8. The Association will maintain its status as an "insured
institution," as defined in 12 U.S.C. [section] 1813(h) or 12 U.S.C. [section]
1724(a), or a similar status under any similar federal law hereinafter enacted,
and do all things necessary to ensure that savings accounts of the Association
are insured by the FSLIC or the FDIC up to the maximum amount permitted by the
National Housing Act and regulations thereunder or the Federal Deposit
Insurance Corporation Act and any regulations thereunder (or any successor
legislation).
4.10 Limitation on Other Subordinated Indebtedness.
Subject to Section 4.8, the Association shall not incur or
suffer or permit to exist any Indebtedness that is by its terms subordinated
in right of payment to Senior Indebtedness and senior in right of payment to
the Notes, as provided in Section 2.4(a).
SECTION 5. DEFAULT
5.1 Event of Default.
An "Event of Default" shall exist if any of the following
occurs and is continuing:
(a) Principal Payments -- failure to pay principal on
any Note on or before the date the payment is due, whether or not
such payment is prohibited by Section 2.4;
(b) Interest -- failure to pay interest on any Note on
or before the date the payment is due which
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continues for 10 Domestic Business Days, whether or not such
payment is prohibited by Section 2.4;
(c) Breach of Covenants -- default in the performance, or
breach of any covenant contained in Section 4 or breach of any other
agreement, covenant, representation, warranty, term or condition made
hereunder or required to be observed or performed under this Agreement, which
continues for 60 days after written notice thereof is given to the Association
by the holders of a majority in outstanding principal amount of the Notes;
(d) Default on Indebtedness or Other Security -- failure by
the Association or Significant Subsidiary to make one or more payments of
principal due (after the expiration of any grace period) on aggregate
Indebtedness exceeding $15,000,000 if such Indebtedness is not discharged
within 60 days after written notice thereof; or any event shall occur or any
condition shall exist, the effect of which event or condition is to cause (after
the expiration of any grace period) more than $15,000,000 of aggregate
Indebtedness or other Securities of the Association or Significant Subsidiary
to become due before its (or their) stated maturity or before its (or their)
regularly scheduled dates of payment if such acceleration is not annulled or
rescinded within 60 days after written notice thereof;
(e) Involuntary Bankruptcy Proceedings, Etc. -- a custodian,
receiver, liquidator or trustee of the Association, or of any of its Property,
is appointed or takes possession and such appointment or possession remains in
effect for more than 60 days; or the Association generally fails to pay its
debts as they become due; or the Association is adjudicated bankrupt or
insolvent; or an order for relief is entered under the Federal Bankruptcy Code
against the Association or any Significant Subsidiary; or any of its Property
is sequestered by court order and the order remains in effect for more than 60
days; or a petition is filed against the Association under any bankruptcy,
reorganization, arrangement, insolvency, readjustment of debt, dissolution or
liquidation law of any jurisdiction, whether now or subsequently in effect,
and is not dismissed within 60 days after filing; or any governmental agency
or any court of competent jurisdiction at the insistence of any governmental
agency shall assume custody or control of the whole or any substantial portion
of the Properties of the Association;
(f) Voluntary Bankruptcy Proceedings, Etc. -- the
Association files a petition in voluntary bankruptcy
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or seeks relief under any provision of any bankruptcy, reorganization,
arrangement, insolvency, readjustment of debt, dissolution or liquidation law
of any jurisdiction, whether now or subsequently in effect; or consents to the
filing of any petition against it under any such law; or consents to the
appointment of or taking possession by a custodian, receiver, trustee or
liquidator of the Association, or of all or any part of its Property, or makes
an assignment for the benefit of its creditors.
5.2 Default Remedies.
(a) Acceleration -- If an Event of Default described in
Section 5.1 exists, the holder or holders of not less than 25% in aggregate
outstanding principal amount of the Notes (exclusive of any Notes owned by the
Association, and its Affiliates) may, at its or their option, exercise any
right, power or remedy permitted by law, including the right, by notice to the
Association, to declare all the outstanding Notes, to be immediately due and
payable; provided, however, that no outstanding principal of the Notes may be
declared immediately due and payable without the specific prior approval of
the FSLIC if, after giving effect thereto, the Association would not meet its
regulatory capital requirements pursuant to FHLBB Regulation 553.13 (12 C.F.R.
Section 553.13) or any comparable statute or regulation that is a successor
thereto and provided, further, that the foregoing restriction shall not apply
to the repayment of the Notes due at the Maturity Date. Upon each declaration,
the principal of the Note declared due shall become immediately due and payable,
together with all accrued interest, and the Association will immediately make
payment, without any presentment, demand, protest or other notice of any kind,
all of which are hereby expressly waived.
No course of dealing or delay or failure to exercise any
right on the part of any Holder shall operate as a waiver of such right or
otherwise prejudice such Holder's rights, powers or remedies. The Association
will pay or reimburse the Holders for all costs and expenses (including
reasonable attorneys' fees) incurred by them after notice to the Association
in collecting any sums due on such Note or Notes or in otherwise enforcing any
of their rights, whether by judicial proceedings or otherwise; provided,
however, that upon and after the occurrence of an Event of Default hereunder,
the Association shall pay the reasonable fees and disbursements of each
Holder's counsel incurred by such Holder in its dealings with the Association
after the
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occurrence of such Event of Default, including without limitation those
reasonable fees and disbursements of Holder's counsel in any action or
participation in, or in connection with, a case or proceeding under Chapter 7
or 11 of the Bankruptcy Code, or any successor statute thereto or in any
liquidation or sale of assets proceeding brought by the FSLIC or the FDIC with
respect to the Association; and provided, further, that such claim of the
Holders under this Section 5.2 shall be made in writing within 120 days after
the date of the final expense incurred or charged for any particular matter.
The obligations of the Association under this Section 5.2 shall survive
payment and cancellation of the Notes.
(b) Annulment of Acceleration -- In the event of each
declaration pursuant to Section 5.2(a), the Holder or Holders of at least
66-2/3% of the aggregate outstanding principal amount of the Notes (exclusive
of any Notes owned by the Association, Significant Subsidiaries and/or its and
their Affiliates) may annul such declaration and its consequences if no
judgment or decree has been entered for the payment of any amount due pursuant
to such declaration and if all sums payable under the Notes and under this
Agreement (except any principal or interest on the Notes which has become
payable solely by reason of such declaration) shall have been duly paid.
5.3 No Waiver.
No delay or omission of the Holders to exercise any right or
power accruing upon any Event of Default shall impair any such right or power,
or shall be construed to be a waiver of any such default or an acquiescence
therein; and, every power and remedy given by this Section 5 or by law to the
Holders may be exercised from time to time, and as often as shall be deemed
expedient.
SECTION 6. INTERPRETATION OF THIS AGREEMENT
6.1 Terms Defined.
As used in this Agreement, the following terms have the
respective meaning, set forth below or in the Section indicated:
Affiliate -- a Person which controls, or is controlled by,
or is under common control with, the Association. For purposes of this
Agreement, a Person shall be deemed to have control of (i) an insured
institution, (including the Association), if such Person directly or indirectly
or acting in concert with one or
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more Persons or through one or more Subsidiaries, owns, controls, or holds the
power to vote, or holds proxies representing, more than 25 percent of the
voting shares of such institution, or controls in any manner the election of a
majority of the directors of such institution; (ii) any other Person if the
Person directly or indirectly or acting in concert with one or more Persons or
through one or more Subsidiaries, owns, controls, or holds the power to vote,
or holds proxies representing, more than 25 percent of the voting shares or
rights of such other Person, or controls in any manner the election or
appointment of a majority of the directors or trustees of such other Person,
or is a general partner in or has contributed more than 25 percent of the
capital of such other Person; (iii) a trust if the Person is a trustee
thereof; or (iv) any other Person if the FSLIC determines that the Person
directly or indirectly exercises a controlling influence over the management
or policies of such other Person.
Agreement -- this Note Agreement dated December 12, 1988
between the Association and you, as amended or modified from time to time.
Associate -- shall have the meaning ascribed to such term
in Rule 12b-2 of the General Rules and Regulations under the Securities
Exchange Act of 1934, as amended, as in effect on the date hereof.
Capital Debt -- shall mean all Indebtedness of the
Association which either (i) complied upon original issuance with applicable
state and federal requirements for financial institution capital notes or
debentures, or (ii) by express provision in the instrument creating or
evidencing such Indebtedness ranks on a parity with or junior to the Notes and
not prior to the Notes in right of payment; provided, however, that the act of
according to any Indebtedness of the Association otherwise ranking on a parity
with or junior to the Notes, any security by way of Lien of or on Property
shall not be deemed to prevent such Indebtedness from constituting
Indebtedness ranking on a parity with or junior to the Notes.
Closing Date -- shall have the meaning given it in Section
1.2.
Code -- shall mean the Internal Revenue Code of 1986, as
such may be amended from time to time.
Domestic Business Day -- shall mean a day on which each of
you are open, at your respective addresses specified herein or in connection
herewith, and in
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Los Angeles, California, for the purpose of conducting a commercial banking
business.
Event of Default -- shall have the meaning given it in
Section 5.1.
FDIC -- shall mean the Federal Deposit Insurance
Corporation.
FHLBB -- shall mean the Federal Home Loan Bank Board.
FSLIC -- shall mean the Federal Savings and Loan Insurance
Corporation.
Holder -- shall mean any purchaser of a Note hereunder, and
any transferee or assignee thereof.
Incipient Default -- any event, which, with the giving of
notice, or the passage of time, or both, would become an Event of Default.
Indebtedness -- of any Person, or the Association, shall
mean all items of indebtedness which, in accordance with generally accepted
accounting principles, would be included in determining liabilities as shown
on the liability side of a balance sheet of such Person, or the Association,
as of the date as of which indebtedness is to be determined and shall also
include all indebtedness and liabilities of others assumed or guaranteed by
such Person, or the Association, or in respect of which such Person or the
Association is secondarily or contingently liable (other than by endorsement
of instruments in the course of collection) whether by reason of any agreement
to acquire such indebtedness or to supply or advance sums or otherwise.
Lien -- any interest in Property securing an obligation owed
to, or a claim by, a Person other than the owner of the Property, whether the
interest is based on common law, statute or contract (including the security
interest lien arising from a mortgage, encumbrance, pledge, conditional sale or
trust receipt or a lease, consignment or bailment for security purposes). The
term "Lien" shall not include minor reservations, exceptions, encroachments,
easements, rights-of-way, covenants, conditions, restrictions and other minor
title exceptions affecting Property; provided that they do not constitute
security for a monetary obligation.
Maturity Date -- shall mean the maturity date set forth in
Section 1.1 herein; provided, that if such day is
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not a Domestic Business Day, then the Maturity Date shall be the next
preceding Domestic Business Day.
Notes -- shall have the meaning given it in Section 1.1.
Person -- an individual, partnership, corporation, trust or
unincorporated organization, and a government or a governmental agency or
political subdivision.
Property -- any interest in or any kind of property or
asset, whether real, personal or mixed, or tangible or intangible.
Regulatory Requirement -- shall mean any of the following:
any change in, or enactment of, any applicable (i) law or governmental
regulation, or (ii) governmental requirement, rule, mandatory guideline or
order, or (iii) governmental or judicial interpretation of any of the
foregoing.
Security -- shall have the same meaning as in Section 2(1)
of the Securities Act of 1933, as amended.
Senior Creditors -- shall mean, with respect to the
Association, all Persons to whom Senior Liabilities are owed.
Senior Liabilities -- shall mean, with respect to the
Association, all Indebtedness of the Association (including, without
limitation, deposits) other than Indebtedness evidenced by the Notes and by
all other Capital Debt except Indebtedness junior to Capital Debt.
Significant Subsidiary -- shall mean a Subsidiary, including
its subsidiaries, which meets any of the following conditions: (i) the
Association's and its other Subsidiaries' investments in and advances to the
Subsidiary exceed 10 percent of the total assets of the Association and its
Subsidiaries consolidated as of the end of the most recently completed fiscal
year; or (ii) the Association's and its other Subsidiaries' proportionate
share of the total assets (after intercompany eliminations) of the Subsidiary
exceeds 10 percent of the total assets of the Association and its Subsidiaries
consolidated as of the end of the most recently completed fiscal year; or
(iii) the Association's and its other equity in the income from continuing
operations before income taxes, extraordinary items and cumulative effect of a
change in accounting principles of the Subsidiary exceeds 10 percent of such
income of the
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Association and its Subsidiaries consolidated for the most recently completed
year.
Subsidiary -- a corporation in which the Association owns,
directly or indirectly, sufficient Voting Stock to enable it ordinarily, in the
absence of contingencies, to elect a majority of the corporate directors (or
Persons performing similar functions).
Taxes -- shall mean taxes, levies, imposts, duties or other
charges of whatsoever nature imposed by any government or any political
subdivision or taxing authority thereof, other than any such charges on or
measured by the net income, net worth of shareholders, or capital of a Holder
pursuant to the income tax laws of the jurisdiction where such Holder's
principal or lending office is located.
Voting Stock -- Securities, the holders of which are
ordinarily, in the absence of contingencies, entitled to elect the corporate
directors (or Persons performing similar functions).
6.2 Accounting Principles.
The character or amount of any asset or liability or item of
income or expense required to be determined under this Agreement and each
consolidation or other accounting computation required to be made under this
Agreement, shall be determined or made in accordance with generally accepted
accounting principles at the time in effect, to the extent applicable [except
where such principles are inconsistent with the requirements of this
Agreement].
6.3 Directly or Indirectly.
Where any provision in this Agreement refers to any action
which any Person is prohibited from taking, the provision shall be applicable
whether the action is taken directly or indirectly by such Person, including
actions taken by, or on behalf of, any partnership in which such Person is a
general partner and all liabilities of such partnerships shall be considered
liabilities of such Person under this Agreement.
6.4 Governing Law.
This Agreement and the Notes shall be governed by and
construed in accordance with California law and applicable federal law.
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SECTION 7. PURCHASER'S SPECIAL RIGHTS
7.1 Transfer of Notes.
In the event of a transfer of a Holder's Notes (a) a
notation will be made thereon by the transferor of all principal, if any, paid
on its Notes, and the date to which interest has been paid, and (b) notice
will be given to the Association of the name and address of the transferee of
the transferred Notes. The Association shall be entitled to presume
conclusively that the requesting Holder remains the holder of the Notes until
(a) the Association receives notice given in accordance with Section 9.1,
below of transfer and of the name and address of the transferee, or (b) such
Notes are presented to the Association as evidence of the transfer. Ten (10)
Domestic Business Days' notice shall be required for any change in the payment
instructions for any Holder. No transfer shall be made unless such transfer is
exempted from or otherwise made by transferee in compliance with all
applicable federal and state securities laws. The Association shall be under
no obligation to register or qualify the Notes under any such federal or state
securities laws.
7.2 Issuance Taxes.
The Association will pay all Taxes in connection with the
issuance and original sale of the Notes and in connection with any
modification of the Notes and will save and hold you harmless against any and
all costs, expenses and liabilities relating to such Taxes. You represent that
you currently have no actual knowledge of any Taxes that might be imposed
pursuant to this Section 7.2.
7.3 Exchange of Notes
Upon surrender of any Note to the Association, the
Association, upon request, will execute and deliver at its expense (except as
provided below), new Notes, in denominations of at least $5,000,000 in an
aggregate principal amount equal to the outstanding principal amount of the
surrendered Note. Each new Note shall be payable to any Person as the
surrendering Holder may request subject to the restrictions herein. Each new
Note shall be dated and bear interest from the date to which interest has been
paid on the surrendered Note or dated the date of the surrendered Note if no
interest has been paid thereon. The Association may require payment of a sum
sufficient to cover any stamp tax or governmental charge imposed in respect of
any transfer.
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7.4 Replacement of Notes.
Upon receipt by the Association of evidence reasonably
satisfactory to it of the ownership of and the loss, theft, destruction or
mutilation of any Note and
(a) in the case of loss, theft or destruction, of
indemnity reasonably satisfactory to it (provided that if the Holder
is an institution with a net worth of not less than $200,000,000 and
a rating of or at least AA- (from Standard & Poor's) or AA3 (from
Moody's Investors Service), its own agreement of indemnity shall be
deemed to be satisfactory), or
(b) in the case of mutilation, upon surrender and
cancellation of the Note.
the Association at its expense will execute and deliver a new Note, dated and
bearing interest from the date to which interest has been paid on the lost,
stolen, destroyed or mutilated Note or dated the date of the lost, stolen,
destroyed or mutilated Note if no interest has been paid thereon.
SECTION 8. MISCELLANEOUS
8.1 Notices.
(a) Except as otherwise expressly set forth herein, all
notices and other communications under this Agreement or under the Notes will
be in writing and will be mailed by first class mail, postage prepaid:
(1) if to you, to the Treasurer and Tax
Collector/Public Finance at the address
shown at the beginning of this Agreement
or in any other manner as you may have
most recently advised the Association in
writing, or
(2) if to the Association, to the Chief
Financial Officer at the address shown at
the beginning of this Agreement, or at any
other address as it may have most recently
furnished in writing to you and to all
other holders of the Notes, and also to
the General Counsel at the same address.
(b) Any notice so addressed and mailed by registered or
certified mail shall be deemed to be given when so mailed.
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8.2 Reproduction of Documents.
This Agreement and all related documents, including (a)
consents, waivers and modifications which may subsequently be executed, (b)
documents received by you at the closing of your purchase of the Notes
(except the Notes themselves), and (c) financial statements, certificates and
other information previously or subsequently furnished to you, may be
reproduced by you by any photographic, photostatic, microfilm, micro-card,
miniature photographic or other similar process and you may destroy any
original document so reproduced. The Association agrees and stipulates that
any such reproduction shall, to the extent permitted by applicable law, be
admissible in evidence as the original itself in any judicial or
administrative proceeding (whether or not the original is in existence and
whether or not the reproduction was made by you in the regular course of
business) and that any enlargement, facsimile or further reproduction of the
reproduction shall likewise be admissible in evidence. Notwithstanding the
above, each Holder agrees to hold any and all non-public information which it
may receive from or on behalf of the Association in confidence, to set up
reasonable procedures for the maintenance of such confidential treatment and
not to disclose the same, except on a need-to-know basis to its employees
and agents.
8.3 Purchase for Investment.
You represent to the Association that you are an "Accredited
Investor" under Rule 501 of Regulation D promulgated under the Securities Act
of 1933, as amended (the "Act"), and are purchasing the Notes for your own
account for investment and with no present intention of distributing or
reselling any of the Notes or any interest thereon, but without prejudice to
your right at all times to sell or otherwise dispose of all or part of the
Notes; provided, that you agree not to sell the Notes or any interest thereon
except in a transaction that would be exempt under the Act were the Notes not
exempt thereunder.
8.4 Successors and Assigns.
This Agreement shall inure to the benefit of and be binding
upon the successors and assigns of each of the parties; provided, that your
obligation to purchase the Notes (as provided in Section 1.2) shall be a right
which is personal to the Association and such right shall not be transferable
or assignable by the Association to any other Person (including successors at
law) whether voluntarily or involuntarily and; provided further, that, except
as
23
<PAGE>
otherwise expressly provided herein, the Association may not assign its rights
or delegate its duties hereunder or under the Notes, whether by operation of
law or otherwise, without the prior written consent of each of the Holders.
The provisions of this Agreement are intended to be for the benefit of all
Holders, and shall be enforceable by any Holder, whether or not an express
assignment of rights under this Agreement has been made by you or your
successors or assigns.
