<PAGE>
UNITED STATES SECURITIES AND EXCHANGE COMMISSION
Washington, D.C. 20549
FORM 10-Q
(Mark one)
[X] QUARTERLY REPORT PURSUANT TO SECTION 13 OR 15(D) OF THE SECURITIES EXCHANGE
ACT OF 1934
For the quarterly period ended June 30, 1998
------------------------------
or
[ ] TRANSITION REPORT PURSUANT TO SECTION 13 OR 15(D) OF THE SECURITIES EXCHANGE
ACT OF 1934
For the transition period from N/A to N/A
--------------- -------------------
Commission File Number: 333-4026
---------------------------------------------------------
First Nationwide (Parent) Holdings Inc.
- --------------------------------------------------------------------------------
Exact name of registrant as specified in its charter)
Delaware 13-3778550
- --------------------------------------------------------------------------------
(State or other jurisdiction (I.R.S. Employer
of incorporation or organization) Identification No.)
135 Main Street, San Francisco, CA 94105
- --------------------------------------------------------------------------------
(Address of principal executive offices) (Zip Code)
415-904-0100
- --------------------------------------------------------------------------------
(Registrant's telephone number, including area code)
N/A
- --------------------------------------------------------------------------------
(Former name, former address and former fiscal year, if changed since last
report)
Indicate by check mark whether the registrant (1) has filed all reports
required to be filed by Section 13 or 15(d) of the Securities Exchange Act of
1934 during the preceding 12 months (or for such shorter period that the
registrant was required to file such reports), and (2) has been subject to such
filing requirements for the past 90 days. X Yes __ No
The number of shares outstanding of registrant's classes of $1.00 par
value common stock, as of the close of business on August 10, 1998: 1,000
shares of common stock.
Page 1 of 38 pages
Exhibit index on page: 37
<PAGE>
FIRST NATIONWIDE (PARENT) HOLDINGS INC.
SECOND QUARTER 1998 REPORT ON FORM 10-Q
TABLE OF CONTENTS
<TABLE>
<CAPTION>
Page No.
PART I. FINANCIAL INFORMATION --------
---------------------
<S> <C>
Item 1. Consolidated Financial Statements
Unaudited Consolidated Balance Sheets
June 30, 1998 and December 31, 1997........................................................3
Unaudited Consolidated Statements of Income
Six months ended June 30, 1998 and 1997....................................................4
Unaudited Consolidated Statements of Income
Three months ended June 30, 1998 and 1997..................................................5
Unaudited Consolidated Statements of Comprehensive Income
Six months ended June 30, 1998 and 1997....................................................6
Unaudited Consolidated Statements of Comprehensive Income
Three months ended June 30, 1998 and 1997..................................................7
Unaudited Consolidated Statement of Stockholder's Equity
Six months ended June 30, 1998.............................................................8
Unaudited Consolidated Statements of Cash Flows
Six months ended June 30, 1998 and 1997....................................................9
Notes to Unaudited Consolidated Financial Statements......................................11
Item 2. Management's Discussion and Analysis of
Financial Condition and Results of Operations.............................................15
PART II. OTHER INFORMATION
-----------------
Item 1. Legal Proceedings.........................................................................36
Item 2. Changes in Securities.....................................................................36
Item 3. Defaults Upon Senior Securities...........................................................36
Item 4. Submission of Matters to a Vote of Security Holders.......................................37
Item 5. Other Information.........................................................................37
Item 6. Exhibits and Reports on Form 8-K..........................................................37
</TABLE>
Page 2
<PAGE>
FIRST NATIONWIDE (PARENT) HOLDINGS INC. AND SUBSIDIARIES
CONSOLIDATED BALANCE SHEETS
JUNE 30, 1998 AND DECEMBER 31, 1997
(Unaudited)
(dollars in thousands, except per share data)
<TABLE>
<CAPTION>
June 30, December 31,
1998 1997
Assets ---- ----
------
<S> <C> <C>
Cash and amounts due from banks $ 345,921 $ 350,214
Interest-bearing deposits in other banks 2,081 36,164
Short-term investment securities 35,404 25,933
----------- -----------
Cash and cash equivalents 383,406 412,311
Securities available for sale, at fair value 783,029 813,085
Securities held to maturity 58,557 58,299
Mortgage-backed securities available for sale, at fair value 8,037,170 5,076,598
Mortgage-backed securities held to maturity 1,143,112 1,337,877
Loans held for sale, net 1,725,497 1,483,466
Loans receivable, net 18,626,425 19,424,410
Investment in Federal Home Loan Bank ("FHLB") System 540,127 468,191
Office premises and equipment, net 179,278 159,349
Foreclosed real estate, net 64,892 76,997
Accrued interest receivable 207,422 188,203
Intangible assets (net of accumulated amortization of
$83,523 in 1998 and $60,294 in 1997) 656,177 675,927
Mortgage servicing rights 669,056 536,703
Other assets 975,877 650,740
----------- -----------
Total assets $34,050,025 $31,362,156
=========== ===========
Liabilities, Minority Interest and Stockholder's Equity
-------------------------------------------------------
Deposits $16,044,288 $16,202,605
Securities sold under agreements to repurchase 2,861,604 1,842,442
Borrowings 12,739,591 11,232,530
Other liabilities 729,599 702,959
----------- -----------
Total liabilities 32,375,082 29,980,536
----------- -----------
Commitments and contingencies -- --
Minority interest 1,213,967 1,175,704
Stockholder's equity:
Common stock, $1.00 par value, 1,000 shares
authorized, issued and outstanding 1 1
Additional paid-in capital -- --
Net unrealized holding gain on securities available for sale 22,481 28,129
Retained earnings (substantially restricted) 438,494 177,786
----------- -----------
Total stockholder's equity 460,976 205,916
----------- -----------
Total liabilities, minority interest and stockholder's equity $34,050,025 $31,362,156
=========== ===========
</TABLE>
See accompanying notes to unaudited consolidated financial statements.
Page 3
<PAGE>
FIRST NATIONWIDE (PARENT) HOLDINGS INC. AND SUBSIDIARIES
CONSOLIDATED STATEMENTS OF INCOME
SIX MONTHS ENDED JUNE 30, 1998 AND 1997
(Unaudited)
(in thousands)
<TABLE>
<CAPTION>
1998 1997
---- ----
<S> <C> <C>
Interest income:
Loans receivable $ 761,340 $ 779,663
Mortgage-backed securities available for sale 178,529 134,432
Mortgage-backed securities held to maturity 47,433 58,869
Loans held for sale 58,230 37,627
Securities available for sale 28,286 25,278
Securities held to maturity 1,572 929
Interest-bearing deposits in other banks 1,571 3,790
--------- ---------
Total interest income 1,076,961 1,040,588
--------- ---------
Interest expense:
Deposits 355,202 374,787
Securities sold under agreements to repurchase 57,049 72,786
Borrowings 369,151 287,290
--------- ---------
Total interest expense 781,402 734,863
--------- ---------
Net interest income 295,559 305,725
Provision for loan losses 20,000 39,900
--------- ---------
Net interest income after provision for loan losses 275,559 265,825
--------- ---------
Noninterest income:
Loan servicing fees, net 71,363 74,979
Customer banking fees and service charges 51,197 46,752
Gain on sale of loans, net 36,124 11,358
(Loss) gain on sale of branches (86) 1,069
Loss on sale of assets, net (181) (214)
Dividends on FHLB stock 14,562 11,975
Other income 11,755 15,368
--------- ---------
Total noninterest income 184,734 161,287
--------- ---------
Noninterest expense:
Compensation and employee benefits 127,620 127,502
Occupancy and equipment 41,406 40,844
Savings Association Insurance Fund deposit insurance premium 5,054 5,450
Loan expense 23,500 33,966
Marketing 9,914 7,684
Professional fees 19,609 22,198
Data processing 6,897 6,182
Foreclosed real estate operations, net (5,138) (857)
Amortization of intangible assets 23,229 24,595
Other 50,626 57,804
--------- ---------
Total noninterest expense 302,717 325,368
--------- ---------
Income before income taxes and minority interest 157,576 101,744
Income tax (benefit) expense (223,818) 19,218
--------- ---------
Income before minority interest 381,394 82,526
Minority interest 118,660 62,900
--------- ---------
Net income $ 262,734 $ 19,626
========= ==========
</TABLE>
See accompanying notes to unaudited consolidated financial statements.
Page 4
<PAGE>
FIRST NATIONWIDE (PARENT) HOLDINGS INC. AND SUBSIDIARIES
CONSOLIDATED STATEMENTS OF INCOME
THREE MONTHS ENDED JUNE 30, 1998 AND 1997
(Unaudited)
(in thousands)
<TABLE>
<CAPTION>
1998 1997
---- ----
<S> <C> <C>
Interest income:
Loans receivable $376,620 $389,020
Mortgage-backed securities available for sale 97,027 73,427
Mortgage-backed securities held to maturity 22,576 28,929
Loans held for sale 30,894 20,374
Securities available for sale 14,563 14,307
Securities held to maturity 698 858
Interest-bearing deposits in other banks 1,161 922
-------- --------
Total interest income 543,539 527,837
-------- --------
Interest expense:
Deposits 177,027 187,767
Securities sold under agreements to repurchase 30,521 38,403
Borrowings 190,988 149,298
-------- --------
Total interest expense 398,536 375,468
-------- --------
Net interest income 145,003 152,369
Provision for loan losses 10,000 19,950
-------- --------
Net interest income after provision for loan losses 135,003 132,419
-------- --------
Noninterest income:
Loan servicing fees, net 34,401 35,265
Customer banking fees and service charges 25,851 24,233
Gain on sale of loans, net 21,619 8,489
Gain on sale of branches -- 1,069
Gain (loss) on sale of assets, net 198 (236)
Dividends on FHLB stock 7,555 6,013
Other income 5,332 7,615
-------- --------
Total noninterest income 94,956 82,448
-------- --------
Noninterest expense:
Compensation and employee benefits 64,639 63,022
Occupancy and equipment 19,923 20,162
Savings Association Insurance Fund deposit insurance premium 2,481 2,797
Loan expense 13,905 26,142
Marketing 6,409 3,616
Professional fees 10,899 13,095
Data processing 4,057 3,247
Foreclosed real estate operations, net (3,418) (1,862)
Amortization of intangible assets 12,140 12,489
Other 26,426 28,936
-------- --------
Total noninterest expense 157,461 171,644
-------- --------
Income before income taxes and minority interest 72,498 43,223
Income tax (benefit) expense (237,708) 9,024
-------- --------
Income before minority interest 310,206 34,199
Minority interest 82,886 31,061
-------- --------
Net income $227,320 $ 3,138
======== ========
</TABLE>
See accompanying notes to unaudited consolidated financial statements.
Page 5
<PAGE>
FIRST NATIONWIDE (PARENT) HOLDINGS INC. AND SUBSIDIARIES
CONSOLIDATED STATEMENTS OF COMPREHENSIVE INCOME
SIX MONTHS ENDED JUNE 30, 1998 AND 1997
(Unaudited)
(in thousands)
1998 1997
---- ----
Net income $262,734 $19,626
Other comprehensive income, net of tax:
Unrealized holding (loss) gain on securities
available for sale:
Unrealized holding (loss) gain arising (5,196) 5,444
during the period
Less: reclassification adjustment for gains
included in net (loss) gain (452) (3)
-------- -------
Other comprehensive (loss) income (5,648) 5,441
-------- -------
Comprehensive income $257,086 $25,067
======== =======
See accompanying notes to unaudited consolidated financial statements.
Page 6
<PAGE>
FIRST NATIONWIDE (PARENT) HOLDINGS INC. AND SUBSIDIARIES
CONSOLIDATED STATEMENTS OF COMPREHENSIVE INCOME
THREE MONTHS ENDED JUNE 30, 1998 AND 1997
(Unaudited)
(in thousands)
1998 1997
---- ----
Net income $227,320 $ 3,138
Other comprehensive income, net of tax:
Unrealized holding loss on securities
available for sale:
Unrealized holding loss arising during (2,112) (15,042)
the period
Less: reclassification adjustment for gains
included in net loss (333) (3)
-------- --------
Other comprehensive loss (2,445) (15,045)
-------- --------
Comprehensive income (loss) $224,875 $(11,907)
======== ========
See accompanying notes to unaudited consolidated financial statements.
Page 7
<PAGE>
FIRST NATIONWIDE (PARENT) HOLDINGS INC. AND SUBSIDIARIES
CONSOLIDATED STATEMENT OF STOCKHOLDER'S EQUITY
SIX MONTHS ENDED JUNE 30, 1998
(Unaudited)
(in thousands)
<TABLE>
<CAPTION>
Net unrealized
Additional holding gains on Total
Common paid-in securities Retained stockholder's
stock capital available for sale earnings equity
----- ---------- ------------------ --------- -------------
<S> <C> <C> <C> <C> <C>
Balance at December 31, 1997 $1 $ -- $28,129 $177,786 $205,916
Net income -- -- -- 262,734 262,734
Capital contribution -- 28 -- -- 28
Redemption of Additional FN
Holdings Preferred Stock -- -- -- 630 630
Dividends to parent -- (28) -- (2,656) (2,684)
Change in net unrealized
holding gains on securities
available for sale -- -- (5,648) -- (5,648)
-- ---- ------- -------- --------
Balance at June 30, 1998 $1 $ -- $22,481 $438,494 $460,976
== ==== ======= ======== ========
</TABLE>
See accompanying notes to unaudited consolidated financial statements.
