<PAGE>
SECURITIES AND EXCHANGE COMMISSION
Washington, D.C. 20579
FORM 8-K
CURRENT REPORT
---------------------
Pursuant to Section 13 or 15(d) of the
Securities Exchange Act of 1934
Date of Report (Date of earliest event reported): April 8, 1997
First Nationwide Holdings Inc.
(Exact name of registrant as specified in its charter)
Delaware 33-82654 13-3778552
(State or other (Commission (IRS Employer
jurisdiction of File Number) Identification No.)
incorporation)
35 East 62nd Street, New York, New York 10021
(Address of principal executive offices) (Zip Code)
Registrant's telephone number, including area code:(212) 572-8600
38 East 63rd Street, New York, New York 10021
(Former name or former address, if changed since last report)
<PAGE>
ITEM 5. OTHER EVENTS.
As previously disclosed in the Annual Report on Form 10-K for the
year ended December 31, 1996 of First Nationwide Holdings Inc. (the "Company"),
on January 3, 1997, the Company acquired 100% of the outstanding stock of Cal
Fed Bancorp Inc. ("Cal Fed") and its subsidiary, California Federal Bank, A
Federal Savings Bank ("California Federal"). On January 3, 1997, the Company's
subsidiary, First Nationwide Bank, A Federal Savings Bank, was merged with and
into California Federal. Concurrent with such merger, Cal Fed was liquidated.
The consolidated financial statements of Cal Fed as of December 31, 1996 and
1995 and for each of the years in the three-year period ended December 31, 1996
and the independent auditors' report thereon have been included in Exhibit 99.1
hereto and are incorporated herein by reference.
ITEM 7. FINANCIAL STATEMENTS, PRO FORMA FINANCIAL INFORMATION
AND EXHIBITS.
(c) Exhibits.
23.1 Consent of Independent Auditors.
99.1 Audited Consolidated Financial State-
ments of Cal Fed Bancorp Inc. and its
Subsidiaries.
2
<PAGE>
SIGNATURES
Pursuant to the requirements of the Securities Exchange Act of
1934, the registrant has duly caused this report to be signed on its behalf by
the undersigned hereunto duly authorized.
FIRST NATIONWIDE HOLDINGS INC.
Dated: April 8, 1997
By: /s/ Laurence Winoker
--------------------------
Name: Laurence Winoker
Title: Vice President and
Controller
3
<PAGE>
EXHIBIT INDEX
Exhibit No. Document Page No.
- - ----------- -------- --------
23.1 Consent of Independent Auditors.
99.1 Audited Consolidated Financial
Statements of Cal Fed Bancorp Inc.
and its Subsidiaries.
<PAGE>
EXHIBIT 23.1
CONSENT OF INDEPENDENT AUDITORS
The Board of Directors
California Federal Bank, A Federal Savings Bank
We consent to incorporation by reference in the Post-Effective Amendment
No. 2 of Registration Statement No. 33-82654, on Form S-1 of First
Nationwide Holdings Inc. (the "Company"), of our report dated February 21, 1997,
relating to the consolidated statements of financial condition of
Cal Fed Bancorp Inc. and subsidiaries ("Cal Fed") as of December 31, 1996
and 1995, 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, 1996, which report appears in the Company's
Form 8-K filed on April 8, 1997.
Our report on the consolidated financial statements of Cal Fed, dated
February 21, 1997, contains an explanatory paragraph that states that Cal Fed
adopted the provisions of the Financial Accounting Standards Board Statement
of Financial Accounting Standards No. 72, Accounting for Certain Acquisitions
of Banking or Thrift Institutions, in 1994.
KPMG Peat Marwick LLP
Los Angeles, California
April 8, 1997
<PAGE>
EXHIBIT 99.1 AUDITED CONSOLIDATED FINANCIAL STATEMENTS
INDEX TO FINANCIAL STATEMENTS
<TABLE>
<CAPTION>
PAGE
<S> <C>
Independent Auditors' Report................................... F-2
CONSOLIDATED STATEMENTS OF FINANCIAL CONDITION................. F-3
CONSOLIDATED STATEMENTS OF OPERATIONS.......................... F-4
CONSOLIDATED STATEMENTS OF CHANGES IN STOCKHOLDERS' EQUITY..... F-5
CONSOLIDATED STATEMENTS OF CASH FLOWS.......................... F-6
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS..................... F-7
</TABLE>
F-1
<PAGE>
INDEPENDENT AUDITORS' REPORT
The Board of Directors
California Federal Bank, A Federal Savings Bank
We have audited the accompanying consolidated statements of financial
condition of Cal Fed Bancorp Inc. and subsidiaries ("Cal Fed") as of December
31, 1996 and 1995, 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, 1996. These consolidated financial
statements are the responsibility of Cal Fed'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 as
of December 31, 1996 and 1995, and the results of their operations and their
cash flows for each of the years in the three-year period ended December 31,
1996 in conformity with generally accepted accounting principles.
As discussed in Note 1 of the notes to the consolidated financial
statements, Cal Fed adopted the provisions of the Financial Accounting
Standards Board's Statement of Financial Accounting Standards No. 72,
Accounting for Certain Acquisitions of Banking or Thrift Institutions, in 1994.
KPMG Peat Marwick LLP
Los Angeles, California
February 21, 1997
F-2
<PAGE>
CAL FED BANCORP INC. AND SUBSIDIARIES
CONSOLIDATED STATEMENTS OF FINANCIAL CONDITION
(DOLLARS IN MILLIONS)
<TABLE>
<CAPTION>
December 31,
--------------------------
ASSETS 1996 1995
----- ----
<S> <C> <C>
Cash.................................... $ 242.1 $ 273.7
Short-term liquid investments........... 69.0 74.1
Securities purchased under
agreements to resell .................. 1,310.1 1,674.6
Securities available for sale........... 6.0 200.3
Securities held to maturity
(market value: $1,942.3 in 1996
and $2,361.3 in 1995)................. 1,963.9 2,366.7
Loans receivable held for sale
(market value: $8.7 in 1996
and $13.8 in 1995).................... 8.7 13.6
Loans receivable held for investment.... 10,099.4 9,290.0
Federal Home Loan Bank stock............ 166.8 135.7
Interest receivable..................... 74.0 79.5
Premises and equipment.................. 58.9 71.2
Real estate held for sale............... 12.9 49.5
Prepaid expenses and other assets....... 86.6 91.7
--------- ---------
Total Assets.................. $14,098.4 $14,320.6
========= =========
LIABILITIES AND STOCKHOLDERS' EQUITY
Deposits............................... $ 8,918.3 $9,476.7
Advances from Federal Home
Loan Banks ........................... 3,111.0 2,671.0
Securities sold under
agreements to repurchase ............. 978.4 857.3
Student Loan Marketing
Association advances ................. -- 200.0
Subordinated debentures................ 57.0 57.6
Other borrowings ...................... 0.3 0.5
Interest payable....................... 21.7 29.4
Other liabilities...................... 120.5 140.6
--------- ---------
Total Liabilities............ $13,207.2 $13,433.1
--------- ---------
Minority interest in preferred
stock of subsidiary................... 172.5 266.0
Stockholders' equity:
Common stock......................... 50.3 49.2
Additional paid-in capital........... 846.7 838.6
Retained earnings (deficit).......... (178.3) (266.3)
--------- ---------
Total Stockholders' Equity...... 718.7 621.5
--------- ---------
Total Liabilities and
Stockholders' Equity.......... $14,098.4 $14,320.6
========= =========
</TABLE>
See accompanying notes to consolidated financial statements.
F-3
<PAGE>
CAL FED BANCORP INC. AND SUBSIDIARIES
CONSOLIDATED STATEMENTS OF OPERATIONS
(DOLLARS IN MILLIONS)
<TABLE>
<CAPTION>
YEAR ENDED DECEMBER 31,
--------------------------------------------------
1996 1995 1994
-------- ---------- ---------
<S> <C> <C> <C>
Interest income:
Loans receivable........................................................ $ 763.4 $ 706.9 $ 630.4
Securities held to maturity............................................. 143.7 170.3 135.5
Securities purchased under agreements to resell ........................ 91.7 68.5 44.0
Securities available for sale........................................... 11.8 49.4 75.2
Short-term liquid investments........................................... 4.7 12.9 23.0
----------- --------- ---------
Total interest income........................................... 1,015.3 1,008.0 908.1
----------- --------- ---------
Interest expense:
Deposits................................................................ 430.6 441.6 390.8
Borrowings.............................................................. 236.1 254.5 175.7
----------- --------- ---------
Total interest expense.......................................... 666.7 696.1 566.5
----------- --------- ---------
Net interest income............................................. 348.6 311.9 341.6
Provision for loan losses................................................. 41.3 31.8 74.9
----------- --------- ---------
Net interest income after provision for loan losses............. 307.3 280.1 266.7
Other income:
Fee income.............................................................. 60.0 54.5 62.4
Gain (loss) on sales of loans........................................... 0.7 (0.3) 0.5
Gain on sales of securities............................................. 1.1 6.9 0.2
Gain on sale of southeast division...................................... -- -- 135.0
Other................................................................... 58.2 2.4 3.1
----------- --------- ---------
Total other income.............................................. 120.0 63.5 201.2
----------- --------- ---------
Other expenses:
Compensation............................................................ 113.5 97.1 118.7
Office occupancy........................................................ 37.2 39.4 47.3
Other general and administrative........................................ 91.1 79.4 89.2
Federal deposit insurance premiums and special assessments.............. 22.0 26.0 35.1
----------- --------- ---------
Total general and administrative expenses....................... 263.8 241.9 290.3
Savings association insurance fund special assessment .................. 58.1 -- --
Operations of real estate held for sale................................. 8.5 8.0 45.9
Loss on assets held for accelerated disposition......................... -- -- 274.8
----------- --------- ---------
Total other expenses............................................ 330.4 249.9 611.0
----------- --------- ---------
Earnings (loss) before income tax expense (benefit) and cumulative
Effect of change in accounting for goodwill............................. 96.9 93.7 (143.1)
Income tax expense (benefit).............................................. (14.5) 0.1 6.3
----------- --------- ---------
Earnings (loss) before cumulative effect of change
in accounting for goodwill ............................................... 111.4 93.6 (149.4)
Cumulative effect of change in accounting for goodwill.................... -- -- (273.7)
----------- --------- ---------
Net earnings (loss) before dividends on preferred stock of
subsidiary ................................................... $ 111.4 $ 93.6 $(423.1)
Dividends on preferred stock of subsidiary ............................... 23.4 25.6 16.9
----------- --------- ---------
Earnings (loss) available for common stockholders......................... $ 88.0 $ 68.0 $(440.0)
=========== ========= =========
Earnings (loss) per common share before the cumulative
effect of change in accounting for goodwill ............................ $ 1.75 $ 1.36 $ (3.82)
Loss per share of the cumulative effect of change in
accounting for goodwill ................................................ $ -- $ -- $ (6.28)
Net earnings (loss) per common share ..................................... $ 1.75 $ 1.36 $ (10.10)
</TABLE>
See accompanying notes to consolidated financial statements.
F-4
<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,
-------------------------------------------
1996 1995 1994
---------- ---------- ---------
<S> <C> <C> <C>
Common Stock:
Balance at beginning of year.................................... 49.2 49.2 25.0
Issuance of shares of common stock........................... 1.1 -- 21.6
Exercise of common stock warrants............................ -- -- 2.6
-------- ------ -------
Balance at end of year.......................................... 50.3 49.2 49.2
-------- ------ -------
Additional paid-in capital:
Balance at beginning of year.................................... 838.6 836.6 658.2
Issuance cost of Preferred Stock, Series B................... -- -- (8.3)
Issuance of shares of Common Stock........................... -- -- 161.7
Exercise of common stock warrants............................ -- -- 20.7
Long-term incentive stock options............................ 2.0 2.0 4.3
Exercise of common stock options............................. 6.1 -- --
-------- ------ -------
Balance at end of year.......................................... 846.7 838.6 836.6
-------- ------ -------
Net unrealized holding (losses) gains on securities available
for sale:
Balance at beginning of year.................................... -- (19.2) 8.3
Net unrealized holding gains (losses)........................ -- 19.2 (27.5)
-------- ------ -------
Balance at end of year.......................................... -- -- (19.2)
-------- ------ -------
Retained earnings (deficit):
Balance at beginning of year.................................... (266.3) (334.3) 105.7
Net earnings (loss) available for common stockholders...... 88.0 68.0 (440.0)
-------- ------ -------
Balance at end of year.......................................... (178.3) (266.3) (334.3)
-------- ------ -------
Total stockholders' equity........................................ $718.7 $621.5 $532.3
======== ====== =======
</TABLE>
See accompanying notes to consolidated financial statements.