8.5 Amendment and Waiver; Acquisition of Notes.
Amendment and Waiver. This Agreement may be amended, and the
observance of any term of this Agreement may be waived, with (and only with)
the written consent of the Association and the Holders of at least 66-2/3% of
the aggregate outstanding principal amount of the Notes (exclusive of any
Notes then owned by the Association, Significant Subsidiaries and/or its and
their Affiliates); provided that no amendment or waiver of any of the
provisions of Sections 1, and 7 shall be effective as to any Holder unless
consented to by such Holder in writing and; provided further, that no
amendment or waiver shall, without the written consent of the Holders of all
of the outstanding Notes, (1) subject to Section 5.2(b), change the amount or
time of any prepayment, payment of principal or the rate or time of payment of
interest, (2) amend Section 5, or (3) amend this Section 8.5(a). Executed or
complete and correct copies of any amendment or waiver effected pursuant to
the provisions of this Section 8.5(a) shall be delivered by the Association to
each Holder promptly following the date on which the same shall become
effective.
8.6 Agreement Controls.
To the extent that the terms, provisions or contents of any
other document of any kind whatsoever given in connection with this Agreement
conflict with the terms of this Agreement (except the Notes, which shall
control in the event of any conflict with the terms hereof), the contents of
this Agreement shall govern and control.
8.7 Duplicate Originals.
Two or more duplicate originals of this Agreement may be
signed by the parties, each of which shall be an original but all of which
together shall constitute one and the same instrument.
24
<PAGE>
8.8 Withholding Taxes.
Upon the date of the Association's issuance or transfer of
the Notes, and from time to time thereafter if requested by the Association,
any Holder organized under the laws of a jurisdiction outside of the United
States shall provide the Association with the forms prescribed by the Internal
Revenue Service to qualify all payments to be made to such Holder for
exemption from United States withholding taxes or for withholding at a reduced
rate under an applicable tax treaty. Unless the Association shall have
received forms or other documents reasonably satisfactory to it indicating
that payments hereunder are not subject to United States withholding tax or are
subject to such tax at a rate reduced by an applicable tax treaty, the
Association shall withhold taxes from such payments at the applicable statutory
rate in case of payments to any Holder organized under the laws of a
jurisdiction outside the United States.
8.9 No Representation or Warranty.
No Holder makes to any other Holder any representation or
any warranty, express or implied, or assumes any responsibility with respect
to this Agreement or the Notes or the execution, construction or
enforceability of this Agreement, the Notes or any instrument or agreement
executed by the Association or any other Person in connection herewith or
therewith.
8.10 Credit Decision.
Each Holder acknowledges that it has, independently of and
without reliance upon any other Holder or any information provided by any
other Holder and based on the financial statements of the Association and such
other document, and information as it has deemed appropriate, made its own
credit analysis and decision to enter into this Agreement. Each Holder also
acknowledges that it will, independent of and without reliance upon any other
Holder and based on such documents and information as it shall deem
appropriate at that time, continue to make its own credit decisions in taking
or not taking action under this Agreement and the Notes and any other
documents relating hereto or thereto.
8.11 Association's Lien or Setoff.
Each Holder that is a depository institution hereby waives
any right of setoff and/or banker's lien that it might otherwise have against
any funds of the Association held on deposit in the Holder.
25
<PAGE>
If this Agreement is satisfactory to you, please so indicate
by signing the acceptance at the foot of a counterpart of this Agreement and
return a counterpart to the Association, whereupon this Agreement will become
binding between us in accordance with its terms on and as of the date first
above written.
Very truly yours,
CALIFORNIA FEDERAL SAVINGS AND LOAN
ASSOCIATION, a federally-chartered
savings and loan association
By: /s/ Jerry St. Dennis
--------------------------------
Jerry St. Dennis
Executive Vice President
By: /s/ Douglas J. Wallis
--------------------------------
Douglas J. Wallis
Assistant Secretary
Accepted:
By:______________________
Title:
26
<PAGE>
Attachment A
THIS SECURITY IS NOT A SAVINGS ACCOUNT OR DEPOSIT AND IT IS NOT INSURED BY THE
FEDERAL SAVINGS AND LOAN INSURANCE CORPORATION.
THIS SECURITY IS NOT ELIGIBLE FOR PURCHASE BY ANY INSTITUTION WHOSE ACCOUNTS
ARE INSURED BY THE FEDERAL SAVINGS AND LOAN INSURANCE CORPORATION OR A
CORPORATE AFFILIATE THEREOF, EXCEPT THAT THIS SECURITY MAY BE PURCHASED BY A
CORPORATE AFFILIATE OF THE ISSUER OR BY ANY DIVERSIFIED SAVINGS AND LOAN
HOLDING COMPANY AND ANY NON-INSURED INSTITUTION SUBSIDIARY THEREOF. BY
ACCEPTING THIS SECURITY, THE HOLDER REPRESENTS THAT IT IS NOT, AND IF THE
BENEFICIAL OWNER IS NOT THE REGISTERED HOLDER, THAT THE BENEFICIAL OWNER IS
NOT, SUCH AN INSURED INSTITUTION OR CORPORATE AFFILIATE THEREOF (EXCEPT AS
PROVIDED IN THE PRECEDING SENTENCE).
California Federal Savings and Loan Association
10.668% Senior Subordinated Note due December 22, 1998
No. ______________ _________________
$_________________ December __, 1988
California Federal Savings and Loan Association, a federally
chartered savings and loan association (the "Association"), for value
received, hereby promises to pay to ____________________, a __________________
("Holder"), or registered assigns the principal sum of _____ Million Dollars
($__,000,000) on December 22, 1998, or if such day is not a Domestic Business
Day, then on the next preceding Domestic Business Day, and to pay interest on
the unpaid principal amount hereof, from the date hereof until the principal
amount hereof is paid in full, at the rate of 10.668 percent (10.668%) per
annum, payable semiannually in arrears on each June 22 and December 22 (or, if
any such day is not a Domestic Business Day, on the next succeeding Domestic
Business Day unless such succeeding Domestic Business Day falls in a different
calendar month, in which case on the immediately preceding Domestic Business
Day), commencing on June 22, 1989, and at maturity (whether by acceleration or
otherwise), computed on the basis of, a 360-day year consisting of twelve (12)
months of thirty
A-1
<PAGE>
(30) days each; and to pay on demand interest on any unpaid overdue amount at
the rate of one percent higher than the rate per annum set forth above.
Payments of principal and interest shall be made in such
coin or currency of the United States of America as at the time of payment is
legal tender for the payment of public and private debts by check mailed and
addressed to the registered holder hereof at the address shown in the register
maintained by the Association for such purpose.
This Note is one of an issuance of Notes of the Association
issued in an aggregate principal amount limited to $50,000,000 pursuant to the
Association's Note Agreement with the Holder of notes dated December 12, 1988,
as the same may be amended, modified, or supplemented from time to time (the
"Agreement"), and is entitled to the benefits thereof. All capitalized terms
not defined herein shall have the meaning set forth in the Agreement. The
Association agrees to make required payments on account of said Notes in
accordance with the provisions for acceleration of the maturity hereof upon
the happening of certain stated events. The Association hereby waives
diligence, presentment, demand, protest and notice of any kind whatsoever. The
Association promises to pay costs of collection and reasonable attorneys' fees
if default is made in the payment of this Note, or in the terms and provisions
of the Agreement, as provided more fully therein. The right to plead any and
all statutes of limitation as a defense to this Note or to any agreement to
pay the same, is hereby expressly waived by the undersigned to the fullest
extent permitted by law. The Association may not make any prepayments of
principal on this Note.
Subject to the provisions of Section 2.4 and 5.2 of the Agreement,
and of FHLBB Regulation 563.8-1 (12 C.F.R. Section 563.8-1), should an event
of default occur in the terms and provisions of this Note or upon the
occurrence of an Event of Default under the Agreement, the entire amount of
principal hereunder may become and be immediately due and payable upon
declaration thereof by holders of at least 25% in the aggregate outstanding
principal amount of the Notes without diligence, demand, presentment, protest
or notice of any kind whatsoever.
This Note is not secured by the assets of the Association,
or any of its affiliates or subsidiaries, and is not eligible as collateral
for any loan by the Association.
Notwithstanding anything to the contrary in this Note (or in
any related document):
A-2
<PAGE>
(a) If the FSLIC shall be appointed receiver for
the Association and in its capacity as such shall cause the
Association to merge with or into another insured
institution, or in such capacity shall sell or otherwise
convey part or all of the assets of the Association to
another insured institution or shall arrange for the
assumption of less than all of the liabilities of the
Association by one or more other insured institutions, the
FSLIC shall have no obligation, either in its capacity as
receiver or in its corporate capacity, to contract for or to
otherwise arrange for the assumption of the obligation
represented by this Note in whole or in part by any insured
institution or institutions which results from any such
merger or which has purchased or otherwise acquired from the
FSLIC as receiver for the Association, any of the assets of
the Association, or which, pursuant to any arrangement with
the FSLIC, has assumed less than all of the liabilities of
the Association. To the extent that obligations represented
by this Note have not been assumed in full by an insured
institution with or into which the Association may have been
merged, as described in this subparagraph (a), and/or by one
or more insured institutions which have succeeded to all or
a portion of the assets of the Association, or which have
been assumed a portion but not all of the liabilities of the
Association as a result of one or more transactions entered
into by the FSLIC as receiver for the Association, then the
holder of this Note shall be entitled to payments hereon in
accordance with the procedures and priorities set forth in
the FHLBB's regulations as they may be applicable to the
receivership of the Association or as they may be set forth
in orders of the FHLBB relating to such receivership.
(b) In the event that the obligation represented by
this Note is assumed in full by another insured institution,
which shall succeed by merger or otherwise to substantially
all of the assets and the business of the Association, or
which shall by arrangement with the FSLIC assume all or a
portion of the liabilities of the Association, and payment
or provision for payment shall have been made in respect of
all matured installments of interest upon the Notes together
with all matured installments of principal on the Notes
which shall have become due otherwise than by acceleration,
then any default caused by the appointment of a receiver for
the Association shall be deemed to have been cured, and any
declaration consequent upon such default declaring the
principal and interest on this Note to be immediately due
and payable shall be deemed to have been rescinded.
A-3
<PAGE>
(c) This Note is not eligible to be purchased or
held by any FSLIC-insured institution or corporate affiliate
thereof except that this Note may be purchased or held by a
corporate affiliate of the Association or by a diversified
savings and loan holding company and its non-insured
institution subsidiaries. The Association may not recognize
on its transfer books any transfer made to a FSLIC-insured
institution or any corporate affiliate thereof (except as
provided for in the preceding sentence) and will not be
obligated to make any payments of principal or interest on
this Note if the owner hereof is a FSLIC-insured institution
or any corporate affiliate thereof (except as provided for
in the preceding sentence).
(d) For the purpose of parts (a) and (b) of this
paragraph, the term "insured institution" means a depository
institution the accounts of which are insured by the FSLIC,
the FDIC or any federal or state agency which performs
similar functions.
(e) For the purposes of this paragraph, the terms
"affiliate" and "subsidiary" shall have the meanings
given to such terms in 12 C.F.R. [section][section] 561.25
and 561.36, respectively.
This Note is subordinate and junior in right of payment to
the Association's obligations to its depositors and to the Association's
obligations to its other Senior Creditors. This Note is also ineligible as
collateral for a loan by the Association. In the event of liquidation of the
Association, all such obligations (other than Capital Debt) shall be entitled
to be paid in full with such interest as may be provided by law before any
payment shall be made on account of the principal of or interest on this Note.
After payment in full of all sums owing to such depositors and other Senior
Creditors, the Holder shall be entitled to be paid from the remaining assets
of the Association before any payment or other distribution, whether in cash,
property or otherwise, shall be made on account of any shares of the
Association.
A-4
<PAGE>
If this Agreement is satisfactory to you, please so indicate
by signing the acceptance at the foot of a counterpart of this Agreement and
return a counterpart to the Association, whereupon this Agreement will become
binding between us in accordance with its terms on and as of the date first
above written.
Very truly yours,
CALIFORNIA FEDERAL SAVINGS AND LOAN
ASSOCIATION, a federally-chartered
savings and loan association
By:________________________________
Jerry St. Dennis
Executive Vice President
By:________________________________
Douglas J. Wallis
Assistant Secretary
Accepted: County of Los Angeles
By:______________________
Title: Treasurer and Tax Collector
26
<PAGE>
Attachment B
__________________, 1988
(213) 229-7000
NMM
County of Los Angeles
Hall of Administration
500 West Temple Street, Room 432
Los Angeles, California 90012
Re: California Federal Savings and Loan
Association - Senior Subordinated Notes
Due 1998
---------------------------------------
Ladies and Gentlemen:
I am the General Counsel of California Federal Savings and
Loan Association, a federally-chartered savings and loan association (the
"Association"), and have served in such capacity in connection with the
negotiation, execution and delivery by the Association of the Note Agreement
dated as of December __, 1988 between the Association and the County of Los
Angeles (the "Note Agreement") relating to the $50,000,000 principal amount of
the Association's _____% Senior Subordinated Notes Due December __, 1998 (the
"Notes"), which the Association proposes to issue.
I have examined and relied upon originals or copies of such
communications or certifications of public officials and such other documents
as I consider necessary for the purpose of rendering this opinion. In
considering
B-1
<PAGE>
County of Los Angeles
________________, 1988
Page 2
such documents, I have assumed the genuineness of all signatures thereon or on
the originals thereof and the conformity to original documents of all copies
or specimen documents and the due authority of all persons executing the same.
I have also consulted with such officers, directors and representatives of the
Association as I deemed relevant and necessary for the purposes of this
opinion.
On the basis of and subject to the foregoing examination and
on the basis of such other matters of fact and questions of law as I have
deemed relevant under the circumstances, and in reliance thereon, and subject
to the assumptions, qualifications, exceptions and limitations expressed
herein, it is my opinion that:
1. The Association is a federally chartered savings and loan
association, in good standing and duly qualified to do business in each
jurisdiction where the failure to be so would have a material adverse effect
upon the business of the Association.
2. The issuance of the Notes and the entering into of the
Note Agreement have been duly authorized by all appropriate corporate action,
and the Notes have been duly executed, authenticated and delivered in
accordance with the Note Agreement. The Note Agreement and the Notes
constitute valid and binding obligations of the Association enforceable in
accordance with their terms.
I express no opinion herein as to the legality, validity,
binding nature or enforceability (whether in accordance with their terms or
otherwise) of: (i) provisions imposing penalties, forfeitures or increases in
rates of interest upon delinquency in any payment or upon any breach or default
under the documents referred to herein; and (ii) any rights of set-off.
I express no opinion as to the remedies available to the
parties for non-material violations or breaches of the Note Agreement. I point
out that a California court or a federal court sitting in California may not
enforce the provisions of the Note Agreement designating governing law.
B-2
<PAGE>
County of Los Angeles
________________, 1988
Page 3
Waivers of vaguely or broadly stated rights or future rights
may be deemed unenforceable under applicable law, and provisions that rights
or remedies are not exclusive, that every right or remedy is cumulative and
may be exercised in addition to or with any other right or remedy or that the
election of some particular remedy or remedies does not preclude recourse to
one or more other remedies may also be unenforceable.
I have assumed for purposes of this opinion that the rights
and remedies set forth in the Note Agreement and/or the Notes will be
exercised by the holders of the Notes in a commercially reasonable manner.
Enforcement may be limited by bankruptcy, insolvency,
reorganization, moratorium or other similar laws affecting creditors' rights
generally and the rights of creditors of federally chartered savings and loan
associations in particular, including, without limitation, the effects of
statutory or other laws regarding preferential transfers, or by general
equitable principles regardless of whether such enforceability is considered
in a proceeding in equity or at law.
3. As of the date hereof, the Association has no outstanding
indebtedness which is subordinate and junior in right of payment to the
Association's obligations to its depositors and to all of the Association's
other obligations to its "Senior Creditors" (as defined in the Note Agreement)
and which is senior in right of payment to the Notes.
4. As a federally-chartered savings and loan association
whose accounts are insured by the Federal Savings and Loan Insurance
Corporation (the "FSLIC"), the Association does not come within the ambit of
Title 11 of the United States Code (the "Bankruptcy Code"), since
the Bankruptcy Code is by its terms inapplicable to such savings and loan
associations.
Appointment of a receiver for the Association in the event
of its insolvency would instead be governed by the provisions of federal law
relating to federally-chartered associations and the FSLIC insurance of
accounts. If a receiver is to be appointed for an
B-3
<PAGE>
County of Los Angeles
________________, 1988
Page 4
insolvent federally-chartered FSLIC-insured association, pursuant
to 12 U.S.C. Section 1729(b)(1) and 12 C.F.R. Section 547.6, the
FSLIC is to be so appointed as such receiver.
The Federal Home Loan Bank Board (the "Board") may appoint
the FSLIC as sole receiver of the Association, if among other grounds, the
Association is insolvent, its assets or earnings are substantially dissipated
due to violations of law, rules or regulations or unsafe or unsound practices,
it is in an unsafe or unsound condition to transact business or its
membership in a federal home loan bank or its FSLIC insurance is terminated.
12 C.F.R. Sections 547.1, 547.2, 547.3.
Pursuant to 12 C.F.R. Section 549.3, a receiver may exercise
all the powers of conservator of a federally-chartered association plus a wide
range of powers with a view to the liquidation of the association.
A conservator is given all the rights and powers of the
association, including the power to do all things desirable or
expedient to carry on the association's business and to preserve
and conserve its assets and properties. 12 C.F.R. Section 548.2.
The authority of the FSLIC upon its appointment as receiver
is set forth in 12 U.S.C. Section 1729(b)(1). In addition, the FSLIC may carry
on the business of and collect all obligations to the insured institution,
settle, compromise or release claims in favor of or against the insured
institution, and do all other things that may be necessary in connection
therewith, subject only to the regulation of the court or other public
authority having jurisdiction over the matter. 12 U.S.C. Section 1729(d).
Board regulations which govern the conduct of the FSLIC as
receiver for a federally-chartered association establish a system for the
notification of creditors and allowance of creditors' claims. 12 C.F.R.
Section 549.4. Such regulations provide that:
(c) Upon expiration of the specified time for presenting
claims, the receiver shall cause to be
B-4
<PAGE>
County of Los Angeles
________________, 1988
Page 5
filed with the Board a complete list of claims presented, indicating
the character of each claim and whether allowed by the receiver. At
such other date(s) as the Board may order or the receiver may
determine, a list of claims presented before that date shall be filed
with the Board.
(d) Creditor claims which were allowed by the receiver or
approved by the Board shall be paid by the receiver, from time to
time, to the extent funds are available, in such manner and amounts
as the Board may direct.
12 C.F.R. Section 549.4(c), (d).
This opinion is limited to the present laws of the State of
California and the federal laws of the United States of America, to present
judicial interpretations thereof and to the facts as they presently exist or
are contemplated by the Notes and the Note Agreement. In rendering this
opinion, I assume no obligation to revise or supplement this opinion should
the present laws of the jurisdictions mentioned herein be changed by
legislative action, judicial decision or otherwise. This opinion is rendered
as of the date hereof, and I express no opinion as to, and disclaim any
undertaking or obligation to update this opinion in respect of, changes of
circumstances or events which occur subsequent to this date.
This opinion is furnished to you solely in connection with
your purchasing the Notes and may not be relied upon by any other person or
by you in any other context. This opinion may not in whole or in part be
circulated, quoted or referred to nor may copies of it be delivered to any
other person without my prior written consent.
Very truly yours,
General Counsel
California Federal Savings
and Loan Association
B-5
<PAGE>
THE FIRST BOSTON CORPORATION December 1, 1988
LOS ANGELES
CALIFORNIA FEDERAL SAVINGS AND LOAN ASSOCIATION
Private Placement of Senior Subordinated Notes
SUMMARY OF TERMS FOR DISCUSSION ONLY
------------------------------------
(Not Reviewed by Counsel for Issuer or Purchaser)
Issuer: California Federal Savings and Loan Association
(the "Association")
Securities Offered: Senior Subordinated Notes
Principal Amount: $50 Million
Expected Ratings: Baa3/BBB-
Maturity: 10 Years
Redemption at Option
of Issuer: None
Spread to Treasury: +160 basis points
Offering Price: 100.00% 10.668% payable 6/22
12/22
Placement Agent's Fee: .675% x $50 million 30/360 basis
Expenses: The Association will be responsible for all expenses
associated with the placement of the Notes,
including the fees of its own counsel, Purchaser's
counsel, and out-of-pocket expenses of the
Placement Agent. Fees for Purchaser's counsel and
Placement Agent's out-of-pocket expenses are not to
exceed $25,000.