Page 8
<PAGE>
FIRST NATIONWIDE (PARENT) HOLDINGS INC. AND SUBSIDIARIES
CONSOLIDATED STATEMENTS OF CASH FLOWS
SIX MONTHS ENDED JUNE 30, 1998 AND 1997
(Unaudited)
(in thousands)
<TABLE>
<CAPTION>
1998 1997
---- ----
<S> <C> <C>
Cash flows from operating activities:
Net income $ 262,734 $ 19,626
Adjustments to reconcile net income to net cash (used in)
provided by operating activities:
Amortization of intangible assets 23,229 24,595
Accretion of purchase accounting premiums and discounts, net (3,675) (9,882)
Accretion of discount on borrowings 372 372
Amortization of mortgage servicing rights 57,074 51,070
Provision for loan losses 20,000 39,900
Loss on sales of assets, net 181 214
Loss (gain) on sale of branches 86 (1,069)
Gain on sales of foreclosed real estate, net (8,403) (7,191)
Loss on sale of loans, net 65,491 51,816
Depreciation and amortization of office premises and equipment 11,225 7,603
Amortization of deferred debt issuance costs 4,351 3,379
FHLB stock dividends (14,562) (11,975)
Capitalization of originated mortgage servicing rights
and excess servicing fees receivable (101,615) (63,174)
Purchases and originations of loans held for sale (4,847,904) (3,024,959)
Proceeds from the sale of loans held for sale 4,537,939 2,962,052
(Increase) decrease in other assets (335,037) 107,353
Increase in accrued interest receivable (18,649) (15,004)
Increase (decrease) in other liabilities 31,358 (733)
Minority interest 118,660 59,048
---------- -----------
Net cash (used in) provided by operating activities (197,145) 193,041
---------- -----------
</TABLE>
See accompanying notes to unaudited consolidated financial statements.
(Continued)
Page 9
<PAGE>
FIRST NATIONWIDE (PARENT) HOLDINGS INC. AND SUBSIDIARIES
CONSOLIDATED STATEMENTS OF CASH FLOWS
SIX MONTHS ENDED JUNE 30, 1998 AND 1997
(Unaudited)
(in thousands)
<TABLE>
<CAPTION>
1998 1997
---- ----
<S> <C> <C>
Cash flows from investing activities:
Acquisitions:
Cal Fed Acquisition $ -- $ (161,196)
GSAC Acquisition (13,577) --
Mortgage loan servicing rights and operations -- (7,728)
Purchases of securities available for sale (513,957) (607,845)
Proceeds from maturities of securities available for sale 549,442 204,888
Purchases of securities held to maturity (615) (58,149)
Proceeds from maturities of securities held to maturity 357 4,374
Purchases of mortgage-backed securities available for sale (4,083,863) (1,743,072)
Principal payments on mortgage-backed securities available for sale 1,107,314 345,823
Proceeds from sales of mortgage-backed securities available for sale 3,253 22,184
Principal payments on mortgage-backed securities held to maturity 194,445 136,207
Net decrease in loans receivable 728,600 652,385
Purchases of FHLB stock, net (71,936) --
Purchases of office premises and equipment (37,221) (24,264)
Proceeds from disposal of office premises and equipment 5,840 1,828
Proceeds from sales of foreclosed real estate 76,424 67,216
Purchases of mortgage servicing rights (63,628) (21,230)
---------- ----------
Net cash flows used in investing activities (2,119,122) (1,188,579)
---------- ----------
Cash flows from financing activities:
Branch Sales -- (21,683)
Net decrease in deposits (157,876) (810,276)
Proceeds from additional borrowings 11,829,493 9,147,953
Principal payments on borrowings (10,321,926) (8,598,582)
Net increase in securities sold under agreements to repurchase 1,019,260 500,856
Proceeds from FN Escrow Merger -- 605,347
Issuance of REIT Preferred Stock, net -- 485,959
Dividends to Parent (2,628) --
Redemption of FN Holdings/FN Escrow Preferred Stock -- (17,250)
Redemption of FN Holdings Preferred Stock (25,000) (62,500)
Dividends paid to minority stockholders, net of taxes (53,933) (61,668)
Issuance costs of FN Holdings Preferred Stock -- (440)
Capital contribution -- 39
Capital distribution to parent (28) --
---------- ----------
Net cash flows provided by financing activities 2,287,362 1,167,755
---------- ----------
Net change in cash and cash equivalents (28,905) 172,217
Cash and cash equivalents at beginning of period 412,311 269,869
---------- ----------
Cash and cash equivalents at end of period $ 383,406 $ 442,086
========== ==========
</TABLE>
See accompanying notes to unaudited consolidated financial statements.
Page 10
<PAGE>
FIRST NATIONWIDE (PARENT) HOLDINGS INC. AND SUBSIDIARIES
Notes to Unaudited Consolidated Financial Statements
(1) Basis of Presentation
---------------------
The accompanying consolidated financial statements were prepared in
accordance with generally accepted accounting principles for interim financial
information and with the instructions for meeting the requirements of
Regulation S-X, Article 10 and therefore do not include all disclosures
necessary for complete financial statements. In the opinion of management, all
adjustments have been made that are necessary for a fair presentation of the
financial position and results of operations and cash flows as of and for the
periods presented. All such adjustments are of a normal recurring nature. The
results of operations for the three and six months ended June 30, 1998 are not
necessarily indicative of the results that may be expected for the entire
fiscal year or any other interim period. Certain amounts for the three and six
month periods in the prior year have been reclassified to conform with the
current period's presentation.
The accompanying consolidated financial statements include the
accounts of First Nationwide (Parent) Holdings Inc. ("Parent Holdings" or the
"Company"), which owns directly 80% of the voting stock of First Nationwide
Holdings Inc. ("FN Holdings"), which owns all of the common stock of California
Federal Bank, A Federal Savings Bank and its subsidiaries. On January 3, 1997,
First Nationwide Bank, A Federal Savings Bank merged with and into California
Federal Bank, A Federal Savings Bank (the "Cal Fed Acquisition"). Unless the
context otherwise indicates, (i) "Old California Federal" refers to California
Federal Bank, A Federal Savings Bank prior to the consummation of the Cal Fed
Acquisition and (ii) "California Federal" or "Bank" refers to California
Federal Bank, A Federal Savings Bank, as the surviving entity after the
consummation of the Cal Fed Acquisition, and to First Nationwide and its
predecessors for periods prior to the Cal Fed Acquisition. All significant
intercompany balances and transactions have been eliminated in consolidation.
These financial statements should be read in conjunction with the consolidated
financial statements included in the Company's Annual Report on Form 10-K for
the year ended December 31, 1997. All terms used but not defined elsewhere
herein have meanings ascribed to them in the Company's Annual Report on Form
10-K.
Minority interest represents amounts attributable to (i) the Bank
Preferred Stock, (ii) the preferred stock of FN Holdings, (iii) the preferred
stock ("REIT Preferred Stock") of California Federal Preferred Capital
Corporation, a wholly owned subsidiary of the Bank, (iv) that portion of
stockholder's equity of Auto One Acceptance Corporation, a subsidiary of the
Bank ("Auto One"), attributable to 20% of its common stock, and (v) the results
of operations and equity of FN Holdings attributable to its class B common
stock, which is owned by Hunter's Glen/Ford Ltd. ("Hunter's Glen").
Earnings per share data is not presented due to the limited ownership
of the Company. Parent Holdings is a holding company whose only significant
asset is its indirect ownership of 80% of the common stock of the Bank, and
therefore all activities for the consolidated entity are carried out by the
Bank and its operating subsidiaries.
(2) Acquisitions and Divestitures
-----------------------------
On February 4, 1998, Auto One acquired 100% of the partnership
interests in Gulf States Acceptance Company, a Delaware limited partnership
("GSAC") and its general partner, Gulf States Financial Services, Inc., a Texas
corporation. GSAC was liquidated and its assets and liabilities were
transferred to Auto One (the "GSAC Acquisition"). The aggregate consideration
paid in connection with the GSAC Acquisition was approximately $13.6 million
plus a 20% interest in the common stock of Auto One.
On February 4, 1998, Parent Holdings and Hunter's Glen entered into a
definitive merger agreement ("Golden State Merger Agreement") with Golden State
Bancorp Inc. ("Golden State"), the publicly traded parent company of Glendale
Federal Bank, Federal Savings Bank ("Glendale Federal"), pursuant to which,
Parent Holdings, Hunter's Glen and Golden State agreed to a tax-free exchange
of shares in a merger transaction (the "Golden State Merger"), to be accounted
for under the purchase method of accounting. In connection with the execution
of the Golden State Merger Agreement, Golden State, Glendale Federal, the Bank,
Stephen J. Trafton, Chairman of the Board, President and Chief Executive
Officer of Golden State and Richard A. Fink, Vice Chairman of Golden State,
entered into a Litigation Management Agreement ("Litigation Management
Agreement") pursuant to which, among other things, Messrs. Trafton and Fink
will oversee and manage the California Federal Litigation (hereinafter defined)
and continue to oversee and manage similar litigation being prosecuted by
Glendale Federal, following the consummation of the Golden State Merger.
Following the Golden State Merger, the combined parent company, Golden State,
will have approximately 135 to 145 million common shares outstanding and will
continue to be a publicly traded company. As part of the Golden
Page 11
<PAGE>
FIRST NATIONWIDE (PARENT) HOLDINGS INC. AND SUBSIDIARIES
Notes to Unaudited Consolidated Financial Statements
State Merger Agreement, Glendale Federal will be merged with and into the Bank.
At March 31, 1998, Glendale Federal had total assets of approximately $15.9
billion and deposits of $9.7 billion and operated 181 branches and 26 loan
offices in California. The Golden State Merger is subject to regulatory and
stockholder approval and is expected to close during the third quarter of 1998.
On March 29, 1998, the Company signed a definitive agreement to sell
its Florida bank franchise (consisting of 24 branches with deposits of $1.5
billion) to Union Planters Bank of Florida, a wholly owned subsidiary of Union
Planters Corp. (the "Florida Branch Sale"). The Company expects to record a
pre-tax gain of approximately $110 million in connection with the Florida
Branch Sale, representing a deposit premium of approximately 7.5%. On June 2,
1998, the Company received regulatory approval for this transaction, which is
expected to close during the third quarter of 1998.
(3) Cash, Cash Equivalents, and Statement of Cash Flows
---------------------------------------------------
The Company uses the indirect method to present cash flows from
operating activities. Cash paid for interest for the six months ended June 30,
1998 and 1997 was $775.7 million and $706.1 million, respectively.
During the six months ended June 30, 1998, noncash activity consisted
of transfers of $62.4 million from loans receivable to foreclosed real estate,
$5.5 million of loans made to facilitate sales of real estate owned and
transfers of $3.2 million from loans held for sale (at lower of cost or market)
to mortgage-backed securities classified as trading securities upon the
securitization of certain of the Bank's single-family loans. Noncash activity
also includes the retirement of preferred stock of $.8 million, the issuance of
additional preferred stock through preferred stock dividends of $.1 million and
dividends to parent of $2.7 million.
During the six months ended June 30, 1997, noncash activity consisted
of transfers of $86.8 million from loans receivable and $1.2 million from loans
held for sale (at lower of cost or market) to foreclosed real estate, $21.6
million of loans made to facilitate sales of real estate owned, the issuance of
additional preferred stock through preferred stock dividends of $1.4 million
and the forgiveness of a $19 million loan from an affiliate of FN Holdings in
exchange for the redemption of the FN Holdings/FN Escrow Preferred Stock.
(4) Minority Interest
-----------------
In connection with the GSAC Acquisition, Auto One issued 250 shares of
its common stock, par value $1.00 per share, representing a 20% interest in
Auto One. The carrying value of Auto One's common stockholders' equity
attributable to the minority stockholders at June 30, 1998 is ($.2) million.
(5) Newly Issued Accounting Pronouncements
--------------------------------------
In June 1997, the FASB issued Statement of Financial Accounting
Standards No. 131, "Disclosures About Segments of an Enterprise and Related
Information" ("SFAS No. 131"). SFAS No. 131 establishes standards for the way
that public business enterprises report information about operating segments in
annual financial statements and requires that those enterprises report selected
information about operating segments in interim financial reports issued to
shareholders. SFAS No. 131 also establishes standards for related disclosures
about products and services, geographic areas, and major customers. This
statement supersedes FASB Statement No. 14, Financial Reporting for Segments of
a Business Enterprise, but retains the requirement to report information about
major customers. It amends FASB Statement No. 94, Consolidation of All
Majority-Owned Subsidiaries, to remove the special disclosure requirements for
previously unconsolidated subsidiaries. This statement is effective for fiscal
years beginning after December 15, 1997. In the initial year of application,
comparative information for earlier years is to be restated. This statement
need not be applied to interim financial statements in the initial year of
application, but comparative information for interim periods in the initial
year of application is to be reported in financial statements for interim
periods in the second year of application. This statement has no impact on the
financial condition or results of operations of the Company, but will require
changes in the Company's disclosure requirements.
Page 12
<PAGE>
FIRST NATIONWIDE (PARENT) HOLDINGS INC. AND SUBSIDIARIES
Notes to Unaudited Consolidated Financial Statements
In February 1998, the FASB issued Statement of Financial Accounting
Standards No. 132, "Employers' Disclosures about Pensions and Other
Postretirement Benefits" ("SFAS No. 132"), an amendment of FASB Statements No.
