<PAGE>
SECURITIES AND EXCHANGE COMMISSION
Washington, D.C. 20549
FORM 8-K
CURRENT REPORT
PURSUANT TO SECTION 13 OR 15(d) OF THE SECURITIES EXCHANGE ACT OF 1934
Date of Report (Date of earliest event reported): September 11, 1998
GOLDEN STATE BANCORP INC.
-------------------------
(Exact name of registrant as specified in its charter)
Delaware 333-28037 95-4642135
- -------------------------------------------------------------------------------
(State or other (Commission (IRS Employer
jurisdiction of File Number) Identification No.)
incorporation)
135 Main Street
San Francisco, California 94105
- -------------------------------------------------------------------------------
(Address of principal executive offices) (Zip Code)
(415) 904-1100
- -------------------------------------------------------------------------------
(Registrant's telephone number, including area code)
414 North Central Avenue, Glendale, California 91203
- -------------------------------------------------------------------------------
(Former name or former address, if changed since last report)
<PAGE>
ITEM 2. ACQUISITION OR DISPOSITION OF ASSETS.
On September 11, 1998, Golden State Bancorp Inc., a Delaware
corporation ("Golden State"), and its subsidiaries consummated the transactions
contemplated by the Agreement and Plan of Reorganization, dated as of February
4, 1998, as amended (the "Agreement"), by and among Golden State, Golden State
Financial Corporation, a Delaware corporation and a wholly-owned subsidiary of
Golden State ("Golden State Financial"), First Nationwide (Parent) Holdings
Inc., a Delaware corporation ("Parent Holdings"), First Nationwide Holdings
Inc., a Delaware corporation ("FNH"), First Gibraltar Holdings Inc., a Delaware
corporation and the sole stockholder of Parent Holdings ("FGH"), and Hunter's
Glen/Ford, Ltd., a Texas limited partnership ("Hunter's Glen").
Pursuant to the Agreement, FNH merged with and into Golden
State Financial (the "FNH Merger"), Parent Holdings merged with and into Golden
State (the "Golden State Merger"), and Glendale Federal Bank, Federal Savings
Bank, an indirect subsidiary of Golden State ("Glendale Federal"), merged (the
"Subsidiary Bank Merger") with and into California Federal Bank, A Federal
Savings Bank, an indirect subsidiary of FNH ("Cal Fed"). The Golden State
Merger and the FNH Merger are sometimes referred to herein collectively as the
"Holding Company Mergers," and the Holding Company Mergers and the Subsidiary
Bank Merger are sometimes referred to herein collectively as the "Mergers."
Immediately prior to the consummation of the Mergers, FNH contributed all of
its assets, including all of the outstanding common stock of Cal Fed, to, and
its long-term debt was assumed by, Golden State Holdings Inc. (formerly New
First Nationwide Holdings Inc.), a Delaware corporation and a wholly owned
subsidiary of FNH. FNH formerly was owned 80% by Parent Holdings and 20% by
Hunter's Glen. Parent Holdings formerly was an indirect wholly owned subsidiary
of MacAndrews & Forbes Holdings Inc. Hunter's Glen is a limited partnership
controlled by Gerald J. Ford, the Chairman and Chief Executive Officer of
Cal Fed.
Pursuant to the Agreement, FGH and Hunter's Glen received at
the closing of the Holding Company
2
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Mergers, in consideration of their interests as stockholders of Parent Holdings
and FNH, certificates representing 41 million and 15.6 million shares,
respectively, of common stock, par value $1.00 per share, of Golden State
("Common Stock"), as determined pursuant to a formula set forth in the
Agreement. The number of shares covered by the share certificates issued to FGH
and Hunter's Glen at the closing was calculated based on the number of
outstanding securities of Golden State as of September 8, 1998. The number of
shares of Common Stock which FGH and Hunter's Glen are entitled to receive upon
consummation of the Holding Company Mergers pursuant to the Agreement will be
recalculated pursuant to the Agreement based on the number of outstanding
securities of Golden State as of the close of business on September 11, 1998,
and FGH and Hunter's Glen will be issued certificates representing the number
of additional shares of Common Stock, if any, which FGH and Hunter's Glen are
so entitled to receive based on such recalculation.
In addition, the Agreement provides that FGH and Hunter's
Glen will be entitled to receive contingent consideration, through the issuance
by Golden State of additional shares of Common Stock to FGH and Hunter's Glen
following consummation of the Mergers, based on (i) the use by the combined
company of certain potential tax benefits resulting from certain net operating
loss carryforwards of the consolidated group of which Parent Holdings was a
part, and the realization of certain other potential tax assets and liabilities
of Golden State and Parent Holdings and (ii) Cal Fed's net after-tax recovery
in certain specified litigation, including a percentage of the net after-tax
recovery, if any, in Cal Fed's goodwill litigation against the United States
(following payment by Cal Fed of all amounts due to the holders of its
contingent litigation recovery participation inter-
3
<PAGE>
ests and its secondary contingent litigation recovery participation interests
and the retention of certain amounts of such recovery by the combined company).
The issuance of such contingent consideration to FGH and Hunter's Glen will
reduce the proportion of the outstanding Common Stock owned by existing Golden
State stockholders and will correspondingly increase the proportion of the
outstanding Common Stock owned by FGH and Hunter's Glen. The foregoing summary
of the provisions of the Agreement relating to the contingent consideration
payable to FGH and Hunter's Glen following the Mergers does not purport to be
complete and is qualified by reference to the specific terms of the Agreement,
included as Exhibits 2.1 and 2.2 to this Current Report on Form 8-K.
Effective immediately upon the consummation of the Holding
Company Mergers, the board of directors of Golden State was expanded to 15
directors, with five directors designated by Golden State and the remaining ten
directors designated by Parent Holdings. The directors designated by Golden
State are Brian P. Dempsey, John F. King, John F. Kooken, Thomas S. Sayles and
Cora M. Tellez. The directors designated by Parent Holdings are Ronald O.
Perelman, Gerald J. Ford, Carl B. Webb, Paul M. Bass, Jr., George W. Bramblett,
Jr., Bob Bullock, Howard Gittis, Gabrielle K. McDonald, Lynn Schenk and Robert
Setrakian.
Upon consummation of the Mergers, Mr. Ford became Chairman
and Chief Executive Officer of Golden State, and Carl B. Webb, the President
and Chief Operating Officer of Cal Fed, became President and Chief Operating
Officer of Golden State.
ITEM 7. FINANCIAL STATEMENTS, PRO FORMA FINANCIAL INFORMATION AND EXHIBITS
The following exhibits are filed as part of this report:
2.1 Agreement and Plan of Reorganization, dated as of February 4, 1998,
by and among First Nationwide (Parent) Holdings Inc., First
Nationwide Holdings Inc., First Gibraltar Holdings Inc., Hunter's
Glen/Ford, Ltd., Golden State Bancorp
4
<PAGE>
Inc. and Golden State Financial Corporation (incorporated by
reference to Exhibit 2.1 to Golden State's Form 8-K dated February 4,
1998).
2.2 Amendment No. 1, dated as of July 13, 1998, to the Agreement and
Plan of Reorganization, dated as of February 4, 1998, by and among
First Nationwide (Parent) Holdings Inc., First Nationwide Holdings
Inc., First Gibraltar Holdings Inc., Hunter's Glen/Ford, Ltd., Golden
State Bancorp Inc. and Golden State Financial Corporation
23.1 Consent of KPMG Peat Marwick LLP
99.1 (a) Financial Statements of Business Acquired (Legal Acquiree).
(i) The following financial statements for Parent
Holdings at December 31, 1997 and 1996, and for the
years ended December 31, 1997, 1996 and 1995 are set
forth in Exhibit 99.1 (a)(i) hereto:
Independent Auditors' Report
Consolidated Balance Sheets
Consolidated Statements of Operations
Consolidated Statements of Comprehensive Income
Consolidated Statements of Stockholder's Equity
Consolidated Statements of Cash Flows
Notes to Consolidated Financial Statements
(ii) The following financial statements for Parent
Holdings at June 30, 1998 and for the six months ended
June 30, 1998 and 1997 are also set forth in Exhibit 99.1
(a)(ii) hereto:
Unaudited Consolidated Balance Sheets
Unaudited Consolidated Statements of Income
Unaudited Consolidated Statement of Comprehensive Income
Unaudited Consolidated Statements of Stockholder's Equity
5
<PAGE>
Unaudited Consolidated Statements of Cash Flows
Notes to Unaudited Consolidated Financial Statements
(b) Pro Forma Financial Information
The following unaudited pro forma condensed combined
financial statements at June 30, 1998 are set forth in
Exhibit 99.1(b) hereto:
Pro Forma Condensed Combined Statement of
Financial Condition at June 30, 1998 (Unaudited)
Pro Forma Condensed Combined Statement of Operations for
the six months ended June 30, 1998 (Unaudited)
Pro Forma Condensed Combined Statement of Operations for
the year ended December 31, 1997 (Unaudited)
ITEM 8. CHANGE IN FISCAL YEAR.
Effective September 11, 1998, Golden State changed its fiscal
year to conform to the calendar year of the accounting acquiror, Parent
Holdings. Golden State anticipates holding its next annual meeting of
stockholders and releasing its next annual report to stockholders during the
second quarter of 1999.
As Parent Holdings is the acquiring entity for accounting
purposes, the assets, liabilities and other items of Golden State will be
combined at fair value on September 11, 1998 with those of Parent Holdings at
historical basis. Golden State will file its report pursuant to the Securities
Exchange Act of 1934 for the year ended December 31, 1998 on Form 10-K. Such
report will reflect historical data for Parent Holdings through September 11,
1998, and data for the merged entity for the period September 12, 1998 through
December 31, 1998.