Net Proceeds(1): 99.325%
All-In-Cost(2): +171 basis points
Subordination: The Notes will be subordinated to all present and
future Senior Indebtedness, including deposits. The
Notes do not limit the creation of additional
liabilities, including Senior Indebtedness, except
that the Association may not create liabilities that
are both junior to Senior Indebtedness and senior in
right of payment to the Notes. No payments on the
Notes may be made if there shall have occurred and
be continuing a default in any payment with respect
to Senior Indebtedness, or an event of default with
respect to any Senior Indebtedness permitting the
holders thereof to accelerate the maturity thereof,
or if any judicial proceeding shall be pending with
respect to any such default.
- -----------------------------
(1) Before expenses.
<PAGE>
Page Two
Events of Default: The following will constitute Events of Default:
(a) failure to pay principal of or premium, if any,
on any Note when due, whether or not such payment
is prohibited by the subordination provisions of the
Note; (b) failure to pay any interest on any Note
when due, continued for 30 days, whether or not such
payment is prohibited by the subordination
provisions of the Note; (c) failure to perform any
other covenant of the Association as provided for
in the Note Agreement, continued for 60 days after
written notice from a majority of holders;
(d) failure to pay when due the principal of, or
acceleration of, any indebtedness for money borrowed
by the Association or any Significant Subsidiary
(exceeding $15,000,000 in the aggregate), if such
indebtedness is not discharged, or such acceleration
is not annulled or rescinded, within 60 days after
written notice; and (e) certain events in
bankruptcy, insolvency or reorganization.
Restrictions on
Acceleration: Holders of at least 25% in principal amount of the
Notes may declare the principal due and payable
upon the occurrence of an Event of Default. No
payment of principal may be accelerated without
prior approval of the FSLIC if, after giving effect
thereto, the Association would not meet its
regulatory capital requirement. This restriction
does not apply to the repayment of the Notes at
maturity.
Limitations in Event
of Receivership: If the FSLIC were appointed receiver for the
Association, (i) the rights of holders could be
eliminated or modified, and (ii) if the FSLIC
arranged for a supervisory acquisition of the
Association by another institution, the FSLIC would
have no obligation to arrange for the assumption of
the Notes.
Merger and Consolidation: The Association may, without the consent of the
holders of Notes, consolidate with or merge into any
other person, or convey, transfer or lease its
properties and assets substantially as an entirety
to any person, provided that in any such case
(i) the successor person shall be a domestic
corporation, association, partnership or trust
shall assume the Association's obligations and
(ii) immediately after giving effect to such
transaction, no default shall have occurred and be
continuing.
<PAGE>
Page Three
Restriction on Purchases: The Notes may not be purchased or held by any FSLIC
insured institution.
Restrictions on Resale: The Notes will not be registered under the
Securities Act of 1933, or with the Federal Home
Loan Bank Board or the Federal Savings and Loan
Insurance Corporation or with any other governmental
agency, or under any state securities or "Blue Sky"
laws in reliance upon an exemption from such laws.
The Issuer has not agreed to provide registration
rights to any purchaser of the Notes and will not
otherwise register the Notes. No resales of Notes
may be made, except pursuant to an applicable
exemption under the Securities Act and FHLBB
regulations and in compliance with any applicable
state securities or "Blue Sky" laws. Counsel should
be consulted as to the applicable requirements in
connection with any transfer of the Notes.
Use of Proceeds: The Association will use the net proceeds for
general corporate purposes.
<PAGE>
EXECUTION COPY
FIRST NATIONWIDE ESCROW CORP.
105/8% Senior Subordinated Notes Due 2003
REGISTRATION AGREEMENT
September 13, 1996
SMITH BARNEY INC.
BEAR, STEARNS & CO. INC.
CS FIRST BOSTON CORPORATION
CITICORP SECURITIES, INC.
NATIONSBANC CAPITAL MARKETS, INC.
c/o Smith Barney Inc.
388 Greenwich Street
New York, NY 10013
Dear Sirs:
First Nationwide Escrow Corp., a Delaware corporation (the
"Company"), proposes to issue and sell to Smith Barney Inc., Bear, Stearns &
Co. Inc., CS First Boston Corporation, Citicorp Securities, Inc. and
Nationsbanc Capital Markets, Inc. (the "Initial Purchasers"), upon the terms
set forth in a purchase agreement of even date herewith, among First
Nationwide Holdings Inc. ("Holdings"), the Company and the Initial Purchasers
(the "Purchase Agreement"), $575,000,000 principal amount of its 105/8% Senior
Subordinated Notes Due 2003 (the "Securities"). As used herein, the "Issuer"
shall refer to the Company prior to the FN Escrow Merger and to Holdings and
any successor thereto following the FN Escrow Merger. Capitalized terms used
but not specifically defined herein are defined in the Purchase Agreement. As
an inducement to the Initial Purchasers to enter into the Purchase Agreement
and in satisfaction of a condition to your obligations thereunder, each of the
Company and Holdings agrees with you, for the benefit of the holders of the
Securities (including the Initial Purchasers) (the "Holders"), as follows:
1. Registered Exchange Offer. The Issuer shall prepare and,
not later than 75 days following the consummation of the Cal Fed Acquisition
(or if the 75th day is not a business day, the first business day thereafter),
shall file with the Securities and Exchange Commission (the "Commission") a
registration statement (the "Exchange Offer Registration Statement") on an
appropriate form under the Securities Act of 1933, as amended (the "1933 Act")
with respect to a proposed offer (the "Registered Exchange Offer") to the
Holders to issue and deliver to such Holders, in exchange for the Securities,
a like principal amount of debt securities of the Issuer (the "Exchange
Notes") identical in all material respects to the Securities (except that the
interest rate increase provisions and the transfer restrictions will be
modified or eliminated, as appropriate), shall use its best efforts to cause
the Exchange Offer Registration Statement to become effective under the 1933
Act within 150 days following the consummation of the Cal Fed Acquisition (or
if the 150th day is not a business day, the first business day thereafter) and
shall use its best efforts to keep the Exchange Offer Registration Statement
effective under the 1933 Act until the close of business on the 180th day
following the expiration of the Registered Exchange Offer (such period being
called the "Exchange Offer Registration Period") for use by
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Exchanging Dealers (as defined below) as contemplated in Section 3(g) below.
The Issuer shall be deemed not to have used its best efforts to keep the
Exchange Offer Registration Statement effective during the Exchange Offer
Registration Period if it voluntarily takes any action that would result in
Exchanging Dealers not being able to use such Registration Statement as
contemplated in such Section 3(g), unless (i) such action is required by
applicable law, or (ii) such action is taken by the Issuer in good faith and
for valid business reasons (not including avoidance of the Issuer's
obligations hereunder), including the acquisition or divestiture of assets, so
long as the Issuer promptly thereafter complies with the requirements of
Section 3(j) hereof, if applicable. The Exchange Notes will be issued under
the Indenture or an indenture (the "Exchange Notes Indenture") between the
Issuer and the Trustee or such other bank or trust company reasonably
satisfactory to you, as trustee (the "Exchange Notes Trustee"), such indenture
to be identical in all material respects with the Indenture except for the
interest rate increase provisions and the transfer restrictions relating to
the Securities (as described above).
Upon the effectiveness of the Exchange Offer Registration
Statement, the Issuer shall promptly commence the Registered Exchange Offer,
it being the objective of such Registered Exchange Offer to enable each Holder
electing to exchange Securities for Exchange Notes (assuming that such Holder
is not an affiliate of the Issuer within the meaning of the 1933 Act, acquires
the Exchange Notes in the ordinary course of such Holder's business and has no
arrangements with any person to participate in the distribution of the
Exchange Notes) to trade such Exchange Notes from and after their receipt
without any limitations or restrictions under the 1933 Act and without
material restrictions under the securities laws of a substantial proportion of
the several states of the United States. Notwithstanding the foregoing, the
Initial Purchasers, the Issuer and the Company acknowledge that, pursuant to
current interpretations by the Commission's staff of Section 5 of the 1933
Act, and in the absence of an applicable exemption therefrom, (i) each Holder
(including any Initial Purchaser) which is a broker-dealer electing to
exchange Securities, acquired for its own account as a result of market making
activities or other trading activities, for Exchange Notes (an "Exchanging
Dealer"), is required to deliver a prospectus containing the information set
forth in Annex A hereto on the cover, in Annex B hereto in "The Exchange
Offer" section, and in Annex C hereto in the "Plan of Distribution" section of
such prospectus in connection with a sale of any such Exchange Notes received
by such Exchanging Dealer pursuant to the Registered Exchange offer and (ii)
each Initial Purchaser which elects to sell Exchange Notes acquired in
exchange for Securities constituting any portion of an unsold allotment is
required to deliver a prospectus, containing the information required by Items
507 and/or 508 of Regulation S-K under the 1933 Act, as applicable, in
connection with such a sale.
In connection with the Registered Exchange Offer, the Issuer
shall:
(a) mail to each Holder a copy of the prospectus forming part
of the Exchange Offer Registration Statement, together with an
appropriate letter of transmittal and related documents;
(b) keep the Registered Exchange Offer open for not less than
30 days after the date notice thereof is mailed to the Holders (or
longer if required by applicable law);
(c) utilize the services of a depositary for the Registered
Exchange Offer with an address in the Borough of Manhattan, The City
of New York;
(d) permit Holders to withdraw tendered Securities at any time
prior to the close of business, New York time, on the last business
day on which the Registered Exchange Offer shall remain open; and
(e) otherwise comply in all respects with all applicable laws.
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As soon as practicable after the close of the Registered
Exchange Offer, the Issuer shall:
(a) accept for exchange all Securities tendered and not validly
withdrawn pursuant to the Registered Exchange Offer;
(b) deliver to the Trustee for cancellation all Securities so
accepted for exchange; and
(c) cause the Trustee or the Exchange Notes Trustee, as the
case may be, promptly to authenticate and deliver to each Holder of
Securities Exchange Notes equal in principal amount to the
Securities of such Holder so accepted for exchange.
Interest on each Exchange Note will accrue from the last
interest payment date on which interest was paid on the Securities surrendered
in exchange therefor or, if no interest has been paid on the Securities, from
the date interest began to accrue on the Securities.
Notwithstanding any other provisions hereof, the Issuer will
ensure that (i) any Exchange Offer Registration Statement and any amendment
thereto and any prospectus forming part thereof and any supplement thereto
complies in all material respects with the 1933 Act and the rules and
regulations thereunder, (ii) any Exchange Offer Registration Statement and any
amendment thereto does not, when it becomes effective, contain an untrue
statement of a material fact or omit to state a material fact required to be
stated therein or necessary to make the statements therein not misleading and
(iii) any prospectus forming part of any Exchange offer Registration
Statement, and any supplement to such prospectus, does not include an untrue
statement of a material fact or omit to state a material fact necessary in
order to make the statements, in the light of the circumstances under which
they were made, not misleading.
Each Holder participating in the Registered Exchange offer
shall be required to represent to the Issuer that at the time of the
consummation of the Registered Exchange Offer (i) any Exchange Notes received
by such Holder will be acquired in the ordinary course of business, (ii) such
Holder will have no arrangements or understanding with any person to
participate in the distribution of the Notes or the Exchange Notes within the
meaning of the 1933 Act, (iii) such Holder is not an "affiliate," as defined
in Rule 405 of the 1933 Act, of the Issuer or if it is an affiliate, such
Holder acknowledges that it must comply with the registration and prospectus
delivery requirements of the 1933 Act to the extent applicable, (iv) if such
Holder is not a broker-dealer, that it is not engaged in, and does not intend
to engage in, a distribution of the Exchange Notes and (v) if such Holder is a
broker-dealer, that it will receive Exchange Notes in exchange for Notes that
were acquired as a result of market-making activities or other trading
activities and that it will be required to acknowledge that it will deliver a
prospectus in connection with any resale of such Exchange Notes.
In the event that any Initial Purchaser determines upon
advice of its outside counsel that it is not eligible to participate in the
Registered Exchange Offer with respect to the exchange of Securities
constituting any portion of an unsold allotment, as soon as practicable upon
receipt by the Issuer of an opinion of outside counsel for such Initial
Purchaser, reasonably satisfactory in form and substance to outside counsel of
the Issuer, to the effect that such exchange does not require compliance with
the registration requirements under the 1933 Act, the Issuer shall issue and
deliver to such Initial Purchaser, in exchange for such Securities, a like
principal amount of Exchange Notes.
2. Shelf Registration. If, because of any change in law or
applicable interpretations thereof by the Commission's staff, the Issuer
determines that it is not permitted to effect the Registered Exchange Offer as
contemplated by Section 1 hereof, or if for any other reason the Registered
Exchange Offer is not consummated within 180 days after the consummation of
the Cal Fed Acquisition (or if such day is not a business
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day, the first business day thereafter), or if any Initial Purchaser so
requests with respect to Securities held by it following consummation of the
Registered Exchange Offer, or if any Holder (other than an Initial Purchaser)
is not eligible to participate in the Registered Exchange Offer or, in the
case of any Initial Purchaser that participates in the Registered Exchange
Offer or acquires Exchange Notes pursuant to the last paragraph of Section 1
hereof, such Initial Purchaser does not receive freely tradeable Exchange
Notes in exchange for exchanged Securities constituting any portion of an
unsold allotment (it being understood that the requirement that an Initial
Purchaser deliver a prospectus in connection with sales of Exchange Notes
acquired in the Registered Exchange Offer in exchange for Securities acquired
as a result of market-making activities or other trading activities, shall not
result in such Exchange Notes not being "freely tradeable" for purposes of
this Section 2) or if the Issuer so elects, the following provisions shall
apply:
(a) The Issuer shall as promptly as practicable file with
the Commission and thereafter shall use its best efforts to cause to
be declared effective a registration statement on an appropriate form
under the 1933 Act relating to the offer and sale of the Securities
by the Holders or the Exchange Notes by the Initial Purchasers, as
applicable, from time to time in accordance with the methods of
distribution elected by such Holders or the Initial Purchasers, as
applicable, and set forth in such registration statement (hereafter,
a "Shelf Registration Statement" and, together with any Exchange
Offer Registration Statement, a "Registration Statement").
(b) The Issuer shall use its best efforts to keep the Shelf
Registration Statement continuously effective in order to permit the
prospectus forming part thereof to be usable by Holders or the
Initial Purchasers, as applicable, for a period of three years from
the date the Shelf Registration Statement is declared effective by
the Commission (or, if the Issuer has consummated the Registered
Exchange Offer, for a period only until September 19, 1999) or such
shorter period that will terminate when all the Securities or
Exchange Notes, as applicable, covered by the Shelf Registration
Statement have been sold pursuant to the Registration Statement or
when, in the opinion of outside counsel to the Issuer, which is
reasonably satisfactory in form and substance to counsel for the
Initial Purchasers, all such Securities may be sold without
registration under the 1933 Act and unlegended certificates
representing the Securities may be given to the holders thereof (in
any such case, such period being called the "Shelf Registration
Period"). The Issuer shall be deemed not to have used its best
efforts to keep the Shelf Registration Statement effective during the
requisite period if it voluntarily takes any action that would result
in Holders of securities covered thereby not being able to offer and
sell such securities during that period, unless (i) such action is
required by applicable law, or (ii) such action is taken by the
Issuer in good faith and for valid business reasons (not including
avoidance of the Issuer's obligations hereunder), including the
acquisition or divestiture of assets, so long as the Issuer promptly
thereafter complies with the requirements of Section 3(j) hereof, if
applicable.
(c) Notwithstanding any other provisions hereof, the Issuer
will ensure that (i) any Shelf Registration Statement and any
amendment thereto and any prospectus forming part thereof and any
supplement thereto complies in all material respects with the 1933
Act and the rules and regulations thereunder, (ii) any Shelf
Registration Statement and any amendment thereto does not, when it
becomes effective, contain an untrue statement of a material fact or
omit to state a material fact required to be stated therein or
necessary to make the statements therein not misleading and (iii) any
prospectus forming part of any Shelf Registration Statement, and any
supplement to such prospectus, does not include an untrue statement
of a material fact or omit to state a material fact necessary in
order to make the statements, in the light of the circumstances under
which they were made, not misleading.
3. Registration Procedures. In connection with any Shelf Registration
Statement and, to the extent applicable, any Exchange Offer Registration
Statement, the following provisions shall apply:
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(a) The Issuer shall (i) furnish to the Initial Purchasers,
prior to the filing thereof with the Commission, a copy of the
Registration Statement and each amendment thereof and each
supplement, if any, to the prospectus included therein and shall use
its best efforts to reflect in each such document, when so filed with
the Commission, such comments as the Initial Purchasers reasonably
may propose, (ii) include the information set forth in Annex A hereto
on the cover, in Annex B hereto in "The Exchange Offer" section, and
in Annex C hereto in the "Plan of Distribution" section of the
prospectus forming a part of the Exchange Offer Registration
Statement, and include the information set forth in Annex D hereto in
the Letter of Transmittal delivered pursuant to the Registered
Exchange Offer, and (iii) if requested by the Initial Purchasers,
include the information required by Items 507 and/or 508 of
Regulation S-K under the 1933 Act, as applicable, in the prospectus
forming a part of the Registration Statement; and (iv) in the case of
a Shelf Registration Statement, include the names of the Holders who
propose to sell Securities pursuant to the Shelf Registration
Statement, as selling security holders.
(b) (1) the Issuer shall advise you and, in the case of a
Shelf Registration Statement, the Holders of securities included
therein, and, if requested by you or any such Holder, confirm such
advice in writing:
(i) when the Registration Statement and any amendment
thereto has been filed with the Commission and when the
Registration Statement or any post-effective amendment
thereto has become effective; and
(ii) of any request by the Commission for amendments
or supplements to the Registration Statement or the
prospectus included therein or for additional information.
(2) The Issuer shall advise you and, in the case of a Shelf
Registration Statement, the Holders of securities included therein,
and, in the case of an Exchange Offer Registration Statement, any
Exchanging Dealer which has provided in writing to the Issuer a
telephone or facsimile number or address for notices, and, if
requested by you or any such Holder or Exchanging Dealer, confirm
such advice in writing;
(i) of the issuance by the Commission of any stop
order suspending the effectiveness of the Registration
Statement or the initiation of any proceedings for that
purpose;
(ii) of the receipt by the Issuer of any notification
with respect to the suspension of the qualification of the
securities included therein for sale in any jurisdiction
or the initiation or threatening of any proceeding for
such purpose; and
(iii) of the happening of any event that requires the
making of any changes in the Registration Statement or the
prospectus so that, as of such date, the statements
therein are not misleading and do not omit to state a
material fact required to be stated therein or necessary
to make the statements therein (in the case of the
prospectus, in light of the circumstances under which they
were made) not misleading (which advise shall be
accompanied by an instruction to suspend the use of the
prospectus until the requisite changes have been made).
(c) The Issuer will make every reasonable effort to obtain
the withdrawal of any order suspending the effectiveness of any
Registration Statement at the earliest possible time.
(d) The Issuer will furnish to each Holder of securities
included within the coverage of any Shelf Registration Statement,
without charge, at least one copy of such Shelf Registration
Statement and
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any post-effective amendment thereto, including financial statements
and schedules, and, if the Holder so requests in writing, all
exhibits (including those incorporated by reference).
(e) The Issuer will, during the Shelf Registration Period,
deliver to each Holder of securities included within the coverage of
any Shelf Registration Statement, without charge, as many copies of
the prospectus (including each preliminary prospectus) included in
such Shelf Registration Statement and any amendment or supplement
thereto as such Holder may reasonably request; and the Issuer
consents to the use of the prospectus or any amendment or supplement
thereto by each of the selling Holders of securities in connection
with the offering and sale of the securities covered by the
prospectus or any amendment or supplement thereto.