F-5
<PAGE>
CAL FED BANCORP INC. AND SUBSIDIARIES
CONSOLIDATED STATEMENTS OF CASH FLOWS
(DOLLARS IN MILLIONS)
<TABLE>
<CAPTION>
FOR THE YEAR ENDED DECEMBER 31,
-----------------------------------------------------
1996 1995 1994
-------- -------- --------
<S> <C> <C> <C>
CASH FLOWS FROM OPERATING ACTIVITIES:
Net earnings (loss) available for common stockholders.......................... $ 88.0 $ 68.0 $ (440.0)
Adjustments to reconcile net earnings (loss) to
net cash provided by operating activities:
Loss on assets held for accelerated disposition.............................. -- -- 274.8
Cululative effect of change in accounting principle.......................... -- -- 273.7
Depreciation and amortization................................................ 14.2 13.0 14.8
Accretion of fees and discounts.............................................. -- (13.5) (37.3)
Provision for losses on loans receivable..................................... 41.3 31.8 74.9
Provision (recovery) for losses on real estate held for sale................. 5.0 (7.4) 79.7
(Gain) loss on sales of loans................................................ (0.7) 0.3 (0.5)
Loans originated for sale.................................................... (230.8) (117.2) (115.8)
Gain on sales of securities.................................................. (2.3) (6.9) (0.2)
Proceeds from sales of loans receivable held for sale........................ 281.1 183.2 1,099.4
Decrease in other assets..................................................... 10.6 39.0 7.3
(Decrease) increase in other liabilities..................................... (27.8) (34.4) 17.0
Other items.................................................................. (11.7) (11.1) (20.5)
-------- --------- ---------
Net cash provided by operating activities............................. 166.9 144.8 1,227.3
CASH FLOWS FROM INVESTING ACTIVITIES:
Loans originated for investment.............................................. (2,369.2) (2,128.9) (2,503.5)
Purchases of securities available for sale................................... (221.0) (202.9) (1,519.2)
Proceeds from sales of securities available for sale......................... 261.6 976.3 670.4
Net (purchases) maturities of securities held to maturity.................... -- (54.2) 0.4
Principal collected on loans receivable held for investment.................. 1,399.7 1,152.1 1,406.9
Principal collected on securities held to maturity........................... 401.8 435.8 533.5
Proceeds from maturities of securities....................................... 156.0 808.8 1.0
Net increase in fhlb stock................................................... (31.1) (1.6) (12.6)
Proceeds from sales of real estate held for sale, net........................ 126.2 136.8 398.2
Net (additions) dispositions of premises and equipment....................... (1.6) (2.8) 8.3
Net increase (decrease) in short-term liquid investments..................... 5.1 259.7 (27.0)
Net increase (decrease) in securities purchased under
agreements to resell ....................................................... 364.5 (1,626.4) (18.0)
-------- --------- ---------
Net cash used (provided) by investing activities...................... 92.0 (247.3) (1,061.6)
CASH FLOWS FROM FINANCING ACTIVITIES:
(Decrease) increase in deposits.............................................. (558.4) 1,115.8 (4,239.9)
Proceeds from federal home loan bank advances................................ 2,030.0 3,135.0 1,710.0
Payments on federal home loan bank advances.................................. (1,590.0) (2,990.0) (200.0)
Net decrease (increase) in reverse repurchase agreements..................... 121.1 (893.7) 1,501.2
Proceeds from other borrowings............................................... 0.4 3.0 202.0
Payments on other borrowings and subordinated debentures..................... (201.2) (286.7) (41.4)
(Payments) proceeds from the (redemption) issuance of common stock........... 1.1 -- 210.9
(Payments) proceeds from the (redemption) issuance of preferred stock........ (93.5) -- 164.2
-------- --------- --------
Net cash (provided) used by financing activities...................... (290.5) 83.4 (693.0)
-------- --------- --------
Net decrease in cash........................................................... (31.6) (19.1) (527.3)
Cash at beginning of period.................................................... 273.7 292.8 820.1
--------- -------- ---------
Cash at end of period.......................................................... $ 242.1 $ 273.7 $ 292.8
========= ======== =========
</TABLE>
See accompanying Notes to Consolidated Financial Statements.
F-6
<PAGE>
CAL FED BANCORP INC. AND SUBSIDIARIES
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
NOTE 1: SUMMARY OF SIGNIFICANT ACCOUNTING POLICIES
PRINCIPLES OF CONSOLIDATION
The consolidated financial statements include the accounts of Cal Fed
Bancorp Inc. ("Bancorp") and its subsidiaries ("Cal Fed"). Cal Fed, through
California Federal Bank, A Federal Savings Bank ("California Federal")
maintains 119 full service branches in California and Nevada and is one of the
largest savings associations in the United States. Cal Fed offers a broad range
of consumer financial services including demand and term deposits and mortgage
and consumer loans. Subsidiaries of Cal Fed sell insurance and investment
products to Cal Fed's customers, and have previously engaged in the real estate
investment and development and trust business. Cal Fed's deposit gathering and
loan production operations are concentrated in California, particularly in
Southern California.
It is Cal Fed'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 1995 and 1994
data in order to conform to the current presentation. The preparation of Cal
Fed'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 Cal Fed for the periods presented. Actual results may differ from
those estimates calculated by Cal Fed.
On January 3, 1997, Cal Fed was acquired by First Nationwide Holdings Inc.
("Holdings"). The consolidated financial statements do not reflect any purchase
accounting adjustments from the acquisition.
During 1995, California Federal obtained regulatory and stockholder
approval to reorganize into a holding company structure, which provided greater
flexibility for meeting future financial and competitive needs. In December
1995, California Federal contributed approximately $22 million in capital to
Bancorp as part of the reorganization into a holding company structure. As a
result of the reorganization, on January 1, 1996, each share of California
Federal's common stock was converted into one share of Bancorp common stock.
Consequently, California Federal became a wholly-owned subsidiary of Bancorp.
California Federal's other securities remain outstanding securities of
California Federal.
SHORT-TERM LIQUID INVESTMENTS
Cal Fed's short-term liquid investments consist of federal funds sold and
certificates of deposit. These investments generally mature within 60 days. Cal
Fed 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
Cal Fed, through California Federal, invests in securities purchased under
agreements to resell ("repurchase agreements") to maximize the yield on its
liquid assets. Cal Fed obtains collateral for these agreements, which normally
consists of U.S. treasury securities or mortgage-backed securities ("MBS")
guaranteed by agencies of the U.S. government. The collateral is held in the
custody of a trustee, who is not a party to the transaction. The duration of
these agreements is typically less than 30 days. Cal Fed deals only with
nationally recognized investment banking firms as the counterparties to these
agreements. Cal Fed's investment in repurchase agreements consisted solely
consisted of securities purchased under agreements to resell identical
securities.
F-7
<PAGE>
INVESTMENTS IN SECURITIES
Cal Fed's investment in securities principally consists of U.S. treasury
securities and mortgage-backed securities. Cal Fed has created MBS when it
exchanges pools of loans for mortgage-backed securities ("securitized loans").
In accordance with Statement of Financial Accounting Standards No. 115,
Accounting for Certain Investments in Debt and Equity Securities ("SFAS No.
115"), Cal Fed classifies its investment in securities as held to maturity
securities, trading securities and available for sale securities as applicable.
Cal Fed did not hold any trading securities at December 31, 1996 or 1995.
Available for Sale Securities
Cal Fed has classified certain securities as "available for sale." Cal Fed
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 Cal Fed 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
Stockholders' 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 Statements of Operations. Realized gains or losses
on available for sale securities are computed on a specific identification
basis.
Securities Held to Maturity
Cal Fed has classified certain securities as "held to maturity."
Securities are designated as held to maturity if Cal Fed 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 Cal Fed 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
Cal Fed's principal interest-earning asset is loans receivable. Cal Fed,
through California Federal, primarily originates loans secured by residential
property of four units or less ("residential 1-4 loans"). Prior to 1993, Cal
Fed was active in the origination of loans secured by residential properties of
five or more units ("multifamily loans") and loans secured by office buildings,
shopping centers, industrial buildings, warehouses, marinas and hotels
("commercial real estate loans"). Cal Fed currently limits its originations of
multifamily and commercial real estate loans to finance the sale of real
estate. Prior to 1993, Cal Fed was active in the origination of loans secured
by vehicles, mobile homes, boats and unsecured personal loans ("consumer
loans"). Since 1993, Cal Fed has ceased originating consumer loans for its own
portfolio. However, Cal Fed does originate consumer loans for other financial
institutions for a fee. Cal Fed segregates its loan portfolio into loans held
for sale and loans held for investment. Cal Fed normally designates a loan as
held for sale at the time of origination. Cal Fed's portfolio of residential
1-4 loans, multi-family loans and commercial real estate loans is primarily
secured by property located in California. Cal Fed continues to focus its
origination efforts in California, particularly in Southern California. Cal
Fed's ability to originate loans is affected by economic conditions,
competition and the market for real estate in California. Likewise, the ability
of Cal Fed's borrowers to honor their contractual loan obligations to Cal Fed
is 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, Cal Fed may
experience a reduction in the level of loan originations and/or an increase in
loan losses.
F-8
<PAGE>
Loans Receivable Held for Sale
Cal Fed, through California Federal, has designated certain of its loans
receivable as "held for sale." In determining the level of loans held for sale,
Cal Fed considers whether such loans would be sold in response to liquidity
needs, asset/liability management requirements, regulatory capital needs and
other factors. Cal Fed'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 a 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
Cal Fed, through California Federal, 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
Cal Fed'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, Cal Fed sells loans and
continues to service such loans for the investor. In these cases, Cal Fed
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. Cal Fed 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 Cal Fed was $4.8 million and
$3.9 million at December 31, 1996 and 1995, respectively. Such amounts were
included in "Prepaid expenses and other assets" on the Consolidated Statements
of Financial Condition.
Loan Servicing
Cal Fed, through California Federal, services its loan portfolio and real
estate and consumer loans which are owned by independent investors. Loans
serviced by Cal Fed for others are primarily the result of Cal Fed selling
loans while retaining the servicing of such loans. Loans which are serviced for
other parties are not included with loans receivable or any other asset in the
accompanying consolidated financial statements. Fees earned for servicing loans
for others are reported as income when the related loan payments are collected.
Loan servicing costs are charged to expense as incurred.
Loans Receivable Held for Investment
Cal Fed'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, Cal Fed has not actively engaged in originating income
property loans, except to finance the sale of Cal Fed'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.
F-9
<PAGE>
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 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. SFAS No. 114 excludes among other items, large groups of
smaller-balance homogenous loans that are collectively evaluated for
impairment. Cal Fed adopted SFAS No. 114 as of January 1, 1995. Cal Fed 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, Cal Fed
measures impairment and establishes specific valuation allowances by utilizing
the fair value of the property collateralizing the loan.
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's non-performing loans consist
of loans on which Cal Fed 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 Cal Fed'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 is used to reduce the recorded investment in the loan until
the loan is returned to performing status. Cal Fed's policy allows 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
Cal Fed 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").
Cal Fed 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. Cal Fed's loan
monitoring system has established specific policies relating to its residential
1-4, income property, commercial banking and consumer loan portfolios.
Additionally, Cal Fed is required by various regulatory agencies to monitor and
classify its assets as Pass, Special Mention, Substandard, Doubtful and Loss.
Cal Fed's monitoring system further disaggregates loans that are determined to
be Pass into four separate grades. Additionally, Cal Fed places loans on a
watchlist if they exhibit certain credit characteristics. These characteristics
include dollar size, tenant concentration and the timing of maturity.
Cal Fed'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, Cal Fed 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. Cal
F-10
<PAGE>
Fed 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, 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. Non-performing income property loans and
performing loans that have been graded substandard, special mention, or
watchlist are typically reviewed on a quarterly basis. Current appraisals are
generally obtained annually as long as the loan continues to possess certain
risk characteristics. These loans are monitored throughout the year by a review
of the collateral's operating performance and the borrowers' indicated or
demonstrated ability to continue to meet their obligations. When necessary, Cal
Fed 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, Cal Fed'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, Cal Fed 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 forecast economic
conditions and Cal Fed's judgment. General allowances are provided for all
loans, regardless of any specific allowances provided. The determination of Cal
Fed's allowance for loan losses is based on estimates that are affected by
changes in the regional or national economy and market conditions. Cal Fed
believes that as of December 31, 1996 and 1995, 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, Cal Fed has
projected that the California economy and the market for real estate will
remain in the same relative condition that it was in at December 31, 1996.
Should these factors experience a downturn in the near term or if market
interest rates increase significantly in the near term, Cal Fed 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 Cal Fed, through California Federal, 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. Cal Fed's REI consists of properties
that Cal Fed, through its subsidiaries, acquired for purposes of development
where Cal Fed is actively seeking to dispose of the property in an expeditious
manner. Cal Fed has not been actively involved in real estate investment or
development for several years. Cal Fed records its REI at the lower of cost or
fair value of the properties. Cal Fed determines fair value by utilizing recent
sales activity and deducting holding and disposition costs over the estimated
remaining period to sell the projects. Cal Fed has assumed an orderly
disposition in estimating the holding period to sale. Should Cal Fed be unable
to sell the project at the projected prices, if the holding period is
substantially longer than forecast, or if Cal Fed's intent with respect to an
orderly disposition were to change, the fair value ultimately realized by Cal
Fed could be materially lower than Cal Fed's current forecast.
F-11
<PAGE>
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, Cal Fed applied Statement of Financial Accounting
Standards No. 72, Accounting for Certain Acquisitions of Banking or Thrift
Institutions ("SFAS No. 72") to acquisitions initiated, by Cal Fed, prior to
September 30, 1982. SFAS No. 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 No. 72 was effective for acquisitions initiated
after September 30, 1982 with retroactive application permitted. Cal Fed had
been accounting for its acquisitions initiated subsequent to September 30, 1982
in accordance with SFAS No. 72. The cumulative effect of the retroactive
application of SFAS No. 72 resulted in the acceleration of Cal Fed's goodwill
amortization arising from Cal Fed's thrift institution acquisitions initiated
prior to September 30, 1982. Under generally accepted accounting principles,
the cumulative effect from the retroactive application of SFAS No. 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
Bancorp files a consolidated federal income tax return and a combined
California franchise tax report with its subsidiaries.
Cal Fed has adopted Financial Accounting Standards Board Statement of
Financial Accounting Standards No. 109, Accounting for Income Taxes ("SFAS No.
109") and has applied the provisions of SFAS No. 109 retroactively to January
1, 1982. Under the asset and liability method of SFAS No. 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 No. 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. Cal Fed'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. Cal Fed 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 Cal Fed's common stock was $1.00 per share at December
31, 1996 and at December 31, 1995. The number of shares issued and outstanding
were 50,316,774 and 49,200,444 at December 31, 1996 and 1995, respectively. The
authorized number of common shares were 100,000,000 at December 31, 1995 and
1994.
On July 29, 1996 Bancorp, the parent company of California Federal,
announced that it had entered into a definitive merger agreement with First
Nationwide Holdings Inc., the parent company of First Nationwide Bank, San
Francisco ("First Nationwide"). The merger agreement was approved by Bancorp's
stockholders and by regulatory authorities and closed on January 3, 1997.
During the fourth quarter of 1995, California Federal obtained
regulatory and stockholder approval to reorganize into a holding company
structure. As a result of the reorganization, on January 1, 1996, each share of
California Federal's common stock was converted into one share of Bancorp
common stock. Consequently, California Federal became a wholly-
F-12
<PAGE>
owned subsidiary of Bancorp. California Federal's other equity securities
remained outstanding securities of California Federal.
During 1994, California Federal issued 1,725,000 shares of 105/8%
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 Cal Fed's Board of Directors. The
Preferred Stock, Series B, has a liquidation preference and par value of
$100.00 per share. The par value of the Preferred Stock, Series B was $100.00
per share at December 31, 1996 and 1995. Both the designated and outstanding
number of shares at December 31, 1996 and 1995 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.
During the second quarter of 1996 California Federal called for redemption
all 3,740,000 shares of its 7 3/4% noncumulative convertible preferred stock,
Series A. Except for the conversion of 18,820 shares into 23,336 shares of
Bancorp'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.
