<PAGE> 1
- --------------------------------------------------------------------------------
- --------------------------------------------------------------------------------
SECURITIES AND EXCHANGE COMMISSION
WASHINGTON, D.C. 20549
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) SEPTEMBER 13, 1996
CAL FED BANCORP INC.
(EXACT NAME OF REGISTRANT AS SPECIFIED IN ITS CHARTER)
<TABLE>
<S> <C> <C>
DELAWARE 1-14098 95-4539347
(STATE OR OTHER JURISDICTION OF (COMMISSION FILE NUMBER) (IRS EMPLOYER IDENTIFICATION NO.)
INCORPORATION)
5700 WILSHIRE BOULEVARD, LOS ANGELES, CALIFORNIA 90036
(ADDRESS OF PRINCIPAL EXECUTIVE OFFICES) (ZIP CODE)
REGISTRANT'S TELEPHONE NUMBER, INCLUDING AREA CODE: (213) 932-4200
</TABLE>
- --------------------------------------------------------------------------------
- --------------------------------------------------------------------------------
<PAGE> 2
ITEM 5. OTHER EVENTS.
Cal Fed Bancorp Inc. (the "Company") was incorporated as a Delaware
corporation to serve as the holding company for California Federal Bank, F.S.B.
(the "Bank"). During the 1995 fourth quarter, the Bank received both regulatory
and shareholder approval to reorganize into a holding company structure (the
"Holding Company Reorganization"). Prior to the effective date of the Holding
Company Reorganization, the Company was a wholly-owned subsidiary of the Bank.
On January 1, 1996, the Holding Company Reorganization was effected in which
each share of the Bank's Common Stock was converted into one share of the
Company's Common Stock. As a result of the Holding Company Reorganization,
effective January 1, 1996 the Bank became a wholly-owned subsidiary of the
Company and the Company became a publicly-traded corporation subject to (among
other requirements) the requirements of the Securities and Exchange Act of 1934,
as amended (the "1934 Act"), relating to the filing of reports, proxy statements
and other information with the Securities and Exchange Commission (the
"Commission").
Pursuant to the informational requirements of the 1934 Act, on March 8,
1996 the Company filed with the Commission an Annual Report on Form 10-K for the
year ended December 31, 1995 (the "1995 Company Form 10-K"). Because the Company
had no operations during 1995 and the Holding Company Reorganization did not
occur until January 1, 1996, the 1995 Company Form 10-K did not contain any
financial statements of the Company. Rather, the 1995 Company Form 10-K
included, as Exhibit 99 thereto, the audited financial statements of the Bank
for the year ended December 31, 1995 contained in the Annual Report on Form 10-K
of the Bank as filed by the Bank, pursuant to the informational requirements of
the 1934 Act, with the Office of Thrift Supervision (the "1995 Bank Audited
Financial Statements"). Included in the footnotes to the 1995 Bank Audited
Financial Statements, as Note 27 thereto, was a Statement of Financial Condition
of the Company as of January 1, 1996, presented on a consolidated basis giving
effect to the consummation of the Holding Company Reorganization.
The Company and the Bank are parties to the Agreement and Plan of Merger
dated as of July 27, 1996 (the "Merger Agreement") with First Nationwide
Holdings, Inc. (the "FNH"), which has been filed with the Commission as Exhibit
2.1 to the Company's Current Report on Form 8-K dated July 27, 1996 and is
incorporated by reference herein. The Merger Agreement provides for (among other
things) a merger of a wholly-owned subsidiary of FNH with and into the Company
pursuant to which the Company will become a wholly-owned subsidiary of FNH and
all outstanding shares of the Common Stock of the Company (other than "Excluded
Shares," as defined in the Merger Agreement) will be converted into the right to
receive certain per share merger consideration specified therein. In connection
with the actions being taken by FNH to arrange the financing of the $23.50 cash
component of the per share merger consideration provided for in the Merger
Agreement, the Company has generated and provided FNH with audited consolidated
financial statements of the Company and its subsidiaries (including the Bank) as
of December 31, 1995 and 1994 and for each of the years in the three-year period
ended December 31, 1995, giving effect to the Holding Company Reorganization on
an "as if" pooling-of-interests basis consistent with the basis used in Note 27
to the 1995 Bank Audited Financial Statements (the "Company 1995 Audited
Financial Statements"), which have not previously been filed by the Company with
the Commission under the 1934 Act (the "Company 1995 Audited Financial
Statements"). The Company 1995 Audited Financial Statements are filed herewith
as Exhibit 99.1.
ITEM 7. FINANCIAL STATEMENTS AND EXHIBITS
The Company 1995 Audited Financial Statements are filed herewith as Exhibit
99.1. See Item 5.
--1--
<PAGE> 3
SIGNATURE
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.
CAL FED BANCORP INC.
Date: September 13, 1996 By: /s/ DOUGLAS J. WALLIS
-------------------------------
Name: Douglas J. Wallis
Title: Executive Vice President
General Counsel and Secretary
--2--
<PAGE> 4
EXHIBIT INDEX
<TABLE>
<CAPTION>
EXHIBIT DESCRIPTION PAGE
------- ----------- ----
<S> <C> <C>
99.1 Audited Consolidated Financial Statements of Cal Fed Bancorp Inc. and
Subsidiaries as of December 31, 1995 and 1994 and for each of two
years in the three-year period ended December 31, 1995................
</TABLE>
--3--
<PAGE> 1
EXHIBIT 99.1
INDEPENDENT AUDITORS' REPORT
The Board of Directors
Cal Fed Bancorp Inc.:
We have audited the accompanying consolidated statements of financial
condition of Cal Fed Bancorp Inc. and subsidiaries (the "Company") as of
December 31, 1995 and 1994, and the related consolidated statements of
operations, changes in stockholders' equity and cash flows for each of the years
in the three-year period ended December 31, 1995. These consolidated financial
statements are the responsibility of the Company's management. Our
responsibility is to express an opinion on these consolidated financial
statements based on our audits.
We conducted our audits in accordance with generally accepted auditing
standards. Those standards require that we plan and perform the audit to obtain
reasonable assurance about whether the financial statements are free of material
misstatement. An audit includes examining, on a test basis, evidence supporting
the amounts and disclosures in the financial statements. An audit also includes
assessing the accounting principles used and significant estimates made by
management, as well as evaluating the overall financial statement presentation.
We believe that our audits provide a reasonable basis for our opinion.
In our opinion, the consolidated financial statements referred to above
present fairly, in all material respects, the financial position of Cal Fed
Bancorp Inc. and subsidiaries as of December 31, 1995 and 1994, and the results
of their operations and their cash flows for each of the years in the three-year
period ended December 31, 1995 in conformity with generally accepted accounting
principles.
As discussed in Note 1 of the notes to the consolidated financial
statements, the Company adopted the provisions of the Financial Accounting
Standards Board's Statements of Financial Accounting Standards No. 72,
Accounting for Certain Acquisitions of Banking or Thrift Institutions, in 1994,
and No. 115, Accounting for Certain Investments in Debt and Equity Securities,
in 1993.
KPMG Peat Marwick LLP
Los Angeles, California
January 18, 1996
1
<PAGE> 2
CAL FED BANCORP INC. AND SUBSIDIARIES
CONSOLIDATED STATEMENTS OF FINANCIAL CONDITION
(DOLLARS IN MILLIONS)
ASSETS
<TABLE>
<CAPTION>
DECEMBER 31,
-----------------------
1995 1994
--------- ---------
<S> <C> <C>
Cash................................................................ $ 273.7 $ 292.8
Short-term liquid investments....................................... 74.1 333.8
Securities purchased under agreements to resell..................... 1,674.6 48.2
Securities available for sale (market value: $200.3 in 1995 and
$1,731.5 in 1994)................................................. 200.3 1,731.5
Securities held to maturity (market value: $2,361.3 in 1995 and
$2,437.2 in 1994)................................................. 2,366.7 2,525.1
Loans receivable held for sale (market value: $13.8 in 1995 and $1.3
in 1994).......................................................... 13.6 1.3
Loans receivable held for investment................................ 9,290.0 8,746.0
Federal Home Loan Bank stock........................................ 135.7 134.1
Interest receivable................................................. 79.5 79.6
Premises and equipment.............................................. 71.2 81.5
Real estate held for sale........................................... 49.5 77.9
Prepaid expenses and other assets................................... 91.7 130.6
--------- ---------
Total Assets.............................................. $14,320.6 $14,182.4
======== ========
LIABILITIES AND STOCKHOLDERS' EQUITY
Deposits............................................................ $ 9,476.7 $ 8,360.9
Advances from Federal Home Loan Banks............................... 2,671.0 2,526.0
Securities sold under agreements to repurchase...................... 857.3 1,751.0
Student Loan Marketing Association advances......................... 200.0 475.0
Subordinated debentures............................................. 57.6 66.5
Interest payable.................................................... 29.4 18.6
Other liabilities................................................... 141.1 186.1
--------- ---------
Total Liabilities......................................... $13,433.1 $13,384.1
--------- ---------
Preferred stock of subsidiary....................................... 266.0 266.0
Stockholders' equity
Common stock...................................................... 49.2 49.2
Additional paid-in capital........................................ 838.6 836.6
Net unrealized holding gains (losses) on securities available for
sale........................................................... -- (19.2)
Retained earnings (deficit)....................................... (266.3) (334.3)
--------- ---------
Total Stockholders' Equity................................ 621.5 532.3
--------- ---------
Total Liabilities and Stockholders' Equity................ $14,320.6 $14,182.4
======== ========
</TABLE>
See accompanying notes to consolidated financial statements.
2
<PAGE> 3
CAL FED BANCORP INC. AND SUBSIDIARIES
CONSOLIDATED STATEMENTS OF OPERATIONS
(DOLLARS IN MILLIONS, EXCEPT PER SHARE DATA)
<TABLE>
<CAPTION>
YEAR ENDED DECEMBER 31,
---------------------------------
1995 1994 1993
-------- ------- --------
<S> <C> <C> <C>
Interest income:
Loans receivable..................................................... $ 706.9 $ 630.4 $ 756.5
Securities held to maturity.......................................... 170.3 135.5 160.9
Securities purchased under agreements to resell...................... 68.5 44.0 30.5
Securities available for sale........................................ 49.4 75.2 61.7
Short-term liquid investments........................................ 12.9 23.0 4.3
-------- ------- --------
Total interest income........................................ 1,008.0 908.1 1,013.9
-------- ------- --------
Interest expense:
Deposits............................................................. 441.6 390.8 516.1
Borrowings........................................................... 254.5 175.7 95.8
-------- ------- --------
Total interest expense....................................... 696.1 566.5 611.9
-------- ------- --------
Net interest income.......................................... 311.9 341.6 402.0
Provision for loan losses.............................................. 31.8 74.9 163.5
-------- ------- --------
Net interest income after provision for loan losses.......... 280.1 266.7 238.5
Other income:
Fee income........................................................... 54.5 62.4 64.3
(Loss) gain on sales of loans........................................ (0.3) 0.5 5.4
Gain on sales of securities.......................................... 6.9 0.2 --
Gain on sale of Southeast Division................................... -- 135.0 --
Other................................................................ 2.4 3.1 0.5
-------- ------- --------
Total other income........................................... 63.5 201.2 70.2
-------- ------- --------
Other expenses:
Compensation......................................................... 97.1 118.7 133.9
Office occupancy..................................................... 39.4 47.3 50.2
Other general and administrative..................................... 79.4 89.2 102.5
Federal deposit insurance premiums and special assessments........... 26.0 35.1 36.7
-------- ------- --------
Total general and administrative expenses.................... 241.9 290.3 323.3
Operations of real estate held for sale.............................. 8.0 45.9 118.3
Loss on assets held for accelerated disposition...................... -- 274.8 --
Amortization of goodwill............................................. -- -- 15.5
-------- ------- --------
Total other expenses......................................... 249.9 611.0 457.1
-------- ------- --------
Earnings (loss) before income tax expense (benefit) and cumulative
effect of change in accounting for goodwill.......................... 93.7 (143.1) (148.4)
Income tax expense (benefit)........................................... 0.1 6.3 (2.9)
-------- ------- --------
Earnings (loss) before cumulative effect of change in accounting for
goodwill............................................................. 93.6 (149.4) (145.5)
Cumulative effect of change in accounting for goodwill................. -- (273.7) --
-------- ------- --------
Net earnings (loss) before dividends on preferred stock of
subsidiary................................................. $ 93.6 $(423.1) $ (145.5)
Dividends on preferred stock of subsidiary............................. 25.6 16.9 3.8
-------- ------- --------
Net earnings (loss) available for common stockholders.................. $ 68.0 $(440.0) $ (149.3)
======== ======= ========
Earnings (loss) per common share before the cumulative effect of change
in accounting for goodwill........................................... $ 1.36 $ (3.82) $ (5.98)
Loss per share of the cumulative effect of change in accounting for
goodwill............................................................. $ -- $ (6.28) $ --
Net earnings (loss) per common share................................... $ 1.36 $(10.10) $ (5.98)
</TABLE>
See accompanying notes to consolidated financial statements.
3
<PAGE> 4
CAL FED BANCORP INC. AND SUBSIDIARIES
CONSOLIDATED STATEMENTS OF CHANGES IN STOCKHOLDERS' EQUITY
(DOLLARS IN MILLIONS, EXCEPT PER SHARE DATA)
<TABLE>
<CAPTION>
YEAR ENDED DECEMBER 31,
-------------------------------
1995 1994 1993
------- ------- -------
<S> <C> <C> <C>
Common stock:
Balance at beginning of year................................ $ 49.2 $ 25.0 $ 25.0
Issuance of shares of common stock....................... -- 21.6 --
Exercise of common stock warrants........................ -- 2.6 --
------- ------- -------
Balance at end of year...................................... 49.2 49.2 25.0
------- ------- -------
Additional paid-in capital:
Balance at beginning of year................................ 836.6 658.2 662.6
Issuance of shares of common stock....................... -- 161.7 --
Exercise of common stock warrants........................ -- 20.7 --
Long-term incentive stock options........................ 2.0 4.3 0.1
Other.................................................... -- (8.3) (4.5)
------- ------- -------
Balance at end of year...................................... 838.6 836.6 658.2
------- ------- -------
Net unrealized holding (losses) gains on securities available
for sale:
Balance at beginning of year................................ (19.2) 8.3 (0.7)
Net unrealized holding gains (losses).................... 19.2 (27.5) 9.0
------- ------- -------
Balance at end of year...................................... -- (19.2) 8.3
------- ------- -------
Retained earnings (deficit):
Balance at beginning of year................................ (334.3) 105.7 255.0
Net earnings (loss)available for Common Stockholders..... 68.0 (440.0) (149.3)
------- ------- -------
Balance at end of year...................................... (266.3) (334.3) 105.7
------- ------- -------
Total Stockholders' Equity.................................... $ 621.5 $ 532.3 $ 797.2
======= ======= =======
</TABLE>
See accompanying notes to consolidated financial statements.
4
<PAGE> 5
CAL FED BANCORP INC. AND SUBSIDIARIES
CONSOLIDATED STATEMENTS OF CASH FLOWS
(DOLLARS IN MILLIONS)
<TABLE>
<CAPTION>
FOR THE YEAR ENDED DECEMBER 31,
-------------------------------------
1995 1994 1993
--------- --------- ---------
<S> <C> <C> <C>
CASH FLOWS FROM OPERATING ACTIVITIES:
Net earnings (loss) available for common stockholders............... $ 68.0 $ (444.0) $ (149.3)
Adjustments to reconcile net earnings (loss) available for common
stockholders to net cash provided by operating activities:
Loss on assets held for accelerated disposition................... -- 274.8 --
Cumulative effect of change in accounting principle............... -- 273.7 --
Depreciation and amortization..................................... 13.0 14.8 33.1
Accretion of fees and discounts................................... (13.5) (37.3) (21.0)
Provision for losses on loans receivable.......................... 31.8 74.9 163.5
(Recovery) provision for losses on real estate held for sale...... (7.4) 79.7 93.6
Loss (gain) on sales of loans..................................... 0.3 (0.5) (5.4)
Loans originated for sale......................................... (117.2) (115.8) (648.3)
Gain on sales of securities....................................... (6.9) (0.2) --
Proceeds from sales of loans receivable held for sale............. 183.2 1,099.4 940.1
Decrease in other assets.......................................... 39.0 7.3 46.3
(Decrease) increase in other liabilities.......................... (34.4) 17.0 (2.1)
Other items....................................................... (11.1) (20.5) (25.9)
-------- -------- --------
Net cash provided by operating activities.................. 144.8 1,227.3 424.6
CASH FLOWS FROM INVESTING ACTIVITIES:
Loans originated for investment................................... (2,128.9) (2,503.5) (2,020.1)
Purchases of securities available for sale........................ (202.9) (1,519.2) (5.5)
Proceeds from sales of securities available for sale.............. 976.3 670.4 --
Proceeds from sales of loans held for investment.................. -- -- 65.1
Net (purchases) maturities of securities held to maturity......... (54.2) 0.4 (145.7)
Principal collected on loans receivable held for investment....... 1,152.1 1,406.9 1,877.2
Principal collected on securities held to maturity................ 435.8 533.5.... 597.4
Proceeds from maturities of securities............................ 808.8 1.0 254.5
Net (increase) decrease in FHLB stock............................. (1.6) (12.6) 29.0
Proceeds from sales of real estate held for sale, net............. 136.8 398.2 522.7
Net (additions) dispositions of premises and equipment............ (2.8) 8.3 2.3
Net decrease (increase) in short-term liquid investments.......... 259.7 (27.0) 123.9
Net (increase) decrease in securities purchased under agreements
to resell....................................................... (1,626.4) (18.0) 9.6
Proceeds from sale of California Thrift & Loan.................... -- -- 30.3
-------- -------- --------
Net cash (used) provided by investing activities........... (247.3) (1,061.6) 1,340.7
CASH FLOWS FROM FINANCING ACTIVITIES:
Increase (decrease) in deposits................................... 1,115.8 (4,239.9) (511.2)
Proceeds from Federal Home Loan Bank advances..................... 3,135.0 1,710.0 505.0
Payments on Federal Home Loan Bank advances....................... (2,990.0) (200.0) (1,328.7)
Net (decrease) increase in reverse repurchase agreements.......... (893.7) 1,501.2 (185.3)
Proceeds from other borrowings.................................... 3.0 202.0 317.5
Payments on other borrowings and subordinated debentures.......... (286.7) (41.4) (300.9)
Proceeds from the issuance of common shares....................... -- 210.9 --
Proceeds from the issuance of preferred shares of subsidiary...... -- 164.2 89.0
-------- -------- --------
Net cash provided (used) by financing activities........... 83.4 (693.0) (1,414.6)
-------- -------- --------
Net (decrease) increase in cash..................................... (19.1) (527.3) 350.7
Cash at beginning of period......................................... 292.8 820.1 469.4
-------- -------- --------
Cash at end of period............................................... $ 273.7 $ 292.8 $ 820.1
======== ======== ========
</TABLE>
See accompanying notes to consolidated financial statements.
5
<PAGE> 6
CAL FED BANCORP INC. AND SUBSIDIARIES
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
NOTE 1: SUMMARY OF SIGNIFICANT ACCOUNTING POLICIES
PRINCIPLES OF CONSOLIDATION
Cal Fed Bancorp Inc. was incorporated as a Delaware corporation to serve as
the holding company for California Federal Bank, F.S.B. ("California Federal").
During the 1995 fourth quarter, California Federal received both regulatory and
shareholder approval to reorganize into a holding company structure. Prior to
the effective date of the reorganization, Cal Fed Bancorp Inc. was a
wholly-owned subsidiary of California Federal. On December 22, 1995, as part of
the reorganization into a holding company structure, California Federal
contributed $22 million in capital to Cal Fed Bancorp Inc. On January 1, 1996,
the reorganization was effected in which each share of California Federal common
stock was converted into one share of Cal Fed Bancorp Inc. common stock. As a
result of the reorganization, California Federal became a wholly-owned
subsidiary of Cal Fed Bancorp Inc. The other equity securities remain
outstanding securities of California Federal. However, while the 7 3/4%
noncumulative convertible preferred stock, Series A of California Federal
remains an outstanding security of California Federal, the Series A preferred
stock will be convertible into shares of Cal Fed Bancorp Inc. common stock if
converted. The Bank may call the Series A preferred stock at anytime on or after
March 31, 1996 at its par value of $25.00.
The consolidated financial statements include the accounts of Cal Fed
Bancorp Inc. and its subsidiaries ("the Bank"). The Bank maintains 125 full
service branches in California and Nevada and is one of the largest savings
associations in the United States. The Bank offers a broad range of consumer
financial services including demand and term deposits and mortgage and consumer
loans. Subsidiaries of the Bank sell insurance and investment products to the
Bank's customers, and have previously engaged in the real estate investment and
development and trust business. The Bank's deposit gathering and loan production
operations are concentrated in California, particularly in Southern California.
It is the Bank's policy to consolidate all majority-owned subsidiaries. All
significant intercompany balances and transactions have been eliminated in
consolidation. Certain reclassifications have been made to the 1994 and 1993
data in order to conform to the current presentation. The preparation of the
Bank's financial statements, in conformity with generally accepted accounting
principles, requires management to make estimates and assumptions that affect
the reported amounts of assets and liabilities and disclosure of contingent
assets and liabilities at the date of the Financial Statements and the reported
operations of the Bank for the periods presented. Actual results may differ from
those estimates calculated by the Bank.
In December 1995, California Federal contributed approximately $22 million
in capital to Cal Fed Bancorp Inc. as part of the reorganization into a holding
company structure. Although the contribution did not impact California Federal's
consolidated regulatory capital at December 31, 1995, California Federal's
regulatory capital will be reduced by the amount of the contribution in 1996.
SHORT-TERM LIQUID INVESTMENTS
The Bank's short-term liquid investments consist of federal funds sold and
certificates of deposit. These investments generally mature within 60 days. The
Bank invests in these assets as a means to maximize its return on short-term
funds that it holds for liquidity purposes.