(f) The Issuer will furnish to each Exchanging Dealer or
Initial Purchaser, as applicable, which so requests, without charge,
at least one copy of the Exchange Offer Registration Statement and
any posteffective amendment thereto, including financial statements
and schedules, and, if the Exchanging Dealer or Initial Purchaser, as
applicable, so requests in writing, all exhibits (including those
incorporated by reference).
(g) The Issuer will, during the Exchange Offer Registration
Period, promptly deliver to each Exchanging Dealer, without charge,
as many copies of the prospectus included in such Exchange Offer
Registration Statement and any amendment or supplement thereto as
such Exchanging Dealer may reasonably request for delivery by such
Exchanging Dealer in connection with a sale of Exchange Notes
received by it pursuant to the Registered Exchange Offer; and the
Issuer consents to the use of the prospectus or any amendment or
supplement thereto by any such Exchanging Dealer, as aforesaid.
(h) Prior to any public offering of securities pursuant to
any Shelf Registration Statement, the Issuer will register or qualify
or cooperate with the Holders of securities included therein and
their respective counsel in connection with the registration or
qualification of such securities for offer and sale under the
securities or blue sky laws of such jurisdictions as any such Holder
reasonably requests in writing and do any and all other acts or
things necessary or advisable to enable the offer and sale in such
jurisdictions of the securities covered by such Shelf Registration
Statement; provided, however, that the Issuer will not be required to
qualify generally to do business in any jurisdiction where it is not
then so qualified or to take any action which would subject it to
general service of process or to taxation in any such jurisdiction
where it is not then so subject.
(i) The Issuer will cooperate with the Holders of securities
to facilitate the timely preparation and delivery of certificates
representing securities to be sold pursuant to any Shelf Registration
Statement free of any restrictive legends and in such denominations
and registered in such names as Holders may request prior to sales of
securities pursuant to such Shelf Registration Statement.
(j) Upon the occurrence of any event contemplated by
paragraph (b)(2)(iii) above, the Issuer will promptly prepare a
post-effective amendment to the Registration Statement or a
supplement to the related prospectus or file any other required
document so that, as thereafter delivered to purchasers of the
securities included therein, the prospectus will not include an
untrue statement of a material fact or omit to state any material
fact necessary to make the statements therein, in the light of the
circumstances under which they were made, not misleading.
(k) Not later than the effective date of the applicable
Registration Statement, the Issuer will provide a CUSIP number for
the Securities or Exchange Notes, as the case may be, and provide the
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applicable trustee with printed certificates for the Securities or
Exchange Notes, as the case may be, in a form eligible for deposit
with The Depository Trust Company.
(l) The Issuer will comply with all applicable rules and
regulations of the Commission and will make generally available to
its security holders as soon as practicable after the effective date
of the applicable Registration Statement an earnings statement
satisfying the provisions of Section 11(a) of the 1933 Act.
(m) The Issuer will cause the Indenture or the Exchange
Notes Indenture, as the case may be, to be qualified under the Trust
Indenture Act of 1939, as amended, in a timely manner.
(n) The Issuer may require each Holder of the securities to
be sold pursuant to any Shelf Registration Statement to furnish to
the Issuer such information regarding the holder and the distribution
of such securities as the Issuer may from time to time reasonably
require for inclusion in such Registration Statement, and the Issuer
may exclude from such Registration Statement the Securities of any
Holder that fails to furnish such information within a reasonable
time after receiving such request.
(o) The Issuer shall enter into such customary agreements
(including if requested an underwriting agreement in customary form)
and take all such other action, if any, as any Holder shall
reasonably request in order to facilitate the disposition of the
securities pursuant to any Shelf Registration Statement.
(p) In the case of any Shelf Registration Statement, the
Issuer shall (i) make reasonably available for inspection by the
Holders, and any underwriter participating in any disposition
pursuant to a Registration Statement, and any attorney, accountant or
other agent retained by the Holders or any such underwriter all
relevant financial and other records, pertinent corporate documents
and properties of the Issuer and (ii) cause the Issuer's officers,
directors and employees to supply all relevant information reasonably
requested by the Holders or any such underwriter, attorney,
accountant or agent in connection with any such Registration
Statement.
(q) In the case of any Exchange Offer Registration
Statement, the Issuer shall (i) make reasonably available for
inspection by the Initial Purchasers, but in each case only in such
firm's capacity as an Exchanging Dealer and with the express
understanding that each such firm shall be acting solely for itself
and not on behalf of any other party, including, without limitation,
any other Exchanging Dealer, all relevant financial and other
records, pertinent corporate documents and properties of the Issuer
and (ii) cause the Issuer's officers, directors and employees to
supply all information reasonably requested by any of them.
(r) In the case of any Shelf Registration Statement, the
Issuer, if requested by any Holders, shall cause (x) its counsel to
deliver an opinion relating to the securities included within the
coverage of such Shelf Registration Statement in customary form, (y)
its officers to execute and deliver all customary documents and
certificates requested by any underwriters of the securities and (z)
its independent public accountants to provide to the selling Holders
and any underwriter therefor a comfort letter in customary form.
(s) In the case of any Exchange Offer Registration
Statement, the Issuer, if requested by the Initial Purchasers, but in
each case only in such firm's capacity as an Exchanging Dealer and
with the express understanding that each such firm shall be acting
solely for itself and not on behalf of any other party, including,
without limitation, any other Exchanging Dealer, in connection with
any prospectus
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delivery as contemplated in paragraph (g) above, shall use its best
efforts to cause, on and as of the effective date of the Exchange
Offer Registration Statement, (x) its counsel to deliver an opinion
relating to the Exchange Offer Registration Statement and the
Exchange Notes in customary form, (y) its officers to execute and
deliver all customary documents and certificates requested and (z)
its independent public accountants to provide a comfort letter in
customary form, subject to receipt of appropriate documentation
(including the delivery of a customary representation letter), as
contemplated by Statement on Auditing Standards No. 72.
4. Registration Expenses. The Issuer will bear all expenses
incurred in connection with the performance of its obligations under Sections
1, 2 and 3 hereof and, in the event of any Shelf Registration Statement, will
reimburse the Holders for the reasonable fees and disbursements of one firm or
counsel designated by the Holders of a majority in principal amount of the
securities to be registered thereunder to act as counsel for the Holders in
connection therewith, and, in the case of any Exchange Offer Registration
Statement, will reimburse the Initial Purchasers, as applicable, for the
reasonable fees and disbursements of counsel in connection therewith.
5. Indemnification.
(a) In the event of a Shelf Registration or in connection
with any prospectus delivery pursuant to a Registered Exchange Offer
by an Exchanging Dealer as contemplated in Section 3(g) above, the
Issuer shall indemnify and hold harmless each Holder and each person,
if any, who controls such Holder within the meaning of Section 15 of
the 1933 Act or Section 20 of the Securities Exchange Act of 1934, as
amended (the "1934 Act") as follows:
(i) against any and all loss, liability, claim,
damage and expense whatsoever, as incurred, arising out of
any untrue statement or alleged untrue statement of a
material fact contained in any such Registration Statement
or any prospectus forming part thereof or the omission or
alleged omission therefrom of a material fact required to be
stated therein or necessary to make the statements therein
(in the case of any prospectus, in the light of the
circumstances under which they were made) not misleading;
(ii) against any and all loss, liability, claim,
damage and expense whatsoever, as incurred, to the extent of
the aggregate amount paid in settlement of any litigation,
or any investigation or proceeding by any governmental or
regulatory agency or body, commenced or threatened, or of
any claim whatsoever based upon any such untrue statement or
omission, or any such alleged untrue statement or omission;
and
(iii) against any and all expense whatsoever, as
incurred (including, subject to Section 5(c) hereof, the
fees and disbursements of counsel chosen by the indemnified
party) reasonably incurred in investigating, preparing or
defending against any litigation, or any investigation or
proceeding by any governmental or regulatory agency or body,
commenced or threatened, or any claim whatsoever based upon
any such untrue statement or omission, or any such alleged
untrue statement or omission;
provided, however, that (i) this indemnity shall not apply to any loss,
liability, claim, damage or expense to the extent arising out of any untrue
statement or omission or alleged untrue statement or omission made in reliance
upon and in conformity with written information furnished to the Issuer by the
indemnified party expressly for use in such Registration Statement and (ii)
such indemnity with respect to any preliminary prospectus shall not inure to
the benefit of any Holder (or any person controlling such Holder) from whom
the person asserting any
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such loss, claim, damage or liability purchased the securities which are the
subject thereof if such person did not receive a copy of the final prospectus
(or the final prospectus as supplemented) at or prior to the confirmation of
the sale of such securities to such person and (A) the untrue statement or
omission of a material fact contained in such preliminary prospectus was
corrected in the final prospectus (or the final prospectus as supplemented)
and (B) such Holder had previously been furnished by or on behalf of the
Issuer (prior to the date of mailing by such Holder of the applicable
confirmation) with a sufficient number of copies of the final prospectus as so
amended or supplemented.
(b) In the event of a Shelf Registration Statement, each
Holder shall indemnify and hold harmless the Issuer, its directors
and officers and each person, if any, who controls the Issuer within
the meaning of Section 15 of the 1933 Act or Section 20 of the 1934
Act against any and all loss, liability, claim, damage and expense
described in the indemnity contained in Section 5(a) hereof, as
incurred, but only with respect to untrue statements or omissions, or
alleged untrue statements or omissions, made in the Registration
Statement (or any amendment or supplement thereto) in reliance on and
in conformity with written information furnished to the Issuer by
such Holder expressly for use in the Registration Statement (or in
such amendment or supplement); provided, however, that no such Holder
shall be liable for any indemnity claims hereunder in excess of the
amount of net proceeds received by such Holder from the sale of
securities pursuant to the Registration Statement.
(c) Each indemnified party shall give notice as promptly as
reasonably practicable to each indemnifying party of any action
commenced against it in respect of which indemnity may be sought
hereunder, but failure to so notify an indemnifying party shall not
relieve such indemnifying party from any liability which it may have
otherwise than on account of this indemnity agreement, except to the
extent actually prejudiced thereby. If any such claim or action shall
be brought against an indemnified party, the indemnified party shall
notify the indemnifying party thereof, the indemnifying party shall
be entitled to participate therein and, to the extent that it wishes,
jointly with any other similarly notified indemnifying party, to
assume the defense thereof with counsel reasonably satisfactory to
the indemnified party. After notice from the indemnifying party to
the indemnified party of its election to assume the defense of such
claim or action, the indemnifying party shall not be liable to the
indemnified party under this Section 5 for any legal or other
expenses subsequently incurred by the indemnified party in connection
with the defense thereof (other than reasonable costs of
investigation); provided, however, if the defendants in any such
action include both an indemnified party and an indemnifying party
and the indemnified party shall have reasonably concluded that there
may be legal defenses available to it and/or other indemnified
parties that are different from or additional to those available to
the indemnifying party, the indemnified party or parties under this
Section 5 shall have the right to employ not more than one counsel to
represent them and, in that event, the fees and expenses of not more
than one such separate counsel shall be paid by the indemnifying
party, as such expenses are incurred. No indemnifying party shall be
liable for any settlement effected without its written consent of any
claim or action. An indemnifying party will not, without the prior
written consent of the indemnified party, settle or compromise or
consent to the entry of any judgment with respect to any pending or
threatened claim, action, suit or proceeding in respect of which
indemnification or contribution may be sought hereunder (whether or
not the indemnified parties are actual or potential parties to such
claim or action) unless such settlement, compromise or consent
includes an unconditional release of each indemnified party from all
liability arising out of such claim, action, suit or proceeding.
(d) To provide for just and equitable contribution in
circumstances in which the indemnity provided for in Section
5(a)-5(c) hereof is for any reason held to be unenforceable by the
indemnified parties although applicable in accordance with its terms,
the Issuer and the applicable Holder or Holders shall contribute to
the aggregate losses, liabilities, claims, damages and expenses of
the nature
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contemplated by said indemnity incurred by the Issuer and such Holder
or Holders, as incurred, in such proportions that the Issuer is
responsible for that portion represented by the percentage that the
aggregate consideration received by the Company from the sale by it
of the Securities sold by such Holder bears to the aggregate
principal amount of Securities sold by such Holder and such Holder is
responsible for the balance; provided, however, that no person found
guilty of fraudulent misrepresentation (within the meaning of Section
11(f) of the 1933 Act) by a court of competent jurisdiction shall be
entitled to contribution from any person who was not guilty of such
fraudulent misrepresentation. For purposes of this Section 5, each
person, if any, who controls a Holder within the meaning of Section
15 of the 1933 Act or Section 20 of the 1934 Act shall have the same
rights to contribution as such Holder and each director and officer
of the Issuer and each person, if any, who controls the Issuer within
the meaning of Section 15 of the 1933 Act or Section 20 of the 1934
Act shall have the same rights to contribution as the Issuer.
6. Miscellaneous.
(a) Amendments and Waivers. The provisions of this Agreement
may not be-amended, modified or supplemented, and waivers or consents
to departures from the provisions hereof may not be given, unless the
Issuer has obtained the written consent of Holders of a majority in
aggregate principal amount of the Securities.
(b) Notices. All notices and other communications provided
for or permitted hereunder shall be made in writing by hand-delivery,
first-class mail, telex, telecopier, or air courier guaranteeing
overnight delivery:
(1) if to a Holder, at the most current address given
by such Holder to the Issuer in accordance with the
provisions of this Section 6(b), which address initially
is, with respect to each Holder, the address of such
Holder maintained by the Registrar under the Indenture,
with a copy in like manner to the Initial Purchasers;
(2) if to the Initial Purchasers, initially at the
respective addresses set forth in the Purchase Agreement
with copies to the parties specified therein; and
(3) if to the Company or Holdings, initially at its
respective address set forth in the Purchase Agreement,
with copies to the parties specified therein.
All such notices and communications shall be deemed to have
been duly given when received.
The Initial Purchasers, Holdings or the Company by notice to
the other may designate additional or different addresses for subsequent
notices or communications.
(c) Successors and Assigns. This Agreement shall be binding
upon the Company, Holdings and their successors and assigns.
(d) Counterparts. This agreement may be executed in any number
of counterparts and by the parties hereto in separate counterparts,
each of which when so executed shall be deemed to be an original and
all of which taken together shall constitute one and the same
agreement.
(e) Headings. The headings in this agreement are for
convenience of reference only and shall not limit or otherwise
affect the meaning hereof.
10
<PAGE>
(f) Governing Law. THIS AGREEMENT SHALL BE GOVERNED BY AND
CONSTRUED IN ACCORDANCE WITH THE INTERNAL LAWS OF THE STATE OF NEW
YORK. Specified times of day refer to New York City time.
11
<PAGE>
Please confirm that the foregoing correctly sets forth the agreement
among the Company, Holdings and you.
Very truly yours,
FIRST NATIONWIDE ESCROW CORP.
By: /s/ Glenn P. Dickes
Name:
Title:
FIRST NATIONWIDE HOLDINGS INC.
By: /s/ Glenn P. Dickes
Name:
Title:
CONFIRMED AND ACCEPTED as of the date first above written:
SMITH BARNEY INC.
BEAR, STEARNS & CO. INC.
CS FIRST BOSTON CORPORATION
CITICORP SECURITIES, INC.
NATIONSBANC CAPITAL MARKETS, INC.
By: SMITH BARNEY INC.
By: /s/ J. Zelter
Name:
Title:
<PAGE>
ANNEX A TO
REGISTRATION AGREEMENT
Each broker-dealer that receives Exchange 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 Exchange 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 1933 Act. This Prospectus, as it may be amended or
supplemented from time to time, may be used by a brokerdealer in connection
with resales of Exchange Notes received in exchange for Notes where such 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 of the Registered Exchange Offer (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."
<PAGE>
ANNEX B TO
REGISTRATION AGREEMENT
Each broker-dealer that receives Exchange Notes for its own
account in exchange for Notes, where such Notes were acquired by such
broker-dealer as a result of marketmaking activities or other trading
activities, must acknowledge that it will deliver a prospectus in connection
with any resale of such Exchange Notes. See "Plan of Distribution."
<PAGE>
ANNEX C TO
REGISTRATION AGREEMENT
PLAN OF DISTRIBUTION
Each broker-dealer that receives Exchange 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 Exchange 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 Exchange Notes received
in exchange for Existing Notes where such Existing Notes were acquired as a
result of marketmaking activities or other trading activities. The Issuer has
agreed that for a period of 180 days after the expiration of the Registered
Exchange Offer, 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 ____________, 199_, all dealers effecting transactions in the
Exchange Notes may be required to deliver a prospectus.1/
The Issuer will not receive any proceeds from any sale of
Exchange Notes by broker-dealers. Exchange 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 Exchange 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
Exchange Notes. Any broker-dealer that resells Exchange 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 Exchange Notes
may be deemed to be an "underwriter" within the meaning of the 1933 Act and
any profit on any such resale of Exchange Notes and any commissions or
concessions received by any such persons may be deemed to be underwriting
compensation under the 1933 Act. The Letter of Transmittal states that by
acknowledging that it will deliver and by delivering a prospectus, a
broker-dealer will not be deemed to admit that it is an "underwriter" within
the meaning of the 1933 Act.
For a period of 180 days after the expiration of the
Registered Exchange Offer, the Issuer will promptly send additional copies of
this Prospectus and any amendment or supplement to this Prospectus to any
broker-dealer that requests such documents 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 1933 Act.
- --------
1. The legend required by Item 502(e) of Regulation S-K must appear on the
back page of the Exchange Offer Prospectus.
<PAGE>
ANNEX D TO
REGISTRATION AGREEMENT
Rider A
o CHECK HERE IF YOU ARE A BROKER-DEALER AND WISH TO RECEIVE 10 ADDITIONAL
COPIES OF THE PROSPECTUS AND 10 COPIES OF ANY AMENDMENTS OR SUPPLEMENTS
THERETO.
Name:
Address:
Rider B
If the undersigned is not a broker-dealer, the undersigned represents that it
is not engaged in, and does not intend to engage in, a distribution of
Exchange Notes. If the undersigned is a broker-dealer that will receive
Exchange Notes for its own account in exchange for Existing Notes, it
represents that the Existing Notes to be exchanged for Exchange Notes were
acquired by it as a result of marketmaking or other trading activities and
acknowledges that it will deliver a prospectus in connection with any resale
of such Exchange Notes; however, by so acknowledging and by delivering a
prospectus, the undersigned will not be deemed to admit that it is an
"underwriter" within the meaning of the 1933 Act.
<PAGE>
[ON THE LETTERHEAD OF PAUL, WEISS, RIFKIND, WHARTON & GARRISON]
February 25, 1997
Securities and Exchange Commission
Judiciary Plaza
450 Fifth Street, N.W.
Washington, D.C. 20549
First Nationwide Holdings Inc.
Registration Statement on
Form S-1 (File No. 333-21015)
-----------------------------
Ladies and Gentlemen:
In connection with the above-captioned Registration
Statement on Form S-1 (the "Registration Statement") filed by First Nationwide
Holdings Inc., a Delaware corporation (the "Company"), with the Securities and
Exchange Commission pursuant to the Securities Act of 1933, as amended (the
"Securities Act"), and the rules and regulations thereunder (the "Securities
Act Rules"), we have been requested to render our opinion as to the legality
of the securities being registered thereunder. The Registration Statement
covers $575,000,000 aggregate principal amount of the
<PAGE>
Securities and Exchange Commission 2
Company's 10-5/8% Senior Subordinated Exchange Notes Due 2003 (the "Exchange
Notes") to be exchanged for a like principal amount of the issued and
outstanding 10-5/8% Senior Subordinated Notes Due 2003 (the "Initial Notes")
pursuant to the Indenture, dated as of September 19, 1996 (the "Original
Indenture"), between First Nationwide Escrow Corp., a Delaware corporation
("FN Escrow Corp."), and The Bank of New York, a New York banking corporation
("The Bank of New York"), as Trustee, which was assumed by the Company
pursuant to the First Supplemental Indenture, dated as of January 3, 1997 (the
"Supplemental Indenture" and, together with the Original Indenture, the
"Indenture") between the Company, FN Escrow Corp. and The Bank of New York, as
Trustee, and as contemplated by the Registration Agreement, dated September
13, 1996, by and among the Company, FN Escrow Corp. and the signatories
thereto.