87, No. 88 and No. 106. SFAS No. 132 revises employers' disclosures about
pension and other postretirement benefit plans. It does not change the
measurement or recognition of those plans. It standardizes the disclosure
requirements for pensions and other postretirement benefits to the extent
practicable, requires additional information on changes in the benefit
obligations and fair values of plan assets that will facilitate financial
analysis, and eliminates certain disclosures that are no longer useful as they
were when FASB Statements No. 87, Employers' Accounting for Pensions, No. 88,
Employers' Accounting for Settlements and Curtailments of Defined Benefit
Pension Plans and for Termination Benefits, and No. 106, Employers' Accounting
for Postretirement Benefits Other Than Pensions, were issued. SFAS No. 132 is
effective for fiscal years beginning after December 15, 1997 and requires
restatement of disclosures for earlier periods provided for comparative
purposes, if available. It is not expected that the Company will experience any
material revision in its disclosures when SFAS No. 132 is adopted.
In June 1998, the FASB issued Statement of Financial Accounting
Standards No. 133, "Accounting for Derivative Instruments and Hedging
Activities" ("SFAS No. 133"). SFAS No. 133 establishes standards for derivative
instruments and for hedging activities, and requires that an entity recognize
all derivatives as either assets or liabilities in the balance sheet and
measure those instruments at fair value. Under SFAS No. 133, an entity that
elects to apply hedge accounting is required to establish at the inception of
the hedge the method it will use for assessing the effectiveness of the hedging
derivative and the measurement approach for determining the ineffective aspect
of the hedge. SFAS No. 133 applies to all entities and amends FASB Statement
No. 107, Disclosures About Fair Values of Financial Instruments, to include in
Statement 107 the disclosure provisions about concentrations of credit risk
from Statement 105. SFAS No. 133 supersedes FASB Statements No. 80, Accounting
for Futures Contracts, No. 105, Disclosure of Information about Financial
Instruments with Off-Balance Sheet Risk and Financial Instruments with
Concentrations of Credit Risk, and No. 119, Disclosure about Derivative
Financial Instruments and Fair Value of Financial Instruments. SFAS No. 133
also nullifies or modifies the consensuses reached in a number of issues
addressed by the Emerging Issues Task Force. SFAS No. 133 is effective for all
fiscal quarters of fiscal years beginning after June 15, 1999. Initial
application of this statement should be as of the beginning of an entity's
fiscal quarter; on that date, hedging relationships must be designated anew and
documented pursuant to the provisions of this statement. Earlier application of
all of the provisions of SFAS No. 133 is encouraged, but is permitted only as
of the beginning of any fiscal quarter that begins after issuance of this
statement. SFAS No. 133 should not be applied retroactively to financial
statements of prior periods. Management has not yet completed its analysis of
SFAS No. 133 and is unable to determine the effect, if any, implementation may
have on the Company's consolidated financial statements.
(6) Subsequent Event
----------------
On August 6, 1998, GS Escrow Corp. ("GS Escrow") issued $2 billion in
debt securities ("GS Escrow Notes"). The GS Escrow Notes were issued to fund a
series of refinancing transactions described below. Upon consummation of the
Golden State Merger and the refinancing transactions, GS Escrow will be merged
(the "GS Escrow Merger") with and into Golden State Holdings Inc. ("GS
Holdings"), which is currently named New First Nationwide Holdings Inc. ("New
FN Holdings") and is a newly formed subsidiary of FN Holdings. Upon
consummation of the Golden State Merger and the GS Escrow Merger, the GS Escrow
Notes will be obligations of New FN Holdings. GS Holdings was formed to acquire
all of the assets of FN Holdings (including all of the common stock of the
Bank) as part of the Golden State Merger.
Prior to the consummation of the Golden State Merger, (i) FN Holdings
(or an affiliate other than GS Escrow) is expected to commence cash tender
offers and consent solicitations (collectively, the "Debt Tender Offers") for
each of its three outstanding series of long-term notes (the "FN Holdings
Notes") which together have a total aggregate principal balance of $915
million; and (ii) FN Holdings (or an affiliate other than GS Escrow Corp.) is
expected to commence cash tender offers (the "Bank Preferred Stock Tender
Offers") for each of the Bank's two outstanding series of preferred stock which
together have a total aggregate liquidation preference of $473.2 million.
The Debt Tender Offers and Bank Preferred Stock Tender Offers are
expected to close subsequent to the closing of the Golden State Merger.
Page 13
<PAGE>
FIRST NATIONWIDE (PARENT) HOLDINGS INC. AND SUBSIDIARIES
Notes to Unaudited Consolidated Financial Statements
After the closing of the Golden State Merger and concurrently with the
closings of the Debt Tender Offers, Golden State Financial Corporation (an
entity that will own 100% of the common stock of GS Holdings following the
consummation of the Golden State Merger), as the successor obligor, is expected
to give a 30-day notice of redemption for all of the outstanding $455 million
aggregate principal amount of 12 1/2% Senior Notes Due 2003 of Parent Holdings
(the "Parent Holdings Notes"), and to irrevocably deposit in trust money or
government obligations in an amount sufficient to pay the redemption price
therefor, together with any accrued and unpaid interest to the date of
redemption, for the purpose of defeasing the Parent Holdings Notes (the "Parent
Holdings Defeasance").
The Debt Tender Offers, the Bank Preferred Stock Tender Offers and the
Parent Holdings Defeasance will be financed with the net proceeds from the
offering of the GS Escrow Notes and, to the extent required, a cash dividend
from the Bank.
There can be no assurance that all of the outstanding FN Holdings
Notes will be tendered to and purchased by FN Holdings in the Debt Tender
Offers. Any FN Holdings 12 1/4% Senior Notes that remain outstanding after the
consummation of the Debt Tender Offers will rank pari passu with the GS Escrow
Notes and any FN Holdings 9c% Senior Subordinated Notes or FN Holdings 10e%
Senior Subordinated Notes that remain outstanding after the consummation of the
Debt Tender Offers will be subordinated in right of payment to the GS Escrow
Notes.
It is not expected that all of the Bank Preferred Stock will be
purchased in the Bank Preferred Stock Tender Offers. FN Holdings expects to
purchase any outstanding Bank Preferred Stock not acquired in the Bank
Preferred Stock Tender Offers once it becomes redeemable (April 1, 1999 in the
case of the 10 5/8% Preferred Stock and September 1, 1999 in the case of the 11
1/2% Preferred Stock).
Page 14
<PAGE>
ITEM 2. MANAGEMENT'S DISCUSSION AND ANALYSIS OF FINANCIAL CONDITION AND RESULTS
OF OPERATIONS
The statements contained in this Report on Form 10-Q that are not
purely historical are forward-looking statements within the meaning of Section
27A of the Securities Act of 1933 and Section 21E of the Securities Exchange
Act of 1934, including statements regarding the Company's expectations,
intentions, beliefs or strategies regarding the future. Forward-looking
statements include the Company's statements regarding liquidity, provision for
loan losses, capital resources and anticipated expense levels in "Management's
Discussion and Analysis of Financial Condition and Results of Operations." In
addition, in those and other portions of this document, the words "anticipate,"
"believe," "estimate," "expect," "intend," and other similar expressions, as
they relate to the Company or the Company's management, are intended to
identify forward-looking statements. Such statements reflect the current views
of the Company with respect to future events and are subject to certain risks,
uncertainties and assumptions. It is important to note that the Company's
actual results could differ materially from those described herein as
anticipated, believed, estimated or expected. Among the factors that could
cause results to differ materially are the risks discussed in the "Risk
Factors" section included in the Company's Registration Statement on Form S-1
filed with the Securities and Exchange Commission on April 25, 1996 (File No.
333-4026) and declared effective on May 15, 1996. The Company assumes no
obligation to update any such forward-looking statement.
OVERVIEW
The principal business of Parent Holdings, through California Federal,
consists of (i) operating retail deposit branches to serve consumers in
California and, to a lesser extent, in Florida and Nevada, (ii) originating
and/or purchasing, on a nationwide basis, 1-4 unit residential loans and, to a
lesser extent, certain commercial real estate and consumer loans, for
investment and (iii) mortgage banking activities, including originating and
servicing 1-4 unit residential loans for others. Revenues are derived primarily
from interest earned on loans, interest received on government and agency
securities and mortgage-backed securities, gains on sales of loans and other
investments and fees received in connection with loan servicing, securities
brokerage and other customer service transactions. Expenses primarily consist
of interest on customer deposit accounts, interest on short-term and long-term
borrowings, provisions for losses, general and administrative expenses
consisting of compensation and benefits, advertising and marketing, premises
and equipment, loan expenses, deposit insurance assessments, data processing
and other general and administrative expenses.
Acquisitions and Sales
On February 4, 1998, Auto One consummated the GSAC Acquisition. The
aggregate consideration paid was approximately $13.6 million plus a 20%
interest in the common stock of Auto One.
Net Income
Parent Holdings reported net income for the six months ended June 30,
1998 of $262.7 million compared with net income of $19.6 million for the
corresponding period in 1997. Net income for the six months ended June 30, 1998
includes a $250 million reduction of the valuation allowance related to the
Bank's deferred tax asset. Without consideration of this $250 million tax
benefit, net income for the six months ended June 30, 1998 would be $12.7
million.
Net interest income was $295.6 million for the six months ended June
30, 1998, compared to $305.7 million during the same period in 1997. The
decrease in 1998 over 1997 is primarily due to a reduction in the net interest
margin resulting from prepayments of higher rate interest-earning assets being
replaced with interest-earning assets having comparatively lower rates,
reflecting the relatively low level of interest rates in 1997 and 1998 and
management's steps to limit interest rate risk.
Year 2000
During the year ended December 31, 1997, the Company finalized its
plan to address issues related to required changes in computer systems for the
year 2000 ("Year 2000"). Issues arise because computer systems and related
software may have been designed to recognize only dates that relate to the 20th
century. Accordingly, if no changes
Page 15
<PAGE>
are implemented, some computer systems would interpret "1/1/00" as January 1,
1900 instead of January 1, 2000. Additionally, some equipment, being controlled
by microprocessor chips, may not deal appropriately with a year "00."
The Company has developed and is currently executing a comprehensive
plan to make its computer systems, applications and facilities Year 2000 ready.
The plan covers four stages including (i) inventory, (ii) assessment, (iii)
remediation and (iv) testing and certification. At year end 1997, the Company
had completed virtually all of the inventory and assessment stages for its
Company owned systems and applications. The remediation process is currently
underway and the Company is utilizing both internal and external resources to
reprogram, or replace where necessary, and test the software for Year 2000
modifications. The remediation process is targeted for completion by year-end
1998, while testing and certification of these systems and applications are
currently targeted for completion by March 31, 1999.
Parent Holdings has initiated communications with its critical
external relationships to determine the extent to which the Company may be
vulnerable to such parties' failure to remediate their own Year 2000 issues.
Where practicable, the Company will assess and attempt to mitigate its risks
with respect to the failure of these entities to be Year 2000 ready. The
effect, if any, on the Company's results of operations from the failure of such
parties to be Year 2000 ready is not reasonably estimable.
It is expected that, by December 31, 1998, all issues related to Year
2000 will be addressed, either by programming changes to the Company's custom
software, by programming changes implemented by third party vendors to
purchased systems, or through the upgrading or purchase of Year 2000-compliant
hardware and equipment. Extensive testing is expected to occur during 1999.
Year 2000 is the highest priority project within the Information and Technology
Services unit of the Company. It is currently expected that costs related to
Year 2000, not including Year 2000 costs associated with the Golden State
Merger, will total approximately $15.8 million over the years 1997 to 1999, of
which $3.8 million and $5.2 million have been incurred during the six months
ended June 30, 1998 and since the inception of the Year 2000 project,
respectively. Costs related to Year 2000 will be funded through operating cash
flows. Management believes there is no material risk that the Company will fail
to address Year 2000 issues in a timely manner.
Financial Condition
During the six months ended June 30, 1998, consolidated total assets
increased $2.7 billion, to $34.0 billion, from December 31, 1997, and total
liabilities increased from $30.0 billion to $32.4 billion.
The Company's non-performing assets, consisting of non-performing
loans, net of purchase accounting adjustments and specific allowances for loan
losses, foreclosed real estate, net, and repossessed assets, decreased to $227
million at June 30, 1998 compared with $272 million at December 31, 1997. Total
non-performing assets as a percentage of the Bank's total assets decreased to
.67% at June 30, 1998 from .87% at December 31, 1997.
Page 16
<PAGE>
RESULTS OF OPERATIONS
Six Months Ended June 30, 1998 versus Six Months Ended June 30, 1997
The following table sets forth, for the periods and at the dates
indicated, information regarding the Company's consolidated average balance
sheets, together with the total dollar amounts of interest income and interest
expense and the weighted average interest rates for the periods presented.
Average balances are calculated on a daily basis. The information presented
represents the historical activity of the Company.