SECURITIES PURCHASED UNDER AGREEMENTS TO RESELL
The Bank invests in securities purchased under agreements to resell
("repurchase agreements") to maximize the yield on its liquid assets. The Bank
obtains collateral for these agreements, which normally consists of U.S.
treasury securities or mortgage-backed securities ("MBS") guaranteed by agencies
of the U.S. government. The collateral is held in the custody of a trustee, who
is not a party to the transaction. The
6
<PAGE> 7
CAL FED BANCORP INC. AND SUBSIDIARIES
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS (CONTINUED)
NOTE 1: SUMMARY OF SIGNIFICANT ACCOUNTING POLICIES (CONTINUED)
duration of these agreements is typically less than 30 days. The Bank deals only
with nationally recognized investment banking firms as the counterparties to
these agreements. The Bank's investment in repurchase agreements solely
consisted of securities purchased under agreements to resell identical
securities.
INVESTMENTS IN SECURITIES
The Bank's investment in securities principally consists of U.S. treasury
securities and mortgage-backed securities. The Bank has created MBS when it
exchanges pools of loans for mortgage-backed securities ("securitized loans").
The Bank adopted Statement of Financial Accounting Standard No. 115, Accounting
for Certain Investments in Debt and Equity Securities ("SFAS 115") at December
31, 1993. In accordance with SFAS 115, the Bank classifies its investment in
securities as held to maturity securities, trading securities and available for
sale securities as applicable. The Bank did not hold any trading securities at
December 31, 1995 or 1994.
Available for Sale Securities
The Bank has classified certain securities as "available for sale". The
Bank classifies securities as available for sale based upon a determination that
such securities may be sold at a future date or if there are foreseeable
circumstances under which the Bank would sell such securities.
Securities designated as available for sale are recorded at market value.
Changes in the market value of debt securities held for sale are included in
shareholders' equity as unrealized holding gains or losses net of the related
tax effect, if any. Unrealized losses, on available for sale securities
reflecting a decline in value judged to be other than temporary, are charged to
income in the Consolidated Statement of Operations. Realized gains or losses on
available for sale securities are computed on a specific identification basis.
Securities Held to Maturity
The Bank has classified certain securities as "held to maturity".
Securities are designated as held to maturity if the Bank has the positive
intent and the ability to hold the securities to maturity. Held to maturity
securities are carried at amortized cost, adjusted for the amortization of any
related premiums or the accretion of any related discounts into interest income
using a methodology which approximates a level yield of interest over the
estimated remaining period until maturity. Unrealized losses on held to maturity
securities, reflecting a decline in value, judged by the Bank to be other than
temporary, are charged to income and reported under the caption "Gain (loss) on
Sale of Securities" in the Consolidated Statements of Operations.
LOANS RECEIVABLE
The Bank's principal interest earning asset is loans receivable. The Bank
primarily originates loans secured by residential property of 4 units or less
("residential 1-4 loans"). Prior to 1993, the Bank was active in the origination
of loans secured by residential properties of 5 or more units ("multifamily
loans") and loans secured by office buildings, shopping centers, industrial
buildings, warehouses, marinas and hotels ("commercial real estate loans.") The
Bank currently limits its originations of multifamily and commercial real estate
loans to finance the sale of real estate. Prior to 1993, the Bank was active in
the origination of loans secured by vehicles, mobile homes, boats and unsecured
personal loans ("consumer loans"). Since 1993, the Bank has ceased originating
consumer loans for its own portfolio. However, the Bank does originate consumer
loans for other financial institutions for a fee. The Bank segregates its loan
portfolio into loans held for sale and loans held for investment. The Bank
normally designates a loan as held for sale at the time of origination. The
Bank's portfolio of residential 1-4 loans, multi-family loans and commercial
real estate loans are primarily secured by property located in California. The
Bank continues to focus its origination efforts in California,
7
<PAGE> 8
CAL FED BANCORP INC. AND SUBSIDIARIES
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS (CONTINUED)
NOTE 1: SUMMARY OF SIGNIFICANT ACCOUNTING POLICIES (CONTINUED)
particularly in Southern California. The Bank's ability to originate loans is
affected by economic conditions, competition and the market for real estate in
California. Likewise, the ability of the Bank's borrowers to honor their
contractual loan obligations to the Bank are also affected by the strength of
the California economy and particularly the availability of employment and the
pricing for residential housing. Should the California economy, the market for
real estate, and/or the availability of employment experience a significant
downturn over the near term, the Bank may experience a reduction in the level of
loan originations and/or an increase in loan losses.
Loans Receivable Held for Sale
The Bank has designated certain of its loans receivable as "held for sale".
In determining the level of loans held for sale, the Bank considers whether such
loans would be sold in response to liquidity needs, asset/liability management
requirements, regulatory capital needs and other factors. The Bank's current
policy is to designate substantially all originations of fixed-rate residential
1-4 loans that conform to the underwriting criteria of Fannie Mae ("FNMA"),
formerly known as the Federal National Mortgage Association or Freddie Mac
("FHLMC"), formerly known as the Federal Home Loan Mortgage Corporation, as held
for sale.
Loans held for sale are recorded at the lower of cost or market value.
Unrealized losses are recorded as 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
The Bank sells whole loans and participations in mortgage loans to
institutional and private investors. Gains and losses resulting from the sales
of loans are determined on the specific identification method and reflect the
extent that the sales proceeds exceed or are less than the Bank's investment in
the loans (which includes adjusting the unpaid principal balance of the loans
for unearned discounts, premiums and deferred fees and costs at the time of
sale). In some cases, the Bank sells loans and continues to service such loans
for the investor. In these cases, the Bank recognizes a gain or loss on the loan
sale measured by the present value of the difference between the yield on the
loans and the yield to be paid to the buyer, reduced by the normal servicing
fees, over the estimated remaining lives of those loans using market prepayment,
default and discount rate assumptions. If loans are sold with recourse, the
estimated liability under the recourse provisions is provided for in the
computation of the gain or loss. The resulting deferred discount or premium
("excess servicing") is amortized as an addition to or deduction from income
using the interest method, adjusted for actual prepayments. The Bank
periodically reviews the remaining premium to ensure that it does not exceed the
present value of the estimated excess servicing fees, using current estimates of
market prepayments and default. In the event that actual prepayments exceed the
assumptions used in determining the gain or loss, the deferred premium is
adjusted to reflect current prepayment projections by a charge to operations. To
the extent sales of loans involve the sale of part of a loan or a pool of loans
with disproportionate credit and prepayment risks, the cost basis is allocated
based upon the relative fair market value of the portion sold and the portion
retained on the date such loans were acquired or, if that is not determinable,
the date of sale. The amount of excess servicing recorded by the Bank was $3.9
million at both December 31, 1995 and 1994. Such amounts were included in
"Prepaid expenses and other assets" on the Consolidated Statements of Financial
Condition.
Loan Servicing
The Bank services its loan portfolio and real estate and consumer loans
which are owned by independent investors. Loans serviced by the Bank for others
are primarily the result of the Bank selling loans while
8
<PAGE> 9
CAL FED BANCORP INC. AND SUBSIDIARIES
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS (CONTINUED)
NOTE 1: SUMMARY OF SIGNIFICANT ACCOUNTING POLICIES (CONTINUED)
retaining the servicing of such loans. Loans which are serviced for other
parties are not included with loans receivable or any other asset in the
accompanying consolidated financial statements. Fees earned for servicing loans
for others are reported as income when the related loan payments are collected.
Loan servicing costs are charged to expense as incurred.
Loans Receivable Held for Investment
The Bank's loan portfolio is comprised of residential 1-4 loans, loans
secured by income producing real estate ("income property loans") and consumer
loans. Since 1993, the Bank has not actively engaged in originating income
property loans, except to finance the sale of the Bank's real estate.
Loans receivable are generally recorded at the contractual amounts owed by
borrowers, less deferrals, unearned interest, the allowance for loan losses,
undisbursed funds and purchase premiums and discounts. Interest on loans is
credited to income as earned, to the extent deemed collectible. Discounts on
loans purchased and unearned interest on consumer loans is accreted into
interest income using the interest method over the contractual lives of the
loans, adjusted for actual prepayments.
Loan Origination Fees and Costs
Loan origination fees and certain direct loan origination costs are
deferred and recognized over the lives of the related loans as an adjustment of
loan yield using the interest method. When a loan is paid off or sold, any
unamortized net deferred fee balance is credited to income. Commitment fees
received in connection with the purchase of loans are deferred and recognized
over the life of the resulting loans as an adjustment of yield, or if the
commitment expires unexercised, credited to income upon expiration of the
commitment. Any costs in connection with the purchase of loans are expensed as
incurred.
Impaired and Non-Performing Loans
In May 1993, the Financial Accounting Standards Board (the "FASB") issued
Statement of Financial Accounting Standards No. 114, Accounting by Creditors for
Impairment of a Loan ("SFAS 114"). Under SFAS 114, a loan is impaired when it is
"probable" that a creditor will be unable to collect all amounts due (i.e., both
principal and interest) according to the contractual terms of the loan
agreement. SFAS 114 excludes among other items, large groups of smaller-balance
homogenous loans that are collectively evaluated for impairment. The Bank
adopted SFAS 114 as of January 1, 1995. The Bank has defined residential 1-4
loans, consumer loans, multifamily loans with an outstanding balance of less
than $750,000 and commercial real estate loans with an outstanding balance of
less than $500,000 as homogenous loans. All homogenous loans that are 90 days or
more delinquent or are in foreclosure are automatically placed on non-performing
status. Additionally, homogenous loans that have had a modification of terms are
individually reviewed to determine if they meet the definition of a troubled
debt restructuring. The measurement of impairment may be based on (i) the
present value of the expected future cash flows of the impaired loan discounted
at the loan's original effective interest rate, (ii) the observable market price
of the impaired loan, or (iii) the fair value of the collateral of a
collateral-dependent loan. The amount by which the recorded investment of the
loan exceeds the measure of the impaired loan is recognized by recording a
valuation allowance with a corresponding charge to the provision for losses. For
all loans secured by real estate, the Bank measures impairment and establishes
specific valuation allowances by utilizing the fair value of the property
collateralizing the loan. Additionally, SFAS 114 eliminates the requirement that
a creditor account for certain loans as foreclosed assets until the creditor has
taken possession of the collateral. SFAS 114 became effective for financial
statements issued for fiscal years beginning after December 15, 1994 and is
required to be adopted prospectively.
9
<PAGE> 10
CAL FED BANCORP INC. AND SUBSIDIARIES
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS (CONTINUED)
NOTE 1: SUMMARY OF SIGNIFICANT ACCOUNTING POLICIES (CONTINUED)
All loans designated by the Bank as "impaired" are either placed on
non-accrual status or are designated as restructured and are included with those
loans reported as non-performing. The Bank did not experience a material impact
upon its financial condition or operations from the implementation of SFAS 114.
The Bank's non-performing loans consist of loans on which the Bank has ceased
the accrual of interest ("non-accrual loans") and loans on which various
concessions have been made with respect to the interest rate or other terms due
to the inability of the borrower to service the obligation under the original
terms of the agreement ("restructured loans"). It is the Bank's policy to place
a loan on non-accrual status in the event that the borrower is 90 days or more
delinquent or earlier if the timely collection of interest and/or principal
appears doubtful. When a loan is determined to be impaired and/or placed on
non-accrual status, the accrued and unpaid interest receivable is reversed. All
cash subsequently collected on non-accrual loans are used to reduce the recorded
investment in the loan until the loan is returned to performing status. The
Bank's policy allows for loans that are contractually performing to be
designated as impaired and to be placed on non-accrual status, if the future
collection of interest and or principal appears doubtful or the risk of default
is probable.
Allowance for Loan Losses
The Bank has established valuation allowances for estimated losses on
specific loans ("specific valuation allowances") and for the inherent risk in
the loan portfolio which has yet to be specifically identified ("general
valuation allowances").
The Bank maintains a loan monitoring system which provides a means for the
timely identification of impaired and potential problem loans and to permit the
evaluation of the adequacy of the allowances for losses. The Bank's loan
monitoring system has established specific policies relating to its residential
1-4, income property, commercial banking and consumer loan portfolios.
Additionally, the Bank is required by various regulatory agencies to monitor and
classify its assets as Pass, Special Mention, Substandard, Doubtful and Loss.
The Bank's monitoring system further disaggregates loans that are determined to
be Pass into four separate grades. Additionally, the Bank places loans on a
watchlist if they exhibit certain credit characteristics. These characteristics
include dollar size, tenant concentration and the timing of maturity.
The Bank's residential 1-4 loans and consumer loans are relatively
homogenous and no single residential 1-4 or consumer loan possesses the
potential for significant risk of loss. Therefore, the Bank normally evaluates
the risk of loss on these loans by analyzing their loss experience, performance,
default rates and other indicators of risk for the portfolios as a whole. The
Bank stratifies its income property loan portfolio by size and by type and
treats performing multi-family loans with outstanding principal balances less
than $750,000 and commercial real estate loans with balances less than $500,000
as homogenous portfolios. Income property loans that are below the homogenous
threshold are evaluated for impairment based upon their payment status and on a
pool basis. For income property loans exceeding the homogenous threshold, the
Bank conducts a periodic review of each loan in order to test each loan for
impairment. The frequency and type of review is dependent upon the inherent risk
attributed to each loan. The level of risk is measured by a scale which
evaluates each loan on a continuum of multiple grades. The frequency and
intensity of the loan review is directly proportionate to the adversity of the
loan grade. The Bank evaluates the risk of default and the risk of loss for each
loan subject to individual monitoring. During 1995, the Bank expanded the scope
of its individual loan monitoring to include commercial real estate loans with
an outstanding principal balance in excess of $500,000. Previously, the Bank had
utilized a threshold of $750,000 for all income property loans. The Bank
expanded the scope of its non-homogenous loans to assure that a majority of its
commercial real estate loans were subject to individual review. Non-performing
income property loans and performing loans that have been graded substandard,
special mention, or watchlist are typically reviewed on a quarterly basis.
Current appraisals are generally obtained annually as long as the loan continues
to possess certain risk characteristics. These loans are monitored throughout
the year by a review of the collateral's operating performance and the
10
<PAGE> 11
CAL FED BANCORP INC. AND SUBSIDIARIES
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS (CONTINUED)
NOTE 1: SUMMARY OF SIGNIFICANT ACCOUNTING POLICIES (CONTINUED)
borrowers indicated or demonstrated ability to continue to meet their
obligations. When necessary, the Bank utilizes operating statements of the
collateral to perform its own discounted cash flow analyses. These analyses
provide the basis for specific valuation allowances. Numerous other factors are
considered in the evaluation, including a review of certain individual
borrowers' current financial status, credit standing, available collateral, the
Bank's judgment regarding prevailing and anticipated economic conditions and
other relevant factors.
Specific valuation allowances are provided when an identified decline in
the value of an impaired loan (or the related collateral) is identified. The
determination of specific valuation allowances includes a periodic evaluation of
the financial status of certain individual borrowers or collateral relating to
loans specifically identified as containing elements of potential risk in the
loan portfolio. For loans that are impaired and secured by real estate or other
collateral, the Bank provides specific allowances based upon the excess of the
outstanding loan amount over the fair value of the related collateral with
consideration of holding and selling costs.
General valuation allowances are based upon the inherent risk in the loan
portfolio that has not been specifically identified. The general valuation
allowance is based upon a number of factors, including historical loss
experience, the level of non-performing and internally classified loans, the
composition of the loan portfolio, estimated remaining lives of the various
types of loans within the portfolio, prevailing and forecasted economic
conditions and the Bank's judgment. General allowances are provided for all
loans, regardless of any specific allowances provided. The determination of the
Bank's allowance for loan losses is based on estimates that are affected by
changes in the regional or national economy and market conditions. The Bank
believes that as of December 31, 1995 and 1994, the allowance for loan losses is
adequate based on current economic and market conditions. However, in the course
of evaluating the adequacy of the allowance for loan losses, the Bank has
assumed that the California economy and the market for real estate will remain
in the same relative condition that it was in at December 31, 1995. Should these
factors experience a downturn in the near term or if market interest rates
increase significantly in the near term, the Bank could experience a material
increase in the level of loan defaults and charge-offs.
REAL ESTATE HELD FOR SALE
Real estate held for sale consists of real estate acquired in settlement of
loans ("REO") and real estate investments ("REI"). REO generally results when
property collateralizing a loan is foreclosed upon or otherwise acquired by the
Bank in satisfaction of the loan. REO is recorded at the lower of the recorded
investment in the loan satisfied, the fair value or the disposition value of the
related assets acquired less anticipated disposition costs. The fair value of
the assets is based upon a current appraisal adjusted for estimated carrying and
selling costs. The disposition value is based upon the current market pricing of
the asset. Net cash receipts on REO are recorded as a reduction in the basis of
the asset. Net cash payments are expensed as incurred. The Bank's REI consist of
properties that the Bank, through its subsidiaries, acquired for purposes of
development. The Bank has not been actively involved in real estate investment
or development for several years. The Bank's REI consist of properties where the
Bank is actively seeking to dispose of the property in an expeditious manner.
The Bank records its REI at the lower of cost or fair value of the properties.
The Bank determines fair value by utilizing recent sales activity and deducting
for holding and disposition costs over the estimated remaining period to sell
the projects. The Bank has assumed an orderly disposition in estimating the
holding period to sale. Should the Bank be unable to sell the project at the
projected prices, or if the holding period is substantially longer than
forecast, or if the Bank's intent with respect to an orderly disposition were to
change, the fair value ultimately realized by the Bank could be materially lower
than the Bank's current forecast.
11
<PAGE> 12
CAL FED BANCORP INC. AND SUBSIDIARIES
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS (CONTINUED)
NOTE 1: SUMMARY OF SIGNIFICANT ACCOUNTING POLICIES (CONTINUED)
PREMISES AND EQUIPMENT, DEPRECIATION AND CAPITALIZATION OF INTEREST
Maintenance and repairs on premises and equipment are charged to expense in
the year incurred. Depreciation and amortization of premises and equipment are
computed using the straight-line method over the estimated useful lives of the
assets. Interest incurred on amounts used to finance the construction of such
assets is capitalized and amortized over the depreciable lives of the related
assets.
GOODWILL
Goodwill, which represents the excess of cost over the fair value of
tangible and identifiable intangible net assets acquired, was amortized on a
straight-line basis over the expected periods to be benefited, ranging from 20
to 40 years. During 1994, the Bank applied Statement of Financial Accounting
Standards No. 72 Accounting for Certain Acquisitions of Banking or Thrift
Institutions ("SFAS 72") to acquisitions initiated, by the Bank, prior to
September 30, 1982. SFAS 72 requires, among other things, that to the extent,
the fair value of liabilities assumed exceeds the fair value of identifiable
assets acquired from a banking or thrift institution, the unidentifiable
intangible asset recognized (i.e., goodwill) generally shall be amortized over a
period no longer than the discount on the acquired long-term interest earning
assets. SFAS 72 was effective for acquisitions initiated after September 30,
1982 with retroactive application permitted. The Bank had been accounting for
its acquisitions initiated subsequent to September 30, 1982 in accordance with
SFAS 72. The cumulative effect of the retroactive application of SFAS 72
resulted in the acceleration of the Bank's goodwill amortization arising from
the Bank's thrift institution acquisitions initiated prior to September 30,
1982. Under generally accepted accounting principles, the cumulative effect from
the retroactive application of SFAS 72 must be reflected as of the first day of
the fiscal year in which it is implemented. To that extent, $273.7 million of
remaining unamortized goodwill was eliminated effective January 1, 1994.
INCOME TAXES
The Bank files a consolidated federal income tax return and a combined
California franchise tax report with its subsidiaries.
The Bank has adopted Financial Accounting Standards Board Statement of
Financial Accounting Standards No. 109, Accounting for Income Taxes ("SFAS 109")
and has applied the provisions of SFAS 109 retroactively to January 1, 1982.
Under the asset and liability method of SFAS 109, deferred income tax expense
(benefit) is derived by establishing deferred tax assets and liabilities as of
the reporting date for the estimated future tax consequences attributable to
differences between the financial statement carrying amounts of existing assets
and liabilities and their respective tax bases. Deferred tax assets and
liabilities are measured using enacted tax rates in effect for the year in which
those temporary differences are expected to be recovered or settled. Under SFAS
109, the effect on deferred tax assets and liabilities of a change in tax rates
is recognized in income in the period that includes the enactment date. The
Bank's evaluation of the realizability of deferred tax assets includes
consideration of the amount and timing of future reversals of existing temporary
differences, as well as available taxable income in carryback years. The Bank
has not considered income from future operations in evaluating the realizability
of its deferred tax assets. See Note 20 Income Taxes.
STOCKHOLDERS' EQUITY
The par value of the Bank's common stock was $1.00 per share at December
31, 1995 and at December 31, 1994. The number of shares issued and outstanding
were 49,200,444 and 49,199,044 at December 31, 1995 and 1994, respectively. The
authorized number of common shares were 100,000,000 at December 31, 1995 and
1994.
12
<PAGE> 13
CAL FED BANCORP INC. AND SUBSIDIARIES
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS (CONTINUED)
NOTE 1: SUMMARY OF SIGNIFICANT ACCOUNTING POLICIES (CONTINUED)
During the 1995 fourth quarter, California Federal obtained regulatory and
shareholder approval to reorganize into a holding company structure. As a result
of the reorganization, on January 1, 1996, each share of California Federal
common stock was converted into one share of Cal Fed Bancorp Inc. common stock.
Consequently, California Federal became a wholly-owned subsidiary of Cal Fed
Bancorp Inc. The other equity securities remain outstanding securities of
California Federal. However, the 7 3/4% noncumulative convertible preferred
stock, Series A of California Federal is convertible into shares of Cal Fed
Bancorp Inc. common stock if converted.
The par value of the 7 3/4% noncumulative convertible preferred stock,
Series A of California Federal was $25.00 per share at both December 31, 1995
and December 31, 1994, respectively. The designated and outstanding number of
shares at December 31, 1995 were 3,800,000 and 3,740,000, respectively.
Preferred stock, Series A, dividends are not cumulative and are payable
quarterly when declared by the Board of Directors of California Federal.
Quarterly dividend payments commenced May 15, 1993. The preferred stock, Series
A, is convertible by the holder into common stock at anytime, unless previously
redeemed by California Federal, at a conversion price of $20.16 per share of
common stock, subject to adjustment. The preferred stock, Series A, is not
redeemable prior to March 31, 1996. The preferred stock, Series A, is redeemable
solely at the option of California Federal at any time on or after March 31,
1996, in whole or in part, at par value plus declared but unpaid dividends.
During 1994, California Federal issued 1,725,000 shares of 10 5/8%
noncumulative perpetual preferred stock, Series B ("Preferred Stock, Series B").
Cash dividends on the Preferred Stock, Series B, are not cumulative and are
payable quarterly when declared by the Board of Directors of California Federal.