In connection with this opinion, we have examined originals,
or copies certified or otherwise identified to our satisfaction, of the (i)
Registration Statement; (ii) Indenture and (iii) form of the Exchange Notes
which is set forth as Exhibit B to the Original Indenture (collectively, the
"Documents").
In addition, we have examined such corporate records and
other instruments as we have deemed necessary or appropriate and such other
certificates, agreements and documents as we deemed relevant and necessary as
a basis for the opinions hereinafter expressed.
<PAGE>
Securities and Exchange Commission 3
In our examination of the aforesaid documents, we have
assumed, without independent investigation, the genuineness of all signatures,
the enforceability of the Documents against all parties thereto (other than
the Company in the case of the Indenture and the Exchange Notes), the
authenticity of all documents submitted to us as originals, the conformity to
the original documents of all documents submitted to us as certified,
photostatic, reproduced or conformed copies of valid existing agreements and
other documents, the authenticity of all such latter documents and the legal
capacity of all individuals who have executed any of the documents.
In expressing the opinions set forth herein, we have assumed
that the Exchange Notes will be in the form of Exhibit B to the Original
Indenture and any information omitted from such form and indicated as such by
a blank space have been properly added. In addition, we have relied upon the
factual matters contained in the representations and warranties of the Company
made in any of the Documents and upon certificates of public officials and
officers of the Company.
The opinions expressed herein are limited to the laws of the
State of New York and the General Corporation Law of the State of Delaware.
Please be advised that no member of this firm is admitted to practice in the
State of Delaware. Our opinion is rendered only with respect to the laws, and
the rules, regulations and orders thereunder, which are currently in effect.
Based upon the foregoing, and subject to the assumptions,
exceptions and qualifications set forth herein, we are of the opinion that the
Exchange Notes to be
<PAGE>
Securities and Exchange Commission 4
issued pursuant to the Indenture, when issued, authenticated and delivered in
accordance with the terms of the Indenture and as contemplated by the
Registration Statement, will be validly issued and delivered and will
constitute valid and binding obligations of the Company, enforceable against
the Company in accordance with their terms, except as enforceability thereof
may be subject to (a) bankruptcy, insolvency, reorganization, fraudulent
conveyance or transfer, moratorium or other similar laws now or hereafter in
effect affecting creditors' rights generally and (b) general principles of
equity (regardless of whether enforceability is considered in a proceeding at
law or in equity).
We hereby consent to the use of our name in the Registration
Statement and in the related Prospectus as the same appears in the caption
"Interests of Named Experts and Counsel," and to the use of this opinion as an
exhibit to the Registration Statement. In giving this consent, we do not
thereby admit that we come within the category of persons whose consent is
required by the Securities Act or the Securities Act Rules.
Very truly yours,
/s/ Paul, Weiss, Rifkind, Wharton & Garrison
PAUL, WEISS, RIFKIND, WHARTON & GARRISON
<PAGE>
EMPLOYMENT AGREEMENT
This Employment Agreement ("Agreement") is entered into as of the 8th day
of January, 1996 ("Effective Date") by and between First Nationwide Mortgage
Corporation (the "Company") and Walter C. Klein, Jr. (the "Executive").
RECITALS
WHEREAS, the Company wishes to employ the Executive, and the Executive
wishes to accept such employment, on the terms and conditions set forth in
this Agreement.
NOW THEREFORE, the parties agree as follows:
I. Service.
A. DUTIES
The Company hereby offers to Executive, and Executive hereby accepts
Employment by the Company as its President. During his employment by
the Company, the duties of the Executive shall be as follows:
(1) Continuing oversight of the mortgage banking operations of the
Company, as defined by the Chairman ("Chairman") of the Board of
the Company or the President of First Nationwide Bank, A Federal
Savings Bank ("FNB").
(2) Providing future acquisition advisory and consulting services to
the Company as requested by the Board, the Chairman or the
President of FNB.
(3) Providing general Company advisory consultations to the Company
and/or its affiliates and their respective senior executive
officers, advisors and shareholders, as requested by the Chairman
or the President of FNB.
(4) At the direction of the Chairman or the President of FNB, serving
as an industry representative at appropriate functions.
(6) Such other duties as are reasonably assigned from time to time by
the Chairman or the President of FNB.
(7) Serve as a member of the Board of Directors of the Company.
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B. STANDARD OF CARE
Throughout the term of this Agreement, the Executive shall serve the
Company faithfully and to best of his abilities, and shall devote
substantially all of his time, energy, skill and best efforts to the
performance of his duties in a manner which will faithfully and
diligently promote the business of and interests of the Company.
C. SPECIAL DUTIES
From time to time, the Executive may be requested by the Chairman
and/or the President of FNB to undertake certain actions on behalf of
the Company which the Executive shall so undertake. The authority of
the Executive to act on behalf of the Company shall be limited to that
given to him by the Board of Directors, the Chairman and/or the
President of FNB, in accordance with the duties and responsibilities
requested of him.
D. TERM
(i) The term of the Agreement shall be from three years from the
Effective Date (the "Term").
(ii) On or before sixty (60) days prior to the end of the Term, the
Company shall provide Executive with notice of whether it will
continue Executive's employment following the Term and the general
terms of that continued employment.
II. Compensation.
A. SALARY AND BONUS
(i) The Company shall pay the Executive a salary at a rate of
$300,000 per year ("Base Salary") for each year of the Term.
Except as otherwise provided herein, the Base Salary shall be
paid by the Company in 24 equal bi-weekly installments on the
15th and last day of each month for each year of the Term.
(ii) In addition to the Base Salary, the Executive shall have the
opportunity to earn a bonus in an amount as set forth on Annex A
for this Agreement ("Bonus") payable on or before thirty (30)
days after the end of the applicable calendar year, for each year
of the Term so long as the Executive shall be employed by the
Company. The Bonus shall be paid in a lump sum payment, subject
to deductions required by law.
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<PAGE>
(iii) If the Executive's employment is terminated at any time during
the Term other than for Cause, for Good Reason or pursuant to
Sections IIIB or F, Executive shall be entitled to receive a
prorated Bonus for that portion of the calendar year Executive
was employed.
B. SALE GUARANTEE
In the event that the Company sells or enters into a definitive
agreement to sell substantially all of its mortgage banking operations
to a non-affiliated party during the Term or within one hundred and
twenty (120) days of the date on which this Agreement is terminated
pursuant to Sections IIIB or F, Executive shall be entitled to a
payment equal to the greater of $1,350,000 or three times the prior
calendar year's Base Salary plus Bonus, and upon such payment by the
Company, this Agreement shall be terminated and Executive shall not be
entitled to further rights or payments hereunder.
C. BENEFITS AND PERQUISITES
The Executive shall be entitled to such benefits and perquisites as
are normally afforded to Executive Vice Presidents of FNB in
accordance with FNB's policy and practice as set forth on Annex B.
D. MANAGEMENT INCENTIVE PLAN
The Executive shall be eligible to participate in the First Nationwide
Holdings Inc. Management Incentive Plan ("Plan"). Participation shall
be subject to the terms of the Plan.
E. RELOCATION AND RELATED EXPENSES
The Executive shall be entitled to reimbursement by the Company
pursuant to its standard relocation policies in place from time to
time, for the following expenses:
(i) Reasonable commuting and temporary living expenses for a period
not to exceed six months;
(ii) Ordinary expenses for the transportation of household and
personal goods to the Frederick, Maryland area;
(iii) In lieu of any payments under the Company's Employee Relocation
Policy and/or practices relative to the sale or purchase of a
home by the Executive, the Company shall make a payment in the
amount of $100,000 at the time the Executive closes on the
purchase of a home in the Frederick, Maryland area.
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<PAGE>
(iv) Such other reasonable and necessary expenses as shall be
approved by the appropriate senior Company officer or President
of FNB related to the Executive's relocation to the Frederick,
Maryland area.
III. Termination
A. TERMINATION
This Agreement may be terminated at any time ("Termination Date") in
accordance with this Section III of the Agreement.
B. EXECUTIVE'S ELECTION
The Executive may terminate this Agreement at any time by providing
written notice to the Chairman of his desire to so terminate this
Agreement.
C. DISABILITY
If, as a result of the Executive's incapacity due to physical or
mental illness, the Executive shall be unable to perform his duties
on a full time basis for four consecutive months, or for 180 days in
a 12 month period ("Permanently Disabled"), the Company shall have
the right any time thereafter, so long as the Executive is still
Permanently Disabled, to terminate this Agreement for disability
("Disability").
D. DEATH
This Agreement shall terminate upon the Executive's Death.
E. TERMINATION BY THE COMPANY
During the term of this Agreement, the Company may terminate the
Executive's employment at any time for Cause or without Cause.
"Cause" shall mean the Executive's personal dishonesty, incompetence,
willful misconduct, breach of fiduciary duty involving personal
profit, intentional failure to perform stated duties, willful
violation of any law or rule or regulation (other than traffic
violations or similar non-criminal or misdemeanor offenses), or final
cease-and-desist order, or material breach of any provision of this
Agreement by the Executive which has not been cured within 30 days of
written notice of such breach by the Company ("Cure Period").
F. TERMINATION UNDER BANKING LAWS
(i) If the Executive is suspended or temporarily prohibited from
participating in the conduct of the Company's affairs by a
notice served under Section 3(e) (3) or (g) (1) of Federal
Deposit Insurance Act (the "FDIA") (12 U.S.C. Section 1818
(e) (3) and (g) (1)) the Company's obligations under this
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<PAGE>
Agreement shall be suspended as of the date of service unless
stayed by appropriate proceedings. If the charges in the notice
are dismissed, the Company may in its discretion (i) pay the
Executive all or part of the compensation withheld while its
obligations hereunder were suspended, and (ii) reinstate (in
whole or in part) any of its obligations which were suspended.
(ii) If the Executive is removed or permanently prohibited from
participating in the conduct of the Company's affairs by an
order issued under Section 8(e) (4) or (g) (1) of the FDIA (12
U.S.C. Section 1818 (e) (4) or (g) (1)), all obligations of the
Company under this Agreement shall terminate as of the
effective date of the order, but vested rights of the
contracting parties shall not be affected.
(iii) If the Company is in default (as defined in Section 3(x)(1) of
the FDIA), all obligations under this Agreement shall terminate
as of the date of default, but this paragraph F(iii) shall not
affect any vested rights of the Company or of the Executive.
(iv) All obligations of the Company under this Agreement may be
terminated, except to the extent determined that continuation
of this Agreement is necessary for the continued operation of
the Company, (i) by the Director of the Office of Thrift
Supervision (the "Director") or his or her designee, at the
time Federal Deposit Insurance Corporation or Resolution Trust
Corporation entered into an agreement to provide assistance to
or on behalf of the Company under the authority contained in
Section 13 (c) of the FDIA; or (ii) by the Director or his or
her designee, at the time the Director or his or her designee
provides a supervisory merger to resolve problems related to
operation of the Company or when the Company is determined by
the Director to be in an unsafe or unsound condition. Any
rights of the parties that have already vested, however, shall
not be affected by such action.
IV. Payment Upon Termination.
A. TERMINATION FOR DISABILITY
During any period that the Executive is Permanently Disabled, the
Executive shall continue to receive his Base Salary at the rate in
effect until the Termination Date of this Agreement. If the Company
shall terminate the Executive's employment hereunder for Disability,
the Company shall pay the Executive (i) within 15 days from the
Termination Date, sixty percent (60%) of the Base Salary remaining for
the Term and benefits and prorated Bonus accrued through the
Termination Date,
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and the Company shall have no further obligations under this
Agreement, other than pursuant to Section VII.
B. TERMINATION FOR DEATH
If this Agreement is terminated as a result of the death of the
Executive, the Company shall pay the persons in the manner set forth
below within 15 days following the Termination Date, sixty percent
(60%) of the Base Salary remaining for the Term and the prorated Bonus
accrued through the date of the Executive's death. With respect to any
payments to be made pursuant to this Section IVB, such payments shall
be made to the Executive's estate.
C. TERMINATION FOR CAUSE OR GOOD REASON OR UNDER BANKING LAWS
If the Company shall terminate the Executive's employment hereunder
for Cause, or for Good Reason or the Executive's employment is
terminated pursuant to Section IIIF above, the Company shall pay the
Executive, within 15 days from the date of termination, the Base
Salary and benefits accrued through the Termination Date, and the
Company shall have no further obligations under this Agreement, other
than pursuant to Section VII. "Good Reason" shall mean: (i) the
Executive's acceptance of a position of employment with another
financial institution or its affiliate; or (ii) a breach by Executive
of any material provision of this Agreement and a failure to cure such
breach during the Cure Period. The basis for termination under this
Section IVC shall be set forth in writing by the Company and delivered
to the Executive.
D. TERMINATION WITHOUT CAUSE OR WITHOUT GOOD REASON
If the Company shall terminate the Executive's employment hereunder
without Cause or without Good Reason, and, at the time of such
termination, the Company does not have standing to terminate this
Agreement under Section IVC, then the Company shall pay to the
Executive, as severance pay in a lump sum within 15 days from
Termination Date, the following amounts, and the Company shall have no
further obligations under this Agreement, other than pursuant to
Section VII:
(i) his Base Salary, prorated Bonus, and benefits accrued through the
Termination Date; and
(ii) in lieu of any further payments of Base Salary for periods
subsequent to the Termination Date, an amount equal to the
balance of the Base Salary due for the balance of the Term.
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E. MITIGATION
(i) If the Executive commits a breach and fails to cure during the
Cure Period, or threatens to commit a breach of Section IVC(i),
of any of the provisions of Sections I or IV hereof, the Company
shall have the following rights and remedies;
(a) The right and remedy to have the provisions of this
Agreement specifically enforced by any court having equity
jurisdiction, it being acknowledge and agree that any such
breach or threatened breach will cause irreparable injury to
the Company and that money damages will not provide an
adequate remedy to the Company; and
(b) The right and remedy to require the Executive to account for
and pay over to the Company all compensation, profits,
monies, accruals, increments or other benefits (collectively
"Benefits") derived or received by the Executive as a result
of any transactions constituting a breach of any of the
provisions of the preceding paragraph, and the executive
hereby agrees to account for and pay over such Benefits to
the Company.
Each of the rights and remedies enumerated above shall be
independent of the other, and shall be severally
enforceable, and all of such rights and remedies shall be in
addition to, and not in lieu of, any other rights and
remedies available to the Company under law or in equity.
(ii) If any of the covenants contained in Sections I or IV, or any
part thereof, hereafter are construed to be invalid or
unenforceable, the same shall not affect the remainder of the
covenant or covenants, which shall be given full effect, without
regard to the invalid portions.
(iii) If any of the covenants contained in Sections I or IV, or any
part thereof, are held to be unenforceable because of the
duration of such provision or the area covered thereby, the
parties agree that the court making such determination shall
have the power to reduce the duration and/or area of such
provision and, in its reduced form, said provision shall then be
enforceable.
(iv) The parties hereto intend to and hereby confer jurisdiction to
enforce the covenants contained in Sections I or IV upon the
courts of any state within the geographical scope of such
covenants. In the event that the courts of any one or more of
such states shall hold such covenants wholly
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<PAGE>
unenforceable by reason of the breadth of such covenants or
otherwise, it is the intention of the parties hereto that such
determination not bar or in any way affect the Company's right
to the relief provided above in the courts of any other states
within the geographical scope of such covenants as to breaches
of such covenants in such other respective jurisdictions, the
above covenants as they relate to each state being for this
purpose severable into diverse and independent covenants.
(v) In the event that any action, suit or other proceeding in law or
in equity is brought to enforce the covenants contained in
Sections I or IV or to obtain money damages for the breach
thereof, and such action results in the award of a judgment for
money damages or in the granting of any injunction in favor of
the Company, all expenses (including reasonable attorneys' fees)
of the Company in such action, suit or other proceeding shall
(on demand of the Company) be paid by the Executive. In the
event the Company fails to obtain a judgment for money damages
or an injunction in favor of the Company, all expenses
(including reasonable attorney's fees) of the Executive in such
action, suit or other proceeding shall (on demand of the
Executive) be paid by the Company.
F. INVENTIONS AND PATENTS
(i) The Executive agrees that all processes, technologies and
inventions (collectively, "Inventions"), including new
contributions, improvements, ideas and discoveries, whether
patentable or not, conceived, developed, invented or made by him
during the Term shall belong to the Company, provided that such
Inventions grew out of the Executive's work with the Company or
any of its subsidiaries or affiliates, are related in any manner
to the business (commercial or experimental) of the Company or
any of its subsidiaries or affiliates or are conceived or made
on the Company's time or with the use of the Company's
facilities or materials. The Executive shall further: (a)
promptly disclose such Inventions to the Company: (b) assign to
the Company, without additional Compensation, all patent and
other rights to such Inventions for the United States and
foreign countries; (c) sign all papers necessary to carry out
the foregoing; and (d) give testimony in support of the
Executive's inventorship.
(ii} If any Invention is described in a patent application or is
disclosed to third parties, directly or indirectly, by the
Executive within two years after the termination of the
Executive's employment by the Company, it is to be presumed that
the Invention was conceived or made during the Term.
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<PAGE>
(iii) The Executive agrees that the Executive will not assert any
rights to any Invention as having been made or acquired by the
Executive prior to the date of this Agreement, except for
Inventions, if any, disclosed to the Company in writing prior to
the date hereof.
G. INTELLECTUAL PROPERTY
The Company shall be the sole owner of all the products and proceeds
of the Executive's services hereunder, including, but not limited to,
all materials, ideas, concepts, formats, suggestions, developments,
arrangements, packages, programs and other intellectual properties
that the Executive may acquire, obtain, develop or create in
connection with and during the Term, free and clear of any claims by
the Executive (or anyone claiming under the Executive) of any kind or
character whatsoever (other than the Executive's right to receive
payments (hereunder). The Executive shall, at the request of the
Company, execute such assignments, certificates or other instruments
as the Company may from time to time deem necessary or desirable to
evidence, establish, maintain, perfect, protect, enforce or defend its
right, title or interest in or to any such properties.
V. Confidentiality.
Without the express prior written consent of the Company, the Executive
will not disclose to others, directly or indirectly, any confidential or
proprietary information relating to the Company or any of its affiliates,
including Mafco Holdings Inc., or any of their respective employees,
representatives, agents, stockholders, officers, directors or their
respective family members, including, but not limited to, trade secrets
and business know-how, as well as all analyses, compilations, studies or
other documents prepared by the Executive or his agents, affiliates and
other representatives containing or based in whole or in part on such
information (collectively, "Confidential Information"), except as may be
necessary to comply with any applicable law, governmental order or
regulation. In the event that the Executive is requested or becomes
legally compelled (by oral questions, interrogatories, requests for
information or documents, subpoena, civil investigative demand or similar
process) to disclose any such information to a third party, the Executive
agrees to provide prompt written notice of such request(s) so that the
Company may seek a protective order or other appropriate remedy and/or
waive compliance with the provisions of this Section V. In the event that
such protective order or other remedy is not obtained, or that the Company
waives compliance with the provisions of this Section V, the Executive
agrees that he will disclose only that portion of the Confidential
Information which is legally required to be disclosed and will use his best
efforts to obtain reliable assurance that such third party will accord
confidential treatment to that portion of the Confidential Information
that is being disclosed. The Executive will deliver promptly to the
Company on the termination of his employment by the Company, or at any
9
<PAGE>
other time the Company may so request, all documents containing
Confidential Information.