NET EARNINGS (LOSS) PER SHARE
Net earnings (loss) per common share is computed by dividing net earnings
(loss) available to common shareholders by the weighted average number of
common shares outstanding, including the dilutive effect, if any, of common
stock equivalents. For the years ended December 31, 1996, 1995 and 1994, the
weighted average number of shares used to calculate primary earnings (loss) per
share were 50,220,881, 49,855,150 and 43,556,167 respectively. For the years
ended December 31, 1996, 1995, and 1994 the weighted average number of shares
used to calculate fully diluted earnings (loss) per share were 50,238,827,
50,020,218 and 43,556,167, respectively.
FINANCIAL INSTRUMENTS
The Financial Accounting Standards Board has issued Statement of Financial
Accounting Standards No. 107 "Disclosures about Fair Value of Financial
Instruments" ("SFAS No. 107").
Financial instruments are defined under SFAS No. 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 Cal Fed's assets and liabilities are financial
instruments as defined under SFAS No. 107. Cal Fed 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 Cal
Fed's financial instruments is concentrated in its loans receivable.
Additionally, Cal Fed is subject to credit risk on certain off-balance sheet
financial instruments. Cal Fed 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 Cal Fed with recourse and standby letters of credit. Cal
Fed'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.
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<PAGE>
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 Cal Fed. Cal Fed's market risk is
concentrated in California Federal's portfolios of securities held for sale and
loans receivable. California Federal's securities held for sale are traded in
active markets. The values of these securities are susceptible to fluctuations
in the general market. When a borrower fails to meet the contractual
requirements of his loan agreement, Cal Fed 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.
Cal Fed 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 Cal Fed's loans receivable and
mortgage backed securities reprice based upon the FHLB Eleventh District cost
of funds index ("COFI"). The repricing of COFI tends to lag market interest
rates. Cal Fed 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
Cal Fed's lending activities are principally conducted in California and
Cal Fed currently focuses on the origination of residential 1-4 loans. The
largest concentration of Cal Fed's loan portfolio is located in the Los Angeles
County area of California. The ability of Cal Fed'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 No. 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 No. 107 requires that
Cal Fed 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
Cal Fed'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.
Cal Fed 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 Cal Fed and another
party agree to exchange interest payments on a notional amount. When using
interest rate cap agreements, Cal Fed 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, Cal Fed 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. Cal Fed 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 Cal Fed 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 Cal Fed, such liability is reflected on
the Consolidated Statements of Financial Condition with a corresponding charge
reflected on the Consolidated Statements of Operations. To the extent that Cal
Fed is in a gain position, Cal Fed records net cash flow as income upon receipt
and typically does not record unrealized gains as income.
F-14
<PAGE>
NEWLY ENACTED AND PROPOSED 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 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
No. 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 No. 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 No. 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. SFAS No. 121 was adopted by Cal Fed on January 1, 1996 and did not
have a material adverse effect on the 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 No. 122"), an
amendment of FASB Statement No. 65 "Accounting for Certain Mortgage Banking
Activities" ("SFAS No. 65"). SFAS No. 122 amends SFAS No. 65 to remove the
distinction in accounting for mortgage servicing rights resulting from
originated loans and those resulting from purchased loans. Additionally, SFAS
No. 122 requires that an enterprise with mortgage banking activities assess its
capitalized mortgage servicing rights for impairment based on the fair value of
those rights. SFAS No. 122 is to be applied prospectively to fiscal years
beginning after December 15, 1995; earlier application is permitted. SFAS No.
122 was adopted during the first quarter of 1996. Cal Fed did not experience a
material impact to its results of operations or financial condition from such
implementation.
In October 1995, the FASB issued Statement of Financial Accounting
Standards No. 123, "Accounting for Stock-Based Compensation" ("SFAS No. 123").
SFAS No. 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 No. 123 are effective for transactions entered into in
fiscal years that begin after December 15, 1995. The disclosure requirements of
SFAS No. 123 are effective for financial statements for fiscal years beginning
after December 15, 1995, or for an earlier fiscal year for which SFAS No. 123
is initially adopted for recognizing compensation cost. During 1996, Cal Fed
had no stock-based employee compensation plans. In addition, Cal Fed did not
enter into any transactions in which its equity instruments were used to
acquire goods or services from non-employees. Therefore, SFAS No. 123 had no
effect on the Financial Statements of Cal Fed.
In November 1995, the FASB issued a Special Report ("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 No. 115"). The Special Report included such guidance that
enabled Cal Fed to reassess the appropriateness of the classifications of all
securities held and account for any resulting reclassifications at fair value
in accordance with 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." Prior to December 31, 1995, Cal Fed
sold such MBS for a loss of less than $0.1 million.
In June 1996, the 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 establishes new
criteria for determining whether a transfer of financial assets in exchange for
cash or other consideration should be accounted for as a sale or as a pledge of
collateral in a secured borrowing. SFAS No. 125 also establishes new accounting
requirements for pledged collateral. As issued, SFAS No. 125 is effective for
all transfers and servicing of financial assets and extinguishments of
liabilities occurring after December 31, 1996 and earlier or retroactive
application is not permitted. During 1996, the FASB issued Statement of
Financial Accounting Standards No. 127, "Deferral of the Effective Date of
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<PAGE>
Certain Provisions of FASB Statement No. 125" ("SFAS No. 127"). SFAS No. 127
defers for one year the effective date (a) of paragraph 15 of SFAS No. 125 and
(b) of paragraphs 9-12 and 237(b) of SFAS No. 125 for repurchase agreement,
dollar-roll, securities lending, and similar transactions. SFAS No. 127
provides additional guidance on the types of transactions for which the
effective date of SFAS No. 125 has been deferred. It also requires that if it
is not possible to determine whether a transfer occurring during calendar-year
1997 is part of a repurchase agreement, dollar-roll, securities lending, or
similar transaction, then paragraphs 9-12 of SFAS No. 125 should be applied to
that transfer. Although the provisions of SFAS No. 125 as amended by SFAS No.
127 have not yet been adopted by Cal Fed, management does not expect such
adoption to have a material impact on its consolidated financial statements.
NOTE 2: SUPPLEMENTAL DISCLOSURE OF CASH FLOW INFORMATION
For the purposes of the Consolidated Statements of Cash Flows, Cal Fed
defines cash as currency on hand and demand deposits with other financial
institutions.
<TABLE>
<CAPTION>
1996 1995 1994
---- ---- ----
(DOLLARS IN MILLIONS)
<S> <C> <C> <C>
Cash Paid (Received) During the Year for:
Interest expense..................................................... $674.4 $685.2 $557.8
Income taxes refunded................................................ (11.2) (1.6) (8.5)
Non-Cash Investing and Financing Activities:
Loan foreclosures.................................................... 120.2 146.2 189.3
Loans exchanged for mortgage-backed securities....................... -- 239.7 424.0
Transfer of securities to available for sale......................... -- 17.2 (a) --
Change in unrealized gain on securities available for sale .......... -- 19.2 (27.5)
Transfer of loans to held for sale .................................. 44.9 78.7 1,213.9 (b)
</TABLE>
- - ----------
(a) In November 1995, FASB issued the Special Report. 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 such MBS for a loss of
less than $0.1 million.
(b) During 1994, Cal Fed 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 Cal Fed's program
to improve its capital position, reduce non-performing assets and improve
its operating efficiency.
NOTE 3: SHORT-TERM LIQUID INVESTMENTS
Cal Fed's short-term liquid investments include certificates of deposit,
commercial paper and Federal funds sold. The amount of short-term liquid
investments held by Cal Fed at any point in time is a function of many factors
including liquidity requirements, projected cash requirements and cash flows.
The following table presents Cal Fed's short-term liquid investments at
the dates indicated:
<TABLE>
<CAPTION>
DECEMBER 31, 1996 DECEMBER 31, 1995
------------------------------------------------------ -----------------------------------------------
WEIGHTED AVG. WEIGHTED AVG.
CARRYING WEIGHTED AVG. MATURITY CARRYING WEIGHTED AVG. MATURITY
VALUE RATE (DAYS) VALUE RATE (DAYS)
----- ---- ------ ----- ---- ------
(DOLLARS IN MILLIONS) (DOLLARS IN MILLIONS)
<S> <C> <C> <C> <C> <C> <C>
Federal funds sold........ $69.0 6.08% 2 $70.0 5.80% 2
Certificates of deposit... -- -- -- 4.1 5.19 27
----- -----
$69.0 6.08% $74.1 5.77%
===== =====
</TABLE>
At December 31, 1996 and 1995 accrued interest and dividends receivable
related to short-term liquid investments held to maturity were $0.1 million and
$0.2 million, respectively.
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<PAGE>
NOTE 4: SECURITIES PURCHASED UNDER AGREEMENTS TO RESELL
Securities purchased under agreements to resell are collateralized by
mortgage-backed securities at December 31, 1996 and by U.S. Treasury securities
at December 31, 1995. The following table provides additional information on
the agreements:
<TABLE>
<CAPTION>
DECEMBER 31,
---------------------------------
1996 1995
---- ----
(DOLLARS IN MILLIONS)
<S> <C> <C>
Carrying value of agreements to resell........................ $1,310.1 $1,674.6
Market value of collateral.................................... 1,341.2 1,704.4
Maximum amounts of outstanding agreements to resell
at any month-end............................................ 1,912.9 1,704.2
Average amounts of outstanding agreements to resell
for the year................................................ 1,660.5 1,144.5
Weighted average interest rate for the year................... 5.52% 5.99%
Weighted average interest rate on year-end balances.......... 6.72% 6.01%
Weighted average maturity of outstanding agreements
to resell (days)............................................ 3 11
</TABLE>
At December 31, 1996 and 1995, Cal Fed 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 Cal Fed for the duration of
the agreements. The following table presents Cal Fed's securities purchased
under agreements to resell, by counterparty, at the dates indicated:
<TABLE>
<CAPTION>
DECEMBER 31,
--------------------------
COUNTERPARTY 1996 1995
(DOLLARS IN MILLIONS)
<S> <C> <C>
Lehman Brothers......................... $ 263.0 $ 700.7
Nomura Securities....................... 350.0 500.0
Bear Stearns............................ 209.8 473.9
Paine Webber ........................... 407.3 --
Donaldson, Lufkin and Jenrette.......... 80.0 --
----------- --------------
$1,310.1 $1,674.6
=========== ==============
</TABLE>
Accrued interest related to securities purchased under agreements to
resell at December 31, 1996 and 1995 totaled $1.6 and $2.7 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, 1996 are as follows:
<TABLE>
<CAPTION>
NET
UNREALIZED UNREALIZED UNREALIZED WEIGHTED
HISTORICAL CARRYING HOLDING HOLDING HOLDING MARKET AVERAGE
COST VALUE GAINS LOSSES GAINS (LOSSES) VALUE RATE
---------- -------- ---------- ---------- -------------- ------ --------
(DOLLARS IN MILLIONS)
<S> <C> <C> <C> <C> <C> <C> <C>
U.S. Treasury securities:
Maturing after 1 year
but within 5 years ....... $6.0 $6.0 $ -- $ -- $ -- $6.0 6.13%
==== ==== ===== ===== ====== ====
</TABLE>
F-17
<PAGE>
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 table below presents the activity of securities available for sale for
the periods presented:
<TABLE>
<CAPTION>
YEAR ENDED DECEMBER 31,
-----------------------------------------------------
1996 1995 1994
---- ---- ----
(Dollars in Millions)
<S> <C> <C> <C>
Balance, January 1...................... $ 200.3 $1,731.5 $894.7
Purchases............................... 221.0 202.9 1,519.2
Sales................................... (259.3) (969.4) (670.2)
Transfers............................... -- 17.2 (a) --
Maturities (b).......................... (156.0) (801.1) 22.2
Market value adjustment................. -- 19.2 (34.4)
-------- ------- ---------
Balance, December 31.................... $ 6.0 $200.3 $1,731.5
======== ======= =========
</TABLE>
- - ----------
(a) During 1995, Cal Fed 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) Maturities include amortization of premiums and accretion of discounts.
Accrued interest receivable on securities available for sale at December
31, 1996 and December 31, 1995 totaled $0.1 million and $2.7 million,
respectively.
Proceeds from sales of securities available for sale during the years
ended December 31, 1996, 1995 and 1994 were $261.6 million, $976.3, and $670.4
million, respectively.
Cal Fed 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 Cal Fed's carrying value of securities pledged as
collateral at December 31, 1996 and 1995, respectively.
DECEMBER 31,
---------------------------
1996 1995
----
(Dollars inMillions)
Pledged as collateral for:
SLMA advances............................. $ -- $124.9
Other borrowings.......................... 52.0 58.8
----- ------
$52.0 $183.7
===== ======
F-18
<PAGE>
NOTE 6: SECURITIES HELD TO MATURITY
Cal Fed's securities held to maturity have primarily consisted of MBS. Cal
Fed also had an investment in a guaranteed investment contract which matured in
1995. Cal Fed's portfolio of MBS consists of securities issued by agencies of
the United States, such as FNMA. The investments are purchased or are obtained
by exchanging pools of mortgage loans for the securities ("securitized loans").