6
<PAGE>
SIGNATURE
Pursuant to the requirements of the Securities Exchange Act
of 1934, the registrant has duly caused this report to be signed on its behalf
by the undersigned hereunder duly authorized.
Dated: September 14, 1998
GOLDEN STATE BANCORP INC.
By: /s/ Richard H. Terzian
-------------------------------------
Name: Richard H. Terzian
Title: Executive Vice
President and Chief Financial Officer
7
<PAGE>
EXHIBIT INDEX
Exhibit
Number Description
- ------ -----------
2.1 Agreement and Plan of Reorganization, dated as of February 4,
1998, by and among First Nationwide (Parent) Holdings Inc.,
First Nationwide Holdings Inc., First Gibraltar Holdings
Inc., Hunter's Glen/Ford, Ltd., Golden State Bancorp Inc. and
Golden State Financial Corporation (incorporated by reference
to Exhibit 2.1 to Golden State's Form 8-K dated February 4,
1998).
2.2 Amendment No. 1, dated as of July 13, 1998, to the Agreement
and Plan of Reorganization, dated as of February 4, 1998, by
and among First Nationwide (Parent) Holdings Inc., First
Nationwide Holdings Inc., First Gibraltar Holdings Inc.,
Hunter's Glen/Ford, Ltd., Golden State Bancorp Inc. and
Golden State Financial Corporation
23.1 Consent of KPMG Peat Marwick LLP
99.1 (a) Financial Statements of Business Acquired.
(i) The following financial statements for Parent Holdings
at December 31, 1997 and 1996, and for the years ended
December 31, 1997, 1996 and 1995 are set forth in
Exhibit 99.1(a)(i) hereto:
Independent Auditors' Report
Consolidated Balance Sheets
Consolidated Statements of Operations
Consolidated Statements of Comprehensive Income
Consolidated Statements of Stockholder's Equity
Consolidated Statements of Cash Flows
Notes to Consolidated Financial Statements
8
<PAGE>
(ii) The following financial statements for Parent
Holdings at June 30, 1998 and for the six months
ended June 30, 1998 and 1997 are also set forth in
Exhibit 99.1(a)(ii) hereto:
Unaudited Consolidated Balance Sheets
Unaudited Consolidated Statements of Income
Unaudited Consolidated Statements of Comprehensive
Income
Unaudited Consolidated Statements of Stockholder's
Equity
Unaudited Consolidated Statements of Cash Flows
Notes to Unaudited Consolidated Financial Statements
(b) Pro Forma Financial Information
The following unaudited pro forma condensed
combined financial statements at June 30, 1998 are
set forth in Exhibit 99.1(b) hereto:
Pro Forma Condensed Combined Statement of Financial
Condition at June 30, 1998(Unaudited)
Pro Forma Condensed Combined Statement of Operations
for the six months ended June 30, 1998 (Unaudited)
Pro Forma Condensed Combined Statement of Operations
for the year ended December 31, 1997 (Unaudited)
9
<PAGE>
Exhibit 2.2
AMENDMENT NO. 1
AMENDMENT NO. 1, dated as of July 13, 1998, by and among
First Nationwide (Parent) Holdings Inc., a Delaware corporation, First
Nationwide Holdings Inc., a Delaware corporation, Golden State Bancorp Inc., a
Delaware corporation, Golden State Financial Corporation, a Delaware
corporation, First Gibraltar Holdings Inc., a Delaware corporation, and
Hunter's Glen/Ford Ltd., Texas limited partnership (collectively, the
"Parties"), to the Agreement and Plan of Reorganization (the "Agreement"),
dated as of February 4, 1998, by and among the Parties. Capitalized terms which
are not otherwise defined herein shall have the meanings set forth in the
Agreement.
WHEREAS, in accordance with Section 8.3 of the Agreement, the
Parties desire to amend the Agreement as set forth herein;
NOW, THEREFORE, in consideration of the foregoing, and
intending to be legally bound hereby, the Parties hereby agree as follows:
1. Section 1.6(c)(ii)(C) of the Agreement is hereby amended
by adding the following new language at the end of subsection (3) thereof after
the words "Effective Date" but before the period:
,plus
(4) if the closing of the sale of
assets and the assumption of liabilities contemplated by the Purchase
and Sale Agreement, dated as of March 29, 1998, by and between CFB and
Union Planters Bank of Florida(the "Florida Branch Sale"), occurs on
or before the Effective Date, then for the first Taxable Period
immediately following the Effective Date, any federal income tax
savings resulting from the Florida Branch Sale. For this purpose, the
amount of federal income tax savings resulting from the Florida Branch
Sale shall be an amount equal to (i) the product of the amount of the
gain recognized by CFB for federal income tax purposes as a result of
the Florida Branch Sale and the highest marginal federal income tax
rate applicable to corporations for the taxable year in which the
<PAGE>
Florida Branch Sale occurs, less (ii) the amount of any federal income
taxes actually paid as a result of such sale (including any payment in
lieu of federal income taxes under the Tax Sharing Agreement(as
defined in Section 6.14)) by CFB.
2. Section 1.6(c)(ii)(A) of the Agreement is hereby amended
by adding the following new sentence at the end of such section:
In the calculation of the Tax Benefits there shall be
excluded any deductions resulting from or arising in
connection with the refinancing of all of the long-term debt
of FNH and Parent Holdings and the purchasing of all of the
preferred stock of CFB, in each case outstanding as of the
date hereof, pursuant to the refinancing transactions
contemplated to be consummated immediately after the
consummation of the transactions contemplated by this
Agreement, or any transactions with substantially similar
purpose or effect.
3. Section 6.7(b) of the Agreement is hereby deleted in its
entirety and replaced with the following new Section 6.7(b):
Parent Holdings shall use its reasonable best efforts to
cause the persons serving as officers and directors of
Golden State immediately prior to the Effective Time to be
covered for a period of six (6) years from the Effective Time
(the "Coverage Period") by the directors' and officers'
liability insurance policy maintained by Golden State (except
that effective as of the Effective Time the single aggregate
coverage limit shall be increased to $100 million, and
provided that Parent Holdings may substitute for such
policy, as amended pursuant hereto, policies of directors'
and officers' liability insurance of at least the same
coverage and amounts and containing terms and conditions which
are not less advantageous to such directors and officers of
Golden State than the terms and conditions of such policy, as
amended pursuant hereto) with respect to acts and omissions
occurring prior to the Effective Time
2
<PAGE>
which were committed by such officers and directors in their
capacity as such; provided that Parent Holdings shall not be
required as to any such policy to pay premiums in excess of
300% of the amount currently expended annually by Golden
State to obtain such insurance, and if such insurance cannot
be obtained for such premium Parent Holdings shall obtain for
such persons the maximum coverage that may be obtained for
such premiums. It is the understanding of the parties hereto
that the obligations of Parent Holdings contemplated by the
preceding sentence are expected to be satisfied through the
purchase by Parent Holdings, by means of the payment of a
single premium prior to the Effective Time, of a directors'
and officers' liability insurance policy with a single
aggregate coverage limit of $100 million, and shall be so
satisfied for so long as such policy remains in effect during
the Coverage Period.
4. Section 6.14(a)(ii) and Section 6.14(b)(i) of the
Agreement are hereby amended by deleting the words "Merger Sub" and inserting
instead the words "New FNH".
5. All references to "this Agreement" in the Agreement shall
be deemed to refer to the Agreement as amended hereby.
6. Each of the Parties represents to the other that (i) it
has full corporate (or partnership) power and authority to execute and deliver
this Amendment and, subject to the terms and conditions set forth in the
Agreement, to consummate the transactions contemplated hereby, (ii) the
execution and delivery of this Amendment by such party have been duly and
validly approved by the Board of Directors of such party and no other corporate
proceedings on the part of such party are necessary in connection with the
execution and delivery of this Amendment by such party, and (iii) this
Amendment has been duly and validly executed and delivered by such party and
constitutes a valid and binding obligation of such party, enforceable against
such party in accordance with its terms.
3
<PAGE>
7. Except as expressly amended by this Amendment, the
Agreement is hereby ratified and confirmed in all respects.
8. This Amendment may be executed in two or more
counterparts, each of which shall be deemed an original and all of which shall
be considered one and the same agreement, and shall become effective when
counterparts have been signed by each of the Parties and delivered to the
other Parties, it being understood that all Parties need not sign the same
counterpart.
9. This Amendment shall be governed and construed in
accordance with the laws of the State of Delaware, without regard to any
applicable conflicts of law provisions.
4
<PAGE>
IN WITNESS WHEREOF, the Parties have caused this Amendment to
be executed by their respective officers thereunto duly authorized as of the
date first above written.
GOLDEN STATE BANCORP INC.
By: /s/ Richard A. Fink
-------------------------------
Name: Richard A. Fink
Title: Vice Chairman
GOLDEN STATE FINANCIAL CORPORATION
By: /s/ Richard A. Fink
-------------------------------
Name: Richard A. Fink
Title: Vice President
FIRST NATIONWIDE (PARENT)
HOLDINGS INC.
By: /s/ Glenn P. Dickes
-------------------------------
Name: Glenn P. Dickes
Title: Vice President
FIRST NATIONWIDE HOLDINGS INC.
By: /s/ Glenn P. Dickes
-------------------------------
Name: Glenn P. Dickes
Title: Vice President
FIRST GIBRALTAR HOLDINGS INC.
By: /s/ Glenn P. Dickes
-------------------------------
Name: Glenn P. Dickes
Title: Vice President
HUNTER'S GLEN/FORD, LTD.