VI. Non-Competition.
A. TERM OF NON-COMPETE
During the Term and, subject to the provisions of Section VIB, for a
period of one (1) year following the Term of this Agreement the
Executive shall not, directly or indirectly, whether acting
individually or through any person, firm, corporation, business or any
other entity, (i) own, manage, operate, control or participate in the
ownership, management, operation or control of, or be connected as an
officer, employee, partner, director or otherwise with, or have any
financial interest in, or aid or assist anyone else in the conduct of
any business which business activity is the same as, or similar to, or
competes with, any business conducted by the Company or by any group,
division or subsidiary of the Company (a "Company Operation"), or (ii)
for a period of two (2) years solicit, induce or influence, or seek to
induce or influence, any person who currently is, or from time to time
may be, engaged or employed by a Company Operation to terminate his or
her engagement or employment by the Company or such subsidiary.
Notwithstanding the foregoing, beneficial ownership not exceeding five
percent of the publicly held voting stock or other publicly held
equity interest of any entity shall not constitute a violation of this
Section VIA.
B. The provisions of Section VIA shall apply to and be binding upon the
Executive only in the event the Company shall terminate the
Executive's employment hereunder for Cause (other than personal
dishonesty or wilful violation of any law, rule or regulation) related
to Conflict of Interest, Good Reason, or the Executive's employment
hereunder is terminated pursuant to Section IIIB provided, however,
that the provisions of Section VIA(ii) shall be applicable to all
events of termination.
VII. Indemnification.
The Company shall indemnify and hold harmless the Executive, his heirs
and his legal or personal representatives, to the fullest extent
permitted by applicable law, from and against any and all losses,
claims, damages, liabilities and expenses (including reasonable
attorneys' fees and expenses), in connection with or arising out of any
pending or threatened judicial or administrative proceeding, whether
civil, criminal or otherwise, including any appeal or other proceeding
for review brought or threatened against the Executive that arises out of
the Executive serving as advisory director, officer, employee or agent
of the Company or of any other entity that the Company has requested the
Executive to serve as director, officer, agent of employer. To the
fullest extent permitted
10
<PAGE>
by applicable law, the obligations of the Company set forth in this
Section VII shall survive the termination of this Agreement.
VIII. Counterparts.
This Agreement may be executed in two or more counterparts, each of
which shall be deemed to be an original but all of which together shall
constitute one and the same instrument.
IX. Authority.
The Company represents and warrants to the Executive that the execution
and delivery of this Agreement and the consummation of the transactions
contemplated hereby have been authorized by all necessary corporate
action on the part of the Company, and that this Agreement, assuming the
due execution and delivery of this Agreement by the Executive,
constitutes a valid and binding agreement of the Company, enforceable
against the Company in accordance with its terms, except to the extent
that the enforceability hereof may be subject to (i) bankruptcy,
insolvency, reorganization, moratorium, fraudulent conveyance and other
similar laws now or hereafter in effect relating to creditors' rights
generally and (ii) general principles of equity (regardless of whether
enforceability is considered in a proceeding at law or in equity).
X. Waivers; Amendment.
This Agreement may not be modified, amended or waived other than by a
written instrument executed by the parties hereto. Neither the failure nor
any delay on the part of either party to exercise any right, remedy,
power or privilege under this Agreement shall operate as a waiver thereof.
XI. Notices.
All notices, requests, demands and other communications required or
permitted under the Agreement shall be in writing and shall be deemed to
have been duly given upon receipt when sent by telecopy (which is
confirmed) or delivered personally, three business days after being
mailed by registered or certified mail (return receipt requested) or one
business day after being sent by overnight couriers, addressed as set forth
below:
11
<PAGE>
(i) If to the Executive:
Walter C. Klein, Jr.
335 N. Greenbay Road
Lake Forest, IL 60045
(ii) If to the Company:
Carl B. Webb
President, Chief Operating Officer
First Nationwide Bank, A Federal Savings Bank
135 Main Street, 20th Floor
San Francisco, CA 94105
Telecopy: (415) 904-0190
with a copy to:
Christie S. Flanagan, Esq.
Executive Vice President, General Counsel
First Nationwide Bank, A Federal Savings Bank
200 Crescent Court, Suite 1350
Dallas, TX 75201
Telecopy: (214) 871-5199
or such other address as either party shall have furnished to the other
party in writing in conformity with the provisions for the giving of
notice, which shall be effective only upon receipt.
XII. Enforceability.
If any other provisions of this Agreement shall be adjudicated to be
invalid or unenforceable, such provision shall be amended to delete
therefrom the portion thus adjudicated to be invalid or unenforceable,
such deletion to apply only with respect to the operation of such
provision in the particular jurisdiction in which such adjudication
is made. If any one or more of the provisions contained in Sections
IV, V or VI shall for any reason be held to be excessively broad as
to duration, activity or subject, it shall be construed by limiting
and reducing it so as to be enforceable to the maximum extent permitted
by applicable law as it shall then appear.
12
<PAGE>
XIII. Specific Performance.
The Executive acknowledges that failure on his part to comply with the
terms of Sections V and VI hereof shall cause the Company immediate and
irreparable harm that cannot be adequately compensated by the remedies
at law, and that in the event of such breach or violation, or
threatened breach or violation, the Company shall have such provisions
of this Agreement specifically enforced by preliminary and permanent
injunctive relief without having to prove the inadequacy of the
available remedies at law or any actual damages and without posting
bond or other security. Any remedy sought or obtained by the Company
shall not be considered either exclusive or a waiver of the rights of
the Company or any other person to assert any other remedies they have
in law or equity. In any proceeding upon a motion for any such
injunctive relief, the Executive's ability to answer in damages shall
not be a bar, or be interposed as a defense, to the granting of such
injunctive relief against the Executive. Any rights under this Section
XIII may be enforced in any appropriate court in the State of
California.
XIV. Effect of Merger, Transfer of Assets, or Dissolution.
A. This Agreement shall be terminated by any voluntary or involuntary
dissolution of the Company resulting from either a merger or
consolidation in which the Company is not the consolidated or
surviving corporation, or a transfer of all or substantially all of
the assets of the Company.
B. Termination under this section shall not be considered for Cause for
the purpose of this Agreement, and shall be deemed a termination upon
sale in accordance with the terms of Section IIB and the Executive
shall have all rights and remedies granted therein.
XV. Assignment.
This Agreement shall be binding upon and shall inure to the benefit of
the Company and its successors and assigns and the Executive, his heirs
and legal or personal representatives.
XVI. Entire Agreement.
This Agreement contains the entire understanding between the parties
hereto with respect to the subject matter hereof, and supersedes all
prior and contemporaneous agreements and understandings among the parties
hereto except as herein contained, which shall be deemed
13
<PAGE>
terminated effectively immediately. The express terms hereof control and
supersede any course of performance and/or usage of the trade
inconsistent with any of the terms hereof.
XVII. Headings.
The headings herein are included for convenience only and are not
intended to be a part of or affect the meaning or interpretation of any
provision of this Agreement.
XVIII. Governing Law.
This Agreement shall be governed by and construed in accordance with
the laws of the State of California without giving effect to the
principles of conflicts of law thereof.
IN WITNESS WHEREOF, the parties hereto have executed this Agreement as of
the date first written above.
WALTER C. KLEIN, JR.
/s/ Walter C. Klein, Jr.
- -------------------------
FIRST NATIONWIDE MORTGAGE CORPORATION
By: /s/ Gerald J. Ford
- -------------------------
Gerald J. Ford
Chairman of the Board and Chief Executive Officer
14
<PAGE>
ANNEX A
Employee shall have the opportunity to earn a Bonus for each of calendar
years 1996, 1997 and 1998, to the extent that this Agreement remains in force
and effect, on the following basis:
(1) An amount equal to fifty percent (50%) of the Base Salary if the net
earnings ("Net Earnings") of the Company, as Net Earnings are defined by
the Board of Directors of the Company, are equal to or greater than the
targeted net earnings ("Targeted Net Earnings"), as established by the
Board, for the calendar years 1996, 1997 and 1998 at issue; plus;
(2) an additional amount, up to a limit of an additional fifty percent (50%)
of Base Salary, calculated as follows:
(a) one percent (1%) of the amount by which Net Earnings exceed Targeted
Net Earnings, capped at Targeted Net Earnings plus $1,000,000, for a
maximum payment of $10,000;
(b) two percent (2%) of the amount by which Net Earnings exceed Targeted
Net Earnings plus $1,000,000, capped at Targeted Net Earnings plus
$2,000,000, for a maximum of $20,000;
(c) three percent (3%) of the amount by which Net Earnings exceed
Targeted Net Earnings plus $2,000,000, capped at an amount of Targeted
Net Earnings plus $3,000,000, for a maximum payment of $30,000;
(d) four percent (4%) of the amount by which Net Earnings exceed Targeted
Net Earnings plus $3,000,000, capped at an amount of Targeted Net
Earnings plus $4,000,000, for a maximum payment of $40,000; and
(e) five percent (5%) of the amount by which Net Earnings exceed Targeted
Net Earnings by $4,000,000, capped at an amount of Targeted Net
Earnings plus $5,000,000, for a maximum payment of $50,000.
15
<PAGE>
POST-EMPLOYMENT
CONSULTING AGREEMENT
THIS AGREEMENT made effective as of the 6th day of January,
1997 (the "Effective Date"), by and between California Federal Bank, F.S.B.
(hereinafter referred to as "the Bank," which term shall for all purposes
include its successors and assigns) and the undersigned Consultant (the
"Consultant").
W I T N E S S E T H:
WHEREAS, the Bank is engaged in the depository, lending and
financial services businesses (collectively the "Business"); and
WHEREAS, Consultant has expertise, experience and capability
in the Business, including having served as an executive officer of the Bank;
and
WHEREAS, the Bank wishes to retain the services of the
Consultant, and the Consultant wishes to perform services for the Bank, on the
terms and conditions set forth in this Agreement;
NOW, THEREFORE, in consideration of the promises and mutual
covenants herein contained, and for other good and valuable consideration, the
receipt and sufficiency of which consideration are mutually acknowledged by
the parties, it is hereby agreed as follows:
1. RECITALS. The recitals hereinbefore set forth constitute
an integral part of this Agreement, evidencing the intent of the parties in
executing this Agreement and describing the circumstances of its execution.
Said recitals are by express reference made a part of the covenants hereof,
and this Agreement shall be construed in the light thereof.
2. ENGAGEMENT OF CONSULTANT. The Bank engages the Consultant
to provide services, as specified in Section 4, below, to the Bank and the
Consultant hereby agrees to provide these services, in accordance with the
terms and conditions set forth in this Agreement.
3. TERM. This Agreement shall commence on the date set forth
above ("Effective Date") and expire on the second anniversary of the Effective
Date, unless earlier terminated by agreement of the parties. Upon termination
of this Agreement, neither party shall have any further obligations hereunder,
except that the Bank shall be obligated to pay to Consultant any compensation
earned or expenses to be reimbursed under Sections 5 and 6, below, and
Consultant's obligations described in Section 7 and the Bank's remedies under
Section 8 (for breaches under Section 7) shall continue notwithstanding the
termination of this Agreement.
4. DUTIES AND CONSULTANT. The Consultant shall, upon the
reasonable request of the Bank, assist the Bank in the post-merger transition
period and, for a period of two (2) years after the Effective Date, in the
pursuit of the "goodwill claim" of the Bank at such times and in such
<PAGE>
manner as Consultant and the Bank shall mutually agree. The Consultant's
on-location (i.e., away from his principal place of business) requirements will
not exceed six (6) days per calendar quarter without the Consultant's consent.
5. COMPENSATION. As compensation for his services and the
restrictive covenants contained herein, the Consultant shall receive
twenty-four (24) monthly payments in the amount of $8,333.33 each, with the
first such payment being due on January 6, 1997 and the remaining payments
being due by the first day of each of the succeeding twenty-three (23) months.
6. ASSISTANCE/EXPENSES. The Bank agrees to provide or to
cause to be provided to Consultant an office and such other assistance as the
Bank determines to be required for Consultant to discharge any
responsibilities assigned pursuant to Section 4. The Bank shall pay or
reimburse the Consultant for the reasonable and appropriate out-of-pocket
expenses incurred by him in connection with the performance of services under
this Agreement. Consultant must provide proper documentation to the Bank for
all such expenses.
7. CONFIDENTIAL INFORMATION. Consultant understands and
acknowledges that his obligations to the Bank under Section 11 of his
Employment Agreement dated as of February 14, 1996, relating to confidential
information shall continue to apply to and obligate Consultant during and
after the term of this Agreement.
8. REMEDIES. Consultant acknowledges that the restraints and
agreements herein provided are fair and reasonable, that enforcement of the
obligations described in Section 7 will not cause him undue hardship and that
said provisions are reasonably necessary and commensurate with the need to
protect the Bank and its legitimate and proprietary business interests and
property from irreparable harm. Consultant acknowledges and agrees that (a) a
breach of any of the obligations described in Section 7, above, will result in
irreparable harm to the business of the Bank, (b) a remedy at law in the form
of monetary damages for any breach by him of any of the obligations described
in Section 7 is inadequate, (c) in addition to any other remedy at law or
equity for such breach, the Bank shall be entitled to institute and maintain
appropriate proceedings in equity, including a suit for injunction to enforce
the specific performance by Consultant of the obligations hereunder and to
enjoin Consultant from engaging in any activity in violation hereof, and (d)
the obligations on his part described in Section 7 shall be construed as
agreements independent of any other provisions in this Agreement, and the
existence of any claim, setoff or cause of action by Consultant against the
Bank, whether predicated on this Agreement or otherwise, shall not constitute
a defense or bar to the specific enforcement by the Bank of said covenants.
9. INDEPENDENT CONTRACTOR. The parties to this Agreement
intend that the Consultant will perform under this Agreement as an independent
contractor, and not as an employee of the Bank. Consequently, during the term
of this Agreement:
2
<PAGE>
(a) The Consultant shall be solely responsible for
the payment of all taxes in connection with the Consultant's
remuneration from the Bank, and the Bank shall not withhold
taxes from his remuneration; and
(b) The Consultant shall not accrue or receive any
benefits under any employee benefit plan maintained by the
Bank attributable to his services hereunder; provided that
nothing in this Agreement shall affect any rights to
benefits Consultant (and Consultant's spouse and dependents)
might have under any employee benefit plans of the Bank by
virtue of his prior service as an employee of Cal Fed
Bancorp Inc. or its subsidiaries.
10. ENTIRE UNDERSTANDING. This Agreement constitutes the
entire understanding between the parties relating to Consultant's services
hereunder and supersedes and cancels all prior written and oral understandings
and agreements with respect to such matters. Any amendment of this Agreement
shall be effective only to the extent that it is in writing, executed by the
Bank and Consultant.
11. BINDING EFFECT. This Agreement shall be binding upon and
inure to the benefit of (a) Consultant's executors, administrators, legal
representatives, heirs and legatees and (b) the Bank and its successors and
assigns.
12. PAYMENT IN THE EVENT OF DEATH. In the event of
Consultant's death prior to the expiration of the term of this Agreement, the
Bank shall pay to such beneficiary as the Consultant may designate in writing,
or the executor of his estate in the absence of such designation, a lump sum
equal to the unpaid balance of the total compensation of two hundred thousand
dollars ($200,000) payable pursuant to Section 5, above. Such payment shall be
in full settlement and satisfaction of all claims and demands on behalf of the
Consultant under this Agreement.
13. WAIVER. The waiver by any party hereto of a breach of
any provision of this Agreement by any other party shall not operate or be
construed as a waiver of any subsequent breach.
14. GOVERNING LAW. This Agreement shall be governed by, and
interpreted, construed and enforced in accordance with, the laws of the State
of California.
15. HEADINGS. The headings of the sections of this
Agreement are for reference purposes only and do not define or limit, and shall
not be used to interpret or construe, the contents of this Agreement.
3
<PAGE>
IN WITNESS WHEREOF, the parties have caused this Agreement
to be duly executed at Los Angeles, California, on the date above set forth.
CONSULTANT CALIFORNIA FEDERAL BANK, F.S.B.
/s/ Edward G. Harshfield By: /s/ Eric K. Kawamura
- --------------------------- -----------------------------------
Edward G. Harshfield Its Senior Vice President
----------------------------------
4
<PAGE>
SUBSIDIARIES OF FIRST NATIONWIDE HOLDINGS INC.
NAME STATE OF INCORPORATION
---- ----------------------
1. FNB Holdings, Inc. Texas
2. FNB Mortgage Corp. California
3. First Prudential Corporation Missouri
4. Niles Investment Company Illinois
5. FN Investment Center California
6. FN Investment Center of New York New York
7. Cal Fed Investment Services California
8. Franciscan Financial Corporation California
9. San Francisco Auxiliary Corporation California
10. Capital Conveyance Company California
11. Development Credit Corporation California
12. Cal Fed Syndications California
13. California Communities, Inc. California
14. Cal Fed Service Corporation California
15. Cal Fed Credit, Inc. California
16. Cal Fed Credit of Texas, Inc. Texas
17. Cal Fed Enterprises California
18. CFE Potrero Corporation California
19. CF Management Corp. California
20. CF Recovery Corp. One California
21. CF Recovery Corp. Two California
22. Crabtree Valley Hotel, Inc. North Carolina
23. Point Clear Bay Hotel, Inc. Alabama
24. Cal Fed Mortgage Company California
25. XCF Acceptance Corporation California
26. FNB Real Estate Corp. Texas
27. FGB Realty Advisors, Inc. Texas
28. California Federal Preferred Capital Corporation Maryland
29. First Nationwide Mortgage Corporation Delaware
30. FNC Insurance Agency, Inc. California
31. Cal Fed Insurance Agency, Inc. California
32. FNMC Mortgage Services, Inc. Delaware
33. First Nationwide Mortgage Services, Inc. Texas
34. Master Mortgage Company California
35. Sierra Network California
36. FN Investment Center of Nevada Nevada
37. California Federal Bank, A chartered under
Federal Savings Bank federal law
<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
February 24, 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
February 24, 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
February 24, 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
February 25, 1997
<PAGE>
LETTER OF TRANSMITTAL
FIRST NATIONWIDE HOLDINGS INC.
OFFER FOR ALL OUTSTANDING
10 5/8% SENIOR SUBORDINATED NOTES DUE 2003
IN EXCHANGE FOR
10 5/8% SENIOR SUBORDINATED EXCHANGE NOTES DUE 2003,
PURSUANT TO THE PROSPECTUS, DATED , 1997
- ------------------------------------------------------------------------------
THE EXCHANGE OFFER WILL EXPIRE AT 5:00 P.M. NEW YORK CITY TIME, ON ,
, 1997, UNLESS EXTENDED (THE "EXPIRATION DATE"). TENDERS MAY BE WITHDRAWN
PRIOR TO 5:00 P.M., NEW YORK CITY TIME, ON THE EXPIRATION DATE.
- ------------------------------------------------------------------------------
Delivery To: The Bank of New York, Exchange Agent
By Mail:
The Bank of New York
101 Barclay Street -- (7 East)
Reorganization Section
New York, New York 10286
Attention: Enrique Lopez
By Overnight Courier or Hand:
The Bank of New York
101 Barclay Street -- (7 East)
Reorganization Section
Corporate Trust Services Window
New York, New York 10286
Attention: Enrique Lopez
By Facsimile in New York:
(212) 571-3080
Confirm by Telephone:
(212) 815-2742
DELIVERY OF THIS INSTRUMENT TO AN ADDRESS OTHER THAN AS SET FORTH ABOVE,
OR TRANSMISSION OF INSTRUCTIONS VIA FACSIMILE OTHER THAN AS SET FORTH ABOVE,
WILL NOT CONSTITUTE A VALID DELIVERY.
The undersigned acknowledges that he or she has received and reviewed the
Prospectus, dated , 1997 (the "Prospectus"), of First Nationwide Holdings
Inc., a Delaware corporation (the "Company"), and this Letter of Transmittal
(the "Letter"), which together constitute the Company's offer (the "Exchange
Offer") to exchange an aggregate principal amount of up to $575,000,000 of
its 10 5/8% Senior Subordinated Exchange Notes Due 2003, which have been
registered under the Securities Act of 1933, as amended (the "New Notes"), of
the Company for a like principal amount of the issued and outstanding 10 5/8%
Senior Subordinated Notes Due 2003 (the "Old Notes") of the Company from the
holders thereof.