Summarized below are securities held to maturity at December 31, 1996 and
1995:
<TABLE>
<CAPTION>
1996 1995
------------------------------------------ ------------------------------------------
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 .................... $ 1,038.2 $ 6.2 $ (3.1) $ 1,041.3 $ 1,192.7 $ 17.9 $ (0.2) $ 1,210.4
Cal Fed AA-rated
mortgage pass-through
securities ............ 623.9 0.9 (2.4) 622.4 802.3 1.3 (5.2) 798.4
Other ................... 301.8 0.4 (23.6) 278.6 371.7 1.5 (20.7) 352.5
---------- ------- ---------- ---------- ---------- ------- ---------- ----------
$ 1,963.9 $ 7.5 $ (29.1) $ 1,942.3 $ 2,366.7 $ 20.7 $ (26.1) $ 2,361.3
========== ======= ========== ========== ========== ======= ========== ==========
</TABLE>
The weighted average interest rates of MBS held to maturity were 6.82% and
6.93% at December 31, 1996 and 1995, respectively. Accrued interest receivable
related to MBS held to maturity outstanding at December 31, 1996 and 1995
totaled $11.2 million and $13.8 million, respectively. Cal Fed utilizes MBS as
collateral for various borrowings. At December 31, 1996 and 1995, $1,374.1 and
$1,316.3 million, respectively, of MBS, were pledged as collateral for various
borrowings as follows:
<TABLE>
DECEMBER 31,
-------------------------
1996 1995
---- ----
(DOLLARS IN MILLIONS)
<S> <C> <C>
Pledged as collateral for:
Advances from FHLB........................... $ 374.6 $255.9
Repurchase agreements........................ 975.7 908.9
SLMA advances................................ -- 108.6
Other obligations............................ 23.8 42.9
---------- ---------
$1,374.1 $1,316.3
========== =========
</TABLE>
At December 31, 1996, Cal Fed had $924.9 million of securitized loans with
some form of recourse to Cal Fed. In the unanticipated event the securitized
loans are sold, purchasers would have varying forms of recourse to Cal Fed. The
recourse provisions subject Cal Fed to varying degrees of liability in the
event of loss. Cal Fed 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, 1996:
<TABLE>
<CAPTION>
ORIGINAL ORIGINAL
LOAN TO VALUE LOAN TO VALUE
SECURITIZED LOANS ORIGINAL RATIO 80% RATIO 80%
WITH RECOURSE LOAN TO VALUE WITH WITHOUT
COLLATERALIZED BY RATIO = 80% PMI (A) PMI (A) TOTAL
----------------- ------------- ------------- -------------- -----
(DOLLARS IN MILLIONS)
<S> <C> <C> <C> <C>
Residential 1-4 units................. $537.5 $44.0 $ 8.9 $590.4
Multi-family property................. 331.8 -- 2.7 334.5
------ ----- ----- ------
$869.3 $44.0 $11.6 $924.9
====== ===== ===== ======
</TABLE>
- - ----------
(a) Private mortgage insurance (PMI) provides limited insurance protection to
Cal Fed in the event of default.
F-19
<PAGE>
Cal Fed periodically reviews the credit quality of its portfolio of MBS.
In the case of securitized loans with recourse provisions, Cal Fed makes an
assessment of the credit quality of the underlying loans. See Note 1 Summary of
Significant Accounting Policies for a discussion of Cal Fed's loan monitoring
policies.
In November 1995, the FASB issued the 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 such 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;
Cal Fed originates certain fixed rate residential 1-4 loans for sale.
At December 31, 1996 and 1995, the historical cost bases of loans
receivable held for sale were $8.7 and $13.6 million, respectively. At December
31, 1996 and 1995, the market value of loans receivable held for sale were $8.7
million and $13.8 million, respectively. Market values, at December 31, 1996
and 1995, were based upon quotes of similar or identical loans.
Gross unrealized gains on loans receivable held for sale were less than
$0.1 million and $0.2 million at December 31, 1996 and 1995, respectively.
Gross unrealized losses on loans receivable held for sale were less than $0.1
million at both December 31, 1996 and 1995. Proceeds from sales of loans
receivable held for sale were $281.1 million, $183.2 million, and $1,099.4
million for the years ended December 31, 1996, 1995 and 1994, respectively.
The following table summarizes the gains and losses recorded for the
periods presented for loans receivable:
<TABLE>
<CAPTION>
DECEMBER 31,
--------------------------------
1996 1995 1994
------ ------ ------
(DOLLARS IN MILLIONS)
<S> <C> <C> <C>
Realized gains from sales of loans receivable......... $1.4 $0.3 $1.0
Realized losses from sales of loans receivable........ (0.7) (0.6) (0.5)
----- ----- -----
Net gains (losses) ................................... $0.7 $(0.3) $ 0.5
===== ===== =====
</TABLE>
F-20
<PAGE>
NOTE 8: LOANS RECEIVABLE HELD FOR INVESTMENT
Loans receivable held for investment consist of the following:
<TABLE>
<CAPTION>
DECEMBER 31,
-------------------------------
1996 1995
---- ----
(DOLLARS IN MILLIONS)
<S> <C> <C>
Loans secured by real estate:
Residential 1-4............................................................. $ 8,253.1 $ 7,277.6
Equity...................................................................... 57.4 64.1
----------- ---------
8,310.5 7,341.7
Income property:
Multi-family............................................................. 1,249.4 1,346.2
Shopping centers......................................................... 69.1 81.8
Office buildings......................................................... 145.6 168.9
Other income property.................................................... 272.5 291.3
----------- ---------
Total income property.................................................. 1,736.6 1,888.2
----------- ---------
Total loans secured by real estate............................ 10,047.1 9,229.9
Consumer:
Mobile homes............................................................. 53.0 66.3
Vehicles................................................................. 2.1 21.5
Equity creditline........................................................ 117.4 137.8
Unsecured................................................................ 14.1 14.6
Loans secured by deposits................................................ 8.1 9.4
----------- ---------
Total consumer loans..................................................... 194.7 249.6
----------- ---------
Business Banking ............................................................ 16.9 --
----------- ---------
10,258.7 9,479.5
Less:
Undisbursed loan funds................................................... (0.3) 0.1
Deferred loan (costs) fees............................................... (26.2) (13.9)
Allowance for loan losses................................................ 173.1 181.0
Unearned interest on equity/consumer loans............................... -- 1.3
Discount on acquired loans............................................... 4.0 7.4
----------- ---------
Total loans receivable........................................ 10,108.1 9,303.6
Less: Loans held for sale (see Note 7)........................ 8.7 13.6
----------- ---------
Loans receivable held for investment.......................... $10,099.4 $9,290.0
=========== =========
</TABLE>
Certain of Cal Fed'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, 1996 and 1995, Cal Fed's loan portfolio included $4.8
billion and $4.7 billion, respectively, of loans with the potential to
negatively amortize, of which $0.9 billion and $1.4 billion of loans have some
amount of negative amortization.
Accrued interest receivable related to loans receivable including loans
held for sale at December 31, 1996 and 1995 totaled $61.0 million and $60.1
million, respectively.
F-21
<PAGE>
Cal Fed 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, 1996 and 1995:
DECEMBER 31,
-------------------------
1996 1995
---- ----
(DOLLARS IN MILLIONS)
Pledged as collateral for:
Advances from FHLB.................. $3,895.3 $3,322.1
Letters of credit from FHLB......... 23.3 52.3
Interest rate swap agreements....... -- --
Capital lease obligations........... 6.6 8.7
-------- --------
$3,925.2 $3,383.1
======== ========
Cal Fed'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 (b)
------------------ ------------------ ------------------ ------------------
DECEMBER 31, DECEMBER 31, DECEMBER 31, DECEMBER 31,
------------------ ------------------ ------------------ ------------------
State 1996 1995 1996 1995 1996 1995 1996 1995
- - ----- ---- ---- ---- ---- ---- ---- ---- ----
(Dollars in Millions)
<S> <C> <C> <C> <C> <C> <C> <C> <C>
California............. $7,146.0 $6,288.9 $46.6 $49.5 $1,155.0 $1,234.6 $467.0 $512.7
Florida................ 389.6 456.4 8.3 11.3 26.0 31.5 9.6 14.8
Nevada................. 201.0 183.4 2.4 2.9 36.0 41.7 4.8 6.3
Georgia................ 67.5 79.6 0.1 0.1 7.6 7.9 1.9 2.0
New York............... 32.2 34.4 -- -- 0.1 0.1 -- --
Arizona................ 31.4 16.1 -- 0.1 14.8 15.3 0.7 1.6
New Jersey............. 33.9 32.5 -- -- -- -- -- --
Texas.................. 46.3 24.8 -- -- 1.6 2.5 -- 0.6
Connecticut............ 30.1 21.0 -- -- -- -- -- --
Washington............. 32.6 13.5 -- -- 4.8 4.9 -- --
Colorado............... 35.3 16.4 -- -- -- -- 1.4 1.6
Illinois............... 23.5 11.3 -- 0.1 0.9 1.1 -- --
Other (a).............. 183.7 99.3 -- 0.1 2.6 6.6 1.8 2.4
-------- -------- ----- ----- -------- -------- ------ ------
$8,253.1 $7,277.6 $57.4 $64.1 $1,249.4 $1,346.2 $487.2 $542.0
======== ======== ===== ===== ======== ======== ====== ======
</TABLE>
- - ----------
(a) Includes states with aggregate gross real estate loans that are less than
$23 million.
(b) Includes shopping centers, office buildings and other income property.
The majority of Cal Fed's California real estate loans are secured by
property located in Los Angeles, Orange, and San Diego counties.
At December 31, 1996, the largest amount of loans to a single borrower
totaled $38.5 million. The collateral for the loan is a 225,000-square foot
office building occupied entirely by certain of Cal Fed's operating and
administrative departments and subject to a lease for the life of the loan.
Impaired and Non-Performing Loans
Cal Fed identifies impaired loans through its loan monitoring process. See
Note 1 Summary of Significant Accounting Policies for further information about
Cal Fed's loan monitoring process. Cal Fed stratifies its review procedures by
loans that are reviewed on an individual basis, and those that are treated as
homogenous pools. Loans that are considered to be homogenous are evaluated on
the basis of their payment record and/or on a pool basis. All homogenous loans
that are 90
F-22
<PAGE>
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.
Loans that are individually monitored are determined to be impaired if it
is determined that it is probable that Cal Fed will be unable to collect the
contractual amount of principal and interest owed to Cal Fed. Cal Fed's policy
allows for a loan to be designated as impaired even if the borrower has
currently fulfilled his repayment obligations. Loans are normally designated as
impaired if delinquent 90 days or more, in foreclosure or if the borrower has
filed for bankruptcy. 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.
Cal Fed has identified two types of non-performing loans within its
portfolio: non-accrual loans and restructured loans. The following table
summarizes Cal Fed's gross non-performing loans by property type at the dates
indicated:
<TABLE>
<CAPTION>
DECEMBER 31,
---------------------------------------------------------------------------------------------
1996 1995
-------------------------------------------- ----------------------------------------
NON-ACCRUAL RESTRUCTURED TOTAL NON-ACCRUAL RESTRUCTURED TOTAL
----------- ------------ ----- ----------- ------------ -----
(DOLLARS IN MILLIONS)
<S> <C> <C> <C> <C> <C> <C>
Residential 1-4............... $ 62.1 $1.9 $64.0 $ 99.6 $3.0 $102.6
Income property:
Multi-family................ 50.5 -- 50.5 86.3 0.3 86.6
Shopping centers............ 3.4 -- 3.4 1.3 -- 1.3
Office buildings............ 5.7 -- 5.7 8.8 -- 8.8
Hotels/motels............... -- -- -- -- -- --
Other income property....... 6.0 1.3 7.3 6.8 -- 6.8
------- ----- ------- ------- ----- -------
Total income property.... 65.6 1.3 66.9 103.2 0.3 103.5
------- ----- ------- ------- ----- -------
Consumer...................... 1.9 -- 1.9 3.5 -- 3.5
------- ----- ------- ------- ----- -------
$129.6 $3.2 $132.8 $206.3 $3.3 $209.6
======= ===== ======= ======= ===== =======
Interest not recognized....... $ 10.3 $-- $ 10.3 $ 10.6 $-- $ 10.6
======= ===== ======= ======= ===== =======
</TABLE>
For each of the years ended December 31, 1996 and 1995, interest income of
less than $0.1 million was recorded on restructured loans. This was less than
$0.1 million lower than what would have been recorded if the restructured loans
had been performing in accordance with their original contractual terms.
The following table summarizes Cal Fed's concentration of gross
non-accrual and restructured loans by state as of the dates indicated:
<TABLE>
<CAPTION>
DECEMBER 31,
----------------------------------------------------------------------------------------------------
NON-ACCRUAL RESTRUCTURED
---------------------------------------------- ---------------------------------------------
STATE 1996 1995 1996 1995
----- ------------------- ------------------- ------------------ -----------------
(DOLLARS IN MILLIONS)
<S> <C> <C> <C> <C> <C> <C> <C> <C>
California............ 117.5 90.6% $188.7 91.5% $3.2 100.0% $3.1 94.0%
Florida............... 6.4 4.9 8.5 4.1 -- -- -- --
Nevada................ 2.1 1.6 3.5 1.7 -- -- 0.2 6.0
Georgia............... 0.4 0.4 1.2 0.6 -- -- -- --
Texas................. -- -- 1.0 0.5 -- -- -- --
Arizona............... -- -- 0.4 0.2 -- -- -- --
Other................. 3.2 2.5 3.0 1.4 -- -- -- --
------ ----- ------ ----- ---- ----- ------ -----
$129.6 100.0% $206.3 100.0% $3.2 100.0% $ 3.3 100.0%
====== ===== ====== ===== ==== ===== ====== =====
</TABLE>
F-23
<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>
DECEMBER 31, 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......................................... $50.4 $ (6.7) $ 43.7
Commercial real estate:
Office buildings.................................. 5.7 (2.0) 3.7
Shopping centers.................................. 3.4 (0.2) 3.2
Industrial........................................ 5.1 (0.4) 4.7
Other............................................. 0.9 (0.2) 0.7
--------- ----------- --------
Total commercial real estate......................... 15.1 (2.8) 12.3
--------- ----------- --------
Total impaired loans with specific allowances.......... 65.5 (9.5) 56.0
--------- ----------- --------
Impaired Loans without Specific Allowances:
Residential 1-4...................................... 1.9 -- 1.9
Commercial real estate............................... 1.4 -- 1.4
--------- ----------- --------
Total impaired loans without specific allowances....... 3.3 -- 3.3
--------- ----------- --------
Total impaired loans measured by individual review..... 68.8 (9.5) 59.3
--------- ----------- --------
Impairment Measured on a Pool Basis:
Residential 1-4...................................... 62.1 -- 62.1
Consumer............................................. 1.9 -- 1.9
--------- ----------- --------
64.0 -- 64.0
--------- ----------- --------
Total impaired loans................................... $132.8 $(9.5) $123.3
========= =========== ========
</TABLE>
Cal Fed has designated all impaired loans at December 31, 1996 as
non-accrual or as a 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 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, 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 December 31, 1996, Cal Fed had designated $25.7
million of loans as impaired that were performing in accordance with their
contractual terms. 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 was $173.8 million for the year ended December 31, 1996. During
the year ended December 31, 1996, Cal Fed recognized $2.3 million of interest
income on impaired loans.