By: /s/ Gerald J. Ford
-------------------------------
Name: Gerald J. Ford
Title: General Partner
<PAGE>
EXHIBIT 23.1
The Board of Directors
Golden State Bancorp Inc.:
CONSENT OF INDEPENDENT AUDITORS
We consent to the use of our report dated February 23, 1998 included herein,
relating to the consolidated balance sheets of First Nationwide (Parent)
Holdings Inc. and subsidiaries as of December 31, 1997 and 1996, and the
related consolidated statements of income, comprehensive income, stockholder's
equity, and cash flows for each of the years in the three-year period ended
December 31, 1997, which report appears in the December 31, 1997 annual report
on Form 10-K of First Nationwide (Parent) Holdings Inc.
/s/ KPMG Peat Marwick LLP
----------------------------------
KPMG Peat Marwick LLP
Dallas, Texas
September 14, 1998
<PAGE>
Exhibit 99.1(a)(i)
INDEPENDENT AUDITORS' REPORT
The Board of Directors
First Nationwide (Parent) Holdings Inc.:
We have audited the accompanying consolidated balance sheets of First
Nationwide (Parent) Holdings Inc. and subsidiaries (the "Company") as of
December 31, 1997 and 1996, and the related consolidated statements of income,
comprehensive income, stockholder's equity and cash flows for each of the years
in the three-year period ended December 31, 1997. These consolidated financial
statements are the responsibility of the Company's management. Our
responsibility is to express an opinion on these consolidated financial
statements based on our audits.
We conducted our audits in accordance with generally accepted auditing
standards. Those standards require that we plan and perform the audit to obtain
reasonable assurance about whether the consolidated financial statements are
free of material misstatement. An audit includes examining, on a test basis,
evidence supporting the amounts and disclosures in the financial statements. An
audit also includes assessing the accounting principles used and significant
estimates made by management, as well as evaluating the overall financial
statement presentation. We believe that our audits provide a reasonable basis
for our opinion.
In our opinion, the consolidated financial statements referred to above
present fairly, in all material respects, the financial position of First
Nationwide (Parent) Holdings Inc. and subsidiaries as of December 31, 1997 and
1996, and the results of their operations and their cash flows for each of the
years in the three-year period ended December 31, 1997, in conformity with
generally accepted accounting principles.
KPMG PEAT MARWICK LLP
Dallas, Texas
February 23, 1998
1
<PAGE>
FIRST NATIONWIDE (PARENT) HOLDINGS INC. AND SUBSIDIARIES
CONSOLIDATED BALANCE SHEETS
DECEMBER 31, 1997 AND 1996
(DOLLARS IN THOUSANDS, EXCEPT PER SHARE DATA)
<TABLE>
<CAPTION>
1997 1996
------------- -------------
<S> <C> <C>
ASSETS
Cash and amounts due from banks .......................................... $ 350,214 $ 135,534
Interest-bearing deposits in other banks ................................. 36,164 20,619
Short-term investment securities ......................................... 25,933 113,716
----------- -----------
Cash and cash equivalents ................................................ 412,311 269,869
Securities available for sale, at fair value ............................. 813,085 542,019
Securities held to maturity (fair value $58,299 in 1997
and $4,287 in 1996)...................................................... 58,299 4,272
Mortgage-backed securities available for sale, at fair value ............. 5,076,598 1,598,652
Mortgage-backed securities held to maturity (fair value
$1,373,289 in 1997 and $1,653,847 in 1996)............................... 1,337,877 1,621,662
Loans held for sale, net ................................................. 1,483,466 825,316
Loans receivable, net .................................................... 19,424,410 10,212,583
Investment in Federal Home Loan Bank ("FHLB") System ..................... 468,191 220,962
Office premises and equipment, net ....................................... 159,349 100,164
Foreclosed real estate, net .............................................. 76,997 51,987
Accrued interest receivable .............................................. 188,203 106,034
Intangible assets (net of accumulated amortization of $60,294
in 1997 and $11,141 in 1996)............................................. 675,927 140,564
Mortgage servicing rights ................................................ 536,703 423,692
Other assets ............................................................. 650,740 517,297
----------- -----------
Total assets .......................................................... $31,362,156 $16,635,073
=========== ===========
LIABILITIES, MINORITY INTEREST AND
STOCKHOLDER'S EQUITY
Deposits ................................................................. $16,202,605 $ 8,501,883
Securities sold under agreements to repurchase ........................... 1,842,442 1,583,387
Borrowings ............................................................... 11,232,530 5,364,894
Other liabilities ........................................................ 702,959 399,446
----------- -----------
Total liabilities ..................................................... 29,980,536 15,849,610
----------- -----------
Commitments and contingencies ............................................ -- --
Minority interest ........................................................ 1,175,704 613,852
Stockholder's equity:
Common stock, $1.00 par value, 1,000 shares authorized,
issued and outstanding ................................................ 1 1
Additional paid-in capital .............................................. -- 161
Net unrealized holding gain on securities available for sale ............ 28,129 36,975
Retained earnings (substantially restricted) ............................ 177,786 134,474
----------- -----------
Total stockholder's equity ............................................ 205,916 171,611
----------- -----------
Total liabilities, minority interest and stockholder's equity ......... $31,362,156 $16,635,073
=========== ===========
</TABLE>
See accompanying notes to consolidated financial statements.
2
<PAGE>
FIRST NATIONWIDE (PARENT) HOLDINGS INC. AND SUBSIDIARIES
CONSOLIDATED STATEMENTS OF OPERATIONS
YEARS ENDED DECEMBER 31, 1997, 1996 AND 1995
(IN THOUSANDS)
<TABLE>
<CAPTION>
1997 1996 1995
------------- ------------- -------------
<S> <C> <C> <C>
Interest income:
Loans receivable ........................................... $1,553,210 $ 884,905 $ 799,607
Mortgage-backed securities available for sale .............. 297,816 115,983 --
Mortgage-backed securities held to maturity ................ 113,300 135,103 212,880
Covered assets ............................................. -- 1,413 10,705
Loans held for sale ........................................ 76,364 61,595 24,257
Securities available for sale .............................. 53,936 31,416 --
Securities held to maturity ................................ 2,436 257 26,885
Interest-bearing deposits in other banks ................... 5,638 3,127 1,511
---------- ---------- ----------
Total interest income .................................... 2,102,700 1,233,799 1,075,845
---------- ---------- ----------
Interest expense:
Deposits ................................................... 746,985 419,174 447,359
Securities sold under agreements to repurchase ............. 140,547 120,280 104,957
Borrowings ................................................. 610,885 308,840 182,499
---------- ---------- ----------
Total interest expense ................................... 1,498,417 848,294 734,815
---------- ---------- ----------
Net interest income ...................................... 604,283 385,505 341,030
Provision for loan losses ................................... 79,800 39,600 37,000
---------- ---------- ----------
Net interest income after provision for loan losses ...... 524,483 345,905 304,030
---------- ---------- ----------
Noninterest income:
Loan servicing fees, net ................................... 143,919 123,887 70,265
Customer banking fees and service charges .................. 100,048 45,044 47,493
Management fees ............................................ 6,211 9,694 15,141
Gain on sales of assets, net ............................... 38,230 38,118 173
Gain on sales of branches .................................. 3,569 363,342 --
Gain (loss) on sales of loans, net ......................... 24,721 17,802 (26)
Gain from termination of Assistance Agreement .............. -- 25,632 --
Dividends on FHLB stock .................................... 24,790 11,670 6,546
Other income ............................................... 22,996 18,189 11,381
---------- ---------- ----------
Total noninterest income ................................. 364,484 653,378 150,973
---------- ---------- ----------
Noninterest expense:
Compensation and employee benefits ......................... 256,448 204,818 154,288
Occupancy and equipment .................................... 81,914 51,936 49,897
Data processing ............................................ 12,402 10,491 9,787
Savings Association Insurance Fund ("SAIF") deposit
insurance premium ........................................ 10,680 81,149 22,262
Marketing .................................................. 20,186 10,908 10,810
Professional fees .......................................... 48,771 18,986 11,202
Loan expense ............................................... 60,437 31,282 12,431
Foreclosed real estate operations, net ..................... (3,304) (7,390) (927)
Amortization of intangible assets .......................... 49,153 9,445 1,474
Other ...................................................... 113,882 80,111 61,329
---------- ---------- ----------
Total noninterest expense ................................ 650,569 491,736 332,553
---------- ---------- ----------
Income before income taxes, extraordinary item and
minority interest ........................................ 238,398 507,547 122,450
Income tax expense (benefit) ............................... 41,315 (75,807) (57,185)
---------- ---------- ----------
Income before extraordinary item and minority interest ..... 197,083 583,354 179,635
Extraordinary item -- (loss) gain on early
extinguishment of debt, net .............................. -- (1,586) 1,967
---------- ---------- ----------
Income before minority interest ............................ 197,083 581,768 181,602
Minority interest .......................................... 131,851 161,191 59,138
---------- ---------- ----------
Net income ............................................... $ 65,232 $ 420,577 $ 122,464
========== ========== ==========
</TABLE>
See accompanying notes to consolidated financial statements.
3
<PAGE>
FIRST NATIONWIDE (PARENT) HOLDINGS INC. AND SUBSIDIARIES
CONSOLIDATED STATEMENTS OF COMPREHENSIVE INCOME
YEARS ENDED DECEMBER 31, 1997, 1996 AND 1995
(IN THOUSANDS)
<TABLE>
<CAPTION>
1997 1996 1995
------------ ----------- -----------
<S> <C> <C> <C>
Net income ..................................................... $ 65,232 $ 420,577 $122,464
Other comprehensive income, net of tax:
Unrealized holding gain on securities available for sale:
Unrealized holding gains arising during the period .......... 8,726 14,580 43,185
Less: reclassification adjustment for gains included in net
income ..................................................... (17,572) (28,415) (1,175)
--------- --------- --------
Other comprehensive income .................................... (8,846) (13,835) 42,010
--------- --------- --------
Comprehensive income ........................................... $ 56,386 $ 406,742 $164,474
========= ========= ========
</TABLE>
See accompanying notes to consolidated financial statements.