<TABLE>
<CAPTION>
Six months ended
June 30, 1998
-------------------------------------------
Average Average
Balance Interest Rate
------- -------- --------
(dollars in millions)
ASSETS
<S> <C> <C> <C>
Interest-earning assets (1):
Securities and interest-bearing deposits in banks (2) $ 1,016 $ 32 6.18%
Mortgage-backed securities available for sale 5,716 178 6.25
Mortgage-backed securities held to maturity 1,236 47 7.67
Loans held for sale, net 1,641 58 7.10
Loans receivable, net 19,462 762 7.82
------- ------ ----
Total interest-earning assets 29,071 1,077 7.41%
------ ----
Noninterest-earning assets 3,223
-------
Total assets $32,294
=======
LIABILITIES, MINORITY INTEREST
AND STOCKHOLDER'S EQUITY
Interest-bearing liabilities:
Deposits $16,206 355 4.42%
Securities sold under agreements to repurchase 2,028 57 5.59
Borrowings (3) 11,491 369 6.48
------- ------ ----
Total interest-bearing liabilities 29,725 781 5.30%
------ ----
Noninterest-bearing liabilities 1,086
Minority interest 1,182
Stockholder's equity 301
-------
Total liabilities, minority interest and
stockholder's equity $32,294
=======
Net interest income $296
====
Interest rate spread 2.11%
====
Net interest margin 1.99%
====
Average equity to average assets 0.93%
====
</TABLE>
Page 17
<PAGE>
<TABLE>
<CAPTION>
Six months ended
June 30, 1997
------------------------------------------
Average Average
Balance Interest Rate
------- -------- -------
(dollars in millions)
ASSETS
<S> <C> <C> <C>
Interest-earning assets (1):
Securities and interest-bearing deposits in banks (2) $ 1,005 $ 30 5.97%
Mortgage-backed securities available for sale 3,953 134 6.80
Mortgage-backed securities held to maturity 1,549 59 7.60
Loans held for sale, net 1,066 37 7.05
Loans receivable, net 19,997 780 7.80
------- ----- ----
Total interest-earning assets 27,570 1,040 7.55%
----- ----
Noninterest-earning assets 2,954
-------
Total assets $30,524
=======
LIABILITIES, MINORITY INTEREST
AND STOCKHOLDER'S EQUITY
Interest-bearing liabilities:
Deposits $16,845 375 4.49%
Securities sold under agreements to repurchase 2,548 73 5.68
Borrowings (3) 8,584 286 6.75
------- ---- ----
Total interest-bearing liabilities 27,977 734 5.30%
---- ----
Noninterest-bearing liabilities 1,210
Minority interest 1,168
Stockholder's equity 169
-------
Total liabilities, minority interest
and stockholder's equity $30,524
=======
Net interest income $306
====
Interest rate spread 2.25%
====
Net interest margin 2.17%
====
Average equity to average assets 0.55%
====
</TABLE>
- ----------------
(1) Non-performing assets are included in the average balances for the periods
indicated.
(2) The information presented includes securities held to maturity, securities
available for sale and interest-bearing deposits in other banks.
(3) Interest and average rate include the impact of interest rate swaps.
Page 18
<PAGE>
The following table presents certain information regarding changes in
interest income and interest expense of the Company during the periods
indicated. The dollar amount of interest income and interest expense fluctuates
depending upon changes in the respective interest rates and upon changes in the
respective amounts (volume) of the Company's interest-earning assets and
interest-bearing liabilities. For each category of interest-earning assets and
interest-bearing liabilities, information is provided on changes attributable
to (i) changes in volume (changes in average outstanding balances multiplied by
the prior period's rate) and (ii) changes in rate (changes in average interest
rate multiplied by the prior period's volume). Changes attributable to both
volume and rate have been allocated proportionately.
<TABLE>
<CAPTION>
Six months ended June 30, 1998 vs. 1997
Increase (Decrease) Due to
-----------------------------------------
Volume Rate Net
------ ---- ---
INTEREST INCOME: (in millions)
<S> <C> <C> <C>
Securities and interest-bearing deposits in banks $ -- $ 2 $ 2
Mortgage-backed securities available for sale 54 (10) 44
Mortgage-backed securities held to maturity (13) 1 (12)
Loans held for sale, net 21 -- 21
Loans receivable, net (20) 2 (18)
---- ---- ----
Total 42 (5) 37
---- ---- ----
INTEREST EXPENSE:
Deposits (14) (6) (20)
Securities sold under agreements to repurchase (15) (1) (16)
Borrowings 94 (11) 83
---- ---- ----
Total 65 (18) 47
---- ---- ----
Change in net interest income $(23) $ 13 $(10)
==== ==== ====
</TABLE>
The volume variances in total interest income and total interest
expense for the six months ended June 30, 1998 compared to the corresponding
period in 1997 are largely due to increased purchases of mortgage-backed
securities funded with FHLB advances. The positive total rate variance of $13
million is primarily attributed to the lower cost of funds on deposits and
lower interest rates paid on new borrowings, partially offset by the
comparatively lower market rates on mortgage-backed securities purchased in
1998 and 1997, and prepayments of higher rate interest-earning assets.
Interest Income. Total interest income was $1.1 billion for the six
months ended June 30, 1998, an increase of $36.4 million from the six months
ended June 30, 1997. Total interest-earning assets for the six months ended
June 30, 1998 averaged $29.1 billion, compared to $27.6 billion for the
corresponding period in 1997. The yield on total interest-earning assets during
the six months ended June 30, 1998 decreased to 7.41% from 7.55% for the six
months ended June 30, 1997, primarily due to the lower market rates on new
mortgage-backed securities purchased in 1998 and 1997 and prepayments of higher
rate interest-earning assets.
Parent Holdings earned $761.3 million of interest income on loans
receivable for the six months ended June 30, 1998, a decrease of $18.3 million
from the six months ended June 30, 1997. The average balance of loans
receivable was $19.5 billion for the six months ended June 30, 1998, compared
to $20.0 billion for the same period in 1997. The weighted average rate on
loans receivable increased to 7.82% for the six months ended June 30, 1998 from
7.80% for the six months ended June 30, 1997. The decline in the average volume
is primarily due to an increase in prepayments.
Parent Holdings earned $58.2 million of interest income on loans held
for sale for the six months ended June 30, 1998, an increase of $20.6 million
from the six months ended June 30, 1997. The average balance of loans held for
sale was $1.6 billion for the six months ended June 30, 1998, an increase of
$575 million from the comparable period in 1997, primarily due to increased
originations and longer holding periods for jumbo loans during the six months
ended June 30, 1998. The weighted average yield on loans held for sale
increased to 7.10% for the six months ended June 30, 1998 from 7.05% for the
six months ended June 30, 1997, primarily due to a higher percentage of
comparatively higher fixed-rate held for sale portfolio in 1998 compared to
1997.
Page 19
<PAGE>
Interest income on mortgage-backed securities available for sale was
$178.5 million for the six months ended June 30, 1998, an increase of $44.1
million from the six months ended June 30, 1997. The average portfolio balances
increased $1.8 billion, to $5.7 billion, during the six months ended June 30,
1998 compared to the same period in 1997. The weighted average yield on these
assets decreased from 6.80% for the six months ended June 30, 1997 to 6.25% for
the six months ended June 30, 1998. The increase in the volume and decrease in
the weighted average yield is primarily due to purchases of $4.1 billion of
mortgage-backed securities during the six months ended June 30, 1998 and $.9
billion during the last six months of 1997 at comparatively lower market rates,
as well as prepayments of higher rate mortgage-backed securities since June 30,
1997.
Interest income on mortgage-backed securities held to maturity was
$47.4 million for the six months ended June 30, 1998, a decrease of $11.4
million from the six months ended June 30, 1997. The average portfolio balance
decreased $313 million, to $1.2 billion, during the six months ended June 30,
1998, primarily attributed to an increase in principal payments.
There was no material variance between the six months ended June 30,
1998 and the six months ended June 30, 1997 with respect to interest income
from securities and interest-bearing deposits in banks.
Interest Expense. Total interest expense was $781.4 million for the
six months ended June 30, 1998, an increase of $46.5 million from the six
months ended June 30, 1997. The increase is primarily the result of increased
borrowings of FHLB advances and a slightly higher cost of funds, partially
offset by a decline in the average balance of deposits resulting from net
deposit run-off.
Interest expense on customer deposits, including Brokered Deposits,
was $355.2 million for the six months ended June 30, 1998, a decrease of $19.6
million from the six months ended June 30, 1997. The average balance of
customer deposits outstanding decreased from $16.8 billion to $16.2 billion for
the six months ended June 30, 1997 and 1998, respectively. The decrease in the
average balance is primarily due to net deposit run-off, anticipated following
the Cal Fed Acquisition. The overall weighted average cost of deposits was
4.42% for the six months ended June 30, 1998 and 4.49% for the six months ended
June 30, 1997, primarily due to higher average balances of lower rate custodial
transaction accounts in 1998.
Interest expense on securities sold under agreements to repurchase
totalled $57.0 million for the six months ended June 30, 1998, a decrease of
$15.7 million from the six months ended June 30, 1997. The average balance of
such borrowings for the six months ended June 30, 1998 and 1997 was $2.0
billion and $2.5 billion, respectively. The decrease in the average balance is
primarily attributed to maturities refinanced with FHLB advances at more
favorable rates. The weighted average interest rate on these instruments
decreased to 5.59% during the six months ended June 30, 1998 from 5.68% for the
six months ended June 30, 1997, primarily due to a decrease in rates on new
borrowings compared to such borrowings during 1997.
Interest expense on borrowings totalled $369.2 million for the six
months ended June 30, 1998, an increase of $81.9 million from the six months
ended June 30, 1997. The increase is primarily attributed to the increase in
FHLB advances used to fund the purchases of mortgage-backed securities and
replace reverse repurchase agreements which matured. The average balance
outstanding for the six months ended June 30, 1998 and 1997 was $11.5 billion
and $8.6 billion, respectively. The weighted average interest rate on these
instruments decreased to 6.48% during the six months ended June 30, 1998 from
6.75% for the six months ended June 30, 1997, primarily due to the lower rates
in effect as a result of the flatter yield curve at June 30, 1998 compared to
June 30, 1997.
Net Interest Income. Net interest income was $295.6 million for the
six months ended June 30, 1998, a decrease of $10.2 million from the six months
ended June 30, 1997. The interest rate spread decreased to 2.11% for the six
months ended June 30, 1998 from 2.25% for the six months ended June 30, 1997,
primarily as a result of prepayments of higher rate interest-earning assets
being replaced with interest-earning assets having comparatively lower yields,
reflecting the flattening of the yield curve during the second half of 1997 and
year to date in 1998.
Noninterest Income. Total noninterest income, consisting primarily of
loan servicing fees, customer banking fees, gains on sales of loans and
dividends on FHLB stock, was $184.7 million for the six months ended June 30,
1998, an increase of $23.4 million from the six months ended June 30, 1997.
Income for the six months ended June 30, 1998 reflects a $24.8 million increase
in gain on sales of loans attributed to early payoffs of commercial loans with
Page 20
<PAGE>
unamortized discounts and additional gains from residential loan sales during
the six months ended June 30, 1998 compared to the same period in 1997.
Loan servicing fees, net of amortization of mortgage servicing rights,
were $71.4 million for the six months ended June 30, 1998, compared to $75.0
million for the six months ended June 30, 1997. The single-family residential
loan servicing portfolio, excluding loans serviced for the Bank, decreased from
$47.4 billion at June 30, 1997 to $46.8 billion at June 30, 1998. During the
six months ended June 30, 1998, the Company sold $4.5 billion in single-family
mortgage loans originated for sale as part of its ongoing mortgage banking
operations compared to $3.0 billion of such sales for the corresponding period
in 1997.
Gain on sales of loans was $36.1 million for the six months ended June
30, 1998, compared to $11.4 million for the six months ended June 30, 1997. The
increase in 1998 is primarily attributed to early payoffs of commercial loans
with unamortized discounts and additional gains from residential loan sales.
Dividends on FHLB stock were $14.6 million for the six months ended
June 30, 1998, an increase of $2.6 million from the six months ended June 30,
1997, representing an increase in the amount of such stock owned by the Bank,
primarily as a result of an increase in borrowings on FHLB advances.
There were no material variances between the six months ended June 30,
1998 and the comparable period in 1997 with respect to customer banking fees,
gain (loss) on sales of assets and other noninterest income.
Noninterest Expense. Total noninterest expense was $302.7 million for
the six months ended June 30, 1998, a decrease of $22.7 million from the six
months ended June 30, 1997. The variance between the two periods is primarily
attributed to 1997 transition expenses (primarily reflected in other
noninterest expense) related to the Cal Fed Acquisition and a $19.0 million
provision for unreimbursable costs related to the foreclosure of single-family
loans serviced for others (reflected as loan expense and professional fees)
also recorded during the six months ended June 30, 1997.
Provision for Income Tax. During the six months ended June 30, 1998
and 1997, Parent Holdings recorded an income tax benefit of $223.8 million and
income tax expense of $19.2 million, respectively. Based on resolutions of
federal income tax audits and favorable future earnings expectations,
management changed its judgment about the realizability of Parent Holdings'
deferred tax asset and reduced its valuation allowance by $250 million in
addition to the amount used to offset income during the period. For the six
months ended June 30, 1998 and 1997, Parent Holdings' valuation allowance was
reduced by $301.6 million and $35.2 million, respectively. Parent Holdings'
effective Federal tax rate was (157)% and 2% during the six months ended June
30, 1998 and 1997, respectively, while its statutory Federal tax rate was 35%
during both periods. The difference between the effective and statutory rates
was primarily the result of the reduction in the deferred tax asset valuation
allowance. Parent Holdings' effective state tax rate was 15% and 17% during the
six months ended June 30, 1998 and 1997, respectively. It is expected that,
beginning July 1, 1998, the Company's effective tax rate for future periods
will be 42%.
Minority Interest. Minority interest in income includes dividends on
the Bank Preferred Stock, the FN Holdings Preferred Stock and the REIT
Preferred Stock totaling $26.5 million, $.6 million and $22.8 million,
respectively, during the six months ended June 30, 1998. Minority interest
relative to the REIT Preferred Stock is reflected on the consolidated
statements of income net of the income tax benefit of $2.9 million which will
inure to the Company as a result of the deductibility of such dividends for
income tax purposes. Minority interest in income also includes $72.5 million
representing that portion of FN Holdings' income attributable to its class B
common stock, which is owned by Hunter's Glen, and $.8 million representing
that portion of Auto One's loss (from February 4, 1998 through June 30, 1998)
attributable to the 20% interest in the common stock of Auto One that was
issued as part of the GSAC Acquisition.