Allowance for Loan Losses
Cal Fed'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, 1996 DECEMBER 31, 1995
-------------------------- -----------------------------------------------------
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 $ -- $ 45.0 $ 45.0
Income property......... 11.7 96.4 108.1 24.3 90.0 114.3
----------- ----------- ------- ----------- ----------- -------
Total real estate.. 11.7 141.4 153.1 24.3 135.0 159.3
Consumer.................. -- 10.0 10.0 -- 11.7 11.7
Unallocated............... -- 10.0 10.0 -- 10.0 10.0
----------- ----------- ------- ----------- ----------- -------
Total.............. $11.7 $161.4 $173.1 $24.3 $156.7 $181.0
=========== =========== ======= =========== =========== ========
</TABLE>
F-24
<PAGE>
Activity in the allowance for loan losses for the years ended December 31,
1996, 1995 and 1994 is summarized as follows:
<TABLE>
<CAPTION>
1996 1995 1994
------ ------ ------
(DOLLARS IN MILLIONS)
<S> <C> <C> <C>
Balance, January 1,.................................................... $181.0 $211.6 $254.3
Provision for losses................................................... 41.3 31.8 74.9
Increase in general allowances from acquisitions ...................... 0.6 -- --
Charge-offs:
Real estate:
Residential 1-4................................................... (28.1) (24.8) (19.5)
Income property:
Multi-family.................................................... (18.4) (30.2) (56.1)
Shopping centers................................................ -- (4.9) (0.9)
Office buildings................................................ (2.3) (5.5) (15.2)
Hotels/motels................................................... -- -- (11.6)
Other income property........................................... (0.6) (1.6) (6.2)
------ ------ ------
Total income property........................................ (21.3) (42.2) (90.0)
------ ------ ------
Total real estate.................................................... (49.4) (67.0) (109.5)
Commercial banking................................................... -- -- (6.8)
Consumer............................................................. (8.0) (5.4) (7.0)
------ ------ ------
Total Charge-offs................................................. (57.4) ( 72.4) (123.3)
------ ------ ------
Recoveries:
Real estate:
Residential 1-4................................................... 4.2 3.1 0.9
Income property:
Multi-family.................................................... 1.7 5.2 0.9
Shopping centers................................................ -- 0.1 --
Office buildings................................................ 0.1 0.4 0.3
Hotels/motels................................................... -- -- --
Other income property........................................... 0.1 -- 0.4
------ ------ ------
Total income property........................................ 1.9 5.7 1.6
------ ------ ------
Total real estate.................................................... 6.1 8.8 2.5
Commercial banking................................................... -- -- 2.1
Consumer............................................................. 1.5 1.2 1.1
------ ------ ------
Total recoveries.................................................. 7.6 10.0 5.7
------ ------ ------
Net charge-offs........................................................ (49.8) (62.4) (117.6)
------ ------ ------
Balance, December 31,.................................................. $173.1 $181.0 $211.6
====== ====== ======
</TABLE>
During the normal course of business, Cal Fed 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. Cal Fed evaluates the credit risk of loans sold
with recourse in the same manner as it reviews its own portfolio of loans. Cal
Fed 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.
A summary of the outstanding balance of loans sold with recourse at
December 31, 1996 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%......................................... $103.1 $232.8 $335.9
Loans with original loan to value ratio greater than 80%
With PMI............................................. 1.6 -- 1.6
Without PMI.......................................... 22.7 25.9 48.6
----------- -------- -------
$127.4 $258.7 $386.1
----------- -------- -------
</TABLE>
F-25
<PAGE>
Cal Fed has obtained credit insurance for $333.1 million of residential
loans sold with recourse not included in the amounts above. The amount of Cal
Fed's liability on these loans was limited to $2.4 million at December 31,
1996. The insurance was obtained to limit Cal Fed's risk of loss on these
loans. The fair value of Cal Fed's potential obligation for recourse or
guarantees on loans sold with recourse at December 31, 1996 and 1995 was
determined to approximate the value of the liability established by Cal Fed for
the potential cost of such obligations, which totaled $9.7 million and $11.5
million at December 31, 1996 and December 31, 1995, respectively.
At December 31, 1996, $3.5 billion of loans owned by others were serviced
by Cal Fed (virtually all of which were originated by Cal Fed) compared to $3.8
billion and $4.5 billion at December 31, 1995 and 1994, respectively.
Loan servicing fees, which are included as a component of "Fee income" on
the Consolidated Statements of Operations, totaled $10.9 million, $12.4
million, and $14.6 million for the years ended December 31, 1996, 1995 and
1994, respectively.
Fair Value of Loans Receivable
The fair value information presented below represents Cal Fed'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, 1996 DECEMBER 31, 1995
--------------------------------- --------------------------------
BOOK VALUE (A) FAIR VALUE BOOK VALUE (A) FAIR VALUE
-------------- ------------ -------------- ----------
(DOLLARS IN MILLIONS)
<S> <C> <C> <C> <C>
Residential 1-4 loans:
Fixed......................... $ 1,511.3 $ 1,524.7 $ 994.1 $ 996.6
Adjustable.................... 6,755.7 6,863.8 6,295.3 6,293.1
-------------- ------------ -------------- ----------
Total residential 1-4
loans.................... 8,267.0 8,388.5 7,289.4 7,289.7
Multi-family loans.............. 1,181.4 1,143.6 1,269.7 1,230.6
Commercial real estate loans.... 449.2 439.6 494.3 485.0
Consumer loans.................. 184.9 190.8 236.6 240.8
Business banking loans ......... 16.9 17.1 -- --
-------------- ------------ -------------- ----------
Total loans held for
investment............. $10,099.4 $10,179.6 $9,290.0 $9,246.1
============== ============ ============== ==========
</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
Cal Fed'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:
DECEMBER 31,
---------------------
1996 1995
------ ------
(DOLLARS IN MILLIONS)
Residential 1-4......................... $11.3 $47.3
Multi-family............................ 1.2 1.5
Office buildings........................ 0.1 0.3
Hotels/motels........................... -- --
Other income property................... 0.3 0.4
------ ------
$12.9 $49.5
======= ======
F-26
<PAGE>
The following table presents Cal Fed's real estate held for sale by state
and property type at December 31, 1996:
<TABLE>
<CAPTION>
RESIDENTIAL MULTI- OFFICE COMMERCIAL/
1-4 UNITS FAMILY BUILDINGS INDUSTRIAL TOTAL
------------ ------ --------- ----------- -------
(DOLLARS IN MILLIONS)
<S> <C> <C> <C> <C> <C>
California................. $10.8 $1.2 $0.1 $0.3 $12.4
Florida.................... 0.3 -- -- -- 0.3
New York................... 0.2 -- -- -- 0.2
------ ---- ------ ------- ------
Total...................... $11.3 $1.2 $0.1 $0.3 $12.9
====== ==== ====== ======= ======
REO........................ $ 9.8 $1.2 $0.1 $0.3 $11.4
REI........................ 1.5 -- -- -- 1.5
------ ---- ---- ------- ------
Total...................... $11.3 $1.2 $0.1 $0.3 $12.9
====== ==== ==== ======= ======
</TABLE>
The operating results of real estate held for sale are summarized below:
<TABLE>
<CAPTION>
YEAR ENDED DECEMBER 31,
------------------------------------
1996 1995 1994
------ ------ --------
(DOLLARS IN MILLIONS)
<S> <C> <C> <C>
(Losses) gains from the sale of real estate and other
net operating income................................. $(3.5) $(15.4) $ 33.8
(Provision for) recoveries of losses on real estate.... (5.0) 7.4 (79.7)
------ ------ --------
$(8.5) $ (8.0) $(45.9)
====== ====== ========
</TABLE>
The following table presents the activity in the allowance for losses on
real estate held for sale:
YEAR ENDED DECEMBER 31,
-------------------------------------
1996 1995 1994
------ ------ ------
(DOLLARS IN MILLIONS)
Balance, January 1 .................. $39.1 $95.7 $ 121.6
Provision for (recoveries of) losses. 5.0 (7.4) 79.7
Net charge-offs...................... (33.2) (49.2) (105.6)
------ ------ ------
Balance, December 31................. $10.9 $39.1 $ 95.7
===== ===== ========
F-27
<PAGE>
NOTE 10: FEDERAL HOME LOAN BANK STOCK
Cal Fed's investment in Federal Home Loan Bank of San Francisco ("FHLB")
stock at December 31, 1996 and 1995 was $166.8 million and $135.7 million,
respectively. The FHLB provides a central credit facility for member
institutions. As a member of the FHLB system, Cal Fed 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. Cal Fed was in compliance with
this requirement at December 31, 1996. The fair value of Cal Fed's FHLB stock
approximates book value due to Cal Fed's ability to redeem such stock with the
FHLB at par value.
NOTE 11: PREMISES AND EQUIPMENT
Premises and equipment consists of the following:
DECEMBER 31,
----------------------------
1996 1995
(DOLLARS IN MILLIONS)
Land................................... $ 11.6 $ 12.0
Buildings.............................. 96.5 103.8
Furniture and equipment................ 94.7 102.6
------- -------
202.8 218.4
Less accumulated depreciation.......... (143.9) (147.2)
------ -------
$ 58.9 $ 71.2
====== =======
Cal Fed has operating lease commitments on certain premises and equipment.
Lease expense, net of sublease income, totaled $25.2 million, $25.5 million,
and $30.7 million for the years ended December 31, 1996, 1995 and 1994,
respectively. Sublease income totaled $9.7 million, $9.8 million, and $10.3
million for the years ended December 31, 1996, 1995 and 1994, respectively.
Annual minimum lease commitments at the dates presented were:
DECEMBER 31,
------------------------
1996 1995
(DOLLARS IN MILLIONS)
Within one year........................ $ 21.9 $ 22.3
Within two years....................... 21.2 21.7
Within three years..................... 23.0 20.2
Within four years...................... 22.1 23.4
Within five years...................... 23.4 22.9
Thereafter............................. 140.6 160.2
------- -------
$252.2 $270.7
======= =======
NOTE 12: ACCELERATED DISPOSITION OF ASSETS
During 1994, Cal Fed 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 Cal Fed's 1994
program to raise capital, reduce non-performing assets and improve operating
efficiency. The 1994 Bulk Sales were designed to reduce Cal Fed's
non-performing assets and reduce Cal Fed's exposure to certain performing loans
with higher risk profiles than Cal Fed wished to retain in its portfolio. In
selecting performing loans for the 1994 Bulk Sales, Cal Fed 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. Cal Fed recorded a
$274.8 million loss from the 1994 Bulk Sales. Cal Fed recorded $60.4 million of
charge-offs, relating to previously established specific allowances, on loans
receivable included in the 1994 Bulk Sales.
F-28
<PAGE>
NOTE 13: DEPOSITS
Cal Fed obtains deposits primarily through a network of full service
branches located in California and Nevada. Deposits obtained by Cal Fed are
insured by the SAIF of the FDIC up to a maximum of $100,000 for each depositor.
A summary of deposit balances and weighted average rates at the dates
indicated follows:
<TABLE>
<CAPTION>
DECEMBER 31, 1996 DECEMBER 31, 1995
----------------------- -----------------------
BALANCE RATE BALANCE RATE
--------- ------ ----------- ------
(DOLLARS IN MILLIONS)
<S> <C> <C> <C> <C>
Passbook accounts ...................... $ 424.1 2.21% $509.7 2.22%
Money market accounts .................. 2,072.4 2.94 2,008.4 2.65
Non-interest bearing commercial......... 324.3 -- 216.9 --
-------- --------
2,820.8 2,735.0
Certificate accounts:
2.00% to 2.99%........................ 10.6 2.77 16.5 2.86
3.00% to 3.99% ....................... 3.9 3.12 22.5 3.34
4.00% to 4.99% ....................... 146.0 4.73 208.2 4.61
5.00% to 5.99% ....................... 5,123.1 5.53 2,545.3 5.49
6.00% to 6.99% ....................... 538.3 6.35 3,630.4 6.26
7.00% to 7.99% ....................... 274.5 7.08 293.0 7.13
8.00% to 8.99% ....................... 1.1 8.12 23.3 8.45
9.00% to 9.99% ....................... -- -- 2.5 9.29
-------- --------
Total certificate accounts ........ 6,097.5 5.65 6,741.7 5.95
-------- --------
$8,918.3 4.64% $9,476.7 4.87%
======== ========
</TABLE>
Deposit maturities are summarized as follows at the dates indicated:
DECEMBER 31,
-------------------------
1996 1995
---- ----
(DOLLARS IN MILLIONS)
Maturing within one year............................ $6,522.2 $8,216.6
Maturing after one year and within two years........ 1,890.5 946.6
Maturing after two years and within three years..... 360.0 196.2
Maturing after three years and within four years.... 68.0 53.6
Maturing after four years and within five years..... 63.4 26.6
Thereafter.......................................... 14.2 37.1
-------- --------
$8,918.3 $9,476.7
======== ========
Jumbo certificates and other deposit accounts with balances of $100,000 or
greater included in the above table had the following remaining contractual
maturities:
AT DECEMBER 31,
---------------------------
1996 1995
---- ----
(DOLLARS IN MILLIONS)
3 months or less .................................. $ 862.3 $789.5
Over 3 months but within 6 months.................. 255.1 247.2
Over 6 months but within 12 months................. 458.9 369.9
Over 12 months..................................... 67.4 112.2
-------- --------
$1,643.7 $1,518.8
======== ========
At December 31, 1996, Cal Fed had $254.8 million of brokered deposits. At
December 31, 1995, Cal Fed had $273.8 million of brokered deposits. Accrued
interest payable on deposits at December 31, 1996 and 1995 was $2.8 million and
$10.8 million, respectively, which is included in "Interest payable" on the
Consolidated Statements of Financial Condition.
F-29
<PAGE>
On August 4, 1994, Cal Fed 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. Cal Fed
received a 4.10% deposit premium from the sale which contributed to a net gain
of $135.0 million recorded from the sale.
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. The
$12.0 million gain is included with "Other income" in the Consolidated
Statements of Operations.
A summary of interest expense by deposit type is summarized in the table
below for the years indicated:
AT DECEMBER 31,
-------------------------------
1996 1995 1994
---- ---- ----
(DOLLARS IN MILLIONS)
Passbook accounts......................... $ 9.6 $ 11.1 $ 14.9
Money market and NOW accounts............. 60.4 55.3 60.2
6-Month certificates...................... 29.9 26.2 27.8
9-Month to 1-Year certificates............ 103.0 133.5 113.5
Other certificates........................ 227.7 215.5 174.4
------ ------ ------
$430.6 $441.6 $390.8
====== ====== ======
Savings deposit fees, which are included as a component of "Fee income" in
the Consolidated Statements of Operations, totaled $30.5 million, $25.4
million, and $25.2 million for the years ended December 31, 1996, 1995 and
1994, respectively.