4
<PAGE>
FIRST NATIONWIDE (PARENT) HOLDINGS INC. AND SUBSIDIARIES
CONSOLIDATED STATEMENTS OF STOCKHOLDER'S EQUITY
YEARS ENDED DECEMBER 31, 1997, 1996 AND 1995
(IN THOUSANDS)
<TABLE>
<CAPTION>
NET UNREALIZED
ADDITIONAL HOLDING GAIN 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, 1994 .......................... $ 1 $ 267,055 $ 8,800 $ 53,811 $ 329,667
Net income ........................................... -- -- -- 122,464 122,464
Dividends and distributions to stockholder ........... -- -- -- (89,986) (89,986)
Change in net unrealized holding gains on
securities available for sale ...................... -- -- 42,010 -- 42,010
--- ---------- --------- ---------- ----------
Balance at December 31, 1995 .......................... 1 267,055 50,810 86,289 404,155
Net income ........................................... -- -- -- 420,577 420,577
Contribution by parent ............................... -- 1,819 -- -- 1,819
Dividends and distributions to stockholder ........... -- (267,055) -- (369,449) (636,504)
Issuance costs of FN Holdings Preferred
Stock .............................................. -- (1,658) -- (2,943) (4,601)
Change in net unrealized holding gains on
securities available for sale ...................... -- -- (13,835) -- (13,835)
--- ---------- --------- ---------- ----------
Balance at December 31, 1996 .......................... 1 161 36,975 134,474 171,611
Net income ........................................... -- -- -- 65,232 65,232
Merger of FN Escrow .................................. -- -- -- (931) (931)
Redemption of Additional FN Holdings
Preferred Stock .................................... -- -- -- 1,871 1,871
Issuance costs of subsidiary preferred stock ......... -- -- -- (14,561) (14,561)
Contribution by parent ............................... -- 49 -- -- 49
Dividends to parent .................................. -- (210) -- (8,299) (8,509)
Change in net unrealized holding gains on
securities available for sale ...................... -- -- (8,846) -- (8,846)
--- ---------- --------- ---------- ----------
Balance at December 31, 1997 .......................... $ 1 $ -- $ 28,129 $ 177,786 $ 205,916
=== ========== ========= ========== ==========
</TABLE>
See accompanying notes to consolidated financial statements.
5
<PAGE>
FIRST NATIONWIDE (PARENT) HOLDINGS INC. AND SUBSIDIARIES
CONSOLIDATED STATEMENTS OF CASH FLOWS
YEARS ENDED DECEMBER 31, 1997, 1996 AND 1995
(IN THOUSANDS)
<TABLE>
<CAPTION>
1997 1996 1995
--------------- --------------- ---------------
<S> <C> <C> <C>
CASH FLOWS FROM OPERATING ACTIVITIES:
Net income .............................................................. $ 65,232 $ 420,577 $ 122,464
Adjustments to reconcile net income to net cash (used in) provided
by operating activities:
Amortization of intangible assets ...................................... 49,153 9,445 1,474
Amortization of discount on senior notes ............................... 744 523 --
(Accretion) amortization of purchase accounting premiums and
discounts, net ....................................................... (20,650) (15,771) (946)
Amortization of mortgage servicing rights .............................. 110,282 90,981 33,892
Provision for loan losses .............................................. 79,800 39,600 37,000
Provision for accrued termination and facilities costs ................. 1,233 8,679 12,772
Gain on sales of assets, net ........................................... (38,230) (38,118) (173)
Gain on sale of branches ............................................... (3,569) (363,342) --
Gain on sales of foreclosed real estate ................................ (12,087) (12,951) (3,010)
Loss on sale of loans, net ............................................. 95,744 63,226 17,928
Gain from termination of Assistance Agreement .......................... -- (25,632) --
Extraordinary loss (gain) on early extinguishment of debt, net ......... -- 1,586 (1,967)
Depreciation and amortization of office premises and equipment 16,773 10,921 8,884
Amortization of deferred issuance costs ................................ 7,591 2,978 766
FHLB stock dividend .................................................... (24,790) (11,670) (6,546)
Capitalization of mortgage servicing rights ............................ (120,465) (81,028) (17,902)
Purchases and originations of loans held for sale ...................... (6,293,262) (4,822,753) (1,773,437)
Proceeds from the sale of loans held for sale .......................... 5,510,777 5,157,186 1,191,281
Decrease (increase) in other assets .................................... 163,945 (91,552) (97,258)
(Increase) decrease in accrued interest receivable ..................... (11,197) 20,991 (9,743)
(Decrease) increase in other liabilities ............................... (137,906) (39,118) 33,155
Minority interest ...................................................... 123,399 160,041 59,138
------------ ------------ ------------
Net cash (used in) provided by
operating activities ............................................... (437,483) 484,799 (392,228)
------------ ------------ ------------
</TABLE>
See accompanying notes to consolidated financial statements.
6
<PAGE>
FIRST NATIONWIDE (PARENT) HOLDINGS INC. AND SUBSIDIARIES
CONSOLIDATED STATEMENTS OF CASH FLOWS (CONTINUED)
YEARS ENDED DECEMBER 31, 1997, 1996 AND 1995
(IN THOUSANDS)
<TABLE>
<CAPTION>
1997 1996 1995
--------------- ------------- -------------
<S> <C> <C> <C>
CASH FLOWS FROM INVESTING ACTIVITIES:
Acquisitions and divestitures:
Auto One Acquisition .......................................... $ (2,845) $ -- $ --
SFFed Acquisition ............................................. -- (83,184) --
Home Federal Acquisition ...................................... -- 79,044 --
Cal Fed Acquisition ........................................... (161,196) -- --
Mortgage loan servicing rights and operations ................. (34,260) (48,305) (214,727)
Branch Purchases .............................................. -- -- 501,351
Purchases of securities available for sale ...................... (1,340,881) (497,963) --
Proceeds from sales of securities available for sale ............ 52,014 92,320 --
Proceeds from maturities of securities available for sale ....... 1,015,410 242,514 --
Purchases of securities held to maturity ........................ (58,965) (9,303) (162,845)
Principal payments from securities held to maturity ............. -- 5 --
Proceeds from maturities of securities held to maturity ......... 4,938 1,250 344,475
Purchases of mortgage-backed securities available for sale ...... (2,589,257) (149,724) --
Principal payments on mortgage-backed securities
available for sale ............................................ 1,099,699 475,186 --
Proceeds from sales of mortgage-backed securities
available for sale ............................................ 50,772 -- --
Purchases of mortgage-backed securities held to maturity ........ (458) -- (19,825)
Principal payments on mortgage-backed securities held to
maturity ...................................................... 283,696 387,891 570,945
Proceeds from sales of loans receivable ......................... 21,179 123,026 431,247
Net decrease (increase) in loans receivable ..................... 514,377 1,498,588 (85,149)
Decrease in covered assets ...................................... -- 39,349 272,254
(Purchases) redemptions of FHLB stock, net ...................... (50,721) (65,753) 25,565
Purchases of office premises and equipment ...................... (66,131) (42,368) (15,331)
Proceeds from the disposal of office premises and equipment ..... 31,400 4,071 1,667
Proceeds from sales of foreclosed real estate ................... 200,275 170,443 71,453
Purchases of mortgage servicing rights .......................... (29,627) (65,994) (774)
Proceeds from sales of mortgage servicing rights ................ 31,051 -- --
------------ ---------- ----------
Net cash (used in) provided by investing activities .......... (1,029,530) 2,151,093 1,720,306
------------ ---------- ----------
</TABLE>
See accompanying notes to consolidated financial statements.
7
<PAGE>
FIRST NATIONWIDE (PARENT) HOLDINGS INC. AND SUBSIDIARIES
CONSOLIDATED STATEMENTS OF CASH FLOWS (CONTINUED)
YEARS ENDED DECEMBER 31, 1997, 1996 AND 1995
(IN THOUSANDS)
<TABLE>
<CAPTION>
1997 1996 1995
--------------- --------------- ---------------
<S> <C> <C> <C>
CASH FLOWS FROM FINANCING ACTIVITIES:
Branch Sales ................................................... (79,900) (4,585,022) --
Net (decrease) increase in deposits ............................ (1,196,360) (56,694) 542,633
Proceeds from additional borrowings ............................ 19,595,218 11,144,414 6,151,319
Principal payments on borrowings ............................... (17,495,008) (8,484,883) (6,860,569)
Net decrease in securities sold under agreements to
repurchase ................................................... (40,289) (202,169) (913,103)
Proceeds from FN Escrow Merger ................................. 605,347 -- --
Issuance of FN Holdings Preferred Stock, net ................... (520) 145,399 --
Issuance of REIT Preferred Stock, net .......................... 485,959 -- --
Redemption of FN Holdings Preferred Stock ...................... (125,000) -- --
Redemption of FN Holdings/FN Escrow Preferred Stock ............ (17,250) -- --
Dividends ...................................................... (8,509) (322,680) (89,986)
Dividends paid to minority stockholders, net of taxes .......... (114,282) (51,723) (34,584)
Capital contribution from parent ............................... 49 1,819 --
Capital distribution ........................................... -- (267,055) --
----------- ---------- ----------
Net cash provided by (used in) financing activities ......... 1,609,455 (2,678,594) (1,204,290)
----------- ---------- ----------
Net change in cash and cash equivalents ......................... 142,442 (42,702) 123,788
Cash and cash equivalents at beginning of year .................. 269,869 312,571 188,783
----------- ---------- ----------
Cash and cash equivalents at end of year ........................ $ 412,311 $ 269,869 $ 312,571
============= ============ ============
</TABLE>
See accompanying notes to consolidated financial statements.