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.
This Letter is to be completed by a holder of Old Notes either if
certificates are to be forwarded herewith or if a tender of certificates for
Old Notes, if available, is to be made by book-entry transfer to the account
maintained by the Exchange Agent at The Depository Trust Company (the
"Book-Entry Transfer Facility") pursuant to the procedures set forth in "The
Exchange Offer--Book-Entry Transfer" section of the Prospectus. Holders of
Old Notes whose certificates are not immediately available, or who are unable
to deliver their certificates or confirmation of the book-entry tender of
their Old Notes into the Exchange Agent's account at the Book-Entry Transfer
Facility (a "Book-Entry Confirmation") and all other documents required by
this Letter to the Exchange Agent on or prior to the Expiration Date, must
tender their Old Notes according to the guaranteed delivery procedures set
forth in "The Exchange Offer--Guaranteed Delivery Procedures" section of the
Prospectus. See Instruction 1. Delivery of documents to the Book-Entry
Transfer Facility does not constitute delivery to the Exchange Agent.
The undersigned has completed the appropriate boxes below and signed this
Letter to indicate the action the undersigned desires to take with respect to
the Exchange Offer.
<PAGE>
List below the Old Notes to which this Letter relates. If the space
provided below is inadequate, the certificate numbers and principal amount of
Old Notes should be listed on a separate signed schedule affixed hereto.
<TABLE>
<CAPTION>
- --------------------------------------------------------------------------------------------
DESCRIPTION OF OLD NOTES 1 2 3
- --------------------------------------------------------------------------------------------
AGGREGATE
NAME(S) AND ADDRESS(ES) OF REGISTERED PRINCIPAL PRINCIPAL
HOLDER(S) CERTIFICATE AMOUNT OF AMOUNT
(PLEASE FILL IN, IF BLANK) NUMBER(S)* OLD NOTE(S) TENDERED**
- --------------------------------------------------------------------------------------------
<S> <C> <C> <C>
----------------------------------------------
----------------------------------------------
----------------------------------------------
TOTAL
- --------------------------------------------------------------------------------------------
* Need not be completed if Old Notes are being tendered by book-entry transfer.
** Unless otherwise indicated in this column, a holder will be deemed to have tendered ALL
of the Old Notes represented by the Old Notes indicated in column 2. See Instruction 2.
Old Notes tendered hereby must be in denominations of principal amount of $1,000 and any
integral multiple thereof. See Instruction 1.
- --------------------------------------------------------------------------------------------
</TABLE>
[ ] CHECK HERE IF TENDERED OLD NOTES ARE BEING DELIVERED BY BOOK-ENTRY TRANSFER
MADE TO THE ACCOUNT MAINTAINED BY THE EXCHANGE AGENT WITH THE BOOK-ENTRY
TRANSFER FACILITY AND COMPLETE THE FOLLOWING:
Name of Tendering Institution
----------------------------------------------
Account Number Transaction Code Number
---------------- -----------------
[ ] CHECK HERE IF TENDERED OLD NOTES ARE BEING DELIVERED PURSUANT TO A NOTICE
OF GUARANTEED DELIVERY PREVIOUSLY SENT TO THE EXCHANGE AGENT AND COMPLETE
THE FOLLOWING:
Name(s) of Registered Holder(s)
--------------------------------------------
Window Ticket Number (if any)
----------------------------------------------
Date of Execution of Notice of Guaranteed Delivery
-------------------------
Date of Institution which guaranteed delivery
------------------------------
IF DELIVERED BY BOOK-ENTRY TRANSFER, COMPLETE THE FOLLOWING:
Account Number Transaction Code Number
---------------- -----------------
[ ] CHECK HERE IF YOU ARE A BROKER-DEALER AND WISH TO RECEIVE 10 ADDITIONAL
COPIES OF THE PROSPECTUS AND 10 COPIES OF ANY AMENDMENTS OR SUPPLEMENTS
THERETO.
Name:
--------------------------------------------------------------------------
Address:
-----------------------------------------------------------------------
-----------------------------------------------------------------------
If the undersigned is not a broker-dealer, the undersigned represents that
it is not engaged in, and does not intend to engage in, a distribution of New
Notes. If the undersigned is a broker-dealer that will receive New Notes for
its own account in exchange for Old Notes, it represents that the Old Notes
to be exchanged for New Notes were acquired by it as a result of
market-making or other trading activities and acknowledges that it will
deliver a prospectus in connection with any resale of such New Notes;
however, by so acknowledging and by delivering a prospectus, the undersigned
will not be deemed to admit that it is an "underwriter" within the meaning of
the Securities Act of 1933, as amended.
<PAGE>
PLEASE READ THE ACCOMPANYING INSTRUCTIONS CAREFULLY
Ladies and Gentlemen:
Upon the terms and subject to the conditions of the Exchange Offer, the
undersigned hereby tenders to the Company the aggregate principal amount of
Old Notes indicated above. Subject to, and effective upon, the acceptance for
exchange of the Old Notes tendered hereby, the undersigned hereby sells,
assigns and transfers to, or upon the order of, the Company all right, title
and interest in and to such Old Notes as are being tendered hereby.
The undersigned hereby represents and warrants that the undersigned has
full power and authority to tender, sell, assign and transfer the Old Notes
tendered hereby and that the Company will acquire good and unencumbered title
thereto, free and clear of all liens, restrictions, charges and encumbrances
and not subject to any adverse claim when the same are accepted by the
Company. The undersigned hereby further represents that any New Notes
acquired in exchange for Old Notes tendered hereby will have been acquired in
the ordinary course of business of the person receiving such New Notes,
whether or not such person is the undersigned, that neither the holder of
such Old Notes nor any such other person has an arrangement or understanding
with any person to participate in the distribution of such New Notes and that
neither the holder of such Old Notes nor any such other person is an
"affiliate," as defined in Rule 405 under the Securities Act of 1933, as
amended (the "Securities Act"), of the Company.
The undersigned also acknowledges that this Exchange Offer is being made
in reliance on interpretations by the staff of the Securities and Exchange
Commission (the "SEC"), as set forth in no-action letters issued to third
parties, that the New Notes issued in exchange for the Old Notes pursuant to
the Exchange Offer may be offered for resale, resold and otherwise
transferred by holders thereof (other than any such holder that is an
"affiliate" of the Company 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 Company 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
other circumstances. If the undersigned is not a broker-dealer, the
undersigned represents 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 Company, 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. If the undersigned
is a broker-dealer that will receive New Notes for its own account in
exchange for Old Notes, it represents that the Old Notes to be exchanged for
the New Notes were acquired by it as a result of market-making or other
trading activities and acknowledges that it will deliver a prospectus in
connection with any resale of such New Notes; however, by so acknowledging
and by delivering a prospectus, the undersigned will not be deemed to admit
that it is an "underwriter" within the meaning of the Securities Act.
The undersigned will, upon request, execute and deliver any additional
documents deemed by the Company to be necessary or desirable to complete the
sale, assignment and transfer of the Old Notes tendered hereby. All authority
conferred or agreed to be conferred in this Letter and every obligation of
the undersigned hereunder shall be binding upon the successors, assigns,
heirs, executors, administrators, trustees in bankruptcy and legal
representatives of the undersigned and shall not be affected by, and shall
survive, the death or incapacity of the undersigned. This tender may be
withdrawn only in accordance with the procedures set forth in "The Exchange
Offer--Withdrawal Rights" section of the Prospectus.
Unless otherwise indicated herein in the box entitled "Special Issuance
Instructions" below, please deliver the New Notes (and, if applicable,
substitute certificates representing Old Notes for any Old Notes not
exchanged) in the name of the undersigned or, in the case of a book-entry
delivery of Old Notes, please credit the account indicated above maintained
at the Book-Entry Transfer Facility. Similarily, unless otherwise indicated
under the box entitled "Special Delivery Instructions" below, please send the
New Notes (and, if applicable, substitute certificates representing Old Notes
for any Old Notes not exchanged) to the undersigned at the address shown
above in the box entitled "Description of Old Notes."
THE UNDERSIGNED, BY COMPLETING THE BOX ENTITLED "DESCRIPTION OF OLD NOTES"
ABOVE AND SIGNING THIS LETTER, WILL BE DEEMED TO HAVE TENDERED THE OLD NOTES
AS SET FORTH IN SUCH BOX ABOVE.
<PAGE>
- -------------------------------------------------------------------------------
SPECIAL ISSUANCE INSTRUCTIONS
(SEE INSTRUCTIONS 3 AND 4)
To be completed ONLY if certificates for Old Notes not exchanged and/or New
Notes are to be issued in the name of and sent to someone other than the
person or persons whose signature(s) appear(s) on this Letter above, or if
Old Notes delivered by book-entry transfer which are not accepted for
exchange are to be returned by credit to an account maintained at the
Book-Entry Transfer Facility other than the account indicated above.
Issue: New Notes and/or Old Notes to:
Name(s)
.......................................................................
(PLEASE TYPE OR PRINT)
..............................................................................
(PLEASE TYPE OR PRINT)
Address
.......................................................................
..............................................................................
(ZIP CODE)
(COMPLETE SUBSTITUTE FORM W-9)
[ ] Credit unexchanged Old Notes delivered by book-entry transfer to the
Book-Entry Transfer Facility account set forth below.
-------------------------------------------------------------
(Book-Entry Transfer Facility
Account Number, if applicable)
- -------------------------------------------------------------------------------
- -------------------------------------------------------------------------------
SPECIAL DELIVERY INSTRUCTIONS
(SEE INSTRUCTIONS 3 AND 4)
To be completed ONLY if certificates for Old Notes not exchanged and/or New
Notes are to be sent to someone other than the person or persons whose
signature(s) appear(s) on this Letter above or to such person or persons at an
address other than shown in the box entitled "Description of Old Notes" on this
Letter above.
Mail: New Notes and/or Old Notes to:
Name(s)
.......................................................................
(PLEASE TYPE OR PRINT)
..............................................................................
(PLEASE TYPE OR PRINT)
Address
.......................................................................
..............................................................................
(ZIP CODE)
- -------------------------------------------------------------------------------
IMPORTANT: THIS LETTER OR A FACSIMILE HEREOF (TOGETHER WITH THE CERTIFICATES
FOR OLD NOTES OR A BOOK-ENTRY CONFIRMATION AND ALL OTHER REQUIRED DOCUMENTS
OR THE NOTICE OF GUARANTEED DELIVERY) MUST BE RECEIVED BY THE EXCHANGE AGENT
PRIOR TO 5:00 P.M., NEW YORK CITY TIME, ON THE EXPIRATION DATE.
PLEASE READ THIS ENTIRE LETTER OF TRANSMITTAL
CAREFULLY BEFORE COMPLETING ANY BOX ABOVE.
- -------------------------------------------------------------------------------
PLEASE SIGN HERE
(TO BE COMPLETED BY ALL TENDERING HOLDERS)
(COMPLETE ACCOMPANYING SUBSTITUTE FORM W-9 ON REVERSE SIDE)
Dated: , 1997
..................................................................
x , 1997
........................................ .......................
x , 1997
........................................ .......................
SIGNATURE(S) OF OWNER DATE
Area Code and Telephone Number
....................................
If a holder is tendering any Old Notes, this Letter must be signed by the
registered holder(s) as the name(s) appear(s) on the certificate(s) for the Old
Notes or by any person(s) authorized to become registered holder(s) by
endorsements and documents transmitted herewith. If signature is by a trustee,
executor, administrator, guardian, officer or other person acting in a
fiduciary or representative capacity, please set forth full title. See
Instruction 3.
Name(s):
..........................................................
..................................................................
(PLEASE TYPE OR PRINT)
Capacity:
.........................................................
Address:
..........................................................
..................................................................
(INCLUDING ZIP CODE)
SIGNATURE GUARANTEE
(IF REQUIRED BY INSTRUCTION 3)
Signature(s) Guaranteed by
an Eligible Institution:
..........................................
(AUTHORIZED SIGNATURE)
...................................................................
(TITLE)
...................................................................
(NAME AND FIRM)
Dated: , 1997
.......................................................
- -------------------------------------------------------------------------------
<PAGE>
INSTRUCTIONS
FORMING PART OF THE TERMS AND CONDITIONS OF THE EXCHANGE OFFER FOR THE
10 5/8% SENIOR SUBORDINATED NOTES DUE 2003 IN EXCHANGE FOR THE
10 5/8% SENIOR SUBORDINATED EXCHANGE NOTES DUE 2003 OF
FIRST NATIONWIDE HOLDINGS INC.
1. DELIVERY OF THIS LETTER AND NOTES; GUARANTEED DELIVERY PROCEDURES.
This letter is to be completed by noteholders either if certificates are
to be forwarded herewith or if tenders are to be made pursuant to the
procedures for delivery by book-entry transfer set forth in "The Exchange
Offer--Book-Entry Transfer" section of the Prospectus. Certificates for all
physically tendered Old Notes, or Book-Entry Confirmation, as the case may
be, as well as a properly completed and duly executed Letter (or manually
signed facsimile hereof) and any other documents required by this Letter,
must be received by the Exchange Agent at the address set forth herein on or
prior to the Expiration Date, or the tendering holder must comply with the
guaranteed delivery procedures set forth below. Old Notes tendered hereby
must be in denominations of principal amount of $1,000 and any integral
multiple thereof.
Noteholders whose certificates for Old Notes are not immediately available
or who cannot deliver their certificates and all other required documents to
the Exchange Agent on or prior to the Expiration Date, or who cannot complete
the procedure for book-entry transfer on a timely basis, may tender their Old
Notes pursuant to the guaranteed delivery procedures set forth in "The
Exchange Offer--Guaranteed Delivery Procedures" section of the Prospectus.
Pursuant to such procedures, (i) such tender must be made through an Eligible
Institution, (ii) prior to the Expiration Date, the Exchange Agent must
receive from such Eligible Institution a properly completed and duly executed
Letter (or a facsimile thereof) and Notice of Guaranteed Delivery,
substantially in the form provided by the Company (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, or a Book-Entry Confirmation, and any other
documents required by the Letter 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 Book-Entry
Confirmation, as the case may be, and all other documents required by this
Letter, are received by the Exchange Agent within five NYSE trading days
after the date of execution of the Notice of Guaranteed Delivery.
The method of delivery of this Letter, the Old Notes and all other
required documents is at the election and risk of the tendering holders, but
the delivery will be deemed made only when actually received or confirmed by
the Exchange Agent. If Old Notes are sent by mail, it is suggested that the
mailing be made sufficiently in advance of the Expiration Date to permit
delivery to the Exchange Agent prior to 5:00 p.m., New York City time, on the
Expiration Date.
See "The Exchange Offer" section of the Prospectus.
2. PARTIAL TENDERS (NOT APPLICABLE TO NOTEHOLDERS WHO TENDER BY BOOK-ENTRY
TRANSFER).
If less than all of the Old Notes evidenced by a submitted certificate are
to be tendered, the tendering holder(s) should fill in the aggregate
principal amount of Old Notes to be tendered in the box above entitled
"Description of Old Notes--Principal Amount Tendered." A reissued certificate
representing the balance of nontendered Old Notes will be sent to such
tendering holder, unless otherwise provided in the appropriate box on this
Letter, promptly after the Expiration Date. ALL OF THE OLD NOTES DELIVERED TO
THE EXCHANGE AGENT WILL BE DEEMED TO HAVE BEEN TENDERED UNLESS OTHERWISE
INDICATED.
3. SIGNATURES ON THIS LETTER; BOND POWERS AND ENDORSEMENTS; GUARANTEE OF
SIGNATURES.
If this Letter is signed by the registered holder of the Old Notes
tendered hereby, the signature must correspond exactly with the name as
written on the face of the certificates without any change whatsoever.
If any tendered Old Notes are owned of record by two or more joint owners,
all of such owners must sign this Letter.
If any tendered Old Notes are registered in different names on several
certificates, it will be necessary to complete, sign and submit as many
separate copies of this Letter as there are different registrations of
certificates.
When this Letter is signed by the registered holder or holders of the Old
Notes specified herein and tendered hereby, no endorsements of certificates
or separate bond powers are required. If, however, the New Notes are to be
issued, or any untendered Old Notes are to be reissued, to a person other
than the registered holder, then endorsements of any certificates transmitted
hereby or separate bond powers are required. Signatures on such
certificate(s) must be guaranteed by an Eligible Institution.
If this Letter is signed by a person other than the registered holder or
holders of any certificate(s) specified herein, such certificate(s) must be
endorsed or accompanied by appropriate bond powers, in either case signed
exactly as the name or names of the registered holder or holders appear(s) on
the certificate(s) and signatures on such certificate(s) must be guaranteed
by an Eligible Institution.
If this Letter or any certificates or bond powers 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 Company,
proper evidence satisfactory to the Company of their authority to so act must
be submitted.
ENDORSEMENTS ON CERTIFICATES FOR OLD NOTES OR SIGNATURES ON BOND POWERS
REQUIRED BY THIS INSTRUCTION 3 MUST BE GUARANTEED 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 (AN "ELIGIBLE
INSTITUTION").
SIGNATURES ON THIS LETTER NEED NOT BE GUARANTEED BY AN ELIGIBLE
INSTITUTION, PROVIDED THE OLD NOTES ARE TENDERED: (I) BY A REGISTERED HOLDER
OF OLD NOTES (WHICH TERM, FOR PURPOSES OF THE EXCHANGE OFFER, INCLUDES ANY
PARTICIPANT IN THE BOOK-ENTRY TRANSFER FACILITY SYSTEM WHOSE NAME APPEARS ON
A SECURITY POSITION LISTING AS THE HOLDER OF SUCH OLD NOTES) WHO HAS NOT
COMPLETED THE BOX ENTITLED "SPECIAL ISSUANCE INSTRUCTIONS" OR "SPECIAL
DELIVERY INSTRUCTIONS" ON THIS LETTER, OR (II) FOR THE ACCOUNT OF AN ELIGIBLE
INSTITUTION.
<PAGE>
4. SPECIAL ISSUANCE AND DELIVERY INSTRUCTIONS.
Tendering holders of Old Notes should indicate in the applicable box the
name and address to which New Notes issued pursuant to the Exchange Offer
and/or substitute certificates evidencing Old Notes not exchanged are to be
issued or sent, if different from the name or address of the person signing
this Letter. In the case of issuance in a different name, the employer
identification or social security number of the person named must also be
indicated. Holders tendering Old Notes by book-entry transfer may request
that Old Notes not exchanged be credited to such account maintained at the
Book-Entry Transfer Facility as such noteholder may designate hereon. If no
such instructions are given, such Old Notes not exchanged will be returned to
the name or address of the person signing this Letter.
5. TAX IDENTIFICATION NUMBER.
Federal income tax law generally requires that a tendering holder whose
Old Notes are accepted for exchange must provide the Company (as payor) with
such holder's correct Taxpayer Identification Number ("TIN") on Substitute
Form W-9 below, which in the case of a tendering holder who is an individual,
is his or her social security number. If the Company is not provided with the
current TIN or an adequate basis for an exemption, such tendering holder may
be subject to a $50 penalty imposed by the Internal Revenue Service. In
addition, delivery to such tendering holder of New Notes may be subject to
backup withholding in an amount equal to 31% of all reportable payments made
after the exchange. If withholding results in an overpayment of taxes, a
refund may be obtained.
Exempt holders of Old Notes (including, among others, all corporations and
certain foreign individuals) are not subject to these backup withholding and
reporting requirements. See the enclosed Guidelines of Certification of
Taxpayer Identification Number on Substitute Form W-9 (the "W-9 Guidelines")
for additional instructions.