NOTE 14: ADVANCES FROM FEDERAL HOME LOAN BANK
FHLB advances totaling $3,111.0 million at December 31, 1996 and $2,671.0
million at December 31, 1995, principally adjustable rate, fixed term, with
interest rates ranging from 5.50% to 9.71%, are secured by MBS and certain
mortgage loans aggregating $4.3 billion and $3.6 billion at December 31, 1996
and 1995, 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 at both December 31, 1996
and 1995. 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, 1996 and 1995 follows:
1996 1995
---- ----
AMOUNT RATE AMOUNT RATE
-------- ---- -------- ----
(DOLLARS IN MILLIONS)
Maturing in one year................ $3,100.0 5.66% $ 880.0 6.16%
Maturing in two years............... -- -- 1,780.0 5.98
Maturing in three years............. 11.0 9.71 -- --
Maturing in four years.............. -- -- 11.0 9.71
Maturing in five years.............. -- -- -- --
-------- --------
$3,111.0 5.67% $2,671.0 6.06%
======== ========
At December 31, 1996, Cal Fed had credit availability with the FHLB which
allows borrowings up to 35% of Cal Fed'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 Cal Fed's FHLB advances, utilized as a
funding source for the sale of the Southeast Division, matured and $0.3 billion
matured in January 1996. Those borrowings bore an interest rate based upon the
one 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 interest rate swap agreement
was established such that the index which determines the interest that Cal Fed
receives is identical to the index that Cal Fed pays relative to the FHLB
Advances. The notional amount of the swaps totaled $1.5 billion at December 31,
1995 and $1.8 billion at December 31, 1996 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.
F-30
<PAGE>
NOTE 15: SECURITIES SOLD UNDER AGREEMENTS TO REPURCHASE
The securities sold under agreements to repurchase ("reverse repurchase
agreements") were collateralized by MBS at both December 31, 1996 and 1995. The
following table provides additional information on the agreements:
1996 1995
---- ----
(DOLLARS IN MILLIONS)
Carrying value of agreements to repurchase.............. $ 978.4 $ 857.3
Carrying value of collateral............................ 975.7 908.9
Market value of collateral.............................. 977.8 907.5
Maximum amounts of outstanding agreements
at any month-end...................................... 1,005.4 1,336.8
Average amounts of outstanding agreements............... 1,042.7 1,098.9
Weighted average interest rate for the year............. 5.40% 5.91%
Weighted average interest on year end balances.......... 6.83% 5.56%
Weighted average maturity of outstanding agreements
(days)................................................ 109 148
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 Cal Fed. The following table presents reverse
repurchase agreements by counterparty:
COUNTERPARTY DECEMBER 31, 1996 DECEMBER 31, 1995
------------ ----------------- -----------------
(DOLLARS IN MILLIONS)
Lehman Brothers...................... $461.3 $780.9
Bear Stearns......................... 109.8 76.4
Paine Webber......................... 407.3 --
------ ------
$978.4 $857.3
====== ======
Accrued interest related to reverse repurchase agreements at December 31,
1996 and 1995 totaled $1.8 million and $1.2 million, respectively.
NOTE 16: STUDENT LOAN MARKETING ASSOCIATION ADVANCES
At December 31, 1995, the SLMA Advance totaled $200.0 million 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%. The SLMA Advance outstanding at December 31, 1995
matured on September 18, 1996.
Accrued interest related to the SLMA Advance at December 31, 1995 totaled
$0.4 million.
NOTE 17: SUBORDINATED DEBENTURES
Cal Fed'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. Cal Fed 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, Cal Fed issued $13.6
million of 10.0% unsecured subordinated debentures due 2003. Cal Fed
repurchased $0.6 million and $8.7 million of these debentures during 1996 and
1995, respectively, at no material gain or loss, leaving a remaining balance
outstanding at December 31, 1996 of $4.3 million.
F-31
<PAGE>
Convertible Subordinated Debentures. The debentures were issued in 1986 by
CalFed Inc., Cal Fed'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 Cal Fed. 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 Bancorp 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
1996 1995 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..................... 4.3 4.9 Jan. 3, 2003 10.00
Convertible Subordinated Debentures........ 2.7 2.7 Feb. 20, 2001 6.50
----- -----
$57.0 $57.6
===== =====
</TABLE>
Accrued interest related to subordinated debentures at December 31, 1996
and 1995 totaled $0.5 million and $0.4 million, respectively.
NOTE 18: INTEREST EXPENSE ON BORROWINGS
Interest expense on borrowings is comprised of the following for the years
indicated:
<TABLE>
<CAPTION>
AT DECEMBER 31,
-------------------------------
1996 1995 1994
---- ---- ----
(DOLLARS IN MILLIONS)
<S> <C> <C> <C>
Securities sold under agreements to repurchase (short-term)..... $ 56.3 $ 64.9 $ 68.5
FHLB advances (short-term)...................................... 20.2 14.7 7.4
------ ------ ------
Interest expense on short-term borrowings..................... 76.5 79.6 75.9
------ ------ ------
FHLB advances (long-term)....................................... 145.4 139.4 76.2
Convertible subordinated debentures............................. 0.2 0.2 0.2
Subordinated debentures......................................... 0.4 0.7 1.4
SLMA advances (long-term)....................................... 8.2 29.2 16.5
Other........................................................... 5.4 5.4 5.5
------ ------ ------
Interest expense on long-term borrowings...................... 159.6 174.9 99.8
------ ------ ------
Total Interest Expense on Borrowings............................ $236.1 $254.5 $175.7
====== ====== ======
</TABLE>
NOTE 19: DERIVATIVE FINANCIAL INSTRUMENTS
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.
The primary focus of Cal Fed's asset/liability management program is to
measure and monitor the sensitivity of net interest income under varying
interest rate scenarios. On a quarterly basis, Cal Fed 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, 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.
F-32
<PAGE>
The following tables present Cal Fed's interest rate exchange agreements
which were designated as hedges at December 31, 1996 and December 31, 1995:
<TABLE>
<CAPTION>
DECEMBER 31, 1996
-------------------------------------------------------------------------------------------------
NOTIONAL WEIGHTED WEIGHTED
AMOUNT AVERAGE YIELD AVERAGE YIELD DESCRIPTION OF
TYPE OF INTEREST RATE (DOLLARS IN MONTHS TO DUE TO PAYABLE BY ASSET OR
EXCHANGE AGREEMENT MILLIONS) MATURITY CAL FED CAL FED LIABILITY HEDGED
------------------ --------- -------- ------- ------- ----------------
<S> <C> <C> <C> <C> <C>
Interest rate swap............. $ 370.0 2 5.48% 5.60% FHLB Advances
Interest rate swap............. 300.0 3 5.57 5.60 FHLB Advances
Interest rate swap............. 415.0 4 5.49 5.61 FHLB Advances
Interest rate swap............. 290.0 5 5.46 5.63 FHLB Advances
Interest rate swap............. 105.0 6 5.47 5.56 FHLB Advances
Interest rate swap............. 320.0 7 5.49 5.63 FHLB Advances
Interest rate swap............. 300.0 11 6.08 5.56 FHLB Advances
---------
Total..................... $2,100.0
========
</TABLE>
<TABLE>
<CAPTION>
DECEMBER 31, 1995
-------------------------------------------------------------------------------------------------
NOTIONAL WEIGHTED WEIGHTED
AMOUNT AVERAGE YIELD AVERAGE YIELD DESCRIPTION OF
TYPE OF INTEREST RATE (DOLLARS IN MONTHS TO DUE TO PAYABLE BY ASSET OR
EXCHANGE AGREEMENT MILLIONS) MATURITY CAL FED CAL FED LIABILITY HEDGED
------------------ --------- -------- ------- ------- ----------------
<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.
The estimated fair value of swaps designated as hedges at December
31, 1996 and 1995 were gains of $11.1 million and $7.1 million,
respectively.
At December 31, 1995, Cal Fed 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 (three month LIBOR) in exchange for interest receivable
at a fixed rate. On October 9, 1996 the index amortizing swap was sold.
Cal Fed recorded a gain of $1.2 million from the sale of the index
amortizing swap.
At December 31, 1996 and 1995, Cal Fed was also a party to an
interest rate floor contract maturing September 1998. In addition, Cal
Fed was a party to an interest rate floor contract that matured in June
1995. Cal Fed paid the counterparties premiums in exchange for cash
payments in the event that a specified index (e.g., 5-year CMT, 1-year
CMT, etc.) falls below the strike price. At December 31, 1996, 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 5.50%. At
December 31, 1995, the notional amount of the interest rate floors was
$100.0 million, the weighted average strike price was 3.38% and the
monthly floating rate was 5.29%. There was no unamortized premium on the
interest rate floors at December 31, 1996 or 1995. At December 31, 1996
the floating rate exceeded the strike price by 2.12%. At December 31,
1995 the floating rate exceeded the strike price by an average of 1.91%.
Cal Fed 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, Cal Fed would
F-33
<PAGE>
be at risk for the amount of the net interest receivable due from the
counterparty. At December 31, 1996, Cal Fed was at risk for $9.6 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>
AT DECEMBER 31,
----------------------------------------
1996 1995 1994
---- ---- ----
(DOLLARS IN MILLIONS)
<S> <C> <C> <C>
Current Tax Expense (Benefit):
Federal............................................... $(43.7) $ -- $ --
State................................................. 20.1 0.1 --
------ ------ -------
(23.6) 0.1 --
------ ------ -------
Deferred Tax Expense (Benefit):
Federal............................................... 64.9 (31.4) (49.0)
State................................................. 15.3 (9.6) (12.3)
------ ------ -------
80.2 41.0 (61.3)
Change in valuation allowance for deferred tax asset.... (71.1) (41.0) 61.3
------ ------ -------
Net change in net deferred taxes...................... 9.1 -- --
------ ------ -------
Total income tax expense (benefit).................... (14.5) 0.1 --
Total allocated to continuing operations.............. (14.5) 0.1 $ 6.3
Total allocated to Stockholders' Equity............... -- -- (6.3)
------ ------ -------
Total tax expense (benefit)........................ (14.5) $ 0.1 $ --
====== ====== =======
</TABLE>
F-34
<PAGE>
The table below sets forth the significant components of the net deferred
tax asset/liability at December 31, 1996 and December 31, 1995 (as adjusted and
restated for 1995 and prior year tax returns filed through 1996):
DECEMBER 31,
--------------------------
1996 1995
---- ----
(DOLLARS IN MILLIONS)
Components of the deferred tax asset:
Bad debt reserve................................... $ (39.0) $ (53.9)
Real estate and partnerships....................... (10.0) (34.9)
Prior year affirmative adjustments, net............ (0.2) (52.3)
Depreciation....................................... (6.0) (9.1)
Net operating loss carryforward.................... (92.3) (69.3)
Alternative minimum tax credit carryforward........ (7.0) (27.7)
State Income Taxes ................................ (12.0) (2.2)
Stock Options ..................................... (0.2) (3.6)
Other.............................................. (31.9) (5.4)
------- -------
(198.6) (258.4)
Valuation allowance................................ 86.7 157.8
------- -------
Deferred tax asset, net of valuation allowance.. (111.9) (100.6)
Components of the deferred tax liability:
Loan fees, interest and discount, net.............. 60.4 58.4
FHLB stock......................................... 41.0 36.5
Accrued interest income............................ 20.0 (3.3)
Prepaid expense.................................... 0.9 3.2
Other.............................................. 5.0 12.1
------- -------
Deferred tax liability.......................... 127.3 106.9
------- -------
Net deferred tax liability...................... $ 15.4 $ 6.3
======= =======
Net state deferred tax liability..................... $ 15.4 $ 6.3
Net federal deferred tax liability................... -- --
------- -------
Net deferred tax liability...................... $ 15.4 $ 6.3
======= =======
The change in the valuation allowance from December 31, 1995 relates to
the increase in the net taxable temporary differences not recognized for
current income tax purposes that create future tax benefits and liabilities and
adjustments made in contemplation of settlements related to the ongoing federal
and state examinations (see discussion below). The valuation allowance of $86.7
million includes $9.4 million related to the $26.8 million balance of an
acquired federal net operating loss expiring in 2002 and 2003 and $70.3 million
attributable to Cal Fed's federal and California tax losses occuring in 1991
through 1995. To the extent Cal Fed realizes a tax benefit not otherwise
available as a result of the acquired federal net operating loss, 65% of the
tax benefits may be payable to the FDIC pursuant to the acquisition agreement.
Cal Fed generated net operating losses in 1993, 1994 and 1995 for federal
income tax purposes of $22.5 million, $26.3 million and $146.2 million expiring
in 2008, 2009 and 2010, respectively. In addition, Cal Fed has adjusted net
operating loss carryforwards from 1991, 1992, 1993, 1994, 1995 and 1996 for
California franchise tax purposes of $2.1 million, $22.4 million, $26.3
million, $35.0 million, $14.5 million and $29.6 million, respectively, expiring
in 1998, 1999 and 2000. The expiration dates of the net operating loss
carryforwards may be accelerated as a result of Bancorp's acquisition by
Holdings. In addition, Cal Fed also has alternative minimum tax credit
carryforwards of $2.1 million for federal income tax purposes and $4.9 million
for California franchise tax purposes which have no expiration date.
On August 20, 1996, the Small Business Job Protection Act ("1996 Act") was
enacted into federal law generally effective for tax years beginning after
1995. One provision of the 1996 Act repealed the reserve method for computing
bad debt deductions for large (over $500 million in assets) savings
institutions for taxable years beginning in 1996. Another provision of the 1996
Act provided that beginning no later than 1998, an institution must recapture
into taxable income over six years the amount of "applicable excess reserves."
An institution's applicable excess reserves is generally the institution's
aggregate tax bad debt reserves at the end of 1995 over the amount of its
"adjusted base year reserves." For taxable years subsequent to 1987, an
institution's adjusted base year reserves are generally the aggregate of its
qualifying, nonqualifying
F-35
<PAGE>
and supplemental tax bad debt reserves at December 31, 1987, the first two of
which being proportionately decreased for any reductions in the institution's
loan portfolio since such date to December 31, 1995. The 1996 Act further
provided that an institution must recapture its adjusted base year reserves if
the institution no longer qualifies as a "bank" for federal income tax purposes
or if its tax bad debt reserves are used for the payment of nontaxable
dividends or other distribution (including distributions in dissolution,
liquidation or redemption of stock), generally as such rules existed prior to
the 1996 Act other than certain newly adopted preferred stock exceptions.