The Preferred Stock, Series B, has a liquidation preference and par value of
$100.00 per share. The par value of the Preferred Stock, Series B was $100.00
per share at December 31, 1995 and 1994. Both the designated and outstanding
number of shares at December 31, 1995 and 1994 were 1,725,000. The Preferred
Stock, Series B, is generally not redeemable prior to April 1, 1999. The
Preferred Stock, Series B, is redeemable at the option of California Federal in
whole or in part, at $105.313 per share on or after April 1, 1999 and prior to
April 1, 2000, and at prices decreasing annually thereafter to the liquidation
preference of $100.00 per share on or after April 1, 2003, plus declared but
unpaid dividends. In addition, the Preferred Stock, Series B, is redeemable at
the option of California Federal or its successor or any acquiring or resulting
entity with respect to California Federal on or after April 1, 1996 and prior to
April 1, 1999 in whole, but not in part, in the event of a change of control of
California Federal at $114.50 per share.
On February 28, 1993, California Federal completed a one-for-five reverse
stock split (the "Reverse Stock Split") of all classes of California Federal's
common stock. The Reverse Stock Split has been reflected in the consolidated
financial statements of the Bank for and at all periods presented. Therefore,
the par value, the number of shares issued, the number of shares authorized, the
number of shares outstanding and the average number of shares at and for all
periods are presented as if the reverse stock split had occurred at the first
day of each fiscal year for all periods presented.
NET EARNINGS (LOSS) PER SHARE
Net earnings (loss) per common share is computed by dividing net earnings
(loss) available to common shareholders by the weighted average number of common
shares outstanding, including the dilutive effect, if any, of common stock
equivalents. For the years ended December 31, 1995, 1994 and 1993, the weighted
average number of shares used to calculate primary earnings (loss) per share
were 49,855,150; 43,556,167 and 24,971,836, respectively. For the years ended
December 31, 1995, 1994 and 1993 the weighted average number of shares used to
calculate fully diluted earnings (loss) per share were 50,020,218; 43,556,167
and 24,971,836, respectively.
13
<PAGE> 14
CAL FED BANCORP INC. AND SUBSIDIARIES
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS (CONTINUED)
NOTE 1: SUMMARY OF SIGNIFICANT ACCOUNTING POLICIES (CONTINUED)
FINANCIAL INSTRUMENTS
The Financial Accounting Standards Board has issued Statement of Financial
Accounting Standards No. 107 "Disclosures about Fair Value of Financial
Instruments" ("SFAS 107").
Financial instruments are defined under SFAS 107 as cash, evidence of an
ownership in an entity, or a contract that conveys or imposes on an entity the
contractual right or obligation to either receive or deliver cash or another
financial instrument.
A significant portion of the Bank's assets and liabilities are financial
instruments as defined under SFAS 107. The Bank is also a party to financial
instruments that are not reported on the Consolidated Statements of Financial
Condition ("off balance sheet financial instruments"). Such off balance sheet
financial instruments include: commitments to originate loans, standby letters
of credit, recourse arrangements and interest rate exchange agreements.
Risks Associated with Financial Instruments
Credit Risk
Credit risk of a financial instrument is the possibility that a loss may
result from the failure of another party to perform in accordance with the terms
of the contract. The most significant credit risk associated with the Bank's
financial instruments is concentrated in its loans receivable. Additionally, the
Bank is subject to credit risk on certain off-balance sheet financial
instruments. The Bank utilizes a loan monitoring system to evaluate the level of
credit risk on its loan portfolio and utilizes a similar process for loans sold
by the Bank with recourse and standby letters of credit. The Bank's credit risk
with respect to interest rate exchange agreements is limited to the premium paid
on interest rate cap and floor arrangements, and the amount of interest due from
the counterparty.
Market Risk
Market risk of a financial instrument is the possibility that future
changes in market prices may reduce the value of a financial instrument or
increase the contractual obligations of the Bank. The Bank's market risk is
concentrated in its portfolios of securities held for sale and loans receivable.
The Bank's securities held for sale are traded in active markets. The values of
these securities are susceptible to fluctuations in the general market. When a
borrower fails to meet the contractual requirements of his loan agreement, the
Bank is subject to the market risk of the collateral securing the loan.
Interest Rate Risk
Financial instruments are subject to interest rate risk to the extent that
they reprice on a frequency, degree or basis that varies from market repricing.
The Bank is subject to interest rate risk to the degree that its interest
earning assets reprice on a different frequency or schedule than its interest
bearing liabilities. A majority of the Bank's loans receivable and mortgage
backed securities reprice based upon the eleventh district cost of funds index
("COFI"). The repricing of COFI tends to lag market interest rates. The Bank
closely monitors the pricing sensitivity of its financial instruments and, if
deemed cost effective, utilizes hedging and other asset/liability techniques to
mitigate the impact of interest rate risk.
Concentrations of Credit Risk
The Bank's lending activities are principally conducted in California and
the Bank currently focuses on the origination of residential 1-4 loans. The
largest concentration of the Bank's loan portfolio is located in the
14
<PAGE> 15
CAL FED BANCORP INC. AND SUBSIDIARIES
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS (CONTINUED)
NOTE 1: SUMMARY OF SIGNIFICANT ACCOUNTING POLICIES (CONTINUED)
Los Angeles County area of California. The ability of the Bank's borrowers to
repay their commitments is contingent on several factors, including the economic
conditions in the borrower's geographic region, primarily Southern California,
market interest rates, and upon the individual financial condition of the
borrower.
Fair Value of Financial Instruments
SFAS 107 requires the disclosure of the fair value of financial
instruments, whether or not recognized on the statement of financial condition,
for which it is practicable to estimate the value. SFAS 107 requires that the
Bank disclose estimated fair values for its financial instruments. Fair values,
estimates and assumptions are set forth in Note 21 Fair Value of Financial
Instruments.
Derivative Financial Instruments
The Bank's derivative financial instruments are primarily limited to
interest rate exchange contracts and such contracts are predominantly utilized
for hedging activities for existing assets and liabilities.
The Bank uses several types of interest rate exchange contracts as an
integral part of its asset/liability management program including: (i) interest
rate swaps, (ii) interest rate caps and (iii) interest rate floors. Interest
rate exchange agreements have been utilized primarily to reduce interest rate
risk on certain interest bearing liabilities and interest earning assets.
Interest rate swap agreements are instruments in which the Bank and another
party agree to exchange interest payments on a notional amount. When using
interest rate cap agreements, the Bank pays another party a premium in exchange
for cash payments on a notional amount in the event that a specified index
exceeds a specified rate. When utilizing interest rate floors, the Bank pays a
premium in exchange for cash payments on a notional amount in the event that a
specified index is less than a specified rate. These premiums are amortized over
the duration of the agreement. The notional amounts of interest rate exchange
agreements are not reflected in the Consolidated Statements of Financial
Condition, but are disclosed in the notes to these Consolidated Financial
Statements. The Bank records interest income and expense on the accrual method
for its interest rate exchange agreements. Changes in the value of interest rate
exchange agreements that are designated as held for a purpose other than trading
are not reflected in the Consolidated Financial Statements unless the Bank
determined that it was probable that the counterparty would default. Interest
rate exchange agreements that are designated as held for trading purposes are
evaluated at fair value, and in the event that such evaluation indicates a net
liability to the Bank, such liability is reflected on the Consolidated
Statements of Financial Condition with a corresponding charge reflected on the
Consolidated Statement of Operations. To the extent that the Bank is in a gain
position, the Bank records net cash flow as income upon receipt and typically
does not record unrealized gains as income.
NEWLY ENACTED AND PROPOSED ACCOUNTING PRONOUNCEMENTS
In October 1994, the FASB issued Statement of Financial Accounting
Standards No. 118, "Accounting by Creditors for Impairment of a Loan -- Income
Recognition and Disclosures" ("SFAS 118"). SFAS 118 amends SFAS 114 to allow a
creditor to use existing methods for recognizing interest income on an impaired
loan. Additionally, SFAS 118 requires, among other things, additional
disclosure, either in the body of the Financial Statements or in the
accompanying notes, about the recorded investment in certain impaired loans and
about how a creditor recognizes interest income related to those impaired loans.
SFAS 118 is effective for financial statements issued for fiscal years beginning
after December 15, 1994. The disclosures required by SFAS 118 are reflected in
the Notes to the Consolidated Financial Statements.
In March 1995, the FASB issued Statement of Financial Accounting Standards
No. 121, "Accounting for the Impairment of Long-Lived Assets and for Long-Lived
Assets to Be Disposed of" ("SFAS 121"). SFAS 121 establishes accounting
standards for the impairment of long-lived assets, certain identifiable
15
<PAGE> 16
CAL FED BANCORP INC. AND SUBSIDIARIES
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS (CONTINUED)
NOTE 1: SUMMARY OF SIGNIFICANT ACCOUNTING POLICIES (CONTINUED)
intangibles, and goodwill related to those assets to be held and used for
long-lived assets and certain identifiable intangibles to be disposed of. SFAS
121 requires that long-lived assets and certain identifiable intangibles to be
held and used by an entity be reviewed for impairment whenever events or changes
in circumstances indicate that the carrying amount of an asset may not be
recoverable. In the event that a long lived asset is determined to be impaired,
an impairment loss shall be recognized. SFAS 121 prescribes that impairment
losses for long-lived assets shall be measured as the amount by which the
carrying amount of the asset exceeds its fair value. Additionally, SFAS 121
provides that long-lived assets, to be disposed by sale or abandonment, shall be
reported at the lower of carrying amount or fair value less cost of disposition.
This statement is effective for financial statements for fiscal years beginning
after December 15, 1995, earlier application is permitted. The Bank has not yet
implemented SFAS 121 and does not believe that it will have a material adverse
effect on its financial position or results of operations.
In May 1995, the FASB issued Statement of Financial Accounting Standards
No. 122, "Accounting for Mortgage Servicing Rights" ("SFAS 122"), an amendment
of FASB Statement No. 65 "Accounting for Certain Mortgage Banking Activities"
("SFAS 65"). SFAS 122 amends SFAS 65 to remove the distinction in accounting for
mortgage servicing rights resulting from originated loans and those resulting
from purchased loans. Additionally, SFAS 122 requires that a mortgage banking
enterprise assess its capitalized mortgage servicing rights for impairment based
on the fair value of those rights. SFAS 122 is to be applied prospectively to
fiscal years beginning after December 15, 1995, earlier application is
permitted. The Bank has not yet implemented SFAS 122 and does not believe that
it will have a material adverse effect on its financial position or results of
operations.
In October 1995, the FASB issued Statement of Financial Accounting
Standards No. 123, "Accounting for Stock-Based Compensation" ("SFAS 123"). SFAS
123 establishes financial accounting and reporting standards for stock-based
employee compensation plans. Those plans include all arrangements by which
employees receive shares of stock or other equity instruments of the employer or
the employer incurs liabilities to employees in amounts based on the price of
the employer's stock. Examples are stock purchase plans, stock options,
restricted stock, and stock appreciation rights. This Statement also applies to
transactions in which an entity issues its equity instruments to acquire goods
or services from nonemployees. Those transactions must be accounted for, or at
least disclosed in the case of stock options, based on the fair value of the
consideration received or the fair value of the equity instruments issued,
whichever is more reliably measurable. The accounting requirements of SFAS 123
are effective for transactions entered into in fiscal years that begin after
December 15, 1995. The disclosure requirements of SFAS 123 are effective for
financial statements for fiscal years beginning after December 15, 1995, or for
an earlier fiscal year for which SFAS 123 is initially adopted for recognizing
compensation cost. The Bank has not yet implemented SFAS 123 and does not
believe that it will have a material adverse effect on its financial position or
results of operations.
In November 1995, the FASB issued a Special Report as an aid in
understanding and implementing Statement of Financial Accounting Standards No.
115, "Accounting for Certain Investments in Debt and Equity Securities" ("SFAS
115"). The Special Report included such guidance that enabled the Bank to
reassess the appropriateness of the classifications of all securities held and
account for any resulting reclassifications at fair value in accordance with
SFAS 115. During the fourth quarter of 1995, the Bank, in accordance with the
Special Report, redesignated $17.2 million of MBS from "held to maturity" to
"available for sale". Prior to December 31, 1995, the Bank sold the MBS for a
loss of less than $0.1 million.
PROPOSED LEGISLATION
The Bank's deposits are insured by the Savings Association Insurance Fund
("SAIF") to a maximum of $100,000 for each insured depositor. The Federal
Deposit Insurance Corporation ("FDIC") administers a
16
<PAGE> 17
CAL FED BANCORP INC. AND SUBSIDIARIES
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS (CONTINUED)
NOTE 1: SUMMARY OF SIGNIFICANT ACCOUNTING POLICIES (CONTINUED)
separate Bank Insurance Fund ("BIF") applicable to commercial banks and certain
other non-SAIF insured institutions. Legislation is currently under
consideration by Congress which includes a one-time assessment for SAIF members
such as the Bank. Should legislation be enacted in its currently contemplated
form, the Bank's one-time assessment would be approximately $80 million, based
upon the Bank's insured deposits at March 31, 1995 and an assumed assessment
rate of 85 basis points. Additionally, once the SAIF has been recapitalized
through the one-time assessment, the Bank's deposit insurance premium
assessments would be reduced from the current rate. The currently proposed
legislation has evolved significantly over recent months and may continue to
change until final legislation is enacted, if ever. Moreover, there can be no
assurance that a premium reduction will occur.
Assuming the proposed one-time special assessment became law in 1996 and
was immediately charged against results of operations, the one-time assessment
would, most likely, have a material adverse effect on the Bank's 1996 results of
operations. However, the Bank believes that it has sufficient regulatory capital
to continue to be classified as "well-capitalized" following such an assessment.
In addition, the Bank would not face any liquidity issues as a result of such a
one-time assessment.
In addition, this proposed legislation would also significantly change the
federal income tax law affecting the bad debt reserves of savings institutions.
Although these proposed tax law changes are generally intended to provide
favorable tax results to savings institutions, there are unique situations, such
as in the case of the Bank, where the results may be unfavorable in comparison
to current tax law. The proposed legislation is currently under review and may
change significantly before final legislation is enacted, if ever.
NOTE 2: SUPPLEMENTAL DISCLOSURE OF CASH FLOW INFORMATION
For the purposes of the Consolidated Statements of Cash Flows, the Bank
defines cash as currency on hand and demand deposits with other financial
institutions.
<TABLE>
<CAPTION>
1995 1994 1993
------ -------- ------
(DOLLARS IN MILLIONS)
<S> <C> <C> <C>
Cash Paid (Received) During the Year for:
Interest expense...................................... $685.2 $ 557.8 $617.4
Income taxes refunded................................. (1.6) (8.5) (41.1)
Non-Cash Investing and Financing activities:
Loan foreclosures..................................... 146.2 189.3 506.3
Loans exchanged for mortgage-backed securities........ 239.7 424.0 411.9
Transfer of securities to available for sale.......... 17.2(A) -- 578.0
Transfer of loans to held for sale (B)................ 78.7 1,213.9 189.6
Transfer of loans to held for investment.............. -- -- 127.4
</TABLE>
- ---------------
(A) In November 1995, the FASB issued a Special Report as an aid to
understanding and implementing SFAS 115. During the fourth quarter of 1995,
the Bank, in accordance with the Special Report, redesignated $17.2 million
of MBS from "held to maturity" to "available for sale" and, prior to
December 31, 1995, sold the MBS for a loss of less than $0.1 million.
(B) During 1994, the Bank designated $1.2 billion of performing and
non-performing loans as assets held for accelerated disposition. This
designation was made during 1994 as an integral part of the Bank's program
to improve its capital position, reduce non-performing assets and improve
its operating efficiency.
17
<PAGE> 18
CAL FED BANCORP INC. AND SUBSIDIARIES
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS (CONTINUED)
NOTE 3: SHORT-TERM LIQUID INVESTMENTS
The Bank's short-term liquid investments include certificates of deposit,
commercial paper and Federal funds sold. The amount of short-term liquid
investments held by the Bank at any point in time is a function of many factors
including: liquidity requirements, projected cash requirements and cash flows.
The following table presents the Bank's short-term liquid investments at
the dates indicated:
<TABLE>
<CAPTION>
DECEMBER 31, 1995 DECEMBER 31, 1994
----------------------------------------------------- -----------------------------------------------------
WEIGHTED AVG. WEIGHTED AVG.
CARRYING WEIGHTED AVG. MATURITY CARRYING WEIGHTED AVG. MATURITY
VALUE RATE (DAYS) VALUE RATE (DAYS)
--------------------- ------------- ------------- --------------------- ------------- -------------
(DOLLARS IN MILLIONS) (DOLLARS IN MILLIONS)
<S> <C> <C> <C> <C> <C> <C>
Federal funds
sold............ $70.0 5.80% 2 $ 330.0 6.28% 3
Certificates of
deposit......... 4.1 5.19 27 3.8 3.18 32
------ -------
$74.1 5.77 $ 333.8 6.25
================= =================
</TABLE>
At both December 31, 1995 and 1994 accrued interest and dividends
receivable related to short-term liquid investments held to maturity was $0.2
million.
NOTE 4: SECURITIES PURCHASED UNDER AGREEMENTS TO RESELL
Securities purchased under agreements to resell are collateralized by
mortgage-backed securities at December 31, 1995 and by U.S. Treasury securities
at December 31, 1994. The following table provides additional information on the
agreements:
<TABLE>
<CAPTION>
DECEMBER 31,
---------------------
1995 1994
-------- --------
<S> <C> <C>
(DOLLARS IN MILLIONS)
Carrying value of agreements to resell............. $1,674.6 $ 48.2
Market value of collateral......................... 1,704.4 48.3
Maximum amounts of outstanding agreements to resell
at any month-end................................. 1,704.2 48.2
Average amounts of outstanding agreements to resell
for the year..................................... 1,144.5 1,032.9
Weighted average interest rate for the year........ 5.99% 4.26%
Weighted average interest rate on year-end
balances......................................... 6.01% 5.70%
Weighted average maturity of outstanding agreements
to resell (days)................................. 11 3
</TABLE>
At December 31, 1995 and 1994, the Bank held only securities purchased
under agreements to resell the identical securities. The securities
collateralizing these agreements are held in the custodial accounts of a
trustee, who is not a party to the agreement for the Bank for the duration of
the agreements. The following table presents the Bank's securities purchased
under agreements to resell, by counterparty, at the dates indicated:
<TABLE>
<CAPTION>
DECEMBER 31,
---------------------
COUNTERPARTY 1995 1994
---------------- -------- --------
(DOLLARS IN MILLIONS)
<S> <C> <C>
Lehman Brothers............................................. $ 700.7 $ 48.2
Nomura Securities........................................... 500.0 --
Bear Stearns................................................ 473.9 --
-------- --------
$1,674.6 $ 148.2
======= =======
</TABLE>
Accrued interest related to securities purchased under agreements to resell
at December 31, 1995 and 1994 totaled $2.7 million and less than $0.1 million,
respectively.
18
<PAGE> 19
CAL FED BANCORP INC. AND SUBSIDIARIES
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS (CONTINUED)
NOTE 5: SECURITIES AVAILABLE FOR SALE
The carrying values, market values and weighted average rate of securities
available for sale at December 31, 1995 are as follows:
<TABLE>
<CAPTION>
NET
UNREALIZED UNREALIZED UNREALIZED WEIGHTED
HISTORICAL CARRYING HOLDING HOLDING HOLDING MARKET AVERAGE
COST VALUE GAINS LOSSES GAINS (LOSSES) VALUE RATE
---------- -------- ---------- ---------- -------------- ------ --------
<S> <C> <C> <C> <C> <C> <C> <C>
(DOLLARS IN MILLIONS)
U.S. Treasury securities:
Maturing within 1 year... $150.0 $149.9 $ -- $ (0.1) $ (0.1) $149.9 4.00%
Maturing after 1 year but
within 5 years......... 50.3 50.4 0.1 -- 0.1 50.4 7.46
------ ------ ---- ------ ------ ------
$200.3 $200.3 $0.1 $ (0.1) $ -- $200.3 4.87%
====== ====== ==== ====== ====== ======
</TABLE>
The carrying values, market values and weighted average rate of securities
available for sale at December 31, 1994 are as follows:
<TABLE>
<CAPTION>
NET
UNREALIZED UNREALIZED UNREALIZED WEIGHTED
HISTORICAL CARRYING HOLDING HOLDING HOLDING MARKET AVERAGE
COST VALUE GAINS LOSSES LOSSES VALUE RATE
---------- -------- ---------- ---------- ---------- -------- --------
(DOLLARS IN MILLIONS)
<S> <C> <C> <C> <C> <C> <C> <C>
U.S. Treasury securities:
Maturing within 1 year.... $1,001.2 $ 997.5 $ -- $ (3.7) $ (3.7) $ 997.5 4.64%
Maturing after 1 year
but within 5 years...... 749.5 734.0 -- (15.5) (15.5) 734.0 6.19
-------- -------- -------- ------ ------ --------
$1,750.7 $1,731.5 $ -- $(19.2) $(19.2) $1,731.5 5.30%
======== ======== ======== ====== ====== ========
</TABLE>
The table below presents the activity of securities available for sale for
the periods presented:
<TABLE>
<CAPTION>
YEAR ENDED DECEMBER 31,
-----------------------------------
1995 1994 1993
-------- -------- -------
(DOLLARS IN MILLIONS)
<S> <C> <C> <C>
Balance, January 1,........................ $1,731.5 $ 894.7 $ 546.0
Purchases.................................. 202.9 1,519.2 5.5
Sales...................................... (969.4) (670.2) --
Transfers.................................. 17.2(A) -- 578.0(B)
Maturities(C).............................. (801.1) 22.2 (250.1)
Market value adjustment.................... 19.2 (34.4) 15.3
-------- -------- -------
Balance, December 31,...................... $ 200.3 $1,731.5 $ 894.7
======== ======== =======
</TABLE>
- ---------------
(A) During 1995, the Bank transferred $17.2 million of mortgage-backed
securities held to maturity to securities available for sale. See Note 6
Securities Held to Maturity for further information.
(B) During 1993, the Bank adopted SFAS 115 and accordingly $578.0 million of
securities held to maturity were transferred to securities available for
sale.
(C) Maturities include amortization of premiums and accretion of discounts.
Accrued interest receivable on securities available for sale at December
31, 1995 and December 31, 1994 totaled $2.7 million and $15.0 million,
respectively.