8
<PAGE>
FIRST NATIONWIDE (PARENT) HOLDINGS INC. AND SUBSIDIARIES
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
1. ORGANIZATION
First Nationwide (Parent) Holdings Inc. (the "Company" or "Parent
Holdings") is a holding company with no business operations of its own. Parent
Holdings' only significant asset is its indirect ownership of 80% of the common
stock of California Federal Bank, A Federal Savings Bank ("California Federal"
or "Bank"), formerly First Nationwide Bank, A Federal Savings Bank ("First
Nationwide"), formerly First Madison Bank, FSB ("First Madison"). Parent
Holdings owns directly 80% of the common stock of First Nationwide Holdings
Inc. ("FN Holdings"), a holding company which owns all of the common stock of
California Federal. As such, Parent Holdings' principal business operations are
conducted by California Federal and its subsidiaries. Parent Holdings is a
subsidiary of First Gibraltar Holdings Inc. ("First Gibraltar Holdings"), an
indirect subsidiary of MacAndrews & Forbes Holdings Inc. ("M&F Holdings").
The Bank was organized and chartered as First Gibraltar Bank, FSB ("First
Gibraltar"), a federal stock savings bank, in December 1988 for the primary
purpose of acquiring substantially all of the assets and assuming deposit,
secured and certain other liabilities of five insolvent Texas savings and loan
associations ("Closed Associations") from the Federal Savings and Loan
Insurance Corporation ("FSLIC"), as receiver.
On February 1, 1993, First Gibraltar sold to BankAmerica Corporation
certain assets, liabilities and substantially all of the branch operations of
First Gibraltar located in Texas, including $829 million of loans and 130
branches with approximately $6.9 billion in deposits (the "BAC Sale"). A net
gain of $141 million was recorded in connection with this sale. Concurrently
with the BAC Sale, First Gibraltar changed its name to First Madison Bank, FSB.
On April 14, 1994, First Madison entered into the Asset Purchase Agreement
(the "Asset Purchase Agreement") with First Nationwide Bank, A Federal Savings
Bank ("Old FNB"), an indirect subsidiary of Ford Motor Company ("Ford Motor").
On October 3, 1994, effective immediately after the close of business on
September 30, 1994, First Madison acquired substantially all of the assets and
certain of the liabilities (the "FN Acquired Business") of Old FNB (the "FN
Acquisition") for approximately $715 million based on estimates prepared by Old
FNB. On March 2, 1995, an additional $11.5 million was paid to Old FNB pursuant
to certain settlement provisions of the Asset Purchase Agreement. Effective on
October 1, 1994, First Madison changed its name to First Nationwide Bank, A
Federal Savings Bank.
On January 3, 1997, pursuant to an Agreement and Plan of Merger (the
"Merger Agreement") among FN Holdings, Cal Fed Bancorp Inc. ("Cal Fed") and
California Federal Bank, A Federal Savings Bank ("Old California Federal"), FN
Holdings acquired 100% of the outstanding stock of Cal Fed and Old California
Federal, and First Nationwide merged with and into Old California Federal. The
aggregate consideration paid under the Merger Agreement consisted of
approximately $1.2 billion in cash and the issuance of litigation interests
(the "Cal Fed Acquisition"). Cal Fed, a savings and loan holding company, owned
100% of the common stock of Old California Federal. At December 31, 1996, Old
California Federal had total assets of approximately $14.1 billion and deposits
of $8.9 billion, and operated 119 branches in California and Nevada. Effective
on January 3, 1997, First Nationwide changed its name to California Federal
Bank, A Federal Savings Bank. In connection with the Cal Fed Acquisition, FN
Holdings made a capital contribution to the Bank on January 3, 1997 of
approximately $685 million.
In November 1996, the Bank created California Federal Preferred Capital
Corporation ("Preferred Capital Corp."), a real estate investment trust
("REIT"), for the purpose of acquiring, holding and managing real estate
mortgage assets. All of Preferred Capital Corp.'s common stock is owned by the
Bank. Pursuant to a subservicing agreement with the Bank's wholly-owned
mortgage banking subsidiary, First Nationwide Mortgage Corporation ("FNMC"),
FNMC services Preferred Capital Corp.'s mortgage assets. On January 31, 1997,
Preferred Capital Corp. issued to the public $500 million of its 9 1/8%
9
<PAGE>
FIRST NATIONWIDE (PARENT) HOLDINGS INC. AND SUBSIDIARIES
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS (CONTINUED)
Noncumulative Exchangeable Preferred Stock (the "REIT Preferred Stock"), which
is reflected in the Company's 1997 consolidated balance sheet as minority
interest. Preferred Capital Corp. used the proceeds from such offering to
acquire mortgage assets from the Bank.
The Bank is a diversified financial services company that primarily serves
consumers in California, and to a lesser extent, in Florida and Nevada. The
Bank's principal business consists of (i) operating retail deposit branches,
(ii) originating and/or purchasing 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. Recently, with its entry into the sub-prime
automobile finance business, the Bank broadened its complement of consumer
lending products. These operating activities are financed principally with
customer deposits, secured short-term and long-term borrowings, collections on
loans, asset sales and retained earnings.
2. FN ESCROW MERGER
On January 3, 1997 and prior to the consummation of the Cal Fed
Acquisition, First Nationwide Escrow Corp. ("FN Escrow"), an affiliate of FN
Holdings, was merged with and into FN Holdings, pursuant to a merger agreement
by and between FN Holdings and FN Escrow (the "FN Escrow Merger"). In
connection therewith, FN Holdings acquired the net proceeds from the issuance
of FN Escrow's $575 million of senior subordinated notes due 2003 (the "10 5/8%
Notes") and assumed FN Escrow's obligations under the 10 5/8% Notes and
indenture. Deferred issuance costs associated with the 10 5/8% Notes of $19
million were included in FN Escrow's other assets and are being amortized over
the term of the 10 5/8% Notes.
Concurrent with the issuance of the 10 5/8% Notes, FN Escrow issued
approximately $36 million aggregate liquidation value of cumulative perpetual
preferred stock (the "FN Escrow Preferred Stock") to Trans Network Insurance
Services Inc., an affiliate of FN Escrow. The FN Escrow Preferred Stock had a
stated liquidation value of $10,000 per share, plus accrued and unpaid
dividends, if any. Cash dividends on the FN Escrow Preferred Stock were
cumulative and accrued at an annual rate of approximately 7.3% of the stated
liquidation value. In connection with the FN Escrow Merger, each share of FN
Escrow Preferred Stock was converted into and became one share of cumulative
perpetual preferred stock of FN Holdings (the "FN Holdings/FN Escrow Preferred
Stock"), which stock had the same relative rights, terms and preferences as the
FN Escrow Preferred Stock. Immediately after issuance, FN Holdings redeemed the
FN Holdings/FN Escrow Preferred Stock at a redemption price of $36.8 million,
representing its stated liquidation value and accrued and unpaid dividends to
January 3, 1997. At the same time, a $19 million loan receivable from an
affiliate of FN Holdings was repaid.
3. ACQUISITIONS AND DIVESTITURES
LMUSA Purchases
On October 2, 1995, FNMC purchased from Lomas Mortgage USA, Inc. ("LMUSA")
a loan servicing portfolio of approximately $11.1 billion (including a
sub-servicing portfolio of $3.1 billion), a $2.9 billion master servicing
portfolio in which FNMC monitors the performance and consolidates the reporting
and remittances of multiple servicers for various investors (a "master
servicing portfolio") and other assets for $100.9 million, and the assumption
of certain indebtedness relating to an acquired loan portfolio totalling
approximately $274 million (the "LMUSA 1995 Purchase"). On January 31, 1996,
FNMC purchased LMUSA's remaining $14.1 billion loan servicing portfolio
(including a sub-servicing portfolio of $2.4 billion), a master servicing
portfolio of $2.7 billion, $5.9 million in foreclosed real estate, $46.8
million in net other servicing receivables, $2.6 million in mortgage loans, and
$6.2 million in net other assets (including $1.4 million in cash and cash
equivalents) for a purchase price of approximately $160.9 million (the "LMUSA
1996 Purchase" and, together with the LMUSA 1995 Purchase, the "LMUSA
Purchases").
10
<PAGE>
FIRST NATIONWIDE (PARENT) HOLDINGS INC. AND SUBSIDIARIES
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS (CONTINUED)
1996 Acquisitions
On February 1, 1996, the Bank acquired SFFed Corp. ("SFFed") and its
wholly-owned subsidiary, San Francisco Federal Savings and Loan Association
(the "SFFed Acquisition"). The following is a summary of the assets acquired
and liabilities assumed in connection with the SFFed Acquisition at February 1,
1996.