To prevent backup withholding, each tendering holder of Old Notes must
provide its correct TIN by completing the Substitute Form W-9 set forth
below, certifying that the TIN provided is correct (or that such holder is
awaiting a TIN) and that (i) the holder is exempt from backup withholding, or
(ii) the holder has not been notified by the Internal Revenue Service that
such holder is subject to backup withholding as a result of a failure to
report all interest or dividends or (iii) the Internal Revenue Service has
notified the holder that such holder is no longer subject to backup
withholding. If the tendering holder of Old Notes is a nonresident alien or
foreign entity not subject to backup withholding, such holder must give the
Company a completed Form W-8, Certificate of Foreign Status. These forms may
be obtained from the Exchange Agent. If the Old Notes are in more than one
name or are not in the name of the actual owner, such holder should consult
the W-9 Guidelines for information on which TIN to report. If such holder
does not have a TIN, such holder should consult the W-9 Guidelines for
instructions on applying for a TIN, check the box in Part 2 of the Substitute
Form W-9 and write "applied for" in lieu of its TIN. Note: Checking this box
and writing "applied for" on the form means that such holder has already
applied for a TIN or that such holder intends to apply for one in the near
future. If such holder does not provide its TIN to the Company within 60
days, backup withholding will begin and continue until such holder furnishes
its TIN to the Company.
6. TRANSFER TAXES.
The Company will pay all transfer taxes, if any, applicable to the
transfer of Old Notes to it or its order pursuant to the Exchange Offer. If
however, New Notes and/or substitute Old Notes not exchanged are to be
delivered to, or are to be registered or issued in the name of, any person
other than the registered holder of the Old Notes tendered hereby, or if
tendered Old Notes are registered in the name of any person other than the
person signing this Letter, or if a transfer tax is imposed for any reason
other than the transfer of Old Notes to the Company or its order pursuant to
the Exchange Offer, the amount of any such transfer taxes (whether imposed on
the registered holder or any other persons) will be payable by the tendering
holder. If satisfactory evidence of payment of such taxes or exemption
therefrom is not submitted herewith, the amount of such transfer taxes will
be billed directly to such tendering holder.
EXCEPT AS PROVIDED IN THIS INSTRUCTION 6, IT WILL NOT BE NECESSARY FOR
TRANSFER TAX STAMPS TO BE AFFIXED TO THE OLD NOTES SPECIFIED IN THIS LETTER.
7. WAIVER OF CONDITIONS.
The Company reserves the absolute right to waive satisfaction of any or
all conditions enumerated in the Prospectus.
8. NO CONDITIONAL TENDERS.
No alternative, conditional, irregular or contingent tenders will be
accepted. All tendering holders of Old Notes, by execution of this Letter,
shall waive any right to receive notice of the acceptance of their Old Notes
for exchange.
Neither the Company, the Exchange Agent nor any other person is obligated
to give notice of any defect or irregularity with respect to any tender of
Old Notes nor shall any of them incur any liability for failure to give any
such notice.
9. MUTILATED, LOST, STOLEN OR DESTROYED OLD NOTES.
Any holder whose Old Notes have been mutilated, lost, stolen or destroyed
should contact the Exchange Agent at the address indicated above for further
instructions.
10. REQUESTS FOR ASSISTANCE OR ADDITIONAL COPIES.
Questions relating to the procedure for tendering, as well as requests for
additional copies of the Prospectus and this Letter, may be directed to the
Exchange Agent, at the address and telephone number indicated above.
<PAGE>
TO BE COMPLETED BY ALL TENDERING HOLDERS
(SEE INSTRUCTION 5)
PAYOR'S NAME: THE BANK OF NEW YORK
<TABLE>
<CAPTION>
- ------------------------------------------------------------------------------------------------------
<S> <C> <C>
SUBSTITUTE PART 1--PLEASE PROVIDE YOUR TIN TIN:
FORM W-9 IN THE BOX AT RIGHT AND CER- ------------------------------
DEPARTMENT OF THE TREASURY TIFY BY SIGNING AND DATING SOCIAL SECURITY NUMBER OR
INTERNAL REVENUE SERVICE BELOW. EMPLOYER IDENTIFICATION NUMBER
PAYOR'S REQUEST FOR -----------------------------------------------------------------------
TAXPAYER PART 2--TIN APPLIED FOR [ ]
IDENTIFICATION NUMBER -----------------------------------------------------------------------
("TIN") AND CERTIFICATION: UNDER THE PENALTIES OF PERJURY, I CERTIFY THAT:
CERTIFICATION (1) the number shown on this form is my correct Taxpayer
Identification Number (or I am waiting for a number to be issued
to me).
(2) I am not subject to backup withholding either because: (a) I am
exempt from backup withholding, or (b) I have not been notified
by the Internal Revenue Service (the "IRS") that I am subject to
backup withholding as a result of a failure to report all
interest or dividends, or (c) the IRS has notified me that I am
no longer subject to backup withholding, and
(3) any other information provided on this form is true and correct.
SIGNATURE DATE
............................. .........................
- ------------------------------------------------------------------------------------------------------
You must cross out item (2) of the above certification if you have been notified by the IRS that you
are subject to backup withholding because of underreporting of interest or dividends on your tax
return and you have not been notified by the IRS that you are no longer subject to backup
withholding.
- -----------------------------------------------------------------------------------------------------
</TABLE>
YOU MUST COMPLETE THE FOLLOWING CERTIFICATE IF YOU CHECKED THE BOX
IN PART 2 OF SUBSTITUTE FORM W-9
- -------------------------------------------------------------------------------
CERTIFICATE OF AWAITING TAXPAYER IDENTIFICATION NUMBER
I certify under penalties of perjury that a taxpayer identification number
has not been issued to me, and either (a) I have mailed or delivered an
application to receive a taxpayer identification number to the appropriate
Internal Revenue Service Center or Social Security Administration Office or
(b) I intend to mail or deliver an application in the near future. I
understand that if I do not provide a taxpayer identification number by the
time of the exchange, 31 percent of all reportable payments made to me
thereafter will be withheld until I provide a number.
------------------------------------------- --------------------------
SIGNATURE DATE
- -------------------------------------------------------------------------------
<PAGE>
NOTICE OF GUARANTEED DELIVERY FOR
FIRST NATIONWIDE HOLDINGS INC.
This form or one substantially equivalent hereto must be used to accept
the Exchange Offer of First Nationwide Holdings Inc. (the "Company") made
pursuant to the Prospectus, dated , 1997 (the "Prospectus"), if
certificates for the outstanding 10 5/8% Senior Subordinated Notes Due 2003
of the Company (the "Old Notes") are not immediately available or if the
procedure for book-entry transfer cannot be completed on a timely basis or
time will not permit all required documents to reach the Company prior to
5:00 p.m., New York City time, on the Expiration Date of the Exchange Offer.
Such form may be delivered or transmitted by telegram, telex, facsimile
transmission, mail or hand delivery to The Bank of New York (the "Exchange
Agent") as set forth below. In addition, in order to utilize the guaranteed
delivery procedure to tender Old Notes pursuant to the Exchange Offer, a
completed, signed and dated Letter of Transmittal (or facsimile thereof) must
also be received by the Exchange Agent prior to 5:00 p.m., New York City
time, on the Expiration Date. Capitalized terms not defined herein are
defined in the Prospectus.
Delivery To: The Bank of New York, Exchange Agent
By Mail:
The Bank of New York
101 Barclay Street -- (7 East)
Reorganization Section
New York, New York 10286
Attention: Enrique Lopez
By Overnight Courier or Hand:
The Bank of New York
101 Barclay Street -- (7 East)
Reorganization Section
Corporate Trust Services Window
New York, New York 10286
Attention: Enrique Lopez
By Facsimile:
(212) 571-3080
Confirm by Telephone:
(212) 815-2742
DELIVERY OF THIS INSTRUMENT TO AN ADDRESS OTHER THAN AS SET FORTH ABOVE,
OR TRANSMISSION OF INSTRUCTIONS VIA FACSIMILE OTHER THAN AS SET FORTH ABOVE,
WILL NOT CONSTITUTE A VALID DELIVERY.
Ladies and Gentlemen:
Upon the terms and conditions set forth in the Prospectus and the
accompanying Letter of Transmittal, the undersigned hereby tenders to the
Company the principal amount of Old Notes set forth below, pursuant to the
guaranteed delivery procedure described in "The Exchange Offer--Guaranteed
Delivery Procedures" section of the Prospectus.
Principal Amount of Old Notes
Tendered:*
$
-------------------------------------- If Old Notes will be delivered by
Certificate Nos. (if available): book-entry transfer to The
Depository Trust Company, provide
- --------------------------------------- account number.
Total Principal Amount Represented by
Old Notes Certificate(s):
$ Account Number
-------------------------------------- --------------------
- --------------
* Must be in denominations of principal amount of $1,000 and any integral
multiple thereof.
<PAGE>
- -------------------------------------------------------------------------------
ALL AUTHORITY HEREIN CONFERRED OR AGREED TO BE CONFERRED SHALL SURVIVE THE
DEATH OR INCAPACITY OF THE UNDERSIGNED AND EVERY OBLIGATION OF THE UNDERSIGNED
HEREUNDER SHALL BE BINDING UPON THE HEIRS, PERSONAL REPRESENTATIVES, SUCCESSORS
AND ASSIGNS OF THE UNDERSIGNED.
- -------------------------------------------------------------------------------
PLEASE SIGN HERE
X
---------------------------- -------------
X
---------------------------- -------------
Signature(s) of Owner(s) Date
or Authorized Signatory
Area Code and Telephone Number:
-------------------------------
Must be signed by the holder(s) of Old Notes as their name(s) appear(s) on
certificates for Old Notes or on a security position listing, or by person(s)
authorized to become registered holder(s) by endorsement and documents
transmitted with this Notice of Guaranteed Delivery. If signature is by a
trustee, executor, administrator, guardian, attorney-in-fact, officer or other
person acting in a fiduciary or representative capacity, such person must set
forth his or her full title below.
PLEASE PRINT NAME(S) AND ADDRESS(ES)
Name(s):
-----------------------------------------------------------------
-----------------------------------------------------------------
-----------------------------------------------------------------
Capacity:
-----------------------------------------------------------------
-----------------------------------------------------------------
Address(es):
-----------------------------------------------------------------
-----------------------------------------------------------------
GUARANTEE
The undersigned, a member of a registered national securities exchange, or a
member of the National Association of Securities Dealers, Inc., or a commercial
bank or trust company having an office or correspondent in the United States,
hereby guarantees that the certificates representing the principal amount of
Old Notes tendered hereby in proper form for transfer, or timely confirmation
of the book-entry transfer of such Old Notes into the Exchange Agent's account
at The Depository Trust Company pursuant to the procedures set forth in "The
Exchange Offer--Guaranteed Delivery Procedures" section of the Prospectus,
together with a properly completed and duly executed Letter of Transmittal (or
a manually signed facsimile thereof) with any required signature guarantee and
any other documents required by the Letter of Transmittal, will be received by
the Exchange Agent at the address set forth above, no later than five New York
Stock Exchange trading days after the date of execution hereof.
- -------------------------------------- --------------------------------------
Name of Firm Authorized Signature
- -------------------------------------- --------------------------------------
Address Title
Name:
- -------------------------------------- ---------------------------------
Zip Code (Please Type or Print)
Area Code and Tel. No. Dated:
---------------- --------------------------------
NOTE: DO NOT SEND CERTIFICATES FOR OLD NOTES WITH THIS FORM. CERTIFICATES FOR
OLD NOTES SHOULD ONLY BE SENT WITH YOUR LETTER OF TRANSMITTAL.
<PAGE>
FIRST NATIONWIDE HOLDINGS INC.
OFFER FOR ALL OUTSTANDING
10 5/8% SENIOR SUBORDINATED NOTES DUE 2003
IN EXCHANGE FOR
10 5/8% SENIOR SUBORDINATED EXCHANGE NOTES DUE 2003
To: BROKERS, DEALERS, COMMERCIAL BANKS,
TRUST COMPANIES AND OTHER NOMINEES:
First Nationwide Holdings Inc. (the "Company") is offering, upon and
subject to the terms and conditions set forth in the Prospectus, dated ,
1997 (the "Prospectus"), and the enclosed Letter of Transmittal (the "Letter
of Transmittal"), to exchange (the "Exchange Offer") its 10 5/8% Senior
Subordinated Exchange Notes Due 2003, which have been registered under the
Securities Act of 1933, as amended, for its outstanding 10 5/8% Senior
Subordinated Notes Due 2003 (the "Old Notes"). The Exchange Offer is being
made in order to satisfy certain obligations of the Company contained in the
Registration Agreement dated September 13, 1996, by and among the Company and
the initial purchasers referred to therein.
We are requesting that you contact your clients for whom you hold Old
Notes regarding the Exchange Offer. For your information and for forwarding
to your clients for whom you hold Old Notes registered in your name or in the
name of your nominee, or who hold Old Notes registered in their own names, we
are enclosing the following documents:
1. Prospectus dated , 1997;
2. The Letter of Transmittal for your use and for the information of your
clients;
3. A Notice of Guaranteed Delivery to be used to accept the Exchange Offer
if certificates for Old Notes are not immediately available or time will not
permit all required documents to reach the Exchange Agent prior to the
Expiration Date (as defined below) or if the procedure for book-entry
transfer cannot be completed on a timely basis;
4. A form of letter which may be sent to your clients for whose account
you hold Old Notes registered in your name or the name of your nominee, with
space provided for obtaining such clients' instructions with regard to the
Exchange Offer;
5. Guidelines for Certification of Taxpayer Identification Number on
Substitute Form W-9; and
6. Return envelopes addressed to The Bank of New York, the Exchange Agent
for the Old Notes.
YOUR PROMPT ACTION IS REQUESTED. THE EXCHANGE OFFER WILL EXPIRE AT 5:00
P.M., NEW YORK CITY TIME, ON , , 1997, UNLESS EXTENDED BY THE
COMPANY (THE "EXPIRATION DATE"). OLD NOTES TENDERED PURSUANT TO THE EXCHANGE
OFFER MAY BE WITHDRAWN AT ANY TIME BEFORE THE EXPIRATION DATE.
To participate in the Exchange Offer, a duly executed and properly
completed Letter of Transmittal (or facsimile thereof), with any required
signature guarantees and any other required documents, should be sent to the
Exchange Agent and certificates representing the Old Notes should be
delivered to the Exchange Agent, all in accordance with the instructions set
forth in the Letter of Transmittal and the Prospectus.
If holders of Old Notes wish to tender, but it is impracticable for them
to forward their certificates for Old Notes prior to the expiration of the
Exchange Offer or to comply with the book-entry transfer procedures on a
timely basis, a tender may be effected by following the guaranteed delivery
procedures described in the Prospectus under "The Exchange Offer--Guaranteed
Delivery Procedures."
The Company will, upon request, reimburse brokers, dealers, commercial
banks and trust companies for reasonable and necessary costs and expenses
incurred by them in forwarding the Prospectus and the
<PAGE>
related documents to the beneficial owners of Old Notes held by them as
nominee or in a fiduciary capacity. The Company will pay or cause to be paid
all stock transfer taxes applicable to the exchange of Old Notes pursuant to
the Exchange Offer, except as set forth in Instruction 6 of the Letter of
Transmittal.
Any inquiries you may have with respect to the Exchange Offer, or requests
for additional copies of the enclosed materials, should be directed to The
Bank of New York, the Exchange Agent for the Old Notes, at its address and
telephone number set forth on the front of the Letter of Transmittal.
Very truly yours,
FIRST NATIONWIDE HOLDINGS INC.
NOTHING HEREIN OR IN THE ENCLOSED DOCUMENTS SHALL CONSTITUTE YOU OR ANY
PERSON AS AN AGENT OF THE COMPANY OR THE EXCHANGE AGENT, OR AUTHORIZE YOU OR
ANY OTHER PERSON TO USE ANY DOCUMENT OR MAKE ANY STATEMENTS ON BEHALF OF
EITHER OF THEM WITH RESPECT TO THE EXCHANGE OFFER, EXCEPT FOR STATEMENTS
EXPRESSLY MADE IN THE PROSPECTUS OR THE LETTER OF TRANSMITTAL.
Enclosures
<PAGE>
FIRST NATIONWIDE HOLDINGS INC.
OFFER FOR ALL OUTSTANDING
10 5/8% SENIOR SUBORDINATED NOTES DUE 2003
IN EXCHANGE FOR
10 5/8% SENIOR SUBORDINATED EXCHANGE NOTES DUE 2003
TO OUR CLIENTS:
Enclosed for your consideration is a Prospectus, dated , 1997 (the
"Prospectus"), and the related Letter of Transmittal (the "Letter of
Transmittal"), relating to the offer (the "Exchange Offer") of First
Nationwide Holdings Inc. (the "Company") to exchange its 10 5/8% Senior
Subordinated Exchange Notes Due 2003, which have been registered under the
Securities Act of 1933, as amended (the "New Notes"), for its outstanding 10
5/8% Senior Subordinated Notes Due 2003 (the "Old Notes"), upon the terms and
subject to the conditions described in the Prospectus and the Letter of
Transmittal. The Exchange Offer is being made in order to satisfy certain
obligations of the Company contained in the Registration Agreement dated
September 13, 1996, by and among the Company and the initial purchasers
referred to therein.
This material is being forwarded to you as the beneficial owner of the Old
Notes carried by us in your account but not registered in your name. A TENDER
OF SUCH OLD NOTES MAY ONLY BE MADE BY US AS THE HOLDER OF RECORD AND PURSUANT
TO YOUR INSTRUCTIONS.
Accordingly, we request instructions as to whether you wish us to tender
on your behalf the Old Notes held by us for your account, pursuant to the
terms and conditions set forth in the enclosed Prospectus and Letter of
Transmittal.
Your instructions should be forwarded to us as promptly as possible in
order to permit us to tender the Old Notes on your behalf in accordance with
the provisions of the Exchange Offer. The Exchange Offer will expire at 5:00
p.m., New York City time, on , , 1997, unless extended by the
Company. Any Old Notes tendered pursuant to the Exchange Offer may be
withdrawn at any time before the Expiration Date.
Your attention is directed to the following:
1. The Exchange Offer is for any and all Old Notes.
2. The Exchange Offer is subject to certain conditions set forth in the
Prospectus in the section captioned "The Exchange Offer--Certain Conditions
to the Exchange Offer."
3. Any transfer taxes incident to the transfer of Old Notes from the
holder to the Company will be paid by the Company, except as otherwise
provided in the Instructions in the Letter of Transmittal.
4. The Exchange Offer expires at 5:00 p.m., New York City time, on ,
, 1997, unless extended by the Company.
If you wish to have us tender your Old Notes, please so instruct us by
completing, executing and returning to us the instruction form on the back of
this letter. THE LETTER OF TRANSMITTAL IS FURNISHED TO YOU FOR INFORMATION
ONLY AND MAY NOT BE USED DIRECTLY BY YOU TO TENDER OLD NOTES.
<PAGE>
INSTRUCTIONS WITH RESPECT TO
THE EXCHANGE OFFER
The undersigned acknowledge(s) receipt of your letter and the enclosed
material referred to therein relating to the Exchange Offer made by First
Nationwide Holdings Inc. with respect to its Old Notes.
This will instruct you to tender the Old Notes held by you for the account
of the undersigned, upon and subject to the terms and conditions set forth in
the Prospectus and the related Letter of Transmittal.
Please tender the Old Notes held by you for my account as indicated below:
AGGREGATE PRINCIPAL AMOUNT OF
OLD NOTES
---------------------------------
10 5/8% Senior Subordinated
Notes Due 2003...........................
[ ] Please do not tender any Old Notes held
by you for my account.
Dated: , 1997
------------------------------- ---------------------------------
---------------------------------
Signature(s)
---------------------------------
---------------------------------
---------------------------------
Please print name(s) here
---------------------------------
---------------------------------
Address(es)
---------------------------------
Area Code and Telephone Number
---------------------------------
Tax Identification or
Social Security No(s).
None of the Old Notes held by us for your account will be tendered unless we
receive written instructions from you to do so. Unless a specific contrary
instruction is given in the space provided, your signature(s) hereon shall
constitute an instruction to us to tender all the Old Notes held by us for your
account.