Proceeds from sales of securities available for sale during the years ended
December 31, 1995, 1994 and 1993 were $976.3 million, $670.4 million and zero,
respectively.
19
<PAGE> 20
CAL FED BANCORP INC. AND SUBSIDIARIES
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS (CONTINUED)
NOTE 5: SECURITIES AVAILABLE FOR SALE (CONTINUED)
The Bank has pledged certain securities, including those available for
sale, as collateral for advances from the Student Loan Mortgage Association
("SLMA") and various other borrowings. The following table presents the
outstanding balances at the Bank's carrying value of securities pledged as
collateral at December 31, 1995 and 1994, respectively.
<TABLE>
<CAPTION>
DECEMBER 31,
-----------------
1995 1994
------ ------
(DOLLARS IN
MILLIONS)
<S> <C> <C>
Pledged as collateral for:
Repurchase agreements.................................... $ -- $692.6
SLMA advances............................................ 124.9 287.0
Other borrowings......................................... 58.8 11.9
------ ------
$183.7 $991.5
====== ======
</TABLE>
NOTE 6: SECURITIES HELD TO MATURITY
The Bank's securities held to maturity have primarily consisted of MBS. The
Bank had an investment in a guaranteed investment contract, which matured in
1995. The Bank's portfolio of MBS consist of securities issued by agencies of
the United States, such as Fannie Mae ("FNMA"). The investments are purchased or
are obtained by exchanging pools of mortgage loans for the securities
("securitized loans").
Summarized below are securities held to maturity at December 31, 1995 and
1994:
<TABLE>
<CAPTION>
1995 1994
--------------------------------------------- ---------------------------------------------
GROSS GROSS GROSS GROSS
CARRYING UNREALIZED UNREALIZED MARKET CARRYING UNREALIZED UNREALIZED MARKET
VALUE GAINS LOSSES VALUE VALUE GAINS LOSSES VALUE
-------- ---------- ---------- -------- -------- ---------- ---------- --------
(DOLLARS IN MILLIONS)
<S> <C> <C> <C> <C> <C> <C> <C> <C>
Mortgage-backed securities:
FNMA........................... $1,192.7 $17.9 $ (0.2) $1,210.4 $1,359.5 $0.4 $(46.4) $1,313.5
California Federal AA-rated
mortgage pass-through
securities................... 802.3 1.3 (5.2) 798.4 787.1 -- (21.1) 766.0
Other.......................... 371.7 1.5 (20.7) 352.5 367.1 -- (20.8) 346.3
-------- ----- ------ -------- -------- ---- ------ --------
2,366.7 20.7 (26.1) 2,361.3 2,513.7 0.4 (88.3) 2,425.8
-------- ----- ------ -------- -------- ---- ------ --------
Guaranteed investment
contracts...................... -- -- -- -- 11.4 -- -- 11.4
-------- ----- ------ -------- -------- ---- ------ --------
$2,366.7 $20.7 $(26.1) $2,361.3 $2,525.1 $0.4 $(88.3) $2,437.2
======== ===== ====== ======== ======== ==== ====== ========
</TABLE>
20
<PAGE> 21
CAL FED BANCORP INC. AND SUBSIDIARIES
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS (CONTINUED)
NOTE 6: SECURITIES HELD TO MATURITY (CONTINUED)
The weighted average interest rates of MBS held to maturity were 6.93% and
6.08% at December 31, 1995 and 1994, respectively. Accrued interest receivable
related to MBS held to maturity outstanding at December 31, 1995 and 1994
totaled $13.8 million and $12.7 million, respectively. The Bank utilizes MBS as
collateral for various borrowings. At December 31, 1995 and 1994, $1,316.3
million and $1,710.6 million, respectively, of MBS, were pledged as collateral
for various borrowings as follows:
<TABLE>
<CAPTION>
DECEMBER 31,
-------------------
1995 1994
-------- --------
(DOLLARS IN
MILLIONS)
<S> <C> <C>
Pledged as collateral for:
Advances from FHLB...................................... $ 255.9 $ 309.7
Repurchase agreements................................... 908.9 1,080.3
SLMA advances........................................... 108.6 269.9
Other obligations....................................... 42.9 50.7
-------- --------
$1,316.3 $1,710.6
======== ========
</TABLE>
At December 31, 1995, the Bank had $1,064.5 million of securitized loans
with some form of recourse to the Bank. In the unanticipated event the
securitized loans are sold, purchasers would have varying forms of recourse to
the Bank. The recourse provisions subject the Bank to varying degrees of
liability in the event of loss. The Bank currently intends to hold its portfolio
of mortgage-backed securities until maturity. The following table presents the
composition of securitized loans with potential recourse, by collateral type, at
December 31, 1995:
<TABLE>
<CAPTION>
ORIGINAL ORIGINAL
LOAN TO VALUE LOAN TO VALUE
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.................. $ 636.1 $51.0 $10.1 $ 697.2
Multi-family property.................. 365.7 -- 1.6 367.3
-------- ----- ----- --------
$1,001.8 $51.0 $11.7 $1,064.5
======== ===== ===== ========
</TABLE>
- ---------------
(A) Private mortgage insurance (PMI) provides limited insurance protection to
the Bank in the event of default.
The Bank periodically reviews the credit quality of its portfolio of MBS.
In the case of securitized loans with recourse provisions, the Bank makes an
assessment of the credit quality of the underlying loans. See Note 1 Summary of
Significant Accounting Policies for a discussion of the Bank's loan monitoring
policies.
In November 1995, the FASB issued a Special Report as an aid to
understanding and implementing SFAS 115. During the fourth quarter of 1995, the
Bank, in accordance with the Special Report, redesignated $17.2 million of MBS
from "held to maturity" to "available for sale" and, prior to December 31, 1995,
sold the MBS for a loss of less than $0.1 million. There were no sales of MBS
during the year ended December 31, 1994.
21
<PAGE> 22
CAL FED BANCORP INC. AND SUBSIDIARIES
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS (CONTINUED)
NOTE 7: LOANS RECEIVABLE HELD FOR SALE
In order to manage its asset size, liquidity requirements, the composition
and interest rate sensitivity of its interest earning assets and other factors;
the Bank originates certain fixed rate residential 1-4 loans for sale.
At December 31, 1995 and 1994, the historical cost bases of loans
receivable held for sale were $13.6 million and $1.3 million, respectively. At
December 31, 1995 and 1994, the market value of loans receivable held for sale
were $13.8 million and $1.3 million, respectively. Market values, at December
31, 1995 and 1994, were based upon quotes of similar or identical loans.
Gross unrealized gains on loans receivable held for sale were $0.2 million
and zero at December 31, 1995 and 1994, respectively. Gross unrealized losses on
loans receivable held for sale were zero at both December 31, 1995 and 1994.
Proceeds from sales of loans receivable held for sale were $183.2 million,
$1,099.4 million and $940.1 million for the years ended December 31, 1995, 1994
and 1993, respectively.
The following table summarizes the gains and losses recorded for the
periods presented for loans receivable:
<TABLE>
<CAPTION>
DECEMBER 31,
-------------------------
1995 1994 1993
----- ----- -----
(DOLLARS IN MILLIONS)
<S> <C> <C> <C>
Realized gains from sales of loans receivable............... $ 0.3 $ 1.0 $ 6.6
Realized losses from sales of loans receivable.............. (0.6) (0.5) (4.4)
Net lower of cost or market adjustment for unrealized
gains..................................................... -- -- 3.2
----- ----- -----
Net (losses) gains.......................................... $(0.3) $ 0.5 $ 5.4
===== ===== =====
</TABLE>
22
<PAGE> 23
CAL FED BANCORP INC. AND SUBSIDIARIES
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS (CONTINUED)
NOTE 8: LOANS RECEIVABLE HELD FOR INVESTMENT
Loans receivable held for investment consist of the following:
<TABLE>
<CAPTION>
DECEMBER 31,
--------------------
1995 1994
-------- --------
(DOLLARS IN
MILLIONS)
<S> <C> <C>
Loans secured by real estate:
Residential 1-4....................................... $7,277.6 $6,543.3
Equity................................................ 64.1 79.3
-------- --------
7,341.7 6,622.6
Income property:
Multi-family....................................... 1,346.2 1,458.1
Shopping centers................................... 81.8 94.5
Office buildings................................... 168.9 192.1
Other income property.............................. 291.3 278.5
-------- --------
Total income property............................ 1,888.2 2,023.2
-------- --------
Total loans secured by real estate(A).............. 9,229.9 8,645.8
Consumer:
Mobile homes....................................... 66.3 79.6
Vehicles........................................... 21.5 49.4
Equity creditline.................................. 137.8 168.7
Unsecured.......................................... 14.6 16.1
Loans secured by deposits.......................... 9.4 8.8
-------- --------
Total consumer loans............................. 249.6 322.6
-------- --------
9,479.5 8,968.4
Less:
Undisbursed loan funds................................ 0.1 --
Deferred loan (costs) fees............................ (13.9) (4.3)
Allowance for loan losses............................. 181.0 211.6
Unearned interest on equity/consumer loans............ 1.3 4.1
Discount on acquired loans............................ 7.4 9.7
-------- --------
Total loans receivable.................................. 9,303.6 8,747.3
Less: Loans held for sale (see Note 7).................. 13.6 1.3
-------- --------
Loans receivable held for investment.................... $9,290.0 $8,746.0
======== ========
</TABLE>
- ---------------
(A) Includes construction loans of $1.4 million at both December 31, 1995 and
1994.
Certain of the Bank's adjustable loan programs allow the borrower to make
monthly payments which are lower than the amount required to amortize the loan
until its maturity in any particular month. In the event that the monthly
payment is not sufficient to pay the interest accruing during the month, the
deficiency is added to the loan's principal balance ("negative amortization").
In the event that a loan incurs significant negative amortization, there is an
increased risk that the market value of the underlying collateral on the loan
may be insufficient to fully satisfy the outstanding principal and interest,
should the borrower default.
At December 31, 1995 and 1994, the Bank's loan portfolio included $4.7
billion and $4.6 billion, respectively, of loans with the potential to
negatively amortize, of which $1.4 billion and $1.0 billion of loans had some
amount of negative amortization.
23
<PAGE> 24
CAL FED BANCORP INC. AND SUBSIDIARIES
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS (CONTINUED)
NOTE 8: LOANS RECEIVABLE HELD FOR INVESTMENT (CONTINUED)
Accrued interest receivable related to loans receivable including loans
held for sale at December 31, 1995 and 1994 totaled $60.1 million and $51.7
million, respectively.
The Bank has pledged certain loans as collateral for advances from the
FHLB, letters of credit, interest rate swaps, and capital lease obligations. The
following table presents the outstanding balance of loans pledged as collateral
at December 31, 1995 and 1994:
<TABLE>
<CAPTION>
DECEMBER 31,
---------------------
1995 1994
-------- --------
(DOLLARS IN MILLIONS)
<S> <C> <C>
Pledged as collateral for:
Advances from FHLB.................................... $3,322.1 $3,408.1
Letters of credit from FHLB........................... 52.3 107.4
Interest rate swap agreements......................... -- 6.9
Capital lease obligations............................. 8.7 9.5
-------- --------
$3,383.1 $3,531.9
======== ========
</TABLE>
The Bank's loans are concentrated in (i) loans secured by residential
property of 1-4 units, (ii) loans with collateral located in California and
(iii) loans secured by residential property of five units or more. The following
table shows the concentrations of the gross real estate secured portfolio by
state and property type:
<TABLE>
<CAPTION>
INCOME PROPERTY
-------------------------------------
RESIDENTIAL 1-4 EQUITY MULTI-FAMILY COMMERCIAL
------------------- ------------- ------------------- ---------------
DECEMBER 31, DECEMBER 31, DECEMBER 31, DECEMBER 31,
------------------- ------------- ------------------- ---------------
STATE 1995 1994 1995 1994 1995 1994 1995 1994
- -------------------------------------- -------- -------- ----- ----- -------- -------- ------ ------
(DOLLARS IN MILLIONS)
<S> <C> <C> <C> <C> <C> <C> <C> <C>
California............................ $6,288.9 $5,574.7 $49.5 $24.8 $1,234.6 $1,338.1 $512.7 $530.3
Florida............................... 456.4 533.3 11.3 45.8 31.5 34.5 14.8 16.7
Nevada................................ 183.4 182.9 2.9 7.1 41.7 42.8 6.3 8.0
Georgia............................... 79.6 92.0 0.1 1.4 7.9 8.1 2.0 2.1
New York.............................. 34.4 30.3 -- -- 0.1 0.2 -- --
Arizona............................... 16.1 5.9 0.1 0.1 15.3 16.5 1.6 1.7
New Jersey............................ 32.5 27.9 -- -- -- -- -- --
Texas................................. 24.8 19.5 -- -- 2.5 4.1 0.6 1.4
Connecticut........................... 21.0 23.0 -- -- -- -- -- --
Washington............................ 13.5 4.5 -- -- 4.9 5.0 -- --
Colorado.............................. 16.4 3.0 -- -- -- -- 1.6 2.7
Illinois.............................. 11.3 1.3 0.1 -- 1.1 1.3 -- --
Other(1).............................. 99.3 45.0 0.1 0.1 6.6 7.5 2.4 2.2
-------- -------- ----- ----- -------- -------- ------ ------
$7,277.6 $6,543.3 $64.1 $79.3 $1,346.2 $1,458.1 $542.0 $565.1
======== ======== ===== ===== ======== ======== ====== ======
</TABLE>
- ---------------
(1) Includes states with totals less than $11 million.
The majority of the Bank's California real estate loans are secured by
property located in Los Angeles, Orange, and San Diego counties.
At December 31, 1995, the largest amount of loans to a single borrower
totaled $39.8 million. The collateral for the loan is a 224,840 square foot
office building occupied entirely by certain of the Bank's operating and
administrative departments and subject to a lease for the life of the loan.
24
<PAGE> 25
CAL FED BANCORP INC. AND SUBSIDIARIES
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS (CONTINUED)
NOTE 8: LOANS RECEIVABLE HELD FOR INVESTMENT (CONTINUED)
Impaired and Non-Performing Loans
The Bank identifies impaired loans through its loan monitoring process. See
Note 1 Summary of Significant Accounting Policies for further information about
the Bank's loan monitoring process. The Bank stratifies its review procedures by
loans that are reviewed on an individual basis, and those that are treated as
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 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 the Bank will be unable to collect the
contractual amount of principal and interest owed to the Bank. The Bank's policy
allows for a loan to be designated as impaired even if the borrower has
currently fulfilled his repayment obligations. Loans that are delinquent 90 days
or more, in foreclosure or if the borrower has filed for bankruptcy are normally
designated as impaired. If a loan is designated as impaired, the loan is either
placed on non-accrual status or designated as a restructured loan and is
included as a non-performing loan. Cash collected on impaired loans on
non-accrual status is generally applied as a reduction to the carrying value of
the loan.
The Bank has identified two types of non-performing loans within its
portfolio: non-accrual loans and restructured loans. The following table
summarizes the Bank's gross non-performing loans by property type at the dates
indicated:
<TABLE>
<CAPTION>
DECEMBER 31,
-------------------------------------------------------------------------
1995 1994
----------------------------------- -----------------------------------
NON-ACCRUAL RESTRUCTURED TOTAL NON-ACCRUAL RESTRUCTURED TOTAL
----------- ------------ ------ ----------- ------------ ------
(DOLLARS IN MILLIONS)
<S> <C> <C> <C> <C> <C> <C>
Residential 1-4................... $ 99.6 $3.0 $102.6 $ 97.7 $5.8 $103.5
Income property:
Multi-family.................... 86.3 0.3 86.6 55.9 -- 55.9
Shopping centers................ 1.3 -- 1.3 2.3 -- 2.3
Office buildings................ 8.8 -- 8.8 6.7 -- 6.7
Hotels/motels................... -- -- -- 0.2 -- 0.2
Other income property........... 6.8 -- 6.8 13.5 -- 13.5
------ ---- ------ ------ ---- ------
Total income property........ 103.2 0.3 103.5 78.6 -- 78.6
------ ---- ------ ------ ---- ------
Consumer.......................... 3.5 -- 3.5 1.9 -- 1.9
------ ---- ------ ------ ---- ------
$206.3 $3.3 $209.6 $178.2 $5.8 $184.0
====== ==== ====== ====== ==== ======
Interest not recognized........... $ 10.6 $ -- $ 10.6 $ 18.0 $0.1 $ 18.1
====== ==== ====== ====== ==== ======
</TABLE>
For the years ended December 31, 1995 and 1994, interest income of less
than $0.1 million and $0.6 million, respectively, was recorded on restructured
loans. This was less than $0.1 million and $0.1 million, respectively, lower
than what would have been recorded if the restructured loans had been performing
in accordance with their original contractual terms.
25
<PAGE> 26
CAL FED BANCORP INC. AND SUBSIDIARIES
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS (CONTINUED)
NOTE 8: LOANS RECEIVABLE HELD FOR INVESTMENT (CONTINUED)
The following table summarizes the Bank's concentration of gross
non-accrual and restructured loans by state as of the dates indicated:
<TABLE>
<CAPTION>
DECEMBER 31,
-------------------------------------------------------------------------------
NON-ACCRUAL RESTRUCTURED
------------------------------------- -------------------------------------
STATE 1995 1994 1995 1994
- -------------------------------- ---------------- ---------------- ---------------- ----------------
(DOLLARS IN MILLIONS)
<S> <C> <C> <C> <C> <C> <C> <C> <C>
California...................... $188.7 91.5% $162.8 91.4% $3.1 94.0% $5.8 100.0%
Florida......................... 8.5 4.1 9.7 5.4 -- -- -- --
Nevada.......................... 3.5 1.7 1.5 0.8 0.2 6.0 -- --
Georgia......................... 1.2 0.6 0.9 0.5 -- -- -- --
Texas........................... 1.0 0.5 -- -- -- -- -- --
Arizona......................... 0.4 0.2 -- -- -- -- -- --
Other........................... 3.0 1.4 3.3 1.9 -- -- -- --
------ ----- ------ ----- ---- ----- ---- -----
$206.3 100.0% $178.2 100.0% $3.3 100.0% $5.8 100.0%
====== ===== ====== ===== ==== ===== ==== =====
</TABLE>
The following table presents impaired loans with specific allowances and
impaired loans without specific allowances by property type and by the method
that impairment is determined at the dates indicated:
<TABLE>
<CAPTION>
DECEMBER 31, 1995
-----------------------------------
GROSS SPECIFIC NET
AMOUNT ALLOWANCE AMOUNT
------ --------- ------
(DOLLARS IN MILLIONS)
<S> <C> <C> <C>
Impairment Measured By Individual Review:
Impaired Loans with Specific Allowances:
Multi-family............................................. $ 86.1 $18.7 $ 67.4
Commercial real estate:
Office buildings...................................... 8.8 2.0 6.8
Shopping centers...................................... 1.3 0.2 1.1
Industrial............................................ 5.8 1.1 4.7
Other................................................. 0.9 0.3 0.6
------ ----- ------
Total commercial real estate............................. 16.8 3.6 13.2
------ ----- ------
Total impaired loans with specific allowances.............. 102.9 22.3 80.6
------ ----- ------
Impaired Loans without Specific Allowances:
Residential 1-4.......................................... 3.0 -- 3.0
Multi-family............................................. 0.5 -- 0.5
Commercial real estate................................... 0.1 -- 0.1
------ ----- ------
Total impaired loans without specific allowances........... 3.6 -- 3.6
------ ----- ------
Total impaired loans measured by individual review......... 106.5 22.3 84.2
------ ----- ------
Impairment Measured on a Pool Basis:
Residential 1-4.......................................... 99.6 -- 99.6
Consumer................................................. 3.5 -- 3.5
------ ----- ------
103.1 -- 103.1
------ ----- ------
Total impaired loans....................................... $209.6 $22.3 $187.3
====== ===== ======
</TABLE>
26
<PAGE> 27
CAL FED BANCORP INC. AND SUBSIDIARIES
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS (CONTINUED)
NOTE 8: LOANS RECEIVABLE HELD FOR INVESTMENT (CONTINUED)
The Bank has designated all impaired loans at December 31, 1995 as
non-accrual or as a troubled debt restructuring. For all impaired loans, the
Bank evaluates the need for a specific allowance by comparing the fair value of
the related collateral to the net recorded investment in the loan. For all
impaired loans where the fair value of the related collateral is less than the
net recorded investment in the loan, the Bank allocates a specific allowance
equal to the excess of the net recorded investment in the loan over the fair
value of the related collateral with consideration given to holding and selling
costs. All uncollected interest relating to impaired loans has been fully
reversed from income. At December 31, 1995, the Bank had designated $81.3
million of loans as impaired that were performing in accordance with their
contractual terms. The Bank applies cash collections from impaired loans as a
reduction of the loan's carrying amount. The average recorded investment in the
impaired loans was $89.2 million for the year ended December 31, 1995. During
the year ended December 31, 1995, the Bank did not recognize interest income on
impaired loans.
Allowance for Loan Losses
The Bank's policies for providing the appropriate level of allowance for
loan losses are discussed further in Note 1 Summary of Significant Accounting
Policies.