During the six months ended June 30, 1997, minority interest in income
includes dividends on the Bank Preferred Stock, the FN Holdings Preferred Stock
and the REIT Preferred Stock of $26.3 million, $8.2 million and $19.1 million,
respectively. Minority interest relative to the REIT Preferred Stock is
reflected on the consolidated statements of income net of the income tax
benefit of $2.4 million which will inure to the Company as a result of the
deductibility of such dividends for income tax purposes. Minority interest in
income also includes $11.7 million representing that portion of FN Holdings'
income attributable to its class B common stock, which is owned by Hunter's
Glen.
Page 21
<PAGE>
Three Months Ended June 30, 1998 versus Three Months Ended June 30,
1997
The following table sets forth, for the periods and at the dates
indicated, information regarding the Company's consolidated average balance
sheets, together with the total dollar amounts of interest income and interest
expense and the weighted average interest rates for the periods presented.
Average balances are calculated on a daily basis. The information presented
represents the historical activity of the Company.
<TABLE>
<CAPTION>
Three months ended
June 30, 1998
------------------------------------------
Average Average
Balance Interest Rate
-------- -------- -------
(dollars in millions)
ASSETS
<S> <C> <C> <C>
Interest-earning assets (1):
Securities and interest-bearing deposits in banks (2) $ 1,079 $ 16 6.09%
Mortgage-backed securities available for sale 6,343 97 6.12
Mortgage-backed securities held to maturity 1,179 22 7.65
Loans held for sale, net 1,848 31 6.69
Loans receivable, net 19,131 377 7.87
------- ---- ----
Total interest-earning assets 29,580 543 7.35%
---- ----
Noninterest-earning assets 3,757
-------
Total assets $33,337
=======
LIABILITIES, MINORITY INTEREST
AND STOCKHOLDER'S EQUITY
Interest-bearing liabilities:
Deposits $16,277 177 4.36%
Securities sold under agreements to repurchase 2,192 30 5.51
Borrowings (3) 11,867 191 6.46
------- ---- ----
Total interest-bearing liabilities 30,336 398 5.27%
---- ----
Noninterest-bearing liabilities 1,464
Minority interest 1,188
Stockholder's equity 349
-------
Total liabilities, minority interest and
stockholder's equity $33,337
=======
Net interest income $145
====
Interest rate spread 2.08%
====
Net interest margin 1.95%
====
Average equity to average assets 1.05%
====
</TABLE>
Page 22
<PAGE>
<TABLE>
<CAPTION>
Three months ended
June 30, 1997
------------------------------------------
Average Average
Balance Interest Rate
-------- -------- -------
(dollars in millions)
ASSETS
<S> <C> <C> <C>
Interest-earning assets (1):
Securities and interest-bearing deposits in banks (2) $ 1,060 $ 17 6.45%
Mortgage-backed securities available for sale 4,354 73 6.74
Mortgage-backed securities held to maturity 1,522 29 7.60
Loans held for sale, net 1,138 20 7.16
Loans receivable, net 19,940 389 7.80
------- ---- ----
Total interest-earning assets 28,014 528 7.54%
---- ----
Noninterest-earning assets 2,799
-------
Total assets $30,813
=======
LIABILITIES, MINORITY INTEREST
AND STOCKHOLDER'S EQUITY
Interest-bearing liabilities:
Deposits $16,845 188 4.47%
Securities sold under agreements to repurchase 2,638 38 5.76
Borrowings (3) 8,920 150 6.76
------- ---- ----
Total interest-bearing liabilities 28,403 376 5.32%
---- ----
Noninterest-bearing liabilities 1,005
Minority interest 1,238
Stockholder's equity 167
-------
Total liabilities, minority interest
and stockholder's equity $30,813
=======
Net interest income $152
====
Interest rate spread 2.22%
====
Net interest margin 2.15%
====
Average equity to average assets 0.54%
====
</TABLE>
- -------------------
(1) Non-performing assets are included in the average balances for the periods
indicated.
(2) The information presented includes securities held to maturity, securities
available for sale and interest-bearing deposits in other banks.
(3) Interest and average rate include the impact of interest rate swaps.
Page 23
<PAGE>
The following table presents certain information regarding changes in
interest income and interest expense of the Company during the periods
indicated. The dollar amount of interest income and interest expense fluctuates
depending upon changes in the respective interest rates and upon changes in the
respective amounts (volume) of the Company's interest-earning assets and
interest-bearing liabilities. For each category of interest-earning assets and
interest-bearing liabilities, information is provided on changes attributable
to (i) changes in volume (changes in average outstanding balances multiplied by
the prior period's rate) and (ii) changes in rate (changes in average interest
rate multiplied by the prior period's volume). Changes attributable to both
volume and rate have been allocated proportionately.
<TABLE>
<CAPTION>
Three months ended June 30, 1998 vs. 1997
Increase (Decrease) Due to
--------------------------------------------
Volume Rate Net
------- ----- ---
(in millions)
<S> <C> <C> <C>
INTEREST INCOME:
Securities and interest-bearing deposits in banks $ -- $ (1) $ (1)
Mortgage-backed securities available for sale 30 (6) 24
Mortgage-backed securities held to maturity (8) 1 (7)
Loans held for sale, net 12 (1) 11
Loans receivable, net (16) 4 (12)
---- ---- ----
Total 18 (3) 15
---- ---- ----
INTEREST EXPENSE:
Deposits (6) (5) (11)
Securities sold under agreements to repurchase (7) (1) (8)
Borrowings 48 (7) 41
---- ---- ----
Total 35 (13) 22
---- ---- ----
Change in net interest income $(17) $10 $ (7)
==== ==== ====
</TABLE>
The volume variances in total interest income and total interest
expense for the three months ended June 30, 1998 compared to the corresponding
period in 1997 are largely due to increased purchases of mortgage-backed
securities funded with FHLB advances. The positive total rate variance of $10
million is primarily attributed to lower rates on FHLB advances and a lower
cost of funds on deposits, partially offset by the comparatively lower market
rates on mortgage-backed securities purchased in 1998 and 1997 and prepayments
of higher rate interest-earning assets.
Interest Income. Total interest income was $543.5 million for the
three months ended June 30, 1998, an increase of $15.7 million from the three
months ended June 30, 1997. Total interest-earning assets for the three months
ended June 30, 1998 averaged $29.6 billion, compared to $28.0 billion for the
corresponding period in 1997. The yield on total interest-earning assets during
the three months ended June 30, 1998 decreased to 7.35% compared to 7.54% for
the three months ended June 30, 1997, primarily due to lower market rates on
new mortgage-backed securities purchased in 1998 and 1997 and prepayments of
higher rate interest-earning assets.
Parent Holdings earned $376.6 million of interest income on loans
receivable for the three months ended June 30, 1998, a decrease of $12.4
million from the three months ended June 30, 1997. The average balance of loans
receivable decreased to $19.1 billion during the three months ended June 30,
1998 from $19.9 billion for the three months ended June 30, 1997, primarily due
to increased prepayments. The weighted average yield on loans receivable
increased to 7.87% for the three months ended June 30, 1998 from 7.80% for the
same period in 1997, partially due to the higher rate loans originated through
Auto One.
Parent Holdings earned $30.9 million of interest income on loans held
for sale for the three months ended June 30, 1998, an increase of $10.5 million
from the three months ended June 30, 1997. The average balance of loans held
for sale was $1.8 billion for the three months ended June 30, 1998, an increase
of $710 million from the same period in 1997, primarily due to increased
originations and longer holding periods for jumbo loans during the three months
ended June 30, 1998. The weighted average yield on loans held for sale
decreased to 6.69% for the three months ended June 30, 1998 from 7.16% during
the three months ended June 30, 1997, primarily due to generally lower market
interest rates during the second quarter of 1998.
Interest income on mortgage-backed securities available for sale was
$97.0 million for the three months ended June 30, 1998, an increase of $23.6
million from the three months ended June 30, 1997. The average portfolio
balance
Page 24
<PAGE>
increased $2.0 billion, to $6.3 billion, during the three months ended June 30,
1998 compared to the same period in 1997. The weighted average yield on these
assets decreased from 6.74% for the three months ended June 30, 1997 to 6.12%
for the three months ended June 30, 1998. The increase in the volume and
decrease in the weighted average yield is primarily due to purchases of $3.1
billion in lower rate mortgage-backed securities during the three months ended
June 30, 1998 and $.9 billion during the last six months of 1997, as well as
prepayments of higher rate mortgage-backed securities since June 30, 1997.
There were no material variances between the three months ended June
30, 1998 and the three months ended June 30, 1997 with respect to interest
income from mortgage-backed securities held to maturity and securities and
interest-bearing deposits in banks.
Interest Expense. Total interest expense was $398.5 million for the
three months ended June 30, 1998, an increase of $23.1 million from the three
months ended June 30, 1997. The increase is primarily the result of increased
borrowings of FHLB advances, partially offset by a decline in the average
balance of deposits resulting from net deposit run-off.
Interest expense on customer deposits, including Brokered Deposits,
was $177.0 million for the three months ended June 30, 1998, a decrease of
$10.7 million from the three months ended June 30, 1997. The average balance of
customer deposits outstanding decreased from $16.8 billion to $16.3 billion for
the three months ended June 30, 1997 and 1998, respectively. The decrease in
the average balance is primarily due to net deposit run-off, anticipated
following the Cal Fed Acquisition. The overall weighted average cost of
deposits decreased to 4.36% for the three months ended June 30, 1998 from 4.47%
for the three months ended June 30, 1997, primarily due to higher average
balances of lower rate custodial transaction accounts.
Interest expense on securities sold under agreements to repurchase
totalled $30.5 million for the three months ended June 30, 1998, a decrease of
$7.9 million from the three months ended June 30, 1997. The average balance of
such borrowings for the three months ended June 30, 1998 and 1997 was $2.2
billion and $2.6 billion, respectively. The decrease in the average balance is
attributed to maturities that were refinanced with FHLB advances at more
favorable rates. The weighted average interest rate on these instruments
decreased to 5.51% during the three months ended June 30, 1998 from 5.76% for
the three months ended June 30, 1997, primarily due to a decrease in rates on
new borrowings compared to such borrowings during 1997.
Interest expense on borrowings totalled $191.0 million for the three
months ended June 30, 1998, an increase of $41.7 million from the three months
ended June 30, 1997. The increase is attributed to additional FHLB advances
used to fund the purchases of mortgage-backed securities and replace reverse
repurchase agreements which matured. The average balance outstanding for the
three months ended June 30, 1998 and 1997 was $11.9 billion and $8.9 billion,
respectively. The weighted average interest rate on these instruments decreased
to 6.46% during the three months ended June 30, 1998 from 6.76% for the three
months ended June 30, 1997, primarily due to the lower rates in effect as a
result of the flatter yield curve at June 30, 1998 compared to June 30, 1997.
Net Interest Income. Net interest income was $145.0 million for the
three months ended June 30, 1998, a decrease of $7.4 million from the three
months ended June 30, 1997. The interest rate spread decreased to 2.08% for the
three months ended June 30, 1998 from 2.22% for the three months ended June 30,
1997, primarily as a result of prepayments of higher rate interest-earning
assets being replaced with interest-earning assets having comparatively lower
yields, reflecting the flattening of the yield curve during the second half of
1997 and year to date in 1998.
Noninterest Income. Total noninterest income, consisting primarily of
loan servicing fees, customer banking fees, gains on sales of loans and
dividends on FHLB stock, was $95.0 million for the three months ended June 30,
1998, an increase of $12.5 million from the three months ended June 30, 1997.
Income for the three months ended June 30, 1998 includes a $13.1 million
increase in gain on sales of loans, primarily attributed to early payoffs of
commercial loans with unamortized discounts and additional gains from
residential loan sales during the second quarter of 1998.
Loan servicing fees, net of amortization of mortgage servicing rights,
were $34.4 million for the three months ended June 30, 1998, compared to $35.3
million for the three months ended June 30, 1997. The single-family residential
loan servicing portfolio, excluding loans serviced for the Bank, decreased from
$47.4 billion at June 30, 1997 to $46.8 billion at June 30, 1998. During the
three months ended June 30, 1998, the Company sold $2.7 billion in
single-family mortgage loans originated for sale as part of its ongoing
mortgage banking operations compared to $1.8 billion of such sales for the
corresponding period in 1997.
Page 25
<PAGE>
Gain on sales of loans was $21.6 million for the three months ended
June 30, 1998, compared to $8.5 million for the three months ended June 30,
1997. The increase is primarily attributed to early payoffs of commercial loans
with unamortized discounts and additional gains from residential loan sales
during the second quarter of 1998.
Dividends on FHLB stock were $7.6 million for the three months ended
June 30, 1998, an increase of $1.5 million from the three months ended June 30,
1997, representing an increase in the volume of such stock owned by the
Company, primarily as a result of an increase in borrowings on FHLB advances.
There were no material variances between the three months ended June
30, 1998 and the comparable period in 1997 with respect to customer banking
fees, gain (loss) on sales of assets and other noninterest income.
Noninterest Expense. Total noninterest expense was $157.5 million for
the three months ended June 30, 1998, a decrease of $14.2 million from the
three months ended June 30, 1997. The variance between the two periods is
primarily attributed to a $19.0 million provision for unreimbursable costs
related to the foreclosure of single-family loans serviced for others, which is
reflected in loan expense and professional fees, recorded during the second
quarter of 1997.