For federal income tax purposes for taxable years beginning before 1996,
savings institutions that met certain definitional and other tests were allowed
to compute a bad debt deduction based on either the percentage of taxable
income method or 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. For taxable years beginning prior to 1996,
the amount by which a qualifying institution's actual tax bad debt reserves
exceeded an allowable offset computed under the experience method ("excess tax
bad debt reserves") was, in certain situations involving the payment of
nontaxable dividends or other distributions (including distribution in
dissolution, liquidation or redemption in stock), subject to recapture and
includable in taxable income.
The consolidated financial statements at December 31, 1996 and 1995 do not
include a potential federal income tax liability of $43.4 million attributable
to California Federal's tax bad debt reserves. Pursuant to the 1996 Act,
circumstances that may require an accrual of this unrecorded tax liability are
a failure to meet the definition of a "bank" for federal income tax purposes,
and dividend payments in excess of tax earnings and profits and other
distributions in dissolution, liquidation or redemption of stock, excluding
preferred stock meeting certain conditions.
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,
------------------------------------------
1996 1995 1994
---- ---- ----
<S> <C> <C> <C>
Statutory federal corporate income tax rate................ 35.0% 35.0% (35.0)%
State tax, net of federal income tax effect................ 19.6 0.1 0.7
----- ----- -----
54.6 35.1 (34.3)
Increase (decrease) resulting from:
Valuation allowance...................................... (66.9) (33.5) 34.2
Bad debt deduction....................................... 0.1 3.4
Stock options............................................ (2.5) (1.6) 1.0
Other, net............................................... (0.1) -- 0.1
----- ----- -----
(14.9)% 0.1% 4.4%
===== ===== =====
</TABLE>
During the fourth quarter of 1996, Cal Fed recorded a net current tax
receivable of $23.6 million, representing the estimated net recovery of prior
years' federal and state taxes. This net tax receivable was based on recently
completed meetings with Internal Revenue Service ("IRS") representatives
whereby agreement was reached on certain tax positions taken by Cal Fed.
Further, Cal Fed also recorded a $41.5 million receivable for the interest
related to the net tax refund.
In August 1996, Cal Fed received $62.9 million from the IRS representing a
refund of taxes in the amount of $12.4 million and interest with respect
thereto of $50.5 million. This refund was due to the settlement of an IRS
examination for the taxable years 1973 through 1981. Further, the IRS and the
California Franchise Tax Board ("FTB") have completed examinations of Cal Fed's
consolidated federal income tax returns through 1988 and combined California
franchise tax reports through 1989, respectively, and have proposed certain
adjustments primarily related to timing differences as to the recognition of
taxable income and expense. Cal Fed previously filed formal protests with both
the IRS and the FTB to take exception to these proposed adjustments and has
filed claims for refund to recover its payment of the assessed federal
deficiencies. Cal Fed currently intends to pursue most of the positions set
forth in its federal and California protests as well as in its federal refund
claims.
F-36
<PAGE>
In addition, the IRS has completed its examination of the consolidated
federal income tax returns filed by a former Cal Fed life insurance company
affiliate, Beneficial Standard Life Insurance Company ("BSLIC"), through 1989
and in December 1993, assessed certain deficiencies against BSLIC. In March
1994, Cal Fed filed a Tax Court petition on behalf of BSLIC, and in November
1995, the Tax Court rendered its decision affirming Cal Fed's position on most
of the issues contested by Cal Fed on behalf of BSLIC.
Cal Fed's current income tax receivables at December 31, 1996 and 1995
were $20.3 million and $7.9 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 Cal Fed'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 Cal Fed's financial instruments, active markets do
not exist. Therefore, considerable judgment was required in estimating fair
value for certain items. The subjective factors include, among other things,
the estimated timing and amount of cash flows, risk characteristics, credit
quality and interest rates, all of which are subject to change. Since the fair
value is estimated as of December 31, 1996 and December 31, 1995, 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
Cal Fed 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, Cal Fed 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 loans, 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 disposition. For impaired residential 1-4 and consumer
loans, fair value was estimated based on a discounted cash flow analysis,
adjusted for Cal Fed's estimate of excess credit risk.
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 Cal Fed's current offering rates of term
deposits with similar maturities. In accordance with SFAS No. 107, no value has
been assigned to Cal Fed's long-term relationships with its deposit customers
(core deposit intangible) since it is not a financial instrument as defined
under SFAS No. 107.
F-37
<PAGE>
Borrowings
The fair value of Cal Fed'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 Cal Fed's various other borrowings was based upon
alternative borrowing costs.
Off-Balance Sheet Financial Instruments
The fair value of Cal Fed'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 Cal Fed as compared to the estimated
interest due to the counterparties of the interest rate exchange agreements;
(ii) the fair value of Cal Fed's recourse arrangements on assets sold was
determined to approximate the value of the liability currently recorded for
such recourse arrangements; and (iii) Cal Fed's standby letters of credit and
commitments to originate or sell loans have terms that are consistent with
current market terms. Therefore, Cal Fed estimates that the face amount of
these commitments approximates book value.
The following table presents fair value estimates and carrying amounts for
financial instruments at December 31, 1996 and December 31, 1995:
<TABLE>
<CAPTION>
DECEMBER 31, 1996 DECEMBER 31, 1995
----------------- -----------------
CARRYING ESTIMATED CARRYING ESTIMATED
AMOUNT FAIR VALUE AMOUNT FAIR VALUE
-------- ---------- -------- ----------
(DOLLARS IN MILLIONS)
<S> <C> <C> <C> <C>
FINANCIAL INSTRUMENT ASSETS:
Cash......................................................... $ 242.1 $ 242.1 $ 273.7 $ 273.7
Short-term liquid investments................................ 69.0 69.0 74.1 74.1
Securities purchased under agreements to resell.............. 1,310.1 1,310.1 1,674.6 1,674.6
Securities available for sale................................ 6.0 6.0 200.3 200.3
Securities held to maturity.................................. 1,963.9 1,942.3 2,366.7 2,361.3
Loans receivable held for sale............................... 8.7 8.7 13.6 13.8
Loans receivable held for investment (a)..................... 10,099.4 10,179.6 9,290.0 9,246.1
Accrued interest receivable and other........................ 78.7 78.7 83.4 98.4
FINANCIAL INSTRUMENT LIABILITIES:
Savings deposits (b)......................................... 8,918.3 8,952.0 9,476.7 9,534.6
Advances from Federal Home Loan Banks........................ 3,111.0 3,096.7 2,671.0 2,676.0
Securities sold under agreements to repurchase............... 978.4 980.0 857.3 852.2
Student loan marketing association advances.................. -- -- 200.0 193.9
Other borrowings............................................. 57.3 62.8 58.1 65.3
Interest payable............................................. 21.7 21.7 29.4 29.4
Other liabilities............................................ 120.5 120.5 140.6 140.6
OFF-BALANCE SHEET FINANCIAL INSTRUMENTS:
Interest rate swaps (designated as a hedge).................. -- 11.1 -- 7.1
Interest rate swaps (designated as held for trading) (c)..... -- -- (0.3) (0.3)
Loans sold with recourse (d) ................................ $9.7 $9.7 $11.5 $11.5
</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 No. 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 Cal Fed's estimate of its credit exposure with
respect to loans sold with recourse.
F-38
<PAGE>
NOTE 22: COMMITMENTS AND CONTINGENCIES
Cal Fed 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:
DECEMBER 31,
------------------------
1996 1995
---- ----
(DOLLARS IN MILLIONS)
Standby letters of credit.................... $ 49.8 $ 57.9
Commitments to sell loans.................... 5.5 15.7
Commitments to fund fixed rate loans......... 189.6 232.0
Commitments to fund adjustable rate loans.... 57.8 98.3
Cal Fed 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. Cal Fed does not anticipate any material loss
as a result of these transactions. Cal Fed 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 Cal Fed's commitments at December 31, 1996 and 1995 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 Cal Fed's
commitments approximates the amount of the outstanding commitments at December
31, 1996 and 1995.
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 Cal Fed
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 Cal Fed 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
assessed punitive damages of $20.0 million against Cal Fed and $5.0 million
against CCI. Cal Fed has begun the process of appealing the judgment. While Cal
Fed 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 Cal Fed 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.
Cal Fed is involved as a defendant in certain legal proceedings incidental
to its business. Cal Fed 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 Cal Fed's actual liability may be substantially higher or lower
than the amount of the established allowance. Cal Fed 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 Cal Fed.
NOTE 23: MINORITY INTEREST
Minority interest at December 31, 1996 was comprised of California
Federal's 10 5/8% noncumulative perpetual preferred stock, Series B. At
December 31, 1995, in addition to California Federal's preferred stock,
Series B, minority interest of Cal Fed included California Federal's 7 3/4%
noncumulative convertible preferred stock, Series A.
7 3/4% Noncumulative Convertible Preferred Stock, Series A, Par Value
$25.00 Per Share
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 California
Federal's equity capital, after deducting issuance costs of $4.5 million.
F-39
<PAGE>
Effective January 1, 1996, the Preferred Stock, Series A, was convertible by
the holders into the common stock of Bancorp at any time at a conversion price
of $20.16 per share, subject to adjustment. During the second quarter of 1996
California Federal 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 Cal Fed'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.
10 5/8% Noncumulative Perpetual Preferred Stock, Series B, Par Value
$100.00 Per Share
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 California
Federal's equity capital, after deducting issuance 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.
NOTE 24: STOCKHOLDERS' EQUITY AND REGULATORY CAPITAL
Common Stock
Cal Fed's common stock at December 31, 1996 and 1995 is summarized in the
table below:
DECEMBER 31,
------------------------------------
1996 1995
---- ----
Par value ................................ $ 1.00 $ 1.00
Number of shares authorized .............. 100,000,000 100,000,000
Number of shares issued and oustanding ... 50,316,774 49,200,444
During the fourth quarter of 1995, Cal Fed 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 California
Federal's common stock was converted into one share of Bancorp common stock.
Consequently, California Federal became a wholly-owned subsidiary of Bancorp.
Participation Interests
During 1995, California Federal registered contingent litigation recovery
participation interests ("Litigation Interests") to be issued to its common
shareholders. The Litigation 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 California Federal's pending goodwill
lawsuit against the Federal government. In the lawsuit, California Federal
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. California Federal's claims arose from changes,
mandated by FIRREA, with respect to the rules for computing California
Federal's regulatory capital. California Federal's shareholders of record on
July 14, 1995 received one Litigation Interest for every ten shares of common
stock owned on the record date. The Litigation Interests were distributed on
July 28, 1995 and began trading on the NASDAQ Small Cap Market under the symbol
"CALGZ" on August 1, 1995.
During 1996, California Federal registered Secondary Contingent Litigation
Recovery Participation Interests ("Secondary Litigation Interests") to be
issued to the common shareholders of Bancorp in connection with the acquisition
of Bancorp by Holdings (the "Merger"). One Secondary Litigation Interest was
distributed to shareholders for each ten common shares of Bancorp held at the
closing of the Merger which occurred January 3, 1997. The Secondary Litigation
Interests represent the right to participate in the cash proceeds, if any,
recovered in California Federal's pending breach-of-contract lawsuit against
the Federal government relating to the phase-out of supervisory goodwill
resulting from the enactment of FIRREA
F-40
<PAGE>
in 1989. Each Secondary Litigation Interest will entitle the holder to receive
a pro rata portion of 60% of the net distributable cash proceeds, if any, of
Cal Fed's goodwill lawsuit after (a) payment of expenses, (b) pro forma taxes,
(c) the net cash proceeds distributable to the holders of the Participation
Interests, and (d) the retention of $125 million of net distributable cash
proceeds by First Nationwide. The Secondary Litigation Interests were
distributed and began trading on the NASDAQ under the symbol "CALGL" in January
1997.
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, 1996, the
industry-wide minimum regulatory capital requirements were:
o Tangible capital of 1.5% of adjusted total assets, consisting
generally of stockholder's 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 California Federal's capital ratios as compared
to the industry-wide minimum capital requirements at December 31, 1996:
CALIFORNIA REGULATORY EXCESS
FEDERAL REQUIREMENT CAPITAL
---------------- ------------------ -------
(DOLLARS IN MILLIONS)
Tangible Capital...... $828.5 5.85% $212.3 1.50% $616.2
Core Capital.......... 828.5 5.85 424.6 3.00 403.9
Risk-based Capital.... 945.2 12.01 630.2 8.00 315.0
The OTS has implemented a system requiring regulatory sanctions against
institutions that are not adequately capitalized, with the sanctions growing
more severe the lower the institution's capital. The OTS has established
specific capital ratios for five separate capital categories:
"well-capitalized," "adequately capitalized," "undercapitalized,"
"significantly undercapitalized" and "critically undercapitalized."
Under the OTS regulations, an institution is treated as well-capitalized
if its ratio of total capital to risk-weighted assets is 10.0% or more, its
ratio of core capital to risk-weighted assets is 6.0% or more, its ratio of
core capital to total assets is 5.0% or greater and it is not subject to any
order or directive by the OTS to meet a specific capital level.
At December 31, 1996, (i) California Federal's total risk-based capital
ratio was 12.01%, $158.1 million in excess of "well-capitalized" requirements,
(ii) California Federal's Tier 1 risk-based capital ratio was 10.56%, $357.6
million in excess of "well-capitalized" requirements, and (iii) California
Federal's leverage ratio was 5.85%, $120.7 million in excess of
"well-capitalized" requirements. Therefore, at December 31, 1996, 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
F-41
<PAGE>
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 (i)
the institution is in an unsafe and unsound condition, or (ii) 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 California Federal's stockholders' equity
to regulatory capital as of December 31, 1996:
<TABLE>
<CAPTION>
TANGIBLE CORE RISK-BASED
CAPITAL CAPITAL CAPITAL
-------- ------- ----------
(DOLLARS IN MILLIONS)
<S> <C> <C> <C>
Stockholders' Equity of California Federal..................... $864.9 $864.9 $864.9
Non-allowable capital:
Intangible assets............................................ (15.7) (15.7) (15.7)
Investment in non-permissible subsidiaries................... (20.7) (20.7) (20.7)
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....................... 828.5 828.5 945.2
Bank's minimum regulatory capital requirement.................. 212.3 424.6 630.2
------ ------ ------
Excess over minimum regulatory capital requirements ......... $616.2 $403.9 $315.0
====== ====== ======
</TABLE>
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.