The following table presents an analysis of the general and specific
allowances at the dates presented:
<TABLE>
<CAPTION>
DECEMBER 31, 1995 DECEMBER 31, 1994
-------------------------------- --------------------------------
SPECIFIC GENERAL SPECIFIC GENERAL
ALLOWANCE ALLOWANCE TOTAL ALLOWANCE ALLOWANCE TOTAL
--------- --------- ------ --------- --------- ------
(DOLLARS IN MILLIONS)
<S> <C> <C> <C> <C> <C> <C>
Real estate:
Residential 1-4................... $ -- $ 45.0 $ 45.0 $ 4.1 $ 44.0 $ 48.1
Income property................... 24.3 90.0 114.3 30.4 112.0 142.4
------ ------ ------ ----- ------ ------
Total real estate............ 24.3 135.0 159.3 34.5 156.0 190.5
Consumer............................ -- 11.7 11.7 -- 11.1 11.1
Unallocated......................... -- 10.0 10.0 -- 10.0 10.0
------ ------ ------ ----- ------ ------
Total........................ $ 24.3 $156.7 $181.0 $34.5 $177.1 $211.6
====== ====== ====== ===== ====== ======
</TABLE>
27
<PAGE> 28
CAL FED BANCORP INC. AND SUBSIDIARIES
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS (CONTINUED)
NOTE 8: LOANS RECEIVABLE HELD FOR INVESTMENT (CONTINUED)
Activity in the allowance for loan losses for the years ended December 31,
1995, 1994 and 1993 is summarized as follows:
<TABLE>
<CAPTION>
1995 1994 1993
------ ------- -------
(DOLLARS IN MILLIONS)
<S> <C> <C> <C>
Balance, January 1,............................ $211.6 $ 254.3 $ 324.0
Provision for losses........................... 31.8 74.9 163.5
Charge-offs:
Real estate:
Residential 1-4........................... (24.8) (19.5) (44.1)
Income property:
Multi-family............................ (30.2) (56.1) (64.9)
Shopping centers........................ (4.9) (0.9) (17.3)
Office buildings........................ (5.5) (15.2) (20.4)
Hotels/motels........................... -- (11.6) (16.0)
Other income property................... (1.6) (6.2) (4.1)
------- ------- -------
Total income property................ (42.2) (90.0) (122.7)
------- ------- -------
Total real estate............................ (67.0) (109.5) (166.8)
Commercial banking........................... -- (6.8) (61.0)
Consumer..................................... (5.4) (7.0) (12.7)
------- ------- -------
Total Charge-offs......................... (72.4) (123.3) (240.5)
------- ------- -------
Recoveries:
Real estate:
Residential 1-4........................... 3.1 0.9 1.2
Income property:
Multi-family............................ 5.2 0.9 4.7
Shopping centers........................ 0.1 -- 2.0
Office buildings........................ 0.4 0.3 3.3
Hotels/motels........................... -- -- 0.3
Other income property................... -- 0.4 0.9
------- ------- -------
Total income property................ 5.7 1.6 11.2
------- ------- -------
Total real estate............................ 8.8 2.5 12.4
Commercial banking........................... -- 2.1 0.3
Consumer..................................... 1.2 1.1 1.7
------- ------- -------
Total recoveries.......................... 10.0 5.7 14.4
------- ------- -------
Net charge-offs................................ (62.4) (117.6) (226.1)
------- ------- -------
Allowances of sold subsidiary.................. -- -- (7.1)
------- ------- -------
Balance, December 31,.......................... $181.0 $ 211.6 $ 254.3
======= ======= =======
</TABLE>
During the normal course of business, the Bank has securitized and/or sold
certain loans with recourse. Estimated probable loan losses and related costs of
collection and repossession are provided for at the time of such sales and are
periodically reevaluated. The Bank evaluates the credit risk of loans sold with
recourse in the same manner as it reviews its own portfolio of loans. The Bank
has accrued an allowance for potential future losses on loans sold with
recourse. Such allowance is included with "Other liabilities" on the
Consolidated Statements of Financial Condition.
28
<PAGE> 29
CAL FED BANCORP INC. AND SUBSIDIARIES
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS (CONTINUED)
NOTE 8: LOANS RECEIVABLE HELD FOR INVESTMENT (CONTINUED)
A summary of the outstanding balance of loans sold with recourse at
December 31, 1995 follows:
<TABLE>
<CAPTION>
RESIDENTIAL INCOME
1-4 PROPERTY TOTAL
----------- -------- ------
(DOLLARS IN MILLIONS)
<S> <C> <C> <C>
Loans with original loan to value ratio less than or
equal to 80%......................................... $125.4 $253.6 $379.0
Loans with original loan to value ratio greater than
80%:
With PMI............................................. 2.2 -- 2.2
Without PMI.......................................... 28.8 26.3 55.1
------ ------ ------
$156.4 $279.9 $436.3
====== ====== ======
</TABLE>
The Bank has obtained credit insurance for $390.3 million of residential
loans sold with recourse not included in the amounts above. The amount of the
Bank's liability on these loans was limited to $2.8 million at December 31,
1995. The insurance was obtained to limit the Bank's risk of loss on these
loans. The fair value of the Bank's potential obligation for recourse or
guarantees on loans sold with recourse at December 31, 1995 and 1994 was
determined to approximate the value of the liability established by the Bank for
the potential cost of such obligations, which totaled $11.5 million and $11.4
million at December 31, 1995 and December 31, 1994, respectively.
At December 31, 1995, $3.8 billion of loans owned by others were serviced
by the Bank (virtually all of which were originated by the Bank) compared to
$4.5 billion and $5.3 billion at December 31, 1994 and 1993, respectively.
Loan servicing fees, which are included as a component of "Fee income" on
the Consolidated Statements of Operations, totaled $12.4 million, $14.6 million
and $18.5 million for the years ended December 31, 1995, 1994 and 1993,
respectively.
During 1993, the Bank sold $5.9 million of loan servicing, and recorded
gains on the sales of $0.2 million. Such gains have been included with "Other
income" on the Consolidated Statements of Operations. During 1995 and 1994, the
Bank had no sales of loan servicing.
29
<PAGE> 30
CAL FED BANCORP INC. AND SUBSIDIARIES
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS (CONTINUED)
NOTE 8: LOANS RECEIVABLE HELD FOR INVESTMENT (CONTINUED)
Fair Value of Loans Receivable
The fair value information presented below represents the Bank's estimate
of the fair value of its loans held for investment. The assumptions inherent in
these fair value estimates may be found in Note 21 Fair Value of Financial
Instruments.
<TABLE>
<CAPTION>
DECEMBER 31, 1995 DECEMBER 31, 1994
---------------------------- ----------------------------
BOOK VALUE(A) FAIR VALUE BOOK VALUE(A) FAIR VALUE
------------- ---------- ------------- ----------
(DOLLARS IN MILLIONS)
<S> <C> <C> <C> <C>
Residential 1-4 loans:
Fixed.......................... $ 994.1 $ 996.6 $ 688.6 $ 664.0
Adjustable..................... 6,295.3 6,293.1 5,888.5 5,700.0
------------- ---------- ------------- ----------
Total residential 1-4
loans..................... 7,289.4 7,289.7 6,577.1 6,364.0
Multi-family loans............... 1,269.7 1,230.6 1,336.3 1,255.8
Commercial real estate loans..... 494.3 485.0 525.3 505.2
Consumer loans................... 236.6 240.8 307.3 305.4
------------- ---------- ------------- ----------
Total loans held for
investment................ $ 9,290.0 $9,246.1 $ 8,746.0 $8,430.4
=========== ======== =========== ========
</TABLE>
- ---------------
(A) Book value is presented net of undisbursed loan funds, discounts, deferred
items and allowances for loan losses.
NOTE 9: REAL ESTATE HELD FOR SALE
The Bank's real estate held for sale is comprised of REO and REI.
A summary of real estate held for sale, net of allowance for losses,
follows:
<TABLE>
<CAPTION>
DECEMBER 31,
-------------------
1995 1994
----- -----
(DOLLARS IN MILLIONS)
<S> <C> <C>
Residential 1-4.......................................... $47.3 $58.6
Multi-family............................................. 1.5 5.1
Office buildings......................................... 0.3 5.6
Hotels/motels............................................ -- 6.1
Other income property.................................... 0.4 2.5
----- -----
$49.5 $77.9
===== =====
</TABLE>
30
<PAGE> 31
CAL FED BANCORP INC. AND SUBSIDIARIES
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS (CONTINUED)
NOTE 9: REAL ESTATE HELD FOR SALE (CONTINUED)
The following table presents the Bank's real estate held for sale by state
and property type at December 31, 1995:
<TABLE>
<CAPTION>
RESIDENTIAL MULTI- OFFICE COMMERCIAL/
1-4 UNITS FAMILY BUILDINGS INDUSTRIAL TOTAL
----------- ------ --------- ----------- -----
(DOLLARS IN MILLIONS)
<S> <C> <C> <C> <C> <C>
California............................... $45.6 $1.5 $ 0.3 $ 0.3 $47.7
Florida.................................. 1.2 -- -- -- 1.2
Georgia.................................. 0.3 -- -- -- 0.3
Nevada................................... 0.2 -- -- -- 0.2
Alabama.................................. -- -- -- 0.1 0.1
----- ---- ---- ---- -----
Total.................................... $47.3 $1.5 $ 0.3 $ 0.4 $49.5
===== ==== ==== ==== =====
REO...................................... $20.0 $1.5 $ 0.3 $ 0.4 $22.2
REI...................................... 27.3 -- -- -- 27.3
----- ---- ---- ---- -----
Total.................................... $47.3 $1.5 $ 0.3 $ 0.4 $49.5
===== ==== ==== ==== =====
</TABLE>
The operating results of real estate held for sale are summarized below:
<TABLE>
<CAPTION>
YEAR ENDED DECEMBER 31,
-----------------------------
1995 1994 1993
------ ------ -------
(DOLLARS IN MILLIONS)
<S> <C> <C> <C>
(Losses) gains from the sale of real estate and other
net operating income................................. $(15.4) $ 33.8 $ (24.7)
Recoveries of (provision for) losses on real estate.... 7.4 (79.7) (93.6)
------ ------ -------
$ (8.0) $(45.9) $(118.3)
====== ====== =======
</TABLE>
During the second quarter of 1995, the Bank provided an allowance with
respect to certain litigation involving loans made in 1989 and 1990 to
California Communities Inc. ("CCI"), a currently inactive subsidiary of the Bank
formerly engaged in real estate development activities. During the second
quarter of 1995, an Orange County California Superior Court jury rendered a
verdict in which it determined that the Bank was financially liable for two
loans made to CCI by the plaintiff on which CCI had defaulted. The jury awarded
the plaintiff $6.5 million in compensatory damages and punitive damages of $20.0
million against the Bank and $5.0 million against CCI. The Bank has begun the
process of appealing the judgment. While the Bank believes that its liability
from this litigation, if any, will be less than the amount awarded by the jury,
there can be no assurance that the ultimate outcome of this litigation will
result in an amount less than the amount determined by the jury and it is
possible that the Bank and its subsidiary could ultimately be found liable for
an amount in excess of the allowance that the Bank has established. The
provision for this allowance has been included in 1995 real estate operations.
The following table presents the activity in the allowance for losses on
real estate held for sale:
<TABLE>
<CAPTION>
YEAR ENDED DECEMBER 31,
-------------------------------
1995 1994 1993
------ -------- -------
(DOLLARS IN MILLIONS)
<S> <C> <C> <C>
Balance, January 1,.................................. $ 95.7 $ 121.6 $ 136.6
(Recoveries of) provision for losses................. (7.4) 79.7 93.6
Net charge-offs...................................... (49.2) (105.6) (108.6)
------ ------- -------
Balance, December 31,................................ $ 39.1 $ 95.7 $ 121.6
====== ======= =======
</TABLE>
31
<PAGE> 32
CAL FED BANCORP INC. AND SUBSIDIARIES
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS (CONTINUED)
NOTE 9: REAL ESTATE HELD FOR SALE (CONTINUED)
Amounts charged off against the allowance for losses are shown net of
recoveries. During 1995, the Bank reduced its allowance for losses on real
estate held for sale. The reduction resulted from a decrease in the Bank's
portfolio of real estate held for sale and a decrease in the level of
charge-offs during 1995. The 1994 bulk sales transactions reduced the level of
delinquent loans which has resulted in lower levels of foreclosures and losses.
The Bank did not experience a material level of recoveries during 1994 or 1993.
NOTE 10: FEDERAL HOME LOAN BANK STOCK
The Bank's investment in Federal Home Loan Bank of San Francisco ("FHLB")
stock at December 31, 1995 and 1994 was $135.7 million and $134.1 million,
respectively. The FHLB provides a central credit facility for member
institutions. As a member of the FHLB system, the Bank is required to own
capital stock in the FHLB in an amount at least equal to the greater of 1% of
the aggregate principal amount of its unpaid home loans, home purchase contracts
and similar obligations at the end of each calendar year, assuming for such
purposes that at least 30% of its assets were home mortgage loans, or 5% of its
advances (borrowings) from the FHLB. The Bank was in compliance with this
requirement at December 31, 1995. The fair value of the Bank's FHLB stock
approximates book value due to the Bank's ability to redeem such stock with the
FHLB at par value.
NOTE 11: PREMISES AND EQUIPMENT
Premises and equipment consists of the following:
<TABLE>
<CAPTION>
DECEMBER 31,
-------------------
1995 1994
------- -------
(DOLLARS IN MILLIONS)
<S> <C> <C>
Land..................................................... $ 12.0 $ 12.2
Buildings................................................ 103.8 110.6
Furniture and equipment.................................. 102.6 103.4
------ -------
218.4 226.2
Less accumulated depreciation............................ (147.2) (144.7)
------ -------
$ 71.2 $ 81.5
====== =======
</TABLE>
The Bank has operating lease commitments on certain premises and equipment.
Lease expense, net of sublease income, totaled $25.5 million, $30.7 million and
$33.2 million for the years ended December 31, 1995, 1994 and 1993,
respectively. Sublease income totaled $9.8 million, $10.3 million and $10.5
million for the years ended December 31, 1995, 1994 and 1993, respectively.
Annual minimum lease commitments at the dates presented were:
<TABLE>
<CAPTION>
DECEMBER 31,
-----------------
1995 1994
------ ------
(DOLLARS IN MILLIONS)
<S> <C> <C>
Within one year............................................................ $ 22.3 $ 22.6
Within two years........................................................... 21.7 22.3
Within three years......................................................... 20.2 21.7
Within four years.......................................................... 23.4 20.5
Within five years.......................................................... 22.9 23.8
Thereafter................................................................. 160.2 194.2
------ ------
$270.7 $305.1
====== ======
</TABLE>
32
<PAGE> 33
CAL FED BANCORP INC. AND SUBSIDIARIES
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS (CONTINUED)
NOTE 12: ACCELERATED DISPOSITION OF ASSETS
During 1994, the Bank completed the accelerated disposition of $1.3 billion
of performing and non-performing assets (the "1994 Bulk Sales"). The assets
included in the 1994 Bulk Sales included loans receivable and REO. The loans
receivable were transferred from the portfolio of loans held for investment to
"held for accelerated disposition" as an integral part of the Bank's 1994
program to raise capital, reduce non-performing assets and improve operating
efficiency. The 1994 Bulk Sales were designed to reduce the Bank's
non-performing assets and reduce the Bank's exposure to certain performing loans
with higher risk profiles than the Bank wished to retain in its portfolio. In
selecting performing loans for the 1994 Bulk Sales, the Bank considered the
credit risk inherent in the loan, the concentration that certain loans possessed
because of the geographic location of the collateral, the size of the loan
and/or the overall relationship with certain borrowers. A substantial amount of
the performing loans sold as part of the 1994 Bulk Sales were classified as
substandard or designated as special mention. The Bank recorded a $274.8 million
loss from the 1994 Bulk Sales. The Bank recorded $60.4 million of charge-offs,
relating to previously established specific allowances, on loans receivable
included in the 1994 Bulk Sales.
The table below presents the composition of the assets sold in the 1994
Bulk Sales:
<TABLE>
<CAPTION>
PERFORMING NON-ACCRUAL RESTRUCTURED
LOANS LOANS LOANS REO TOTAL
---------- ----------- ------------ ------ --------
(DOLLARS IN MILLIONS)
<S> <C> <C> <C> <C> <C>
Residential 1-4................... $ 62.4 $ 121.8 $ -- $ 47.0 $ 231.2
Multi-family...................... 487.3 183.5 7.6 34.7 713.1
Commercial real estate............ 272.4 113.9 -- 20.6 406.9
------ ------ ---- ------ --------
$822.1 $ 419.2 $7.6 $102.3 $1,351.2
====== ====== ==== ====== ========
</TABLE>
During 1993, the Bank completed the sale of a pool of $232.1 million of
non-performing assets and collected $52.4 million of payoffs on non-performing
assets (the "1993 Bulk Sale"). Those transactions resulted in a $228.7 million
reduction in non-accrual loans and a $55.8 million reduction in REO. The 1993
Bulk Sale resulted in $80.0 million of charge-offs. The charge-offs related to
the 1993 Bulk Sale were primarily related to previously established specific
valuation allowances.
NOTE 13: DEPOSITS
The Bank obtains deposits primarily through a network of full service
branches located in California and Nevada. Deposits obtained by the Bank are
insured by the SAIF of the FDIC up to a maximum of $100,000 for each depositor.
33
<PAGE> 34
CAL FED BANCORP INC. AND SUBSIDIARIES
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS (CONTINUED)
NOTE 13: DEPOSITS (CONTINUED)
A summary of deposit balances and weighted average rates at the dates
indicated follows:
<TABLE>
<CAPTION>
DECEMBER 31, 1995 DECEMBER 31, 1994
------------------ -------------------
BALANCE RATE BALANCE RATE
-------- ----- -------- ------
(DOLLARS IN MILLIONS)
<S> <C> <C> <C> <C>
Passbook accounts............................ $ 509.7 2.22% $ 578.2 2.22%
Money market and NOW accounts................ 2,008.4 2.65 2,121.1 2.38
Non-interest bearing commercial.............. 216.9 -- 184.9 --
-------- --------
2,735.0 2,884.2
Certificate accounts:
2.00% to 2.99%............................. 16.5 2.86 28.9 2.86
3.00% to 3.99%............................. 22.5 3.34 861.0 3.85
4.00% to 4.99%............................. 208.2 4.61 2,352.4 4.53
5.00% to 5.99%............................. 2,545.3 5.49 1,605.3 5.51
6.00% to 6.99%............................. 3,630.4 6.26 296.9 6.70
7.00% to 7.99%............................. 293.0 7.13 322.9 7.29
8.00% to 8.99%............................. 23.3 8.45 3.4 8.15
9.00% to 9.99%............................. 2.5 9.29 4.6 9.20
10.00% to 10.99%........................... -- -- 0.8 10.51
11.00% to 11.99%........................... -- -- 0.5 11.55
-------- --------
Total certificate accounts.............. 6,741.7 5.95 5,476.7 4.99
-------- --------
$9,476.7 4.87% $8,360.9 4.02%
======= =======
</TABLE>
Deposit maturities are summarized as follows at the dates indicated:
<TABLE>
<CAPTION>
DECEMBER 31,
---------------------
1995 1994
-------- --------
(DOLLARS IN MILLIONS)
<S> <C> <C>
Maturing within one year................................ $8,216.6 $7,392.3
Maturing after one year and within two years............ 946.6 521.7
Maturing after two years and within three years......... 196.2 178.9
Maturing after three years and within four years........ 53.6 182.8
Maturing after four years and within five years......... 26.6 44.4
Thereafter.............................................. 37.1 40.8
-------- --------
$9,476.7 $8,360.9
======= =======
</TABLE>
Jumbo certificates and other deposit accounts with balances of $100,000 or
greater included in the above table had the following remaining contractual
maturities:
<TABLE>
<CAPTION>
AT DECEMBER 31,
---------------------
1995 1994
-------- --------
(DOLLARS IN MILLIONS)
<S> <C> <C>
3 months or less...................................... $ 789.5 $ 681.1
Over 3 months but within 6 months..................... 247.2 132.6
Over 6 months but within 12 months.................... 369.9 249.3
Over 12 months........................................ 112.2 70.1
-------- --------
$1,518.8 $1,133.1
======== ========
</TABLE>
34
<PAGE> 35
CAL FED BANCORP INC. AND SUBSIDIARIES
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS (CONTINUED)
NOTE 13: DEPOSITS (CONTINUED)
At December 31, 1995, the Bank had $273.8 million of brokered deposits. At
December 31, 1994, the Bank had no brokered deposits. Accrued interest payable
on deposits at December 31, 1995 and 1994 was $10.8 million and $2.7 million,
respectively, which is included in "Interest payable" on the Consolidated
Statements of Financial Condition.
On August 4, 1994, the Bank completed the sale of 44 branches located in
Florida and Georgia ("Southeast Division"). At the time of the sale, the
Southeast Division had deposits totaling approximately $3.9 billion. The Bank
received a 4.10% deposit premium from the sale which contributed to a net gain
of $135.0 million recorded from the sale. The $135.0 million net gain from the
sale of the Southeast Division is included with "Other income" in the
Consolidated Statements of Operations for 1994.
A summary of interest expense by deposit type is summarized in the table
below for the years indicated:
<TABLE>
<CAPTION>
AT DECEMBER 31,
----------------------------
1995 1994 1993
------ ------ ------
(DOLLARS IN MILLIONS)
<S> <C> <C> <C>
Passbook accounts................................ $ 11.1 $ 14.9 $ 18.8
Money market and NOW accounts.................... 55.3 60.2 83.3
6-Month certificates............................. 26.2 27.8 41.0
9-Month to 1-Year certificates................... 133.5 113.5 154.4
Other certificates............................... 215.5 174.4 218.6
------ ------ ------
$441.6 $390.8 $516.1
====== ====== ======
</TABLE>
Savings deposit fees, which are included as a component of "Fee income" in
the Consolidated Statements of Operations, totaled $25.4 million, $25.2 million
and $26.1 million for the years ended December 31, 1995, 1994 and 1993,
respectively.
NOTE 14: ADVANCES FROM FEDERAL HOME LOAN BANK
FHLB advances totaling $2,671.0 million at December 31, 1995 and $2,526.0
million at December 31, 1994, principally adjustable rate, fixed term, with
interest rates ranging from 5.77% to 9.71%, are secured by MBS and certain
mortgage loans aggregating $3.6 billion and $3.7 billion at December 31, 1995
and 1994, respectively. The rates of the FHLB advances primarily reprice based
upon the LIBOR index and therefore are sensitive to its volatility. Accrued
interest payable on FHLB advances was $16.6 million and $9.5 million at December
31, 1995 and 1994, respectively. The accrued interest on FHLB advances is
included with "Interest payable" on the Consolidated Statements of Financial
Condition.
A summary of maturities of FHLB advances and weighted average interest
rates at December 31, 1995 and 1994 follows:
<TABLE>
<CAPTION>
1995 1994
----------------- -----------------
AMOUNT RATE AMOUNT RATE
-------- ---- -------- ----
(DOLLARS IN MILLIONS)
<S> <C> <C> <C> <C>
Maturing in one year............................ $ 880.0 6.16% $2,015.0 6.21%
Maturing in two years........................... 1,780.0 5.98 500.0 6.36
Maturing in three years......................... -- -- -- --
Maturing in four years.......................... 11.0 9.71 -- --
Maturing in five years.......................... -- -- 11.0 9.71
------- -------
$2,671.0 6.06% $2,526.0 6.25%
======= =======
</TABLE>
35
<PAGE> 36
CAL FED BANCORP INC. AND SUBSIDIARIES
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS (CONTINUED)
NOTE 14: ADVANCES FROM FEDERAL HOME LOAN BANK (CONTINUED)
At December 31, 1995, the Bank had credit availability with the FHLB which
allows borrowings up to 30% of the Bank's assets, subject to the balance of
pledged collateral, with terms up to ten years in the form of FHLB Advances and
Letters of Credit.