Provision for Income Tax. During the three months ended June 30, 1998
and 1997, Parent Holdings recorded income tax benefit of $237.7 million and
income tax expense of $9.0 million, respectively. Based on resolutions of
federal income tax audits and favorable future earnings expectations,
management changed its judgment about the realizability of Parent Holdings'
deferred tax asset and reduced its valuation allowance by $250 million in
addition to the amount used to offset income during the period. For the quarter
ended June 30, 1998 and 1997, Parent Holdings' valuation allowance was reduced
by $273.8 million and $14.5 million, respectively. Parent Holdings' effective
Federal tax rates were (214)% and 2% during the three months ended June 30,
1998 and 1997, respectively, while its statutory Federal tax rate was 35%
during both periods. The difference between the effective and statutory rates
was primarily the result of the reductions in the deferred tax asset valuation
allowance. Parent Holdings' effective state tax rate was 15% and 17% during the
three months ended June 30, 1998 and 1997, respectively. It is expected that,
beginning July 1, 1998, the Company's effective tax rate for future periods
will be 42%.
Minority Interest. Minority interest in income includes dividends on
the Bank Preferred Stock and the REIT Preferred Stock totaling $13.2 million
and $11.4 million, respectively, during the three months ended June 30, 1998.
Minority interest relative to the REIT Preferred Stock is reflected on the
consolidated statements of income net of the income tax benefit of $1.5 million
which will inure to the Company as a result of the deductibility of such
dividends for income tax purposes. Minority interest in income also includes
$60.3 million representing that portion of FN Holdings' income attributable to
its class B common stock, which is owned by Hunter's Glen, and $.5 million
representing that portion of Auto One's loss (from February 4, 1998 through
June 30, 1998) attributable to the 20% interest in the common stock of Auto One
that was issued as part of the GSAC Acquisition.
During the three months ended June 30, 1997, minority interest in
income includes dividends on the Bank Preferred Stock, the FN Holdings
Preferred Stock and the REIT Preferred Stock of $13.2 million, $3.7 million and
$11.4 million, respectively. Minority interest relative to the REIT Preferred
Stock is reflected on the consolidated statements of income net of the income
tax benefit of $1.5 million which will inure to the Company as a result of the
deductibility of such dividends for income tax purposes. Minority interest in
income also includes $4.3 million representing that portion of FN Holdings'
income attributable to its class B common stock, which is owned by Hunter's
Glen.
PROVISION FOR LOAN LOSSES
The adequacy of the allowance for loan losses is periodically
evaluated by management in order to maintain the allowance at a level that is
sufficient to absorb expected loan losses. The Company charges current earnings
with a provision for estimated credit losses on loans receivable. The provision
considers both specifically identified problem loans as well as credit risks
not specifically identified in the loan portfolio. The Company established
provisions for loan losses of $20.0 million and $39.9 million during the six
months ended June 30, 1998 and 1997, respectively. The decrease in the
provision for loan losses during the six months ended June 30, 1998 compared to
the same period in 1997 is the result of management's evaluation of the
adequacy of the allowance based on, among other things, past loan loss
experience and known and inherent risks in the portfolio, evidenced in part by
the continued decline in the Company's level of non-performing assets. In
addition, management's periodic evaluation of the adequacy of the allowance for
loan losses considers potential adverse situations that may affect the
borrower's ability to repay, the estimated value of underlying collateral, and
current and prospective economic conditions. The allowance for loan losses is
increased by provisions for loan losses and allowances on acquired loans, while
it is decreased by charge-offs (net of recoveries).
Page 26
<PAGE>
Activity in the allowance for loan losses during the six months ended
June 30, 1998 and 1997 is as follows (in thousands):
1998 1997
---- ----
Balance - January 1 $418,674 $246,556
Purchase - Cal Fed Acquisition -- 143,820
Provision for loan losses 20,000 39,900
Charge-offs (19,685) (32,243)
Recoveries 1,676 2,468
-------- --------
Balance - June 30 $420,665 $400,501
======== ========
Although management believes that the allowance for loan losses is
adequate for its current portfolios, it will continue to review its loan
portfolio to determine the extent to which any changes in economic conditions
or loss experience may require additional provisions in the future.
ASSET AND LIABILITY MANAGEMENT
Banks and savings associations are subject to interest rate risk to
the degree that their interest-bearing liabilities, consisting principally of
deposits, securities sold under agreements to repurchase and FHLB advances,
mature or reprice more or less frequently, or on a different basis, than their
interest-earning assets. The process of planning and controlling asset and
liability mixes, volumes and maturities to influence the net interest spread is
referred to as asset and liability management. The objective of the Company's
asset and liability management is to maximize its net interest income over
changing interest rate cycles within the constraints imposed by prudent lending
and investing practices, liquidity needs and capital planning.
Parent Holdings, through the Bank, actively pursues investment and
funding strategies intended to minimize the sensitivity of its earnings to
interest rate fluctuations while maintaining the flexibility required to
execute its business strategies. The Company measures the interest rate
sensitivity of the balance sheet through gap and duration analysis, as well as
net interest income and market value simulation, and, after taking into
consideration both the variability of rates and the maturities of various
instruments, evaluates strategies which may reduce the sensitivity of its
earnings to interest rate and market value fluctuations. An important decision
is the selection of interest-bearing liabilities and the generation of
interest-earning assets which best match relative to interest rate changes. In
order to reduce interest rate risk by increasing the percentage of interest
sensitive assets, the Company has continued its emphasis on the origination of
adjustable rate mortgage ("ARM") products for its portfolio. Where possible,
the Company seeks to purchase assets or originate real estate loans that
reprice frequently and that on the whole adjust in accordance with the
repricing of its liabilities. At June 30, 1998, approximately 91% of the
Company's real estate loan portfolio consisted of ARMs.
ARMs have from time to time been offered with low initial interest
rates as marketing inducements. In addition, most ARMs are also subject to
periodic interest rate adjustment caps or floors. In a period of rising
interest rates, ARMs could reach a periodic adjustment cap while still at a
rate significantly below their contractual margin over existing market rates.
Since repricing liabilities are typically not subject to such interest rate
adjustment constraints, the Company's net interest margin would most likely be
negatively impacted in this situation. Certain ARMs currently offered by the
Company have a fixed monthly payment for a given period, with any changes as a
result of market interest rates reflected in the unpaid principal balance
through negative amortization.
One of the most important sources of a financial institution's net
income is net interest income, which is the difference between the combined
interest earned on interest-earning assets and the combined interest paid on
interest-bearing liabilities. Net interest income is also dependent on the
relative balances of interest-earning assets and interest-bearing liabilities.
A traditional measure of interest rate risk within the savings
industry is the interest rate sensitivity gap, which is the sum of all
interest-earning assets minus the sum of all interest-bearing liabilities to be
repriced within given periods. A gap is considered positive when the interest
rate sensitive assets exceed interest rate sensitive liabilities, while the
opposite results in a negative gap. During a period of rising interest rates, a
negative gap would tend to adversely affect net interest income, and a positive
gap would tend to result in an increase in net interest income, while the
opposite would tend to occur in a period of falling rates.
Page 27
<PAGE>
The following table sets forth the projected maturities based upon
contractual maturities as adjusted for projected prepayments and "repricing
mechanisms" (provisions for changes in the interest rates), as of June 30,
1998. Prepayment rates are assumed in each period on substantially all of the
Company's loan portfolio based upon expected loan prepayments. Repricing
mechanisms on the Company's assets are subject to limitations such as caps on
the amount that interest rates and payments on its loans may adjust and,
accordingly, such assets may not respond in the same manner or to the same
extent to changes in interest rates as the Company's liabilities. In addition,
the interest rate sensitivity of the Company's assets and liabilities
illustrated in the table would vary substantially if different assumptions were
used or if actual experience differed from the assumptions set forth. The
Company's estimated interest rate sensitivity gap at June 30, 1998 is as
follows:
<TABLE>
<CAPTION>
Maturity/Rate Sensitivity
----------------------------------------------------
Within 1-5 Over 5 Noninterest
1 Year Years Years Bearing Total
--------- ------- ------- ----------- -------
(dollars in millions)
<S> <C> <C> <C> <C> <C>
INTEREST-EARNING ASSETS:
Securities held to maturity, interest-bearing
deposits in other banks and short-term
investment securities(1)(2) $ 96 $ -- $ -- $ -- $ 96
Securities available for sale (3) 783 -- -- -- 783
Mortgage-backed securities
available for sale (3) 8,037 -- -- -- 8,037
Mortgage-backed securities
held to maturity (1)(4) 1,135 2 -- -- 1,137
Loans held for sale, net (3)(5) 1,707 -- -- -- 1,707
Loans receivable, net (1)(6) 14,891 3,263 757 -- 18,911
Investment in FHLB 540 -- -- -- 540
------- ------ ----- ------ -------
Total interest-earning assets 27,189 3,265 757 -- 31,211
Noninterest-earning assets -- -- -- 2,839 2,839
------- ------ ----- ------ -------
$27,189 $3,265 $ 757 $2,839 $34,050
======= ====== ===== ====== =======
INTEREST-BEARING LIABILITIES:
Deposits (7) $14,395 $1,641 $ 8 $ -- $16,044
Securities sold under agreements to
repurchase (1) 2,862 -- -- -- 2,862
FHLB advances (1) 4,208 6,784 2 -- 10,994
Other borrowings (1) 238 814 693 -- 1,745
------- ------ ----- ------ -------
Total interest-bearing liabilities 21,703 9,239 703 -- 31,645
Noninterest-bearing liabilities -- -- -- 730 730
Minority interest -- -- -- 1,214 1,214
Stockholder's equity -- -- -- 461 461
------- ------ ----- ------ -------
$21,703 $9,239 $ 703 $2,405 $34,050
======= ====== ===== ====== =======
Gap $5,486 $(5,974) $ 54 $(434)
====== ======= ===== =====
Cumulative gap $5,486 $(488) $(434) $(434)
====== ===== ===== =====
Gap as a percentage of total assets 16.1% (17.6)% 0.2% (1.3)%
==== ===== === ====
Cumulative gap as a percentage of total assets 16.1% (1.5)% (1.3)% (1.3)%
==== ==== ==== ====
</TABLE>
Page 28
<PAGE>
- -------------------
(1) Based upon (a) contractual maturity, (b) instrument repricing date, if
applicable, and (c) projected repayments and prepayments of principal, if
applicable. Prepayments were estimated generally by using the prepayment
rates forecast by various large brokerage firms as of June 30, 1998. The
actual maturity and rate sensitivity of these assets could vary
substantially if future prepayments differ from the Company's prepayment
estimates.
(2) Consists of $59 million of securities held to maturity, $2 million of
interest-bearing deposits in other banks and $35 million of short-term
investment securities.
(3) As loans held for sale and securities and mortgage-backed securities
available for sale may be sold within one year, they are considered to be
maturing within one year.
(4) Excludes underlying non-performing loans of $6 million.
(5) Excludes non-performing loans of $18 million.
(6) Excludes allowance for loan losses of $421 million and non-performing loans
of $136 million.
(7) Fixed rate deposits and deposits with a fixed pricing interval are reflected
as maturing in the year of contractual maturity or first repricing date.
Money market deposit accounts, demand deposit accounts and passbook accounts
are reflected as maturing within one year.
At June 30, 1998, interest-bearing liabilities of the Company exceeded
interest-earning assets by approximately $434 million. At December 31, 1997,
interest-bearing liabilities of the Company exceeded interest-earning assets by
approximately $309 million.
The maturity/rate sensitivity analysis is a static view of the balance
sheet with assets and liabilities grouped into certain defined time periods,
and thus only partially depicts the dynamics of the Company's sensitivity to
interest rate changes. Since it is measured at a single point in time, this
analysis may not fully describe the complexity of relationships between product
features and pricing, market rates and future management of the balance sheet
mix. The Company utilizes computer modeling, under various interest rate
scenarios, to provide a dynamic view of the effects of the changes in rates,
spreads, and yield curve shifts on net interest income.
The Company's risk management policies are established by the
Asset/Liability Management Committee ("ALCO") of the Bank. ALCO meets monthly
to formulate the Bank's investment and risk management strategies. The basic
responsibilities of ALCO include management of net interest income and market
value of portfolio equity, management of liquidity to provide adequate funding,
and the establishment of asset product priorities by formulating performance
evaluation criteria, risk evaluation techniques and a system to standardize the
analysis and reporting of originations, competitive trends, profitability and
risk. On a quarterly basis, the Board of Directors of the Bank is apprised of
ALCO strategies adopted and their impact on operations, and, at least annually,
the Board of Directors of the Bank reviews the Bank's interest rate risk
management policy statements.
LIQUIDITY
The standard measure of liquidity in the savings industry is the ratio
of cash and short-term U. S. government securities and other specified
securities to deposits and borrowings due within one year. Effective November
24, 1997, the OTS established a minimum liquidity requirement for the Bank of
4.00%, a reduction from 5.00%, which had been in effect prior to that date in
1997. California Federal has been in compliance with the liquidity regulations
during 1998 and 1997.