<TABLE>
<CAPTION>
ESTIMATED
SFFED BANK REMAINING
CARRYING FAIR VALUE CARRYING LIVES
VALUE ADJUSTMENTS VALUE (IN YEARS)
--------------- ------------- --------------- -----------
(DOLLARS IN THOUSANDS)
<S> <C> <C> <C> <C>
Cash and cash equivalents ............. $ 181,061 $ -- $ 181,061 --
Mortgage-backed securities ............ 918,817 11,007 929,824 1-5
Loans receivable, net ................. 2,715,758 (23,245) 2,692,513 2-12
Office premises and equipment ......... 20,581 (11,672) 8,909 3-10
Investment in FHLB System ............. 31,989 -- 31,989 --
Foreclosed real estate, net ........... 30,018 -- 30,018 --
Accrued interest receivable ........... 22,740 -- 22,740 --
Mortgage servicing rights ............. 2,238 13,762 16,000 2-4
Other assets .......................... 44,938 (7,773) 37,165 2-5
Deposits .............................. (2,678,692) (10,950) (2,689,642) 1-5
Securities sold under agreements to
repurchase ........................... (815,291) (3,640) (818,931) --
Borrowings ............................ (227,203) (8,831) (236,034) 1-9
Other liabilities ..................... (50,805) (6,075) (56,880) 1-5
------------ --------- ------------
$ 196,149 $ (47,417) 148,732
============ =========
Purchase price ........................ 264,245
------------
Excess cost over fair value of net
assets acquired ...................... $ 115,513 15
============
</TABLE>
In connection with the SFFed Acquisition, FN Holdings issued $140 million
of 9 1/8% Senior Subordinated Notes Due 2003 (the "9 1/8% Senior Subordinated
Notes") and contributed the proceeds thereof of $133 million to the Bank as
additional paid-in capital.
11
<PAGE>
FIRST NATIONWIDE (PARENT) HOLDINGS INC. AND SUBSIDIARIES
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS (CONTINUED)
On June 1, 1996, the Bank acquired Home Federal Financial Corporation
("HFFC"), and its wholly-owned federally chartered savings association, Home
Federal Savings and Loan Association of San Francisco (the "Home Federal
Acquisition," and together with the SFFed Acquisition, the "1996
Acquisitions"). The aggregate consideration paid in connection with the Home
Federal Acquisition was approximately $67.8 million. The following is a summary
of the assets acquired and liabilities assumed in the Home Federal Acquisition
at June 1, 1996:
<TABLE>
<CAPTION>
ESTIMATED
HFFC BANK REMAINING
CARRYING FAIR VALUE CARRYING LIVES
VALUE ADJUSTMENTS VALUE (IN YEARS)
------------- ------------- ------------- -----------
(DOLLARS IN THOUSANDS)
<S> <C> <C> <C> <C>
Cash and cash equivalents ............. $ 146,867 $ -- $ 146,867 --
Mortgage-backed securities ............ 4,053 (65) 3,988 1-5
Loans receivable, net ................. 538,722 4,020 542,742 2-12
Office premises and equipment ......... 4,202 (2,125) 2,077 3-10
Investment in FHLB System ............. 6,259 -- 6,259
Foreclosed real estate, net ........... 2,421 (198) 2,223 --
Accrued interest receivable ........... 3,594 -- 3,594 --
Mortgage servicing rights ............. 817 2,243 3,060 2-4
Other assets .......................... 10,016 2,392 12,408 2-5
Deposits .............................. (632,399) (1,875) (634,274) 1-5
Borrowings ............................ (30,000) 241 (29,759) 1-6
Other liabilities ..................... (3,602) (3,293) (6,895) 1-5
---------- -------- ----------
$ 50,950 $ 1,340 52,290
========== ========
Purchase price ........................ 67,823
----------
Excess cost over fair value of net
assets acquired ...................... $ 15,533 15
==========
</TABLE>
The 1996 Acquisitions and the LMUSA Purchases were accounted for as
purchases and, accordingly, their respective purchase prices were allocated to
the assets acquired and liabilities assumed in each transaction based on
estimates of fair values at the date of purchase. Since the respective dates of
purchase, the results of operations related to such assets and liabilities have
been included in the Company's consolidated statements of income.
12
<PAGE>
FIRST NATIONWIDE (PARENT) HOLDINGS INC. AND SUBSIDIARIES
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS (CONTINUED)
Cal Fed Acquisition
The following is a summary of the assets acquired and liabilities assumed
in connection with the Cal Fed Acquisition at January 3, 1997.
<TABLE>
<CAPTION>
ESTIMATED
CAL FED BANK REMAINING
CARRYING FAIR VALUE CARRYING LIVES
VALUE ADJUSTMENTS VALUE (IN YEARS)
--------------- ------------- --------------- -----------
(DOLLARS IN THOUSANDS)
<S> <C> <C> <C> <C>
Cash and cash equivalents .............. $ 1,027,491 $ -- $ 1,027,491 --
Securities ............................. 6,013 12 6,025 1
Mortgage-backed securities ............. 1,963,869 4,532 1,968,401 6-9
Loans receivable, net .................. 10,084,170 (23,991) 10,060,179 2-12
Office premises and equipment, net ..... 58,900 (17,592) 41,308 3-10
Investment in FHLB System .............. 166,786 -- 166,786 --
Foreclosed real estate, net ............ 18,482 (16) 18,466 --
Accrued interest receivable ............ 71,868 -- 71,868 --
Mortgage servicing rights .............. 4,759 39,738 44,497 2-7
Other assets ........................... 87,096 142,634 229,730 2-5
Deposits ............................... (8,985,630) (9,699) (8,995,329) 1-8
Borrowings ............................. (3,468,004) (2,918) (3,470,922) 1-5
Other liabilities ...................... (198,454) (188,892) (387,346) 1-10
Preferred stock ........................ (172,500) -- (172,500) --
------------ ---------- ------------
$ 664,846 $ (56,192) 608,654
============ ==========
Purchase price ......................... 1,188,687
------------
Excess cost over fair value of net
assets acquired ....................... $ 580,033 15
============
</TABLE>
The Cal Fed Acquisition was accounted for as a purchase and accordingly,
the purchase price was allocated to the assets acquired and liabilities assumed
in the transaction based on estimates of fair value at the date of purchase.
Since the date of purchase, the results of operations related to such assets
and liabilities have been included in the Company's 1997 consolidated statement
of income.
Weyerhaeuser Purchase
On May 31, 1997, FNMC acquired a 1-4 unit residential loan servicing
portfolio of approximately $3.2 billion and approximately 40,000 loans from WMC
Mortgage Corporation (the "Weyerhaeuser Purchase") for $37.1 million. The
Company's consolidated statement of income for the year ended December 31, 1997
includes the results of the acquired servicing portfolio from June 1, 1997.
Auto One Acquisition
On September 1, 1997, the Bank acquired Auto One Acceptance Corporation
("Auto One") in a purchase transaction (the "Auto One Acquisition"). Auto One
primarily engages in indirect sub-prime auto financing activities, providing
loan processing, funding and loan servicing for over 800 franchised automobile
dealers. Auto One is a licensed lender in 47 states. Auto One is headquartered
in Dallas, Texas, and is a wholly-owned subsidiary of the Bank. The results of
operations for Auto One for the period from September 1, 1997 are included in
the Company's consolidated statement of income for the year ended December 31,
1997.
13
<PAGE>
FIRST NATIONWIDE (PARENT) HOLDINGS INC. AND SUBSIDIARIES
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS (CONTINUED)
Servicing Sale
On September 30, 1997, FNMC sold servicing rights for approximately 52,000
loans with an unpaid principal balance of approximately $2.3 billion,
recognizing a pre-tax gain of $14.0 million (the "Servicing Sale").
Branch Sales
During the first six months of 1996, the Bank consummated the sale of its
retail deposits and the related retail banking assets comprised of cash on
hand, loans on deposits, and facilities in Ohio, New York, New Jersey and
Michigan (collectively, the "Branch Sales") at gross prices which represented
an average premium of 7.96% of the approximately $4.6 billion deposits sold.
The Bank recorded a pre-tax gain of $363.3 million in connection with the
Branch Sales. The Company's consolidated statement of income for the year ended
December 31, 1996 includes the results of operations of those branches sold in
the Branch Sales for the period prior to sale.
Garberville Branch Sale
On May 9, 1997, the Bank consummated the sale of deposit accounts and
related retail banking assets comprised of cash on hand, loans on deposits and
facilities totalling $21.7 million to Humboldt Bank at a gross price
representing a deposit premium of 4.5% (the "Garberville Branch Sale"), and
resulting in a net pre-tax gain on sale of $1.1 million.
Texas Branch Sale
On December 12, 1997, the Bank sold its retail deposits and all related
retail banking facilities in the state of Texas (consisting of three branches)
totalling $57.6 million at a gross price representing a deposit premium of 4.1%
and resulting in a pre-tax net gain on sale of $2.5 million (the "Texas Branch
Sale").
Pro Forma Financial Information
The following unaudited pro forma financial information combines the
historical results of the Company as if the Cal Fed Acquisition and the
issuances of the REIT Preferred Stock, the 10 5/8% Notes and the 12 1/2% Senior
Notes (as defined herein) had occurred as of the beginning of the first year
presented (in thousands):
<TABLE>
<CAPTION>
YEAR ENDED DECEMBER 31,
-------------------------
1997 1996
----------- -----------
<S> <C> <C>
Net interest income ......... $605,871 $668,156
Net income .................. 63,760 147,986
</TABLE>
The gains recognized related to the Branch Sales, net of related taxes,
and certain sales of branches by Cal Fed are excluded from the above table. The
pro forma information does not include the effect of the Home Federal
Acquisition, the SFFed Acquisition, the LMUSA 1996 Purchase, the Weyerhaeuser
Purchase, the Auto One Acquisition, the Servicing Sale, the Branch Sales, the
Garberville Branch Sale, the Texas Branch Sale, the sales of certain branches
by Cal Fed or the issuance of the 9 1/8% Senior Subordinated Notes because such
effect is not significant. The pro forma results are not necessarily indicative
of the results which would have actually been obtained if the Cal Fed
Acquisition and the issuances of the REIT Preferred Stock, the 10 5/8% Notes or
the 12 1/2% Senior Notes had been consummated in the past nor do they project
the results of operations in any future period.
Purchase Accounting Adjustments
Premiums and discounts related to interest-earning assets acquired and
interest-bearing liabilities assumed are amortized (accreted) to operations
using the interest method over the estimated remaining lives of the respective
assets and liabilities.