During 1995, $1.6 billion of the Bank's FHLB advances, utilized as a
funding source for the sale of the Southeast Division, matured. Those borrowings
bore an interest rate based upon the 1 month LIBOR plus 0.27%. When those
borrowings matured, the FHLB offered to renew them. In order to reduce the cost
of those borrowings, the Bank entered into an interest rate swap agreement which
reduces the cost of the advances to approximately the one month LIBOR plus
0.20%. The interest rate swap agreement was established, such that the index
which determines the interest that the Bank receives is identical to the index
that the Bank pays relative to the FHLB Advances. The notional amount of the
swaps totaled $1.5 billion at December 31, 1995 and the maturity of the swaps is
identical to that of the FHLB advances. The counterparty to the interest rate
swaps is an internationally recognized broker-dealer.
NOTE 15: SECURITIES SOLD UNDER AGREEMENTS TO REPURCHASE
The securities sold under agreements to repurchase ("reverse repurchase
agreements") were collateralized by MBS at December 31, 1995 and by MBS and U.S.
Treasury securities at December 31, 1994. The following table provides
additional information on the agreements:
<TABLE>
<CAPTION>
1995 1994
------- -------
(DOLLARS IN MILLIONS)
<S> <C> <C>
Carrying value of agreements to repurchase............ $ 857.3 $1,751.0
Carrying value of collateral.......................... 908.9 1,772.9
Market value of collateral............................ 907.5 1,783.5
Maximum amounts of outstanding agreements
at any month-end.................................... 1,336.8 1,751.0
Average amounts of outstanding agreements............. 1,098.9 1,493.0
Weighted average interest rate for the year........... 5.91% 4.52%
Weighted average interest on year-end balances........ 5.56% 5.87%
Weighted average maturity of outstanding agreements
(days).............................................. 148 53
</TABLE>
The securities collateralizing these agreements are held in the custodial
account of a trustee that is not a party to the agreements, until the maturities
of the agreements. For all of the agreements, the dealers have agreed to resell
the identical securities to the Bank. The following table presents reverse
repurchase agreements by counterparty:
<TABLE>
<CAPTION>
COUNTERPARTY DECEMBER 31, 1995 DECEMBER 31, 1994
------------ ------------------- -------------------
(DOLLARS IN MILLIONS)
<S> <C> <C>
Lehman Brothers................................. $ 780.9 $ 674.5
Bear Stearns.................................... 76.4 --
Morgan Stanley.................................. -- 700.1
FHLB of San Francisco........................... -- 326.5
Smith Barney.................................... -- 49.9
------- ---------
$ 857.3 $ 1,751.0
======= =========
</TABLE>
Accrued interest related to reverse repurchase agreements at December 31,
1995 and 1994 totaled $1.2 million and $4.7 million, respectively.
36
<PAGE> 37
CAL FED BANCORP INC. AND SUBSIDIARIES
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS (CONTINUED)
NOTE 16: STUDENT LOAN MARKETING ASSOCIATION ADVANCES
The advance from the Student Loan Marketing Association ("SLMA Advances")
was $200.0 million at December 31, 1995 and was secured by MBS with a carrying
value of $108.6 million and government securities with a carrying value of
$124.9 million and had a weighted average interest rate of 5.86%. At December
31, 1994, the advances totaled $475.0 million and were secured by MBS with a
carrying value of $269.9 million and government securities with a carrying value
of $287.0 million and had a weighted average interest rate of 6.43%. The SLMA
Advance outstanding at December 31, 1995 is scheduled to mature on September 18,
1996.
Accrued interest related to SLMA Advances at December 31, 1995 and 1994
totaled $0.4 million and $0.9 million, respectively.
NOTE 17: SUBORDINATED DEBENTURES
The Bank's subordinated debentures consist of (i) a senior subordinated
note, (ii) subordinated debentures issued in connection with the 1992 corporate
restructuring and (iii) convertible subordinated debentures.
Senior Subordinated Note. The Bank has outstanding a $50.0 million, 10.68%
unsecured senior subordinated note which is scheduled to mature on December 22,
1998.
1992 Subordinated Debentures. On December 16, 1992, the Bank issued $13.6
million of 10.0% unsecured subordinated debentures due 2003. The Bank
repurchased $8.7 million of these debentures during 1995 for no material gain or
loss.
Convertible Subordinated Debentures. The debentures were issued in 1986 by
CalFed Inc., the Bank's former holding company, which as a result of the 1992
corporate restructuring was merged with and into XCF Acceptance Corporation
("XCF"), a subsidiary of the Bank. The debentures are unsecured obligations of
XCF, bear an annual interest rate of 6.5%, and, effective January 1, 1996, are
convertible into the common stock of Cal Fed Bancorp Inc. at a conversion price
of $143.95 per share. The debentures are redeemable at the option of the holders
on February 20, 2000, at 123% of their principal amount.
<TABLE>
<CAPTION>
DECEMBER 31,
--------------- DATE OF INTEREST
1995 1994 MATURITY RATE
----- ----- -------------- --------
(DOLLARS IN
MILLIONS)
<S> <C> <C> <C> <C>
Senior Subordinated Note.................... $50.0 $50.0 Dec. 22, 1998 10.68%
1992 Subordinated Debt...................... 4.9 13.6 Jan. 3, 2003 10.00
Convertible Subordinated Debentures......... 2.7 2.9 Feb. 20, 2001 6.50%
----- -----
$57.6 $66.5
===== =====
</TABLE>
Accrued interest related to subordinated debentures at December 31, 1995
and 1994 totaled $0.4 million and $0.8 million, respectively.
37
<PAGE> 38
CAL FED BANCORP INC. AND SUBSIDIARIES
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS (CONTINUED)
NOTE 18: INTEREST EXPENSE ON BORROWINGS
Interest expense on borrowings is comprised of the following for the years
indicated:
<TABLE>
<CAPTION>
AT DECEMBER 31,
---------------------------
1995 1994 1993
------ ------ -----
(DOLLARS IN MILLIONS)
<S> <C> <C> <C>
Securities sold under agreements to repurchase
(short-term)............................................ $ 64.9 $ 68.5 $14.6
FHLB advances (short-term)................................ 14.7 7.4 2.3
Other..................................................... -- -- 0.6
------ ------ -----
Interest expense on short-term borrowings............... 79.6 75.9 17.5
------ ------ -----
Securities sold under agreements to repurchase
(long-term)............................................. -- -- 8.3
FHLB advances (long-term)................................. 139.4 76.2 52.4
Medium-term notes......................................... -- -- 0.4
Convertible subordinated debentures....................... 0.2 0.2 0.2
Subordinated debentures................................... 0.7 1.4 1.4
SLMA advances (long-term)................................. 29.2 16.5 9.5
Other..................................................... 5.4 5.5 6.1
------ ------ -----
Interest expense on long-term borrowings................ 174.9 99.8 78.3
------ ------ -----
Total Interest Expense on Borrowings...................... $254.5 $175.7 $95.8
====== ====== =====
</TABLE>
NOTE 19: DERIVATIVE FINANCIAL INSTRUMENTS
The Bank's use of derivative financial instruments is limited to interest
rate exchange agreements. The Bank utilizes interest rate exchange agreements as
an integral part of its asset/liability management program.
The primary focus of the Bank'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, the Bank simulates the level of
net interest income expected to be earned over a twelve month period following
the date of the simulation. The simulation is based on a projection of market
interest rates at varying levels and estimates the impact of such market rates
on the levels of interest earning assets and interest bearing liabilities during
the measurement period. Also, any periodic or lifetime caps that contractually
limit the repricing of any interest earning asset is considered.
Based upon the outcome of the simulation analysis, the Bank may consider
the use of interest rate exchange agreements as a means of reducing the
volatility of projected net interest income within certain ranges of projected
changes in interest rates. The Bank evaluates the effectiveness of entering into
any interest rate exchange agreements by measuring the cost of such agreements
in relation to the reduction in net interest income volatility within an assumed
range of interest rates.
38
<PAGE> 39
CAL FED BANCORP INC. AND SUBSIDIARIES
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS (CONTINUED)
NOTE 19: DERIVATIVE FINANCIAL INSTRUMENTS (CONTINUED)
The following tables present the Bank's interest rate exchange agreements
which were designated as hedges at December 31, 1995 and December 31, 1994:
<TABLE>
<CAPTION>
DECEMBER 31, 1995
--------------------------------------------------------------------------------------
WEIGHTED WEIGHTED
TYPE OF INTEREST MONTHS AVERAGE YIELD AVERAGE YIELD DESCRIPTION OF
RATE NOTIONAL TO DUE TO PAYABLE BY ASSET OR
EXCHANGE AGREEMENT AMOUNT MATURITY THE BANK THE BANK LIABILITY HEDGED
- -------------------- -------- -------- ------------- ------------- ------------------------
(DOLLARS
IN
MILLIONS)
<S> <C> <C> <C> <C> <C>
Interest rate
swap.............. $ 25.0 5 5.74% 8.77% FHLB advances
Interest rate
swap.............. 500.0 10 5.94 5.63 FHLB advances
Interest rate
swap.............. 100.0 3 5.45 5.94 2-year fixed rate CDs
Interest rate
swap.............. 100.0 4 7.45 5.75 18-month fixed rate CDs
Interest rate
swap.............. 100.0 3 6.36 5.60 1-year fixed rate CDs
Interest rate
swap.............. 1,540.0 15 5.83% 5.91% FHLB advances(A)
--------
Total.......... $2,365.0
========
</TABLE>
- ---------------
(A) Please refer to Note 14 Advances from Federal Home Loan Bank for further
information about this interest rate swap.
<TABLE>
<CAPTION>
DECEMBER 31, 1994
--------------------------------------------------------------------------------------
WEIGHTED WEIGHTED
MONTHS AVERAGE YIELD AVERAGE YIELD DESCRIPTION OF
TYPE OF INTEREST RATE NOTIONAL TO DUE TO PAYABLE BY ASSET OR
EXCHANGE AGREEMENT AMOUNT MATURITY THE BANK THE BANK LIABILITY HEDGED
- ----------------------- -------- -------- ------------- ------------- ------------------------
(DOLLARS
IN
MILLIONS)
<S> <C> <C> <C> <C> <C>
Interest rate swap..... $191.5 9 4.19% 8.38% Fixed rate loans
Interest rate swap..... 25.0 17 6.31 8.77 FHLB advances
Interest rate swap..... 50.0 9 5.07 6.13 2-year fixed rate CDs
Interest rate swap..... 100.0 15 5.45 6.13 2-year fixed rate CDs
Interest rate swap..... 75.0 8 3.86 6.08 FHLB advances
Interest rate swap..... 50.0 10 5.07% 6.13% 2-year fixed rate CDs
------
Total............. $491.5
======
</TABLE>
The estimated fair value of swaps designated as hedges at December 31, 1995
and 1994 were gains (losses) of $7.1 million and $(6.6) million, respectively.
At December 31, 1995 and 1994, the Bank had an index amortizing interest
rate swap which was designated as held for trading with a notional balance of
$50.0 million, with interest payable at a variable rate determined by a
specified index (3 month LIBOR) in exchange for interest receivable at a fixed
rate. At December 31, 1995, this agreement had a weighted average rate to be
paid by the Bank of 5.94% and the weighted average rate to be received was
4.82%. At December 31, 1994, this agreement had a weighted average rate to be
paid by the Bank of 5.63% and the weighted average rate to be received was
4.82%. The agreement has an expiration date of April 1999. It is partially
collateralized by MBS and a letter of credit amounting to approximately $5.4
million at December 31, 1995. The fair value of the index amortizing swap at
December 31, 1995 was a liability of $0.3 million. Such liability has been
reflected on the Consolidated Statements of Financial Condition. The average
fair value of the index amortizing swap during 1995 was a
39
<PAGE> 40
CAL FED BANCORP INC. AND SUBSIDIARIES
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS (CONTINUED)
NOTE 19: DERIVATIVE FINANCIAL INSTRUMENTS (CONTINUED)
liability of $1.0 million. The fair value of the index amortizing swap at
December 31, 1994 was a liability of $2.2 million. Such liability has been
reflected on the Consolidated Statements of Financial Condition.
At December 31, 1995 and 1994, the Bank was also a party to an interest
rate floor contract maturing September 1998. In addition, the Bank was a party
to an interest rate floor contract that matured in June 1995. The Bank paid the
counterparties premiums in exchange for cash payments in the event that a
specified index (e.g., 5-year CMT, 1-year CMT) falls below the strike price. At
December 31, 1995, the notional amount of the remaining interest rate floor was
$100.0 million, the strike price was 3.38% and the monthly floating rate was
5.29%. At December 31, 1994, the notional amount of the interest rate floors was
$150.0 million, the weighted average strike price was 4.51% and the monthly
floating rate for the interest rate floor was based on the 1-year Treasury
Constant Maturity Rate for the floor contract maturing September 1998 and the
5-year Treasury Constant Maturity Rate for the floor contract that matured in
June 1995. The unamortized premium on the interest rate floors was zero and $0.3
million at December 31, 1995 and 1994, respectively. At December 31, 1995, the
floating rate exceeded the strike price by 1.91%. At December 31, 1994, the
floating rate exceeded the strike price by an average of 2.79%.
The Bank adheres to credit guidelines when entering into interest rate
exchange agreements in order to minimize its exposure to credit loss in the
event of non-performance by the counterparties to the agreements. In the event
that a counterparty to an interest rate swap does not perform in accordance with
the terms of the agreement, the Bank would be at risk for the amount of the net
interest receivable due from the counterparty. At December 31, 1995, the Bank
was at risk for $11.9 million of net interest receivable from its counterparties
on its aggregate interest rate exchange portfolio.
NOTE 20: INCOME TAXES
Income tax expense (benefit) consists of:
<TABLE>
<CAPTION>
AT DECEMBER 31,
----------------------------
1995 1994 1993
------ ------ ------
(DOLLARS IN MILLIONS)
<S> <C> <C> <C>
Current Tax Expense (Benefit):
Federal................................................ $ -- $ -- $ 2.9
State.................................................. 0.1 -- 0.5
------ ------ ------
0.1 -- 3.4
------ ------ ------
Deferred Tax Expense (Benefit):
Federal................................................ 41.1 (49.0) (20.8)
State.................................................. 11.4 (12.3) (10.0)
------ ------ ------
52.5 (61.3) (30.8)
Change in valuation allowance for deferred tax asset..... (52.5) 61.3 30.8
------ ------ ------
Net change in net deferred taxes....................... -- -- --
------ ------ ------
Total income tax expense (benefit)..................... $ 0.1 $ -- $ 3.4
====== ====== ======
Total allocated to continuing operations............... $ 0.1 $ 6.3 $ (2.9)
Total allocated to stockholders' equity................ -- (6.3) 6.3
------ ------ ------
Total tax expense (benefit)......................... $ 0.1 $ -- $ 3.4
====== ====== ======
</TABLE>
40
<PAGE> 41
CAL FED BANCORP INC. AND SUBSIDIARIES
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS (CONTINUED)
NOTE 20: INCOME TAXES (CONTINUED)
The table below sets forth the significant components of the net deferred
tax asset/liability at December 31, 1995 and December 31, 1994 (as adjusted and
restated for 1994 and prior year tax returns filed through 1995):
<TABLE>
<CAPTION>
DECEMBER 31,
-------------------
1995 1994
------- -------
(DOLLARS IN MILLIONS)
<S> <C> <C>
Components of the deferred tax asset:
Bad debt reserve............................................... $ (87.1) $(152.8)
Real estate and partnerships................................... (38.8) (37.7)
Prior year affirmative adjustments, net........................ (48.0) (48.0)
Depreciation................................................... (10.3) (8.6)
Net operating loss carryforward................................ (30.9) (24.8)
Alternative minimum tax credit carryforward.................... (27.8) (27.8)
Other.......................................................... (11.7) (12.5)
------- -------
(254.6) (312.2)
Valuation allowance............................................ 146.3 198.8
------- -------
Deferred tax asset, net of valuation allowance.............. (108.3) (113.4)
Components of the deferred tax liability:
Loan fees, interest and discount, net.......................... 51.9 54.3
FHLB stock..................................................... 36.9 36.4
Accrued interest income........................................ 12.7 13.2
Prepaid expense................................................ 2.5 6.5
Other.......................................................... 10.6 9.3
------- -------
Deferred tax liability...................................... 114.6 119.7
------- -------
Net deferred tax liability.................................. $ 6.3 $ 6.3
======= =======
Net state deferred tax liability................................. $ 6.3 $ 6.3
Net federal deferred tax liability............................... -- --
------- -------
Net deferred tax liability.................................. $ 6.3 $ 6.3
======= =======
</TABLE>
The change in the valuation allowance from December 31, 1994 relates to the
decrease in the net deductible temporary difference in 1995 that cannot be
realized through carryback to prior periods. The valuation allowance of $146.3
million at December 31, 1995 includes $11.0 million related to a $31.5 million
acquired federal net operating loss expiring in 2002 and 2003 and $19.9 million
attributable to the Bank's tax losses occurring in 1993, 1994 and 1995. In the
event the $31.5 million net operating loss is utilized, 65% of the tax benefits
may at some time be payable to the FDIC pursuant to the acquisition agreement.
Although the Bank has reported net earnings since the quarter ended June
1994, significant regulatory and tax law changes have been proposed that could
adversely affect future earnings for both financial reporting and income tax
purposes. See Proposed Legislation in Note 1 -- Summary of Significant
Accounting Policies for further information. In addition, even though the Bank
has reported net earnings for financial reporting purposes during this period,
it has continued to generate losses for income tax purposes, thus raising
uncertainty regarding the realizability of its net operating loss carryforward
and other deferred tax assets. Accordingly, the Bank has recorded a valuation
allowance equal to its net deductible temporary difference at December 31, 1995
as well as at December 31, 1994.
41
<PAGE> 42
CAL FED BANCORP INC. AND SUBSIDIARIES
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS (CONTINUED)
NOTE 20: INCOME TAXES (CONTINUED)
The Bank generated net operating losses in 1993, 1994 and 1995 for federal
income tax purposes of $5.7 million, $21.3 million and $16.5 million expiring in
2008, 2009 and 2010, respectively. In addition, the Bank has adjusted net
operating loss carryforwards from 1993, 1994 and 1995 for California franchise
tax purposes of $16.7 million, $23.9 million and $0.8 million expiring in 1998,
1999 and 2000, respectively. The Bank also has alternative minimum tax credit
carryforwards of $19.6 million for federal income tax purposes and $8.2 million
for California franchise tax purposes which have no expiration date.
For federal income tax purposes, savings institutions that meet certain
definitional and other tests may compute a bad debt deduction based on either
the percentage of taxable income method or the experience method. For years
subsequent to 1986, the Bank has computed its deduction for qualifying real
property loans based on the experience method. The experience method allows a
deduction for an amount necessary to increase a savings institution's tax bad
debt reserve, adjusted for net charge-offs during the current year, up to the
greater of the adjusted base year reserve amount or an amount based on the
savings institution's actual 6 year moving average experience. For years
subsequent to 1987, the adjusted base year reserve amount at the end of any year
is the tax bad debt reserve amount at the end of 1987 proportionately decreased
by any reduction in the aggregate related loan base at the end of the current
year relative to the end of 1987.
The consolidated financial statements at December 31, 1995 and 1994 do not
include a potential federal income tax liability of $25.3 million and zero,
respectively, attributable to the Bank's tax bad debt reserves. Circumstances
that may require an accrual of this unrecorded tax liability are a failure to
meet the tax definition of a savings institution and, if the currently proposed
tax law changes are enacted, dividend payments in excess of tax earnings and
profits and other distributions in dissolution, liquidation or redemption of
stock.
A reconciliation of total income tax expense (benefit) and the amount
computed by applying the statutory federal corporate income tax rate to earnings
(loss) from continuing operations before income tax expense (benefit) follows:
<TABLE>
<CAPTION>
PERCENT OF PRETAX
EARNINGS
-------------------------
YEAR ENDED DECEMBER 31,
-------------------------
1995 1994 1993
----- ----- -----
<S> <C> <C> <C>
Statutory federal corporate income tax rate................. 35.0% (35.0)% (35.0)%
State tax, net of federal income tax effect................. 0.1 0.7 (0.5)
----- ----- -----
35.1 (34.3) (35.5)
Increase (decrease) resulting from:
Valuation allowance....................................... (43.9) 34.2 14.0
Bad debt deduction........................................ 0.7 3.4 14.7
Amortization of goodwill.................................. -- -- 3.6
Distribution of Participation Interests................... 8.4 -- --
Rate change............................................... -- -- (1.5)
Other, net................................................ (0.2) 1.1 2.7
----- ----- -----
0.1% 4.4% (2.0)%
===== ===== =====
</TABLE>
The Internal Revenue Service ("IRS") and the California Franchise Tax Board
("FTB") have completed examinations of the Bank's consolidated federal income
tax returns through 1988 and combined California franchise tax reports through
1985, respectively, and have proposed certain adjustments primarily related to
timing differences as to the recognition of taxable income and expense. The Bank
previously filed formal protests with both the IRS and the FTB to take exception
to these proposed adjustments and has filed claims for refund to recover its
payment of the assessed federal deficiencies. The Bank currently intends to
42
<PAGE> 43
CAL FED BANCORP INC. AND SUBSIDIARIES
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS (CONTINUED)
NOTE 20: INCOME TAXES (CONTINUED)
pursue most of the positions set forth in its federal and California protests as
well as in its federal refund claims.
In addition, the IRS has completed its examination of the consolidated
federal income tax returns filed by the Bank's former life insurance company
affiliate, Beneficial Standard Life Insurance Company ("BSLIC"), through 1989
and in December 1993, assessed certain deficiencies against BSLIC. In March
1994, the Bank filed a Tax Court petition on behalf of BSLIC, and in November
1995, the Tax Court rendered its decision affirming the Bank's position on most
of the issues contested by the Bank on behalf of BSLIC.
The Bank's current income tax receivables at December 31, 1995 and 1994
were $7.9 million and $9.6 million, respectively.