Restriction on Stockholders' 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
On August 20, 1996, the Small Business Job Protection Act ("1996 Act") was
enacted into federal law generally effective for the tax years beginning after
1995. Although the 1996 Act repealed the reserve method for computing bad debt
deductions for large savings institutions, including California Federal, it
generally retained prior law regarding recapture of tax bad debt reserves.
Under the 1996 Act, a savings institution must recapture its adjusted base year
reserves if the institution no longer qualifies as a "bank" for federal income
tax purposes or if its tax bad debt reserves are used to pay nontaxable
dividends or make other distributions in dissolution, liquidation or redemption
of stock, excluding preferred stock meeting certain conditions. Similar to
pre-1996 federal tax law, the amount includable in taxable income is equal to
the distribution plus the federal income tax attributable thereto, up to the
aggregate amount of the adjusted base year reserves. At December 31, 1996,
Bancorp's retained earnings included approximately $124 million attributable to
California Federal's adjusted base year reserves.
F-42
<PAGE>
Prior to 1996, federal tax law provided that savings institutions that met
certain definitional and other tests were 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") were 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 up to the aggregate amount of excess tax bad debt reserves. At
December 31, 1995, California Federal's total tax bad debt reserves of
approximately $195 million did not include any amount which may represent
excess tax bad debt reserves.
NOTE 25: EMPLOYEE RETIREMENT BENEFIT PLANS
Retirement Plans
Cal Fed has two defined benefit plans: one covering its employees
("retirement income plan") and one for the non-employee directors ("outside
directors plan"). The outside directors plan was terminated as of the date of
the merger with Holdings, and liquidated for the amount of $1.0 million. Prior
to 1995, Cal Fed 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 became 100% vested. However, credited service will continue to
accrue for purposes of determining eligibility for early retirement (and the
applicable early retirement reduction factors). Effective May 1, 1996 the plan
was also amended to generally allow a vested participant whose termination of
employment occurred before June 1, 1996 and whose benefit was not eligible to
be paid in a lump sum cash distribution, to elect to receive a severance
benefit in a single lump sum payment. The participant was to make the election
and receive the distribution prior to July 31, 1996. This resulted in a
decrease in projected benefit obligation.
Cal Fed'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. Cal Fed from time to time may increase
its contribution beyond the minimum reflecting the tax and cash position of Cal
Fed and the funded status of the plan. Additionally, Cal Fed had a supplemental
defined benefit retirement plan for key employees (the "supplemental plan")
which was terminated on December 31, 1993. Cal Fed has recorded a liability of
$0.1 million as of December 31, 1996 related to the supplemental plan.
F-43
<PAGE>
The following tables set forth the funded status of the pension plan and
amounts recognized in Cal Fed's consolidated statements for the years
indicated:
<TABLE>
<CAPTION>
RETIREMENT INCOME PLAN
------------------------------------------------------
ACCUMULATED ASSETS ASSETS
BENEFITS EXCEED EXCEED
EXCEED ACCUMULATED ACCUMULATED
ASSETS BENEFITS BENEFITS
1996 1995 1994
----------- ----------- -----------
(DOLLARS IN MILLIONS)
<S> <C> <C> <C>
Actuarial present value of benefit obligations:
Accumulated benefit obligation, including vested
benefits of $18.4 million in 1996, $34.4 million
in 1995, $30.9 million in 1994.......................... $19.3 $35.3 $30.1
===== ===== =====
Projected benefit obligation for service rendered to date..... $19.3 $35.3 $30.1
Plan assets at fair value, primarily listed stock and
fixed income securities................................. 19.2 35.5 33.3
----- ----- -----
Projected benefit obligation greater than (or less than)
plan assets ............................................ 0.1 (0.2) (3.2)
Unrecognized net loss from past experience
different from that assumed............................. (3.9) (7.7) (3.3)
Adjustment required to recognize minimum liability ........... 3.9 -- --
----- ----- -----
Pension liability (asset) included in other liabilities (assets) $0.1 $(7.9) $(6.5)
===== ===== =====
Net pension expense included the following components:
Interest cost on projected benefit obligation................ $ 2.0 $ 2.0 $ 2.4
Actual return on plan assets................................. (1.9) (5.7) (1.5)
Other, net................................................... 0.1 3.3 (1.3)
----- ----- -----
Net periodic pension expense (income) ......................... 0.2 (0.4) $(0.4)
Adjustment for settlement of obligations .................... 3.9 -- --
----- ----- -----
Total periodic pension expense, net of adjustment .............. $ 4.1 $(0.4) $(0.4)
===== ===== =====
</TABLE>
Average assumptions used for all plans were:
AS OF DECEMBER 31,
----------------------------
1996 1995 1994
---- ---- ----
Discount rate................................ 7.75% 7.25% 8.00%
Rate of increase in compensation levels...... N/A (a) N/A (a) N/A (a)
Expected long-term rate of return on assets.. 8.50% 8.50% 8.50%
- - ----------
(a) 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
No. 106"). SFAS No. 106 became effective for fiscal years beginning after
December 15, 1992. SFAS No. 106 establishes accounting standards for all
employers' postretirement benefits other than pensions; however, it focuses on
postretirement health care benefits. SFAS No. 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.
Cal Fed has a defined benefit postretirement plan which provides for
postretirement medical benefits to eligible retired employees.
F-44
<PAGE>
The following table sets forth the funded status of the postretirement
benefit plans and amount recognized in Cal Fed's consolidated statements for
the years ended December 31, 1996 and 1995:
<TABLE>
<CAPTION>
1996 1995
---- ----
(DOLLARS IN MILLIONS)
<S> <C> <C>
Accumulated Postretirement Benefit Obligation:
Current Retirees.................................................................. $1.8 $ 2.1
Current Actives................................................................... 0.9 1.0
---- -----
Total ...................................................................... 2.7 $ 3.1
==== =====
Accumulated Postretirement Benefit Obligation....................................... $2.7 $ 3.1
Plan assets at fair value........................................................... -- --
---- -----
Excess of accumulated postretirement benefit obligations greater than
plan assets............................................................... 2.7 3.1
Unrecognized transition obligation.................................................. (3.8) (4.0)
Unrecognized net gain............................................................... 3.7 3.1
---- -----
Net postretirement benefit liability included in other liabilities.......... $2.6 $2.2
==== =====
Net Periodic Postretirement Benefit Cost:
Service cost...................................................................... $0.2 0.2
Interest cost..................................................................... 0.2 0.3
Amortization of transition obligation............................................. 0.2 0.2
Other, net........................................................................ (0.2) (0.2)
---- -----
Net periodic postretirement benefit cost.................................... $0.4 $ 0.5
---- -----
Effect of one percent increase in trend rates:
Service and interest cost......................................................... $0.1 $ 0.1
---- -----
Accumulated postretirement benefit obligation..................................... $0.3 $ 0.4
---- -----
</TABLE>
The cost of inflation for health care and medical costs of plan
participants (the "health care trend rate") was assumed to start at 11.0% for
1996, and gradually trend downward over 10 years to 6%. The assumed discount
rate, in determining postretirement benefits, was 7.75% and 7.25% at December
31, 1996 and 1995, respectively. At December 31, 1996 and 1995, there were no
plan assets related to this plan.
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 Cal Fed's
F-45
<PAGE>
contributions based on years of service. Up to 4% of participants'
contributions are matched by Cal Fed on a schedule that is determined by the
participants' years of service with Cal Fed. The table below presents Cal Fed's
matching contributions as determined by the participants' years of service.
<TABLE>
<CAPTION>
CAL FED'S MATCHING
OF PARTICIPANTS' PARTICIPANTS'
CONTRIBUTIONS UP VESTING IN CAL
TO 4% OF QUALIFIED FED'S
YEARS OF SERVICE COMPENSATION CONTRIBUTION
---------------- ------------ ------------
<S> <C> <C>
At least 3 months 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>
Cal Fed'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, 1996, 1995 and 1994, Cal Fed's pre-tax
Plan expense was $4.0 million, $3.9 million and $4.2 million, respectively. As
of the date of the merger with Holdings, Cal Fed's contributions to all active
participants became 100% vested.
NOTE 26: QUARTERLY RESULTS OF OPERATIONS (UNAUDITED)
<TABLE>
<CAPTION>
QUARTER ENDED
-------------------------------------------------------------------------
MARCH 31, JUNE 30, SEPTEMBER 30, DECEMBER 31,
1996 1996 1996 1996
---- ---- ---- ----
(DOLLARS IN MILLIONS)
<S> <C> <C> <C> <C>
Interest income................................ $256.9 $252.1 $252.6 $253.7
Interest expense.................................. 171.3 163.3 166.1 166.0
------ ------ ------ ------
Net interest income............................... 85.6 88.8 86.5 87.7
Provision for loan losses......................... 10.2 10.2 10.4 10.5
Other income...................................... 15.8 28.0 (a) 18.2 58.0 (c)
Other expenses.................................... 61.6 62.5 118.6 (b) 87.7
Income tax expense (benefit)...................... -- 0.1 -- (14.6)(d)
----- ----- ----- -----
Net earnings (loss)............................... $29.6 $44.0 (24.3) $62.1
===== ===== ====== =====
Net earnings (loss) per common share ............. $0.46 $0.72 $(0.58) $1.15
===== ===== ====== =====
</TABLE>
- - -------------------
(a) The increase in other income during the second quarter of 1996 represents
the $12.0 million gain on the sale of six branches in San Diego.
(b) The increase in other expenses during the third quarter of 1996 resulted
from the accrual of $58.1 million for a one-time special SAIF assessment.
(c) Other income increased during the fourth quarter of 1996 as a result of
a $42.2 million income tax refund.
(d) The income tax benefit for the fourth quarter of 1996 resulted from
adjustments to prior years' income taxes.
F-46
<PAGE>
<TABLE>
<CAPTION>
QUARTER ENDED
-----------------------------------------------------------------------
MARCH 31, JUNE 30, SEPTEMBER 30, DECEMBER 31,
1995 1995 1995 1995
---- ---- ---- ----
(DOLLARS IN MILLIONS)
<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 expense................. -- 0.1 -- --
------ ------ ------ ------
Net earnings....................... $ 14.7 $ 21.7 $ 31.9 $ 25.3
====== ====== ====== ======
Net earnings per common share ..... $ 0.17 $ 0.31 $ 0.50 $ 0.38
====== ====== ====== ======
</TABLE>
- - --------------
(a) Other income increased during the third quarter of 1995 as a result of
$6.8 million of gains on the sale of $729.3 million of securities held
for sale.
NOTE 27: SUBSEQUENT EVENTS
On July 29, 1996 Cal Fed announced that it had entered into a definitive
merger agreement with Holdings, the parent company of First Nationwide,
pursuant to which on January 3, 1997, Holdings acquired 100% of the outstanding
stock of Cal Fed. The aggregate consideration paid consisted of approximately
$1.2 billion in cash and the issuance of litigation interests owned by Cal Fed.
The terms of the Merger agreement provided for each Cal Fed stockholder to
receive a cash payment of $23.50 per common share plus a new security (see
"Secondary Litigation Interests" below).
During 1996, Cal Fed registered Secondary Litigation Interests to be
issued to its common stockholders in connection with Merger. One Secondary
Litigation Interest was distributed to stockholders for each ten common shares
held at the closing of the Merger which occurred January 3, 1997. The Secondary
Litigation Interests represent the right to participate in the cash proceeds,
if any, recovered in Cal Fed's pending breach-of-contract lawsuit against the
federal government relating to the phase-out of supervisory goodwill resulting
from the enactment of FIRREA in 1989. Each Secondary Litigation Interest will
entitle the holder to receive a pro rata portion of 60 percent of the net
distributable cash proceeds, if any, of Cal Fed's goodwill lawsuit after (a)
payment of expenses, (b) pro forma taxes, (c) the net cash proceeds
distributable to the holders of the Litigation Interests, and (d) the retention
of $125 million of net distributable cash proceeds by First Nationwide. In
January 1997, the Secondary Litigation Interests were distributed and began
trading on the NASDAQ under the symbol "CALGL."
NOTE 28: 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.
F-47
<PAGE>
CAL FED BANCORP INC.
STATEMENT OF FINANCIAL CONDITION
<TABLE>
<CAPTION>
DECEMBER 31, 1996
-------------------
ASSETS (DOLLARS IN MILLIONS)
<S> <C>
Cash....................................................................... $ 0.4
Investment in subsidiaries................................................. 692.4
Due from subsidiaries ..................................................... 26.0
----------
Total Assets..................................................... $ 718.8
==========
LIABILITIES AND STOCKHOLDERS' EQUITY
Other liabilities ......................................................... $ 0.1
Total stockholders' equity ................................................ 718.7
----------
$ 718.8
==========
STATEMENT OF OPERATIONS
FOR THE YEAR ENDED
DECEMBER 31, 1996
------------------
Other income .............................................................. $ 0.1
Interest on loans to subsidiaries ......................................... 1.0
----------
1.1
General and administrative expenses........................................ 6.1
Income tax expense (benefit) .............................................. --
----------
Net loss before equity in undistributed net earnings of subsidiaries ...... (5.0)
----------
Equity in undistributed net earnings of subsidiaries ...................... 93.0
----------
Net earnings .............................................................. $ 88.0
==========
STATEMENT OF CASH FLOWS
FOR THE YEAR ENDED
DECEMBER 31, 1996
------------------
Net Cash Flows from Operating Activities:
Net earnings ........................................................... $ 88.0
Adjustments to reconcile net earnings to net cash provided by
operating activities:
Increase in other liabilities ....................................... 0.1
Equity in undistributed net earnings of subsidiaries ................ (93.0)
-----------
Net cash used by operating activities ............................. (4.9)
Cash Flows from Investing Activities:
Increase in due from subsidiaries ................................... (26.0)
-----------
Net cash provided by investing activities ........................... (26.0)
Cash Flows from Financing Activities:
Exercise of common stock options .................................... (76.1)
Litigation interest dividend from California Federal ................ 57.1
-----------
Proceeds from issuance of common stock .............................. 50.3
-----------
Net cash used by financing activities ............................... 31.3
-----------
Net increase in cash ...................................................... 0.4
Cash at beginning of year.................................................. --
-----------
Cash at end of year ....................................................... $ 0.4
===========
</TABLE>
F-48