14
<PAGE>
FIRST NATIONWIDE (PARENT) HOLDINGS INC. AND SUBSIDIARIES
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS (CONTINUED)
GSAC Acquisition
On September 5, 1997, the Bank entered into an agreement with Gulf States
Acceptance Company, a Delaware limited partnership ("GSAC") and its general
partner, Gulf States Financial Services, a Texas corporation, pursuant to which
Auto One will acquire 100% of the partnership interests in GSAC and GSAC will
be liquidated and its assets and liabilities will be transferred to Auto One
(the "GSAC Acquisition"). The aggregate consideration to be paid in connection
with the GSAC Acquisition is approximately $22.5 million and a 20% interest in
the common stock of Auto One. This transaction closed on February 4, 1998. See
note 35 "Subsequent Events" for further discussion.
4. SUMMARY OF SIGNIFICANT ACCOUNTING POLICIES
The accounting and reporting policies of Parent Holdings conform to
generally accepted accounting principles and general practices within the
savings and loan industry. The following summarizes the more significant of
these policies.
(a) Basis of Presentation
The accompanying consolidated financial statements include the accounts
of Parent Holdings, FN Holdings, the Bank and the Bank's wholly-owned
subsidiaries not subject to the Assistance Agreement (as defined herein).
Earnings per share data is not presented due to the limited ownership of
the Company. All significant intercompany accounts and transactions have
been eliminated.
(b) Cash and Cash Equivalents
For purposes of the consolidated statements of cash flows, cash and cash
equivalents include cash and amounts due from banks, interest-bearing
deposits in other banks, and other short-term investment securities with
original maturities of three months or less. Savings and loan associations
are required by the Federal Reserve System to maintain non-interest bearing
cash reserves equal to a percentage of certain deposits. The reserve
balance for California Federal at December 31, 1997 was $51.0 million.
(c) Securities and Mortgage-backed Securities
The Company's investment in securities consists primarily of U.S.
government and agency securities and mortgage-backed securities. Parent
Holdings classifies debt and equity securities, including mortgage-backed
securities, into one of three categories: held to maturity, available for
sale or trading securities. Securities held to maturity represent
securities which management has the positive intent and ability to hold to
maturity and are reported at amortized cost. Securities bought and held
principally for the purpose of selling them in the near term are classified
as trading securities and reported at fair value, with unrealized gains and
losses included in income. All other securities are classified as available
for sale and are carried at fair value, with unrealized holding gains and
losses, net of tax, reported as a separate component of stockholder's
equity until realized. Should an other than temporary decline in the fair
value of a security classified as held to maturity or available for sale
occur, the carrying value of such security would be written down to fair
value by a charge to operations. Realized gains or losses on securities
available for sale are computed on a specific identification basis and are
accounted for on a trade-date basis.
Amortization and accretion of premiums and discounts relating to
mortgage-backed securities is recognized using the interest method over the
estimated lives of the underlying mortgages with adjustments based on
prepayment experience.
(d) Loans Held for Sale, Net
One-to-four unit residential loans originated and intended for sale in
the secondary market are carried at the lower of aggregate cost or market
value as determined by outstanding commitments
15
<PAGE>
FIRST NATIONWIDE (PARENT) HOLDINGS INC. AND SUBSIDIARIES
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS (CONTINUED)
from investors or current investor yield requirements calculated on an
aggregate basis. Net unrealized losses are recognized in a valuation
allowance by charges to income.
(e) Loans Receivable, Net
Loans receivable, net, is stated at unpaid principal balances, less the
allowance for loan losses, and net of deferred loan origination fees and
purchase discounts or premiums.
Discounts or premiums on 1-4 unit residential loans are accreted or
amortized to income using the interest method over the remaining period the
loans are expected to be outstanding. Discounts or premiums on consumer and
other loans are recognized over the lives of the loans using the interest
method.
A significant portion of the Company's real estate loan portfolio is
comprised of adjustable-rate mortgages. The interest rate and payment terms
of these mortgages adjust on a periodic basis in accordance with various
published indices. The majority of these adjustable-rate mortgages have
terms which limit the amount of interest rate adjustment that can occur
each year and over the life of the mortgage. During periods of limited
payment increases, negative amortization may occur on certain
adjustable-rate mortgages. See note 31.
The allowance for loan losses is increased by charges to income and
decreased by charge-offs (net of recoveries). Management's periodic
evaluation of the adequacy of the allowance is based on such factors as the
Company's past loan loss experience, delinquency trends, known and inherent
risks in the portfolio, adverse situations that may affect the borrower's
ability to repay, the estimated value of any underlying collateral, and
current economic conditions. As management utilizes information currently
available to make such evaluation, the allowance for loan losses is
subjective and may be adjusted in the future depending on changes in
economic conditions or other factors. Additionally, regulatory authorities,
as an integral part of their regular examination process, review the Bank's
allowance for estimated losses on a periodic basis. These authorities may
require the Bank to recognize additions to the allowance based on their
judgment of information available to them at the time of their examination.
Uncollectible interest on loans that are contractually ninety days or
more past due is charged off, or an allowance is established, based on
management's periodic evaluation. The allowance is established by a charge
to interest income equal to all interest previously accrued, and income is
subsequently recognized only to the extent that cash payments are received.
When, in management's judgment, the borrower's ability to make periodic
interest and principal payments resumes, the loan is returned to accrual
status.
(f) Auto One Loans
Since the consummation of the Auto One Acquisition, California Federal
has purchased sub-prime auto financing contracts from an established dealer
network throughout the United States. Any premium or discount is amortized
using the interest method over the estimated lives of the loans. The
allowance for estimated losses is regularly assessed by management, and
such allowances are maintained on a static pool basis.
(g) Impaired Loans
The Company considers a loan is impaired when it is "probable" that a
creditor will be unable to collect all amounts due (i.e., both principal
and interest) according to the contractual terms of the loan agreement. 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 nonaccrual loans, troubled debt restructurings, and performing
loans which exhibit, among other characteristics, high loan-to-value
ratios, low debt--
16
<PAGE>
FIRST NATIONWIDE (PARENT) HOLDINGS INC. AND SUBSIDIARIES
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS (CONTINUED)
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.
The measurement of impairment may be based on (i) the present value of
the expected future cash flows of the impaired loan discounted at the
loan's original effective interest rate, (ii) the observable market price
of the impaired loan, or (iii) the fair value of the collateral of a
collateral-dependent loan. Large groups of smaller balance homogeneous
loans are collectively evaluated for impairment. For the Company, loans
collectively reviewed for impairment include all single-family loans, and
performing multi-family and commercial real estate loans under $500,000,
excluding loans which have entered the workout process.
Cash receipts on impaired loans not performing according to contractual
terms are generally used to reduce the carrying value of the loan, unless
the Company believes it will recover the remaining principal balance of the
loan. Impairment losses are included in the allowance for loan losses
through a charge to provision for loan losses. Adjustments to impairment
losses due to changes in the fair value of collateral of impaired loans are
included in provision for loan losses. Upon disposition of an impaired
loan, loss of principal, if any, is recorded through a charge-off to the
allowance for loan losses.
(h) Loan Origination and Commitment Fees and Related Costs
Loan origination fees, net of direct underwriting and closing costs, are
deferred and amortized to interest income using the interest method over
the contractual term of the loans, adjusted for actual loan prepayment
experience. Unamortized fees on loans sold or paid in full are recognized
as income. Adjustable-rate loans with lower initial interest rates during
the introductory period result in the amortization of a substantial portion
of the net deferred fee during the introductory period.
Fees received in connection with loan commitments are deferred and
recognized as fee revenue on a straight-line basis over the term of the
commitment. If the commitment is subsequently exercised during the
commitment period, the remaining unamortized commitment fee at the time of
exercise is recognized over the term of the loan using the interest method.
Commitment fees paid to investors, for the right to deliver permanent
residential mortgages in the future to the investors at a specified yield,
are deferred. Amounts are included in the recognition of gain (loss) on
sale of loans as loans are delivered to the investor in proportion to the
percentage relationship of loans delivered to the total commitment amount.
Any unused fee is recognized as an expense at the expiration of the
commitment date, or earlier, if it is determined that the commitment will
not be filled.
Other loan fees and charges, which represent income from the prepayment
of loans, delinquent payment charges, and miscellaneous loan services, are
recognized as income when collected.
(i) Office Premises and Equipment
Land is carried at cost. Premises, equipment and leasehold improvements
are stated at cost, less accumulated depreciation and amortization.
Premises, equipment and leasehold improvements are depreciated or amortized
on a straight-line basis over the lesser of the lease term or the estimated
useful lives of the various classes of assets. Maintenance and repairs on
premises and equipment are charged to expense in the period incurred.
Closed facilities of the Company and its subsidiaries are carried at fair
value. In the case of leased premises that are vacated by the Company, a
liability is recorded representing the difference between the net present
value of future lease payments and holding costs and the net present value
of anticipated sublease income, if any, for the remaining term of the
lease.
17
<PAGE>
FIRST NATIONWIDE (PARENT) HOLDINGS INC. AND SUBSIDIARIES
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS (CONTINUED)
(j) Foreclosed Real Estate
Real estate acquired through foreclosure is initially recorded at fair
value less estimated disposal costs at the time of foreclosure. Subsequent
to foreclosure, the Company charges current earnings with a provision for
estimated losses when the carrying value of the collateral property exceeds
its fair value. Gains or losses on the sale of real estate are recognized
upon disposition of the property. Carrying costs such as maintenance and
property taxes are expensed as incurred.
(k) Intangible Assets
Intangible assets, which primarily consist of the excess of cost over
fair value of net assets acquired in business combinations accounted for as
a purchase, are amortized on a straight-line basis over the expected period
to be benefited of 15 years. The Company periodically reviews the
operations of the businesses acquired to determine that income from
operations continues to support the recoverability of its intangible assets
and the amortization periods used.