NOTE 21: FAIR VALUE OF FINANCIAL INSTRUMENTS
The following summary presents a description of the methodologies and
assumptions used to estimate the fair value of the Bank's financial instruments.
Much of the information used to determine fair value is highly subjective. When
applicable, readily available market information has been utilized. However, for
a significant portion of the Bank's financial instruments, active markets do not
exist. Therefore, considerable judgments were required in estimating fair value
for certain items. The subjective factors include, among other things, the
estimated timing and amount of cash flows, risk characteristics, credit quality
and interest rates, all of which are subject to change. Since the fair value is
estimated as of December 31, 1995 and December 31, 1994, the amounts that will
actually be realized or paid at settlement or maturity of the instruments could
be significantly different.
Cash and Short-Term Investments
The book value of cash and short-term investments approximates the fair
value of such assets because of the short maturity of such investments.
Securities Purchased Under Agreements to Resell
The book value of securities purchased under agreements to resell
approximates the fair value of such securities due to the short term maturity of
such investments.
Securities Available for Sale and Securities Held to Maturity
The Bank has utilized market quotes for similar or identical securities in
an actively traded market, where such a market exists, or has obtained quotes
from independent security brokers or dealers to determine the fair value of its
securities available for sale and securities held to maturity.
Loans Receivable
The fair value of loans receivable was computed as follows: (i) for loans
held for sale, quotes were obtained from independent brokers or dealers; (ii)
for performing residential loans held for investment, the Bank aggregated the
loans into pools based upon secondary market requirements for mortgage-backed
securities and utilized market quotes for similar securities; (iii) for
performing consumer, commercial banking and income property, the fair value was
determined by a discounted cash flow analysis and (iv) the fair value of
impaired income property loans was determined on an individual basis, based upon
the fair value of the related collateral, reduced by an estimate of the cost and
timing of disposition. For impaired residential 1-4 and consumer loans, fair
value was estimated based on a discounted cash flow analysis, adjusted for the
Bank's estimate of excess credit risk.
43
<PAGE> 44
CAL FED BANCORP INC. AND SUBSIDIARIES
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS (CONTINUED)
NOTE 21: FAIR VALUE OF FINANCIAL INSTRUMENTS (CONTINUED)
Deposits
The fair value of deposits was determined as follows: (i) for demand
deposits, passbook accounts, money market accounts and other deposits
immediately withdrawable, fair value was determined to approximate the amount
payable on demand and (ii) for fixed maturity deposits, the fair value was
estimated by discounting expected cash flows using an average of rates offered
by other institutions combined with the Bank's current offering rates of term
deposits with similar maturities. In accordance with SFAS 107, no value has been
assigned to the Bank's long-term relationships with its deposit customers (core
deposit intangible) since it is not a financial instrument as defined under SFAS
107.
Borrowings
The fair value of the Bank's borrowings was determined as follows: (i) the
fair value of FHLB advances was based upon current rates for advances with
similar terms and maturities; (ii) the fair value of student loan marketing
advances was estimated to approximate the amounts due as the rates on these
borrowings fluctuate with a market index; (iii) the fair value of reverse
repurchase agreements was based upon the current pricing for such agreements and
(iv) the fair value of the Bank's various other borrowings was based upon
alternative borrowing costs.
Off-Balance Sheet Financial Instruments
The fair value of the Bank's off-balance sheet financial instruments was
determined as follows: (i) the fair value of interest rate exchange agreements
that do not have an active market was determined by computing the net present
value of the estimated interest due to the Bank as compared to the estimated
interest due to the counterparties of the interest rate exchange agreements;
(ii) the fair value of the Bank's recourse arrangements on assets sold was
determined to approximate the value of the liability currently recorded for such
recourse arrangements; and (iii) the Bank's standby letters of credit and
commitments to originate or sell loans have terms that are consistent with
current market terms. Therefore, the Bank estimates that the face amount of
these commitments approximates book value.
44
<PAGE> 45
CAL FED BANCORP INC. AND SUBSIDIARIES
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS (CONTINUED)
NOTE 21: FAIR VALUE OF FINANCIAL INSTRUMENTS (CONTINUED)
The following table presents fair value estimates and carrying amounts for
financial instruments at December 31, 1995 and December 31, 1994:
<TABLE>
<CAPTION>
DECEMBER 31, 1995 DECEMBER 31, 1994
--------------------- ---------------------
CARRYING ESTIMATED CARRYING ESTIMATED
AMOUNT FAIR VALUE AMOUNT FAIR VALUE
-------- ---------- -------- ----------
(DOLLARS IN MILLIONS)
<S> <C> <C> <C> <C>
FINANCIAL INSTRUMENT ASSETS:
Cash........................................... $ 273.7 $ 273.7 $ 292.8 $ 292.8
Short-term liquid investments.................. 74.1 74.1 333.8 333.8
Securities purchased under agreements to
resell....................................... 1,674.6 1,674.6 48.2 48.2
Securities available for sale.................. 200.3 200.3 1,731.5 1,731.5
Securities held to maturity.................... 2,366.7 2,361.3 2,525.1 2,437.2
Loans receivable held for sale................. 13.6 13.8 1.3 1.3
Loans receivable held for investment(A)........ 9,290.0 9,246.1 8,746.0 8,430.4
Accrued interest receivable and other.......... 83.4 98.4 83.5 95.5
FINANCIAL INSTRUMENT LIABILITIES:
Savings deposits(B)............................ 9,476.7 9,534.6 8,360.9 8,425.0
Advances from federal home loan banks.......... 2,671.0 2,676.0 2,526.0 2,548.7
Securities sold under agreements to
repurchase................................... 857.3 852.2 1,751.0 1,750.6
Student loan marketing association advances.... 200.0 193.9 475.0 461.0
Other borrowings............................... 58.1 65.3 66.8 72.3
Interest payable............................... 29.4 29.4 18.6 18.6
Other liabilities.............................. 140.6 140.6 185.8 185.8
OFF-BALANCE SHEET FINANCIAL INSTRUMENTS:
Interest rate floors(C)........................ -- -- -- --
Interest rate swaps (designated as a hedge).... -- 7.1 -- (6.6)
Interest rate swaps (designated as held for
trading)(C).................................. (0.3) (0.3) (2.2) (2.2)
Loans sold with recourse(D).................... $ 11.5 $ 11.5 $ 11.4 $ 11.4
</TABLE>
- ---------------
(A) Please see Note 8 Loans Receivable Held for Investment for additional
detail.
(B) The fair value does not include any amount that relates to core deposit
intangibles, since they are not defined as financial instruments under SFAS
107.
(C) The estimated fair values represent either a net gain or a net (loss). The
net loss has been reflected in the Consolidated Statement of Financial
Position as a component of "other liabilities."
(D) These amounts represent the Bank's estimate of its credit exposure with
respect to loans sold with recourse.
45
<PAGE> 46
CAL FED BANCORP INC. AND SUBSIDIARIES
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS (CONTINUED)
NOTE 22: COMMITMENTS AND CONTINGENCIES
The Bank is a party to various outstanding commitments and contingent
liabilities in the normal course of business which are not reflected in the
accompanying consolidated financial statements. The following is a summary of
such commitments and contingencies:
<TABLE>
<CAPTION>
DECEMBER 31,
-----------------
1995 1994
------ ------
(DOLLARS IN MILLIONS)
<S> <C> <C>
Standby letters of credit................................ $ 57.9 $ 63.6
Commitments to sell loans................................ 15.7 1.8
Commitments to fund fixed rate loans..................... 232.0 231.6
Commitments to fund adjustable rate loans................ 98.3 208.2
</TABLE>
The Bank makes contractual commitments to extend credit, which are legally
binding agreements to lend money to customers at predetermined interest rates
for a specified period of time. The Bank does not anticipate any material loss
as a result of these transactions. The Bank applies the same credit standards
used in the lending process when extending these commitments, and periodically
reassesses the customers' creditworthiness through ongoing credit reviews.
The fair value of the Bank's commitments at December 31, 1995 and 1994 was
based upon (i) the contractual terms of the commitment as compared to market
terms, (ii) the period of time that the commitments could be exercised and (iii)
the inherent credit risk of the commitments. The fair value of the Bank's
commitments approximates the amount of the outstanding commitment at December
31, 1995 and 1994.
During the second quarter of 1995, the Bank provided an allowance with
respect to certain litigation involving loans made in 1989 and 1990 to
California Communities Inc. ("CCI"), a currently inactive subsidiary of the Bank
formerly engaged in real estate development activities. During the second
quarter of 1995, an Orange County, California Superior Court jury rendered a
verdict in which it determined that the Bank was financially liable for two
loans made to CCI by the plaintiff. CCI subsequently defaulted on the loans. The
jury awarded the plaintiff $6.5 million in compensatory damages and punitive
damages of $20.0 million against the Bank and $5.0 million against CCI. The Bank
has begun the process of appealing the judgment. While the Bank believes that
its liability from this litigation, if any, will be less than the amount awarded
by the jury, there can be no assurance that the ultimate outcome of this
litigation will result in an amount less than the amount determined by the jury
and it is possible that the Bank and its subsidiary could ultimately be found
liable for an amount in excess of the allowance that has been established. The
provision for this allowance has been included in 1995 real estate operations.
The Bank is involved as a defendant in certain legal proceedings incidental
to its business. The Bank has established an accrual for its estimate of the
potential liability that it believes it may be found liable for. However, it is
possible that the Bank's actual liability may be substantially higher or lower
than the amount of the established allowance. The Bank does not believe that the
litigation to which it is a party, if adversely decided, in the aggregate would
have a material adverse effect upon the Bank's financial condition. However,
adverse decisions in such matters could have a material adverse effect upon the
Bank's results of operations for the relevant period or periods in which they
occur.
46
<PAGE> 47
CAL FED BANCORP INC. AND SUBSIDIARIES
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS (CONTINUED)
NOTE 23: STOCKHOLDERS' EQUITY, PREFERRED STOCK OF SUBSIDIARY AND REGULATORY
CAPITAL
Common Stock
The Bank's common stock at December 31, 1995 and 1994 is summarized in the
table below:
<TABLE>
<CAPTION>
DECEMBER 31,
---------------------------
1995 1994
----------- -----------
<S> <C> <C>
Par value......................................................... $ 1.00 $ 1.00
Number of shares authorized....................................... 100,000,000 100,000,000
Number of shares issued and outstanding........................... 49,200,444 49,199,044
</TABLE>
During the 1995 fourth quarter, California Federal obtained regulatory and
shareholder approval to reorganize into a holding company structure, which will
provide greater flexibility for meeting future financial and competitive needs.
As a result of the reorganization, on January 1, 1996, each share of California
Federal's common stock was converted into one share of Cal Fed Bancorp Inc.
common stock. Consequently, California Federal became a wholly-owned subsidiary
of Cal Fed Bancorp Inc.
Preferred Stock of Subsidiary
In March 1993, California Federal issued 3,740,000 shares of 7 3/4%
noncumulative convertible preferred stock at its liquidation preference of
$25.00 per share (the "Preferred Stock, Series A"). The issuance of the
Preferred Stock Series A, resulted in an $89.0 million increase in the equity
capital of California Federal after deducting issue costs of $4.5 million.
Effective January 1, 1996, the Preferred Stock, Series A, is convertible by the
holders into the common stock of Cal Fed Bancorp Inc. at any time at a
conversion price of $20.16 per share, subject to adjustment. The Preferred
Stock, Series A, is not redeemable prior to March 31, 1996. At or after March
31, 1996, the Preferred Stock, Series A, is redeemable at the option of
California Federal, in whole or in part, at par value plus declared but unpaid
dividends.
In March 1994, California Federal issued 1,725,000 shares of 10 5/8%
noncumulative perpetual preferred stock at its liquidation preference of $100.00
per share (the "Preferred Stock, Series B"). The issuance of the Preferred
Stock, Series B resulted in an $164.2 million increase in the equity capital of
California Federal after deducting issue costs of $8.3 million. The Preferred
Stock, Series B, is generally not redeemable prior to April 1, 1999. The
Preferred Stock, Series B, is redeemable at the option of California Federal, in
whole or in part, at $105.313 per share on or after April 1, 1999 and prior to
April 1, 2000, and at prices decreasing annually thereafter to the liquidation
preference of $100.00 per share on or after April 1, 2003, plus declared but
unpaid dividends. In addition, the Preferred Stock, Series B, is redeemable at
the option of California Federal or its successor or any acquiring or resulting
entity with respect to California Federal on or after April 1, 1996 and prior to
April 1, 1999 in whole, but not in part, in the event of a change of control of
California Federal at $114.50 per share. The preferred stock of subsidiary is
accounted for as a minority interest in the accompanying financial statements.
Dividends on preferred stock of subsidiary are accounted for as expense in the
audited financial statements.
Common Stock Warrants
In December 1992, California Federal issued 13,879,865 warrants to purchase
California Federal common stock during June 1994. Throughout June 1994, warrant
holders were entitled to purchase one share of the common stock of California
Federal for $9.00 and five warrants. Approximately 93% of the warrants were
exercised. Warrants not exercised by June 30, 1994 became worthless and no
longer entitled the holders to purchase any shares of California Federal's
common stock. The exercised warrants provided California Federal with $23.3
million of additional equity capital during 1994.
47
<PAGE> 48
CAL FED BANCORP INC. AND SUBSIDIARIES
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS (CONTINUED)
NOTE 23: STOCKHOLDERS' EQUITY, PREFERRED STOCK OF SUBSIDIARY AND REGULATORY
CAPITAL (CONTINUED)
Participation Interests
During 1995, California Federal registered contingent litigation recovery
participation interests ("Participation Interests") to be issued to its common
shareholders. The Participation Interests represent a right to receive an amount
equal to up to 25.377745% of the cash payment, if any, actually received by
California Federal resulting from the pending goodwill lawsuit of California
Federal against the federal government. In the lawsuit, California Federal
alleges that the United States breached certain contractual commitments
regarding the computation of its regulatory capital and deprived California
Federal of certain of its property without just compensation in violation of the
United States constitution. The claims of California Federal arose from changes,
mandated by FIRREA, with respect to the rules for computing the regulatory
capital of California Federal. California Federal's shareholders of record on
July 14, 1995, received one Participation Interest for every ten shares of
common stock owned on the record date. The Participation Interests were
distributed on July 28, 1995 and began trading on the NASDAQ Small Cap Market
under the symbol "CALGZ" on August 1, 1995.
Regulatory Capital
As a savings institution which is regulated by the OTS, California Federal
is required to comply with the capital requirements of the OTS. The regulations
of the OTS require savings institutions to maintain certain minimum levels of
regulatory capital. An institution that fails to comply with its regulatory
capital requirements must obtain OTS approval of a capital plan and can be
subject to a capital directive and certain restrictions on its operations. An
institution that fails to obtain OTS approval of its capital plan is deemed to
be in an unsafe and unsound condition and could be the subject of the
appointment of a conservator or a receiver. At December 31, 1995, the
industry-wide minimum regulatory capital requirements were:
- Tangible capital of 1.5% of adjusted total assets, consisting generally
of stockholders' equity, but excluding most intangible assets such as
goodwill.
- 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).
- Total risk-based capital consisting of core capital plus certain
subordinated debt and other capital instruments and general valuation
allowances on loans receivable equal to 8.0% of the value of risk-
weighted assets plus off-balance sheet items.
The table below presents the capital ratios of California Federal as
compared to the industry-wide minimum capital requirements at December 31, 1995:
<TABLE>
<CAPTION>
CALIFORNIA REGULATORY EXCESS
FEDERAL REQUIREMENT CAPITAL
---------------- --------------- ------
<S> <C> <C> <C> <C> <C>
(DOLLARS IN MILLIONS)
Tangible Capital....................... $845.3 5.91% $214.5 1.50% $630.8
Core Capital........................... $845.3 5.91% $429.0 3.00% $416.3
Risk-based Capital..................... $961.4 12.36% $623.0 8.00% $338.4
</TABLE>
The OTS has implemented a system requiring regulatory sanctions against
institutions that are not adequately capitalized, with the sanctions growing
more severe the lower the institution's capital. The OTS has established
specific capital ratios for five separate capital categories: "well
capitalized," "adequately capitalized," "undercapitalized," "significantly
undercapitalized" and "critically undercapitalized."
48
<PAGE> 49
CAL FED BANCORP INC. AND SUBSIDIARIES
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS (CONTINUED)
NOTE 23: STOCKHOLDERS' EQUITY, PREFERRED STOCK OF SUBSIDIARY AND REGULATORY
CAPITAL (CONTINUED)
Under the OTS regulations, an institution is treated as well capitalized if
its ratio of total capital to risk-weighted assets is 10.0% or more, its ratio
of core capital to risk-weighted assets is 6.0% or more, its ratio of core
capital to total assets is 5.0% or greater and it is not subject to any order or
directive by the OTS to meet a specific capital level.
At December 31, 1995, (i) the total risk-based capital ratio of California
Federal was 12.36 percent, $183.3 million in excess of "well-capitalized"
requirements, (ii) the Tier I risk-based capital ratio of California Federal was
10.90 percent, $380.1 million in excess of "well-capitalized" requirements, and
(iii) the leverage ratio of California Federal was 5.91 percent, $130.2 million
in excess of "well-capitalized" requirements. Therefore, at December 31, 1995,
California Federal met and exceeded all of the requirements of a well
capitalized institution.
An institution is undercapitalized if its ratio of total capital to
risk-weighted assets is less than 8.0%, its ratio of core capital to
risk-weighted assets is less than 4.0% or its ratio of core capital to total
assets is less than 4.0% (3.0% if the institution receives the highest rating on
the CAMEL examination rating system). An institution whose capital falls between
the well capitalized and undercapitalized levels is treated as adequately
capitalized. An institution is treated as significantly undercapitalized if the
above capital ratios are less than 6.0%, 3.0%, or 3.0% respectively. An
institution is treated as critically undercapitalized if its ratio of tangible
equity (core capital, plus cumulative preferred stock, minus intangible assets
other than qualifying supervisory goodwill and certain purchased mortgage
servicing rights) to total assets is equal to or less than 2.0%. The OTS can
apply to an institution in a particular capital category the sanctions that
apply to the next lower capital category if the OTS determines, after providing
the institution notice and opportunity for a hearing, that (1) the institution
is in an unsafe and unsound condition, or (2) the institution received, in its
most recent report of examination, a less-than-satisfactory rating for asset
quality, management, earnings, or liquidity, and the deficiency has not been
corrected. The OTS cannot, however, use this authority to require an adequately
capitalized institution to file a capital restoration plan, or to subject a
significantly undercapitalized institution to the sanctions applicable to
critically undercapitalized institutions.
Following is a reconciliation of the shareholder's equity of California
Federal to regulatory capital as of December 31, 1995:
<TABLE>
<CAPTION>
TANGIBLE CORE RISK-BASED
CAPITAL CAPITAL CAPITAL
-------- ------- ----------
(DOLLARS IN MILLIONS)
<S> <C> <C> <C>
Shareholder's Equity of California Federal............... $887.5 $887.5 $887.5
Non-allowable capital:
Intangible assets...................................... (17.1) (17.1) (17.1)
Investment in non-permissible subsidiaries............. (25.1) (25.1) (25.1)
Tier II capital items:
Allowable subordinated debt............................ -- -- 19.2
Allowable general valuation allowance on loans
receivable (limited to 1.25% of risk-weighted
assets)............................................. -- -- 96.9
------ ------ ------
Regulatory capital of California Federal................. 845.3 845.3 961.4
Bank's minimum regulatory capital requirement............ 214.5 429.0 623.0
------ ------ ------
Excess over minimum regulatory capital requirements.... $630.8 $416.3 $338.4
====== ====== ======
</TABLE>
With certain limited exceptions, California Federal's investments in and
extensions of credit to any subsidiary engaged in activities not permissible for
a national bank ("non-includable subsidiaries") must be deducted from capital
over a phase-in period.
49
<PAGE> 50
CAL FED BANCORP INC. AND SUBSIDIARIES
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS (CONTINUED)
NOTE 23: STOCKHOLDERS' EQUITY, PREFERRED STOCK OF SUBSIDIARY AND REGULATORY
CAPITAL (CONTINUED)
The table below presents the amount of investments in and extensions of
credit to non-includable subsidiaries which may be included in regulatory
capital for the periods indicated:
<TABLE>
<CAPTION>
AMOUNT WHICH
MAY BE INCLUDED
FOR THE PERIOD IN CAPITAL
-------------- ---------------
<S> <C>
July 1, 1994 to June 30, 1995.......................... 60%
July 1, 1995 to June 30, 1996.......................... 40%
After June 30, 1996.................................... 0%
</TABLE>
At December 31, 1995, California Federal had $16.7 million included in its
regulatory capital relating to such investments and extensions of credit.
Restriction on Shareholder's Equity and Dividends
The payment of dividends, stock repurchases, and other capital
distributions by California Federal are subject to regulation by the OTS. The
OTS requires 30 days' prior notice of any capital distribution. On December 5,
1994, the OTS proposed various amendments to its rules on capital distributions
to conform them to the prompt corrective action system established by the
Federal Deposit Insurance Corporation Improvement Act of 1991. Under the
proposed regulation, those institutions that have the CAMEL ratings of 1 or 2
and are not controlled by a holding company would no longer be required to
notify OTS before capital distributions. Most other savings institutions could
make capital distributions upon giving notice to OTS provided that, following
the distribution, the institution would remain at least adequately capitalized
as defined by the prompt corrective action system. The proposed amendments are
pending.
Pursuant to statutes, savings institutions that do not meet their current
capital requirements generally may not make any capital distributions.
Tax Bad Debt Reserves
For federal income tax purposes, savings institutions meeting certain
definitional and other tests are allowed special bad debt reserve deductions. If
amounts appropriated to these tax bad debt reserves in excess of an allowable
offset computed under the experience method ("excess tax bad debt reserves") are
used for the payment of nontaxable dividends or other distributions to
stockholders (including distributions in dissolution, liquidation or redemption
of stock), an amount will generally be includable in taxable income. The amount
includable in taxable income is equal to the distribution plus the federal
income tax attributable thereto, up to the aggregate amount of excess tax bad
debt reserves. At December 31, 1995, the Bank's total tax bad debt reserves of
approximately $76 million did not include any amount which may represent excess
tax bad debt reserves.
NOTE 24: EMPLOYEE RETIREMENT BENEFIT PLANS
Retirement Plans
The Bank has two defined benefit plans: one covering its employees
("retirement income plan") and one for the non-employee directors ("outside
directors plan"). Prior to 1995, the bank had two outside directors plans.