A major source of the Company's funding is expected to be the Bank's
retail deposit branch network, which management believes will be sufficient to
meet its long-term liquidity needs. The ability of the Company to retain and
attract new deposits is dependent upon the variety and effectiveness of its
customer account products, customer service and convenience, and rates paid to
customers. The Company also obtains funds from the repayment and maturities of
loans and mortgage-backed securities, while additional funds can be obtained
from a variety of other sources including Brokered Deposits, loan sales,
securities sold under agreements to repurchase, FHLB advances, and other
secured and unsecured borrowings. It is anticipated that FHLB advances and
securities sold under agreements to repurchase will continue to be important
sources of funding, and management expects there to be adequate collateral for
such funding requirements.
The Company's primary uses of funds are the origination or purchase of
loans, the purchase of mortgage-backed securities, the funding of maturing
certificates of deposit, demand deposit withdrawals, the repayment of
borrowings,
Page 29
<PAGE>
and the payment of dividends with respect to the REIT Preferred Stock and the
Bank Preferred Stock. Certificates of deposit scheduled to mature during the
twelve months ending June 30, 1999 aggregate $8.3 billion. The Company may
renew these certificates, attract new replacement deposits, replace such funds
with other borrowings, or it may elect to reduce the size of the balance sheet.
In addition, at June 30, 1998, Parent Holdings had securities sold under
agreements to repurchase, FHLB advances and other borrowings aggregating $7.3
billion maturing within twelve months. The Company may elect to pay off such
debt or to replace such borrowings with additional FHLB advances or other
borrowings at prevailing rates.
Parent Holdings' primary source of cash to pay the interest on and
principal of its long-term debt is expected to be distributions from FN
Holdings. The annual interest on the Company's long-term debt is $56.9 million.
Although Parent Holdings expects that distributions from FN Holdings will be
sufficient to pay interest when due and the principal amount of its long-term
debt at maturity, there can be no assurance that earnings from the Bank will be
sufficient to make such distributions to FN Holdings, or that FN Holdings will
make distributions to Parent Holdings in amounts sufficient to enable Parent
Holdings to pay interest on its long-term debt. In addition, there can be no
assurance that such distributions will be permitted by the terms of any debt
instruments of Parent Holdings' subsidiaries then in effect, including FN
Holdings' long-term debt, by the terms of any class of preferred stock issued
by the Bank or its subsidiaries, including the REIT Preferred Stock and the
Bank Preferred Stock, or under applicable federal thrift laws.
FN Holdings' primary source of cash to pay the interest on and
principal of its long-term debt is expected to be distributions from the Bank.
The annual interest on the FN Holdings Notes is $98.4 million. Interest on the
GS Escrow Notes, to be assumed by a subsidiary of FN Holdings in the GS Escrow
Merger, will approximate $140.9 million per year. Although FN Holdings expects
that distributions from the Bank will be sufficient to pay interest when due
and the principal amount of its long-term debt at maturity, there can be no
assurance that earnings from the Bank will be sufficient to make such
distributions to FN Holdings. In addition, there can be no assurance that such
distributions will be permitted by the terms of any debt instruments of FN
Holdings' subsidiaries then in effect, by the terms of any class of preferred
stock issued by the Bank, including the REIT Preferred Stock and the Bank
Preferred Stock, or under applicable federal thrift laws.
The Company anticipates that cash and cash equivalents on hand, the
cash flow from assets as well as other sources of funds will provide adequate
liquidity for its operating, investing and financing needs and the Bank's
regulatory liquidity requirements for the foreseeable future. In addition to
cash and cash equivalents of $383.4 million at June 30, 1998, the Company has
substantial additional borrowing capacity with the FHLB and other sources.
As presented in the accompanying unaudited consolidated statements of
cash flows, the sources of liquidity vary between periods. The primary sources
of funds during the six months ended June 30, 1998 were net loan repayments of
$725.3 million, proceeds from sales of loans of $4.5 billion, $11.8 billion in
additional borrowings, a $1.0 billion net increase in securities sold under
agreements to repurchase and $1.9 billion in proceeds from principal payments
and maturities of securities and mortgage-backed securities available for sale
and held to maturity. The primary uses of funds were $10.3 billion in principal
payments on borrowings, $4.6 billion in purchases of securities and
mortgage-backed securities available for sale, $4.8 billion in originations of
loans, $157.9 million from a net decrease in deposits and $53.9 million in net
dividend payments to minority shareholders.
PROBLEM AND POTENTIAL PROBLEM ASSETS
The Company considers a loan to be impaired when, based upon current
information and events, it believes it is probable that the Company will be
unable to collect all amounts due according to the contractual terms of the
loan agreement. Any insignificant delay (i.e., 60 days or less) or
insignificant shortfall in amount of payments will not cause a loan to be
considered impaired. In determining impairment, the Company considers large
non-homogeneous loans including non-performing loans, troubled debt
restructurings, and performing loans which exhibit, among other
characteristics, high LTV ratios, low debt-coverage ratios or other indications
that the borrowers are experiencing increased levels of financial difficulty.
The Company bases the measurement of collateral-dependent impaired loans on the
fair value of the loan's collateral. The amount, if any, by which the recorded
investment of the loan exceeds the measure of the impaired loan's value is
recognized by recording a valuation allowance.
Page 30
<PAGE>
At June 30, 1998, the carrying value of loans that were considered to
be impaired totalled $97.2 million (of which $20.3 million were on
non-performing status). The average recorded investment in impaired loans
during the six months ended June 30, 1998 was approximately $98.7 million. For
the six months ended June 30, 1998, Parent Holdings recognized interest income
on those impaired loans of $4.4 million, which included $.7 million of interest
income recognized using the cash basis method of income recognition.
The following table presents the amounts, net of specific allowances
for loan losses and purchase accounting adjustments, of the Company's
non-performing loans, foreclosed real estate, repossessed assets, troubled debt
restructurings and impaired loans as of the dates indicated. These categories
are not mutually exclusive; certain loans are included in more than one
classification.
<TABLE>
<CAPTION>
June 30, 1998
----------------------------------------------------
Non-performing Impaired Restructured
---------------- ------------ --------------
(in millions)
<S> <C> <C> <C>
Real Estate:
1-4 unit residential $133 $-- $ 2
5+ unit residential 10 40 21
Commercial and other 10 56 21
Land -- -- --
Construction 1 1 --
---- --- ---
Total real estate 154 97 44
Non-real estate 6 -- --
---- --- ---
Total loans, net 160 $97(b) $44(c)
=== ===
Foreclosed real estate, net 65
Repossessed assets 2
----
Total non-performing assets $227(a)
====
December 31, 1997
----------------------------------------------------
Non-performing Impaired Restructured
---------------- ------------ --------------
(in millions)
Real Estate:
1-4 unit residential $165 $ -- $ 2
5+ unit residential 12 43 43
Commercial and other 6 67 26
Land -- -- --
Construction 2 -- --
---- ---- ---
Total real estate 185 110 71
Non-real estate 7 -- --
---- ---- ---
Total loans 192 $110(b) $71(c)
==== ===
Foreclosed real estate, net 77
Repossessed assets 3
----
Total non-performing assets $272(a)
====
</TABLE>
- -------------------
(a) Includes loans securitized with recourse on non-performing status of
$5.7 million and $5.2 million at June 30, 1998 and December 31, 1997,
respectively, and loans held for sale on non-performing status of
$18.4 million and $1.2 million at June 30, 1998 and December 31, 1997.
(b) Includes $20.3 million and $18.6 million of loans on non-performing
status at June 30, 1998 and December 31, 1997, respectively. Also
includes $19.2 million and $17.5 million of loans classified as
troubled debt restructurings at June 30, 1998 and December 31, 1997,
respectively.
(c) Includes non-performing loans of $1.1 million and $2.1 million at June
30, 1998 and December 31, 1997, respectively. At June 30, 1998 and
December 31, 1997, $.3 million and $1.7 million, respectively, of
these non-performing troubled debt restructurings were also considered
impaired.
There were no accruing loans contractually past due 90 days or more at
June 30, 1998 or December 31, 1997.
Page 31
<PAGE>
Parent Holdings' non-performing assets, consisting of non-performing
loans, net of purchase accounting adjustments, foreclosed real estate, net, and
repossessed assets, decreased to $227 million at June 30, 1998, from $272
million at December 31, 1997. Non-performing assets as a percentage of the
Bank's total assets decreased to .67% at June 30, 1998, from .87% at December
31, 1997.
Parent Holdings, through the Bank, manages its credit risk by
regularly assessing the current and estimated future performance of the real
estate markets in which it operates. The Company continues to place a high
degree of emphasis on the management of its asset portfolio. The Company has
three distinct asset management functions: performing loan asset management,
problem loan asset management and credit review. These three functions are
charged with the responsibility of reducing the risk profile within the
residential, commercial and multi-family asset portfolios by applying asset
management and risk evaluation techniques that are consistent with the
Company's portfolio management strategy and regulatory requirements. In
addition to these asset management functions, the Company has a specialized
credit risk management group that is charged with the development of credit
policies and performing credit risk analyses for all asset portfolios.
The following table presents non-performing real estate assets by
geographic region of the country as of June 30, 1998:
<TABLE>
<CAPTION>
Total
Non-performing Foreclosed Non-performing
Real Estate Real Estate, Real Estate Geographic
Loans, Net (2) Net (2) Assets Concentration
-------------- -------- ------ -------------
(dollars in millions)
<S> <C> <C> <C> <C>
Region:
California $ 89 $39 $128 58.52%
Northeast (1) 28 12 40 18.16
Other regions 37 14 51 23.32
---- --- ---- ------
Total $154 $65 $219 100.00%
==== === ==== ======
</TABLE>
- --------------------
(1) Includes Connecticut, Massachusetts, New Hampshire, New Jersey, New York,
Pennsylvania, Rhode Island and Delaware.
(2) Net of purchase accounting adjustments and specific allowances for
losses.
At June 30, 1998, the Company's largest non-performing asset was
approximately $4.6 million, and it had three non-performing assets over $2
million in size with balances averaging approximately $4.0 million. The Company
has 1,358 non-performing assets below $2 million in size, including 1,266
non-performing 1-4 unit residential assets.
A summary of the activity in the allowance for loan losses by loan
type is as follows for the six months ended June 30, 1998:
<TABLE>
<CAPTION>
5+ Unit
Residential
1-4 Unit and Commercial Consumer
Residential Real Estate and Other Total
----------- -------------- --------- -----
(dollars in millions)
<S> <C> <C> <C> <C>
Balance - December 31, 1997 $202 $198 $19 $419
Provision for loan losses 12 5 3 20
Charge-offs (13) (3) (4) (20)
Recoveries 1 -- 1 2
---- ---- --- ----
Balance - June 30, 1998 $202 $200 $19 $421
==== ==== === ====
</TABLE>
The ratio of allowance for loan losses to non-performing loans at June
30, 1998 and December 31, 1997 was 262.0% and 217.8%, respectively.
Page 32
<PAGE>
MORTGAGE BANKING OPERATIONS
Since 1994, the Company, through the Bank's wholly owned mortgage bank
subsidiary, First Nationwide Mortgage Corporation ("FNMC"), has significantly
expanded its mortgage banking operations. During May 1997 and January 1998,
FNMC acquired mortgage servicing assets of $3.2 billion and $3.6 billion,
respectively, as a result of four bulk servicing acquisitions. The balance in
the servicing portfolio has remained relatively flat as a result of the net
effect of a 1997 servicing sale of loans with an unpaid principal balance of
$2.3 billion and the higher prepayments on the underlying loans serviced,
offset by the bulk purchases in 1997 and 1998, the acquisition of additional
1-4 unit residential loan servicing portfolios in the Cal Fed Acquisition and
the originated servicing. The 1-4 unit residential loans serviced for others
totalled $46.8 billion at June 30, 1998, a decrease of $.7 billion and $.6
billion from December 31, 1997 and June 30, 1997, respectively. During the six
months ended June 30, 1998, the Company, through FNMC, originated $4.8 billion
and sold (generally with servicing retained) $4.5 billion of 1-4 unit
residential loans. Gross revenues from mortgage loan servicing activities for
the six months ended June 30, 1998 totalled $118.8 million, a decrease of $3.6
million from the six months ended June 30, 1997.
A decline in long-term interest rates generally results in an
acceleration of mortgage loan prepayments. Higher than anticipated levels of
prepayments generally cause the accelerated amortization of mortgage servicing
rights ("MSRs"), and generally will result in a reduction in the market value
of MSRs and in the Company's servicing fee income. To reduce the sensitivity of
its earnings to interest rate and market value fluctuations, the Company hedged
the change in value of its MSRs based on changes in interest rates ("MSR
Hedge").
At June 30, 1998, the Company, through FNMC, was a party to several
interest rate floor contracts maturing from October 2001 through January 2003.
The Company paid counterparties a premium in exchange for cash payments in the
event that the 10-year Constant Maturity Treasury rate falls below negotiated
strike prices. At June 30, 1998, the notional amount of the interest rate
floors was $1.4 billion and the strike prices were between 5.5% and 6.5%. In
addition, the Company, through FNMC, was a party to swap agreements related to
principal-only mortgage-backed securities and prepayment-linked swap agreements
with a remaining notional amount of $107.4 million and $1.2 billion,
respectively. The estimated market values of interest rate floor contracts and
swaps designated as hedges against MSRs at June 30, 1998 were $28.6 million and
$21.3 million, respectively.
The following is a summary of activity in MSRs and the MSR Hedge for the
six months ended June 30, 1998 (in thousands):
<TABLE>
<CAPTION>
Total MSR
MSRs MSR Hedge Balance
--------- ---------- ----------
<S> <C> <C> <C> <C> <C>
Balance at December 31, 1997 $531,269 $ 5,434 $536,703
Additions - bulk purchases 57,136 -- 57,136
Originated servicing 102,029 -- 102,029
Additions - other 21,087 -- 21,087
Additions to MSR Hedge -- 13,478 13,478
Payments received under interest rate floor contracts -- (6,338) (6,338)
Net payments made under principal-only swap agreements -- 381 381
Net payments made under futures contracts -- 1,654 1,654
Amortization (54,213) (2,861) (57,074)
-------- ------- --------
Balance at June 30, 1998 $657,308 $11,748 $669,056
======== ======= ========
</TABLE>
Capitalized mortgage servicing rights are amortized in proportion to,
and over the period of, estimated future net servicing income. SFAS No. 125
requires enterprises to measure the impairment of servicing rights based on the
difference between the carrying amount of the servicing rights and their
current fair value. At June 30, 1998 and December 31, 1997, no allowance for
impairment of the mortgage servicing rights was necessary.
Page 33
<PAGE>
CAPITAL RESOURCES
OTS capital regulations require savings associations to satisfy three
minimum capital requirements: tangible capital, core (leverage) capital and
risk-based capital. In general, an association's tangible capital, which must
be at least 1.5% of adjusted total assets, is the sum of common stockholders'
equity (including retained earnings), noncumulative perpetual preferred stock
and minority interest in equity accounts of fully consolidated subsidiaries,
less disallowed intangibles. An association's ratio of core capital to adjusted
total assets (the "core capital ratio") must be at least 4%, recently amended
from 3% which had been in effect prior to March 1998. Core capital generally is
the sum of tangible capital plus certain qualifying intangibles. Under the
risk-based capital requirement, a savings association must have total capital
(core capital plus supplementary capital) equal to at least 8% of risk-weighted
assets (which equals assets plus the credit risk equivalent of certain
off-balance sheet items, each multiplied by the appropriate risk weight).
Supplementary capital, which may not exceed 100% of core capital for purposes
of the risk-based requirements, includes, among other things, certain permanent
capital instruments such as qualifying cumulative perpetual preferred stock, as
well as some forms of term capital instruments, such as qualifying subordinated
debt. The capital requirements are viewed as minimum standards by the OTS, and
most associations are expected to maintain capital levels well above the
minimum. In addition, the OTS regulations provide that minimum capital levels
higher than those provided in the regulations may be established by the OTS for
individual savings associations, depending upon their particular circumstances.
The Bank is not subject to any such individual minimum regulatory capital
requirement. These capital requirements are applicable to the Bank but not to
Parent Holdings.
At June 30, 1998, the Bank's regulatory capital levels exceeded the
minimum regulatory capital requirements, with tangible, core and risk-based
capital ratios of 5.46%, 5.46% and 12.15%, respectively. The following is a
reconciliation of the Bank's stockholders' equity to regulatory capital as of
June 30, 1998:
<TABLE>
<CAPTION>
Tangible Core Risk-based
Capital Capital Capital
---------- --------- ----------
(dollars in millions)
<S> <C> <C> <C>
Stockholders' equity of the Bank at June 30, 1998 $ 2,565 $ 2,565 $ 2,565
Minority interest - REIT Preferred Stock 500 500 500
Unrealized holding gain on securities available for
sale, net (28) (28) (28)
Non-qualifying MSRs (67) (67) (67)
Non-allowable capital:
REIT Preferred Stock in excess of 25% of
Tier 1 capital (53) (53) (53)
Intangible assets (656) (656) (656)
Goodwill Litigation Asset (100) (100) (100)
Investment in subsidiaries (54) (54) (54)
Excess deferred tax asset (319) (319) (319)
Supplemental capital:
Qualifying subordinated debt debentures -- -- 94
General loan loss allowance -- -- 218
Assets required to be deducted:
Low level recourse deduction -- -- (2)
Land loans with more than 80% LTV ratio -- -- (3)
------- -------- --------
Regulatory capital of the Bank 1,788 1,788 2,095
Minimum regulatory capital requirement 492 1,311 1,380
------- -------- --------
Excess above minimum capital requirement $ 1,296 $ 477 $ 715
======= ======== ========
Regulatory capital of the Bank 5.46% 5.46% 12.15%
Minimum regulatory capital requirement 1.50 4.00 8.00
---- ---- -----
Excess above minimum capital requirement 3.96% 1.46% 4.15%
==== ==== ====
</TABLE>
The amount of adjusted total assets used for the tangible and core
capital ratios is $32.8 billion. Risk-weighted assets used for the risk-based
capital ratio amounted to $17.2 billion.
Page 34
<PAGE>
The Bank is also subject to the "prompt corrective action" standards
prescribed in the FDICIA and related OTS regulations, which, among other
things, define specific capital categories based on an association's capital
ratios. The capital categories, in declining order, are "well capitalized,"
"adequately capitalized," "undercapitalized," "significantly undercapitalized,"
and "critically undercapitalized." Associations categorized as
"undercapitalized" or worse are subject to certain restrictions, including the
requirement to file a capital plan with the OTS, prohibitions on the payment of
dividends and management fees, restrictions on executive compensation, and
increased supervisory monitoring, among other things. Other restrictions may be
imposed on the association either by the OTS or by the FDIC, including
requirements to raise additional capital, sell assets, or sell the entire
association. Once an association becomes "critically undercapitalized" it is
generally placed in receivership or conservatorship within 90 days.
To be considered "well capitalized," a savings association must
generally have a leverage capital ratio of at least 5.00%, a Tier 1 (core
capital) risk-based capital ratio of at least 6.00%, and a total risk-based
capital ratio of at least 10.00%. An association is deemed to be "critically
undercapitalized" if it has a tangible equity ratio of 2.00% or less. At June
30, 1998, California Federal's capital levels were sufficient for it to be
considered "well capitalized:"
Risk-based
Leverage -----------------------
Capital Tier 1 Total Capital
------- ------ -------------
Regulatory capital of the Bank 5.46% 10.37% 12.15%
"Well capitalized" ratio 5.00 6.00 10.00
---- ----- -----
Excess above "well capitalized" ratio 0.46% 4.37% 2.15%
==== ===== =====
OTS capital regulations allow a savings association to include a net
deferred tax asset in regulatory capital, subject to certain limitations. To
the extent that the realization of a deferred tax asset depends on a savings
association's future taxable income, such deferred tax asset is limited for
regulatory capital purposes to the lesser of the amount that can be realized
within one year or 10 percent of core capital. At June 30, 1998, $319 million
of the net tax benefit was determined to be attributable to the amount of
taxable income that may be realized in periods beyond one year. Accordingly,
such amount has been excluded from the Bank's regulatory capital at June 30,
1998.
DISCLOSURES ABOUT MARKET RISK
There have been no material changes in reported market risks faced by
the Company since the Company's report in Item 7A of its Form 10-K for the year
ended December 31, 1997.
Page 35
<PAGE>
PART II - OTHER INFORMATION
ITEM 1. LEGAL PROCEEDINGS
Parent Holdings and California Federal are involved in legal
proceedings on claims incidental to the normal conduct of their business.
Although it is impossible to predict the outcome of any outstanding legal
proceedings, management believes that such legal proceedings and claims,
individually or in the aggregate, will not have a material effect on the
financial condition or results of operations of the Company.
In addition to legal proceedings within the normal course of business,
the Bank is the plaintiff in a claim against the United States in the lawsuit,
California Federal Bank v. United States, Civil Action No. 92-138C (the
"California Federal Litigation"). In the California Federal Litigation, the
Bank alleges, among other things, that the United States breached certain
contractual commitments regarding the computation of its regulatory capital for
which the Bank seeks damages and restitution. The Bank's claims arose from
changes, mandated by the Financial Institutions Reform, Recovery and
Enforcement Act of 1989 ("FIRREA"), with respect to the rules for computing Old
California Federal's regulatory capital.
On July 1, 1996, the United States Supreme Court issued its opinion
for United States v. Winstar Corporation, No. 95-865, which affirmed the
decisions of the United States Court of Appeals for the Federal Circuit and the
United States Court of Federal Claims in various consolidated cases (the
"Winstar Cases") granting summary judgment to the plaintiff thrift institutions
on the liability portion of their breach of contract claims against the United
States. The Supreme Court held that the government breached certain express
contracts when Congress enacted FIRREA, and the Supreme Court remanded the
proceedings for a determination of the appropriate measure and amount of
damages, which to date have not been awarded.
On October 30, 1996, Old California Federal filed a motion for partial
summary judgment as to the Federal government's liability to the Bank for
breach of contract, which was opposed by the Federal government. In addition,
the government filed a cross-motion for partial summary judgment as to certain
liability issues. A hearing on the motions for partial summary judgment on
liability was held on August 7, 1997. On December 22, 1997, a U.S. Claims Court
Judge ruled in favor of this motion to establish the government's liability,
and a formal order in that regard was subsequently issued on July 16, 1998. The
trial of the damages phase of the Bank's case has been scheduled to begin in
December 1998.
In connection with the Cal Fed Acquisition, the Company recorded as an
asset part of the estimated after-tax cash recovery from the California Federal
Litigation that will inure to the Company, net of amounts payable to holders of
the Litigation Interests and the Secondary Litigation Interests in any such
recovery (the "Goodwill Litigation Asset"). The Goodwill Litigation Asset was
recorded at its estimated fair value of $100 million, net of estimated tax
liabilities, as of January 3, 1997, and is included in the consolidated balance
sheets as of June 30, 1998 and December 31, 1997.
ITEM 2. CHANGES IN SECURITIES.
None.
ITEM 3. DEFAULTS UPON SENIOR SECURITIES.
None.
Page 36
<PAGE>
ITEM 4. SUBMISSION OF MATTERS TO A VOTE OF SECURITY HOLDERS.
None.
ITEM 5. OTHER INFORMATION.
None.
ITEM 6. EXHIBITS AND REPORTS ON FORM 8-K
(a) Exhibits:
3.1 Third Restated Certificate of Incorporation of the Registrant.
(Incorporated by reference to Exhibit 3.1 to Amendment No. 1 to the
Registrant's Registration Statement on Form S-1 (File No. 4026)).
3.2 By-laws of the Registrant. (Incorporated by reference to Exhibit
3.2 to the Registrant's Registration Statement on Form S-1 (File
No. 333-4026)).
27.1 Financial Data Schedule
(b) Reports on Form 8-K:
None.
Page 37
<PAGE>
SIGNATURES
Pursuant to the requirements of the Securities Exchange Act of 1934,
the Registrant has duly caused this report to be signed on its behalf by the
undersigned thereunto duly authorized.
First Nationwide (Parent) Holdings Inc.
/s/ Laurence Winoker
---------------------------------------
By: Laurence Winoker
Vice President and Controller
(Signing on behalf of the
Registrant and as the Principal
Accounting Officer)
August 13, 1998
Page 38
<TABLE> <S> <C>
<PAGE>
<ARTICLE> 9
<LEGEND>
This schedule contains summary financial information extracted from the
consolidated balance sheets and statements of income found on pages 3 and 4 of
the Company's unaudited financial statements for the six months ended June 30,
1998.
</LEGEND>
<CIK> 0001013229
<NAME> FIRST NATIONWIDE(PARENT)HOLDINGS INC.
<MULTIPLIER> 1,000
<CURRENCY> US$
<S> <C>
<PERIOD-TYPE> 6-MOS
<FISCAL-YEAR-END> DEC-31-1998
<PERIOD-START> JAN-01-1998
<PERIOD-END> JUN-30-1998
<EXCHANGE-RATE> 1
<CASH> 345,921
<INT-BEARING-DEPOSITS> 2,081
<FED-FUNDS-SOLD> 0
<TRADING-ASSETS> 0
<INVESTMENTS-HELD-FOR-SALE> 8,820,199
<INVESTMENTS-CARRYING> 1,201,669
<INVESTMENTS-MARKET> 1,201,669
<LOANS> 20,351,922<F1>
<ALLOWANCE> 420,665
<TOTAL-ASSETS> 34,050,025
<DEPOSITS> 16,044,288
<SHORT-TERM> 7,308,014
<LIABILITIES-OTHER> 729,599
<LONG-TERM> 8,293,181
0
0
<COMMON> 1
<OTHER-SE> 460,975
<TOTAL-LIABILITIES-AND-EQUITY> 34,050,025
<INTEREST-LOAN> 819,570
<INTEREST-INVEST> 257,391
<INTEREST-OTHER> 0
<INTEREST-TOTAL> 1,076,961
<INTEREST-DEPOSIT> 355,202
<INTEREST-EXPENSE> 781,402
<INTEREST-INCOME-NET> 295,559
<LOAN-LOSSES> 20,000
<SECURITIES-GAINS> 649
<EXPENSE-OTHER> 302,717
<INCOME-PRETAX> 157,576
<INCOME-PRE-EXTRAORDINARY> 381,394
<EXTRAORDINARY> 0
<CHANGES> 0
<NET-INCOME> 262,734
<EPS-PRIMARY> 0
<EPS-DILUTED> 0
<YIELD-ACTUAL> 7.41
<LOANS-NON> 160,585
<LOANS-PAST> 0
<LOANS-TROUBLED> 43,536
<LOANS-PROBLEM> 57,752
<ALLOWANCE-OPEN> 418,674
<CHARGE-OFFS> 19,685
<RECOVERIES> 1,676
<ALLOWANCE-CLOSE> 420,665
<ALLOWANCE-DOMESTIC> 6,009
<ALLOWANCE-FOREIGN> 0
<ALLOWANCE-UNALLOCATED> 414,656
<FN>
<F1>Tag 17 - Loans includes Loans held for sale of $1,725,497 and Allowance for
loan losses of $420,665
</FN>
</TABLE>