During 1995, one of the outside directors plans was terminated and subsequently
liquidated. Effective May 31, 1993, the retirement income plan was frozen and
all accrued benefits were automatically 100% vested. The plan froze all accrued
benefits, however, credited service will continue to accrue for purposes of
determining eligibility for early retirement (and the applicable early
retirement reduction factors).
50
<PAGE> 51
CAL FED BANCORP INC. AND SUBSIDIARIES
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS (CONTINUED)
NOTE 24: EMPLOYEE RETIREMENT BENEFIT PLANS (CONTINUED)
The Bank's funding policy for the retirement income plan is to contribute
an amount equal to the minimum required contribution under the Employee
Retirement Income Security Act of 1974. The Bank from time to time may increase
its contribution beyond the minimum reflecting the tax and cash position of the
Bank and the funded status of the plan. The outside directors plan is unfunded.
Additionally, the Bank had a supplemental defined benefit retirement plan for
key employees (the "supplemental plan") which was terminated on December 31,
1993. The Bank has recorded a liability of $0.1 million as of December 31, 1995
related to the supplemental plan.
The following tables set forth the pension plans' funded status and amounts
recognized in the Bank's consolidated statements for the years indicated:
<TABLE>
<CAPTION>
RETIREMENT INCOME PLAN
-------------------------------------------
ASSETS ASSETS ASSETS
EXCEED EXCEED EXCEED
ACCUMULATED ACCUMULATED ACCUMULATED
BENEFITS BENEFITS BENEFITS
----------- ----------- -----------
1995 1994 1993
----------- ----------- -----------
(DOLLARS IN MILLIONS)
<S> <C> <C> <C>
Actuarial present value of benefit obligations:
Accumulated benefit obligation, including vested
benefits of $34.4 million in 1995, $30.9 million
in 1994, $39.1 million in 1993.................... $35.3 $30.1 $39.0
===== ===== =====
Projected benefit obligation for service rendered to
date.............................................. $35.3 $30.1 $39.0
Plan assets at fair value, primarily listed stock and
fixed income securities........................... 35.5 33.3 40.5
----- ----- -----
Excess of projected benefit obligation under plan
assets............................................ (0.2) (3.2) (1.5)
Unrecognized net gain (loss) from past experience
different from that assumed....................... (7.7) (3.3) (4.5)
Transition amount from initial application of SFAS
87................................................ -- -- --
Unrecognized prior service cost...................... -- -- --
Adjustment required to recognize minimum liability... -- -- --
----- ----- -----
Pension (asset) liability included in other
liabilities.......................................... $(7.9) $(6.5) $(6.0)
===== ===== =====
Net pension expense included the following components:
Service cost -- benefits earned during the period...... $ -- $ -- $ 2.0
Interest cost on projected benefit obligation.......... 2.0 2.4 2.9
Actual return on plan assets........................... (5.7) (1.5) (3.2)
Other, net............................................. 3.3 (1.3) 0.5
----- ----- -----
Net periodic pension (income) expense.................. $(0.4) $(0.4) $ 2.2
===== ===== =====
</TABLE>
51
<PAGE> 52
CAL FED BANCORP INC. AND SUBSIDIARIES
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS (CONTINUED)
NOTE 24: EMPLOYEE RETIREMENT BENEFIT PLANS (CONTINUED)
<TABLE>
<CAPTION>
ACCUMULATED ACCUMULATED ACCUMULATED
BENEFITS BENEFITS BENEFITS
EXCEED EXCEED EXCEED
ASSETS ASSETS ASSETS
----------- ----------- -----------
1995(A) 1994(A) 1993(B)
----------- ----------- -----------
(DOLLARS IN MILLIONS)
<S> <C> <C> <C>
Actuarial present value of benefit obligations:
Accumulated benefit obligation, including vested
benefits of $34.4 million in 1995, $30.9 million
in 1994, $39.1 million in 1993.................... $ 0.1 $ 2.3 $ 2.7
===== ===== =====
Projected benefit obligation for service rendered to
date.............................................. $ 0.1 $ 2.3 $ 2.7
Plan assets at fair value, primarily listed stock and
fixed income securities........................... -- -- --
----- ----- -----
Excess of projected benefit obligation over plan
assets............................................ 0.1 2.3 2.7
Unrecognized net gain (loss) from past experience
different from that assumed....................... -- (0.9) (1.2)
Transition amount from initial application of SFAS
87................................................ -- (0.2) (0.2)
Unrecognized prior service cost...................... -- -- --
Adjustment required to recognize minimum liability... -- 1.1 1.4
----- ----- -----
Pension (asset) liability included in other
liabilities.......................................... $ 0.1 $ 2.3 $ 2.7
===== ===== =====
Net pension expense included the following components:
Service cost -- benefits earned during the period...... $ -- $ 0.1 $ 0.1
Interest cost on projected benefit obligation.......... -- 0.2 0.2
Actual return on plan assets........................... -- -- --
Other, net............................................. -- 0.1 0.1
----- ----- -----
Net periodic pension expense........................... $ -- $ 0.4 $ 0.4
===== ===== =====
</TABLE>
- ---------------
(A) These amounts relate to both the supplemental plan and the outside directors
plan.
(B) These amounts relate to the outside directors plan.
Average assumptions used for all plans were:
<TABLE>
<CAPTION>
AS OF DECEMBER 31,
------------------------------------
1995 1994 1993
------ ------ ------
<S> <C> <C> <C>
Discount rate.............................. 7.25% 8.00% 7.25%
Rate of increase in compensation levels.... N/A(C) N/A(C) N/A(C)
Expected long-term rate of return on
assets................................... 8.50% 8.50% 8.50%
</TABLE>
- ---------------
(C) Not applicable due to a freeze in accrued benefits of the plan.
The FASB has issued Statement of Financial Accounting Standards No. 106,
Employers' Accounting for Postretirement Benefits Other Than Pensions ("SFAS
106"). SFAS 106 became effective for fiscal years beginning after December 15,
1992. SFAS 106 establishes accounting standards for all employers'
postretirement benefits other than pensions; however, it focuses on
postretirement health care benefits. SFAS 106 changes the current practice of
accounting for postretirement benefits on a cash basis by accruing the cost of
these benefits during the years the employee renders the necessary service. The
Bank has a defined benefit postretirement plan which provides for postretirement
medical benefits to eligible retired employees.
52
<PAGE> 53
CAL FED BANCORP INC. AND SUBSIDIARIES
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS (CONTINUED)
NOTE 24: EMPLOYEE RETIREMENT BENEFIT PLANS (CONTINUED)
The following table sets forth the postretirement benefits plans funded
status and amount recognized in the Bank's consolidated statements for the years
ended December 31, 1995 and 1994:
<TABLE>
<CAPTION>
1995 1994
----- -----
(DOLLARS IN
MILLIONS)
<S> <C> <C>
Accumulated Postretirement Benefit Obligation:
Current Retirees................................................... $ 2.1 $ 2.2
Current Actives.................................................... 1.0 1.5
----- -----
$ 3.1 $ 3.7
===== =====
Accumulated Postretirement Benefit Obligation........................ $ 3.1 $ 3.7
Plan assets at fair value............................................ -- --
----- -----
Excess of accumulated postretirement benefit obligations under plan
assets............................................................. 3.1 3.7
Unrecognized transition obligation................................... (4.0) (4.3)
Unrecognized net gain................................................ 3.1 2.4
----- -----
Net postretirement benefit liability included in other
liabilities..................................................... $ 2.2 $ 1.8
===== =====
Net Periodic Postretirement Benefit Cost:
Service cost....................................................... $ 0.2 $ 0.3
Interest cost...................................................... 0.3 0.4
Amortization of transition obligation.............................. 0.2 0.3
Other, net......................................................... (0.2) 0.4
----- -----
Net periodic postretirement benefit cost........................ $ 0.5 $ 1.4
===== =====
Effect of one percent increase in trend rates:
Service and interest cost.......................................... $ 0.1 $ 0.1
===== =====
Accumulated postretirement benefit obligation...................... $ 0.4 $ 0.5
===== =====
</TABLE>
The cost of inflation for health care and medical costs of plan
participants (the "health care trend rate") was assumed to start at 11.5% and
gradually trend downward over 11 years to 6%. The assumed discount rate, in
determining postretirement benefits, was 7.25% and 8.00% at December 31, 1995
and 1994, respectively. At December 31, 1995 and 1994, there were no plan assets
related to this plan.
53
<PAGE> 54
CAL FED BANCORP INC. AND SUBSIDIARIES
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS (CONTINUED)
NOTE 24: EMPLOYEE RETIREMENT BENEFIT PLANS (CONTINUED)
Investment Plus Plan
The Investment Plus Plan (the "Plan") is a defined contribution plan that
is available to substantially all employees. The Plan is a qualified plan under
Section 401(k) of the Internal Revenue Code. Employee contributions are
voluntary, as employees may elect to defer from one to ten percent of
compensation, exclusive of overtime, bonuses or other special payments
("qualifying compensation"). Participants vest immediately in their own
contributions and they vest in the Bank's contributions based on years of
service. Up to 4% of participants' contributions are matched by the Bank on a
schedule that is determined by the participants' years of service with the Bank.
The table below presents the Bank's matching contributions as determined by the
participants' years of service.
<TABLE>
<CAPTION>
BANK'S MATCHING
OF PARTICIPANTS' PARTICIPANTS'
CONTRIBUTIONS UP VESTING IN THE
TO 4% OF QUALIFIED BANK'S
YEARS OF SERVICE COMPENSATION CONTRIBUTION
---------------- ------------------ --------------
<S> <C> <C>
Less than 1 year....................................... 0% 0%
At least 1 year but less than 2 years.................. 125 0
At least 2 years but less than 3 years................. 125 25
At least 3 years but less than 4 years................. 125 50
At least 4 years but less than 5 years................. 125 75
At least 5 years, but less than 10 years............... 150 100
10 or more years....................................... 200% 100%
</TABLE>
The Bank's contributions may be made without regard to current or
accumulated profits, provided that the Plan is designed to qualify as a profit
sharing plan for purposes of Section 401(a), et seq. of the Internal Revenue
Code. For the years ended December 31, 1995, 1994 and 1993, the Bank's pre-tax
plan expense was $3.9 million, $4.2 million and $3.3 million, respectively.
NOTE 25: STOCK INCENTIVE PLANS
In December 1995, the Bank's stockholders approved the 1995 Employee Stock
Incentive Plan for Cal Fed Bancorp Inc. Under the 1995 Employee Stock Incentive
Plan, 2,000,000 shares of common stock of Cal Fed Bancorp Inc. may be issued
pursuant to grants of options or other stock based awards, subject to certain
adjustments to prevent dilution. The 1995 Employee Stock Incentive Plan became
effective upon its adoption by the stockholders. As of December 31, 1995, no
options were granted or exercised under the 1995 Employee Stock Incentive Plan.
In addition, in December 1995, the stockholders also approved the 1995
Non-Employee Director Stock Option Plan for Cal Fed Bancorp Inc. Under the 1995
Non-Employee Director Stock Option Plan, 170,000 shares of common stock of Cal
Fed Bancorp Inc. may be issued pursuant to grants of options, subject to certain
adjustments to prevent dilution. The 1995 Non-Employee Director Stock Option
Plan became effective upon its adoption by the stockholders and these options
generally became exercisable over a twenty year period from the date of grant.
The first date of grant is the day after the 1997 Annual Meeting of Stockholders
of Cal Fed Bancorp Inc. As of December 31, 1995, no options of the 1995
Non-Employee Directors Plan were granted or exercised.
In 1983, the Bank's stockholders approved the 1983 Stock Incentive Plan
under which 1,500,000 shares of common stock could have been granted as options
or sold as restricted stock to eligible employees. These options generally
became exercisable over a four year period from the date of grant. All options
granted under
54
<PAGE> 55
CAL FED BANCORP INC. AND SUBSIDIARIES
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS (CONTINUED)
NOTE 25: STOCK INCENTIVE PLANS (CONTINUED)
the 1983 Stock Incentive Plan were vested on December 16, 1992. Option activity,
giving effect for the one-for-five reverse stock split which occurred on
February 28, 1993, during 1995, 1994 and 1993 follows:
<TABLE>
<CAPTION>
1995 1994 1993
------------------------------- -------------------------------- --------------------------------
NUMBER NUMBER NUMBER
OF RANGE OF OF RANGE OF OF RANGE OF
SHARES OPTION PRICES SHARES OPTION PRICES SHARES OPTION PRICES
------ ---------------------- ------- ---------------------- ------- ----------------------
<S> <C> <C> <C> <C> <C> <C> <C> <C> <C> <C> <C> <C>
Balance, January 1........ 1,200 $15.63 - $172.50 43,200 $15.63 - $172.50 104,554 $15.63 - $172.50
Granted................... -- -- -- -- -- --
Canceled or expired....... (1,200) 86.875 (42,000) 21.25 - 163.75 (61,354) 15.63 - 172.50
Exercised................. -- -- -- -- -- --
------ ---------------------- ------- ---------------------- ------- ----------------------
Balance, December 31...... -- -- - -- 1,200 $15.63 - $172.50 43,200 $15.63 - $172.50
====== ====================== ======= ====================== ======= =====================
</TABLE>
There were no 1983 Stock Incentive Plan options exercised during 1995, 1994
or 1993.
In 1993, the Bank's shareholders approved the 1993 Employee Stock Incentive
Plan under which 1,600,000 shares of common stock may be granted subject to
certain adjustments to prevent dilution. Option activity during 1995 and 1994
follows:
<TABLE>
<CAPTION>
1995 1994 1993
------------------------------------ ----------------------------------- ------------------------------------
NUMBER NUMBER NUMBER
OF RANGE OF OF RANGE OF OF RANGE OF
SHARES OPTION PRICES SHARES OPTION PRICES SHARES OPTION PRICES
---------- ------------------------ --------- ----------------------- --------- ------------------------
<S> <C> <C> <C> <C> <C> <C> <C> <C> <C> <C> <C> <C>
Balance, January
1.............. 1,411,450 $ 1.000 - $ 15.875 1,318,500 $1.000 - $15.875 -- --
Granted.......... 35,000 9.875 - 12.750 287,200 9.375 - 13.625 1,655,900 $ 1.000 - $15.875
Canceled or
expired........ (12,850) 12.125 - 15.750 (194,250) 7.300 - 15.750 (337,400) 13.875 - 15.875
Exercised........ (1,400) 12.125 -- -- -- --
=========
--------- ------------------------ --------- ----------------------- ------------------------
Balance, December
31............. 1,432,200 $ 1.000 - $ 15.875 1,411,450 $1.000 - $15.875 1,318,500 $ 1.000 - $15.875
========= ======================== ========= ====================== ========= ========================
</TABLE>
At December 31, 1995, there were 166,400 shares available for future grant.
At December 31, 1995, the weighted average option prices for shares under option
and for shares exercisable were $7.21 and $6.51, respectively. The weighted
average option prices of shares exercised was $12.125 at December 31, 1995. On
the date of the 1993 grant, the market price of the Bank's common stock exceeded
the exercise price such that $8.0 million of deferred compensation expense was
recorded at the date of grant. These options generally vest and become
exercisable to the participants over a 36 month period. During 1995 and 1994,
approximately $2.0 million and $4.3 million, respectively, was charged to
compensation expense. The Bank has a total of $1.7 million of deferred
compensation expense scheduled to be recorded between January 1, 1996 and
December 31, 1996.
In 1994, the Bank's shareholders approved the 1994 Non-Employee Director
Stock Option Plan under which 161,000 shares of common stock may be granted
subject to certain adjustments to prevent dilution.
Option activity for the 1994 Non-Employee Director Stock Option Plan
follows:
<TABLE>
<CAPTION>
1995 1994
--------------------------- ---------------------------
NUMBER OF RANGE OF NUMBER OF RANGE OF
SHARES OPTION PRICES SHARES OPTION PRICES
--------- ------------- --------- -------------
<S> <C> <C> <C> <C>
Balance, January 1.................... 120,000 $ 10.00 -- $ --
Granted............................... -- -- 120,000 10.00
Canceled or expired................... -- -- -- --
Exercised............................. -- -- -- --
------- ------ ------- ------
Balance, December 31.................. 120,000 $ 10.00 120,000 $ 10.00
======= ====== ======= ======
</TABLE>
55
<PAGE> 56
CAL FED BANCORP INC. AND SUBSIDIARIES
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS (CONTINUED)
NOTE 25: STOCK INCENTIVE PLANS (CONTINUED)
At December 31, 1995, there were 41,000 shares available for future grant.
The weighted average exercise price for shares under option was $10.00 at
December 31, 1995.
NOTE 26: QUARTERLY RESULTS OF OPERATIONS (UNAUDITED)
<TABLE>
<CAPTION>
QUARTER ENDED
---------------------------------------------------------
MARCH 31, JUNE 30, SEPTEMBER 30, DECEMBER 31,
1995 1995 1995 1995
--------- -------- ------------- ------------
(DOLLARS IN MILLIONS, EXCEPT PER SHARE DATA)
<S> <C> <C> <C> <C>
Interest income............................... $ 245.6 $252.1 $ 249.9 $260.4
Interest expense.............................. 172.8 175.7 170.0 177.6
------ ------ ------ ------
Net interest income........................... 72.8 76.4 79.9 82.8
Provision for loan losses..................... 8.3 8.6 7.6 7.3
Other income.................................. 14.5 14.3 21.5(A) 13.2
Other expenses................................ 64.3 60.3 61.9 63.4
Income tax expense............................ -- 0.1 -- --
Dividends on preferred stock of subsidiary.... 6.4 6.4 6.4 6.4
------ ------ ------ ------
Net earnings available for common
stockholders................................ $ 8.3 $ 15.3 $ 25.5 $ 18.9
====== ====== ====== ======
Net earnings per share........................ $ 0.17 $ 0.31 $ 0.50 $ 0.38
====== ====== ====== ======
</TABLE>
<TABLE>
<CAPTION>
QUARTER ENDED
---------------------------------------------------------
MARCH 31, JUNE 30, SEPTEMBER 30, DECEMBER 31,
1994 1994 1994 1994
--------- -------- ------------- ------------
(DOLLARS IN MILLIONS, EXCEPT PER SHARE DATA)
<S> <C> <C> <C> <C>
Interest income............................... $ 224.1 $229.6 $ 222.3 $232.1
Interest expense.............................. 133.1 139.0 139.6 154.8
------ ------ ------ ------
Net interest income........................... 91.0 90.6 82.7 77.3
Provision for loan losses..................... 43.9 11.4 11.2 8.4
Other income.................................. 17.4 17.5 151.4(B) 14.9
Other expenses................................ 381.1(C) 85.7 73.4(D) 70.8
Income tax expense............................ 5.8 0.5 -- --
Dividends on preferred stock of subsidiary.... 1.8 2.3 6.4 6.4
------ ------ ------ ------
(Loss) earnings before the cumulative effect
of change in accounting for goodwill........ (324.2) 8.2 143.1 6.6
Cumulative effect of change in accounting for
goodwill.................................... (273.7) -- -- --
------ ------ ------ ------
Net (loss) earnings available for common
stockholders................................ $(597.9) $ 8.2 $ 143.1 $ 6.6
====== ====== ====== ======
Net (loss) earnings per share before the
cumulative effect of change in accounting
for goodwill................................ $(11.39) $ 0.17 $ 2.87 $ 0.13
Net (loss) earnings per share of the
cumulative effect of change in accounting
for goodwill................................ (9.62) -- -- --
------ ------ ------ ------
Net (loss) earnings per share................. $(21.01) $ 0.17 $ 2.87 $ 0.13
====== ====== ====== ======
</TABLE>
- ---------------
(A) Includes a $6.8 million gain on the sale of $729.3 million of Treasury
securities.
(B) Includes $135.0 million gain from the sale of Southeast Division.
(C) Includes $280.0 million provision for estimated losses on assets held for
accelerated disposition.
(D) Includes $5.2 million recovery upon consummation of the sale of assets held
for accelerated disposition.
56
<PAGE> 57
CAL FED BANCORP INC. AND SUBSIDIARIES
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS (CONTINUED)
NOTE 27: PARENT COMPANY FINANCIAL INFORMATION
The following financial statements are for Cal Fed Bancorp Inc., the parent
company, on a stand-alone basis. The financial statements should be read in
conjunction with the other Notes to the consolidated financial statements.
STATEMENTS OF FINANCIAL CONDITION
<TABLE>
<CAPTION>
DECEMBER 31,
-----------------
1995 1994
------ ------
<S> <C> <C>
ASSETS
Cash....................................................................... $ 22.1 $ --
Investment in California Federal Bank...................................... 599.4 532.3
------ ------
$621.5 $532.3
====== ======
LIABILITIES AND STOCKHOLDERS' EQUITY
Total liabilities.......................................................... $ -- $ --
Total stockholders' equity................................................. 621.5 532.3
====== ======
$621.5 $532.3
====== ======
</TABLE>
STATEMENTS OF OPERATIONS
<TABLE>
<CAPTION>
YEAR ENDED DECEMBER 31,
-----------------------------
1995 1994 1993
----- ------- -------
<S> <C> <C> <C>
Equity in undistributed net earnings (loss) of subsidiaries
available for common stockholders............................. $68.0 $(440.0) $(149.3)
----- ------- -------
Net earnings (loss) available for common stockholders........... $68.0 $(440.0) $(149.3)
===== ======= =======
</TABLE>
STATEMENTS OF CASH FLOWS
<TABLE>
<CAPTION>
YEAR ENDED DECEMBER 31,
------------------------------
1995 1994 1993
------ ------- -------
<S> <C> <C> <C>
Net Cash Flows from Operating Activities:
Net earnings (loss) available for common stockholders.......... $ 68.0 $(444.0) $(149.3)
Adjustments to reconcile net earnings (loss) to net cash
provided by operating activities:
Equity in undistributed net earnings of subsidiaries
available for common stockholders....................... (68.0) 440.0 149.3
------ ------- -------
Net cash provided by operating activities............ -- -- --
Cash Flows from Investing Activities........................... -- -- --
------ ------- -------
Cash Flows from Financing Activities:
Proceeds from initial capitalization......................... 22.1 -- --
------ ------- -------
Net increase in cash........................................... $ 22.1 $ -- $ --
Cash at beginning of year...................................... -- -- --
------ ------- -------
Cash at end of year............................................ $ 22.1 $ -- $ --
====== ======= =======
</TABLE>
57