(l) Mortgage Servicing Rights
The Company purchases mortgage servicing rights separately and acquires
mortgage servicing rights by purchasing or originating mortgage loans and
selling those loans with servicing rights retained. Generally, purchased
mortgage servicing rights are capitalized at the cost to acquire the rights
and are carried at the lower of cost, net of accumulated amortization, or
fair value. Originated mortgage servicing rights are capitalized based on
the relative fair value of the servicing right to the fair value of the
loan and the servicing right and are carried at the lower of the
capitalized amount, net of accumulated amortization, or fair value.
A portion of the cost of originating a mortgage loan is allocated to the
mortgage servicing right based on its fair value. To determine the fair
value of mortgage servicing rights, the Company uses market prices for
comparable mortgage servicing contracts, when available, or alternatively
uses a valuation model that calculates the present value of future net
servicing income. In using this valuation method, the Company incorporates
assumptions that market participants would use in estimating future net
servicing income, which include estimates of the cost of servicing, the
discount rate, mortgage escrow earnings rate, an inflation rate, ancillary
income, prepayment speeds and default rates and losses.
Mortgage servicing rights are amortized in proportion to, and over the
period of, estimated net servicing income. The amortization of the mortgage
servicing rights is analyzed periodically and is adjusted to reflect
changes in prepayment rates and other estimates. A decline in long-term
interest rates generally results in an acceleration in mortgage loan
prepayments.
The Company measures the impairment of servicing rights based on the
difference between the carrying amount and current fair value of the
servicing rights. In determining impairment, the Company aggregates all
mortgage servicing rights and stratifies them based on the predominant risk
characteristics of interest rate, loan type and investor type. A valuation
allowance is established for any excess of amortized cost over the current
fair value, by risk stratification, by a charge to income.
The Company employs hedging techniques through the use of interest rate
floor contracts and principal-only swap agreements to reduce the
sensitivity of its earnings and value of its servicing rights to declining
interest rates and borrower prepayments as further discussed in note 17.
The Company uses hedge accounting because mortgage servicing rights expose
the Company to interest rate risk and at the inception and throughout the
hedge period, high correlation of changes in the market value of the hedge
instruments and the fair value of the mortgage servicing rights are
probable so that the results of the hedge instruments will substantially
offset the effects of interest rate changes on the mortgage servicing
rights. If these requirements are not met, the hedge instruments are
considered speculative and are marked to market with changes in market
value reflected in current earnings.
18
<PAGE>
FIRST NATIONWIDE (PARENT) HOLDINGS INC. AND SUBSIDIARIES
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS (CONTINUED)
The premium paid by the Company on the interest rate floor contracts is
amortized based on the option decay rate. Amounts receivable or payable
under the principal-only swap agreements and amounts receivable under the
interest rate floor contracts or terminated hedges are included in the
carrying value of mortgage servicing rights and are amortized as part of
the mortgage servicing rights basis.
(m) Gains/Losses on Sales of Mortgage Loans
Mortgage loans are generally sold with the mortgage servicing rights
retained by the Company. The carrying value of mortgage loans sold is
reduced by the cost allocated to the associated mortgage servicing rights.
Gains or losses on sales of mortgage loans are recognized based on the
difference between the selling price and the carrying value of the related
mortgage loans sold. Deferred origination fees and expenses, net of
commitment fees paid in connection with the sale of the loans, are
recognized at the time of sale in the gain or loss determination.
(n) Servicing Fee Income
Servicing fee income is recorded for the fees earned for servicing
mortgage loans under servicing agreements with Fannie Mae ("FNMA"), Freddie
Mac ("FHLMC"), the Government National Mortgage Association ("GNMA"), and
certain private investors. The fees are based on a contractual percentage
of the outstanding principal balance or a fixed amount per loan and are
recorded as income when received. The amortization of mortgage servicing
rights is netted against servicing fee income.
(o) Interest Rate Swap Agreements
The Bank is a party to various interest rate swap agreements as a means
of managing its interest rate exposure relative to the Bank's FHLB
advances. Amounts receivable or payable under these derivative financial
instruments are recognized as adjustments to interest expense of the hedged
liability (FHLB advances). Gains and losses on early termination of these
agreements are included in the carrying amount of the related liability and
amortized over the remaining term of the liability.
(p) Income Taxes
For federal income tax purposes, Parent Holdings and FN Holdings are
members of the Mafco Holdings Inc. ("Mafco," the indirect parent of FN
Holdings) affiliated group, and accordingly, their federal taxable income
or loss will be included in the consolidated federal income tax return
filed by Mafco. Parent Holdings may also be included in certain state and
local income tax returns of Mafco or its subsidiaries. FN Holdings' tax
sharing agreement with Mafco provides that income taxes will be based on
the separate results of FN Holdings. The agreement generally provides that
FN Holdings will pay to Mafco amounts equal to the taxes that FN Holdings
would be required to pay if it were to file a return separately from the
affiliated group. Furthermore, the agreement provides that FN Holdings
shall be entitled to take into account any net operating loss carryovers in
determining its tax liability. The agreement also provides that Mafco will
pay FN Holdings amounts equal to tax refunds FN Holdings would be entitled
to if it had always filed a separate company tax return. Parent Holdings
has not entered into any tax sharing agreements.
Income taxes are accounted for under the asset and liability method.
Deferred tax assets and liabilities are recognized for the future tax
consequences attributable to differences between the financial statement
carrying amounts of existing assets and liabilities and their respective
tax bases and operating loss and tax credit carryforwards. Deferred tax
assets and liabilities are measured using enacted tax rates expected to
apply to taxable income in the years in which those temporary differences
are expected to be recovered or settled. The effect on deferred tax assets
and liabilities of a change in tax rates is recognized in income in the
period that includes the enactment date.
19
<PAGE>
FIRST NATIONWIDE (PARENT) HOLDINGS INC. AND SUBSIDIARIES
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS (CONTINUED)
(q) Extraordinary Gain or Loss from Extinguishment of Debt
During 1996, California Federal repurchased $44 million aggregate
principal amount of the $50 million in 11.20% Senior Notes (as defined
herein) assumed in the SFFed Acquisition resulting in an extraordinary loss
of approximately $1.6 million, net of income taxes, on the early
extinguishment of debt. During 1995, California Federal prepaid $250
million in FHLB advances resulting in an extraordinary gain of
approximately $2.0 million, net of income taxes, on the early
extinguishment of such borrowings.
(r) Management's Use of Estimates
The preparation of the consolidated financial statements in conformity
with generally accepted accounting principles requires management to make
estimates and assumptions that affect (i) the reported amounts of assets
and liabilities, (ii) disclosure of contingent assets and liabilities at
the date of the consolidated financial statements and (iii) the reported
amounts of revenues and expenses during the reporting period. Actual
results could differ from those estimates.
(s) Reclassification
Certain amounts within the consolidated financial statements have been
reclassified to conform to the current year presentation.
(t) Newly Issued Accounting Pronouncements
On June 28, 1996, the FASB issued Statement of Financial Accounting
Standards No. 125, "Accounting for Transfers and Servicing of Financial
Assets and Extinguishments of Liabilities" ("SFAS No. 125"). SFAS No. 125
provides accounting and reporting standards for transfers and servicing of
financial assets and extinguishments of liabilities based on consistent
application of a financial-components approach that focuses on control.
Under that approach, after a transfer of financial assets, an entity
recognizes the financial and servicing assets it controls and the
liabilities it has incurred, derecognizes financial assets when control has
been surrendered, and derecognizes liabilities when extinguished. This
statement provides consistent standards for distinguishing transfers of
financial assets that are sales from transfers that are secured borrowings.
In December 1996, the FASB issued Statement of Financial Accounting
Standards No. 127, "Deferral of the Effective Date of Certain Provisions of
FASB Statement No. 125" ("SFAS No. 127"). SFAS No. 127 defers for one year
the effective date (i) of paragraph 15 of SFAS No. 125 and (ii) of
paragraphs 9-12 and 237(b) of SFAS No. 125 for repurchase agreement,
dollar-roll, securities lending and similar transactions. SFAS No. 127
provides additional guidance on the types of transactions for which the
effective date of SFAS No. 125 has been deferred. It also requires that if
it is not possible to determine whether a transaction occurring during
calendar-year 1997 is part of a repurchase agreement, dollar-roll,
securities lending, or similar transaction, then paragraphs 9-12 of SFAS
No. 125 should be applied to that transfer. The Company adopted SFAS No.
125, as amended by SFAS No. 127, on January 1, 1997. Such adoption did not
have a material impact on the Company's consolidated financial statements.
In June 1997, the FASB issued Statement of Financial Accounting Standards
No. 130, "Reporting Comprehensive Income" ("SFAS No. 130"). SFAS No. 130
establishes standards for reporting and display of comprehensive income and
its components (revenues, expenses, gains and losses) in a full set of
general purpose financial statements. SFAS No. 130 requires that all items
that are required to be recognized under accounting standards as components
of comprehensive income be reported in a financial statement that is
displayed with the same prominence as other financial statements. It does
not require a specific format for that financial statement but requires
that an enterprise display an amount representing total comprehensive
income for the period in that financial statement. This statement is
effective for fiscal years beginning after December 15, 1997. Reclassi-
20
<PAGE>
FIRST NATIONWIDE (PARENT) HOLDINGS INC. AND SUBSIDIARIES
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS (CONTINUED)
fication of financial statements for earlier periods provided for
comparative purposes is required. This statement has no impact on the
financial condition or results of operations of the Company, but does
impact the Company's disclosure requirements. The Company adopted this
statement effective October 1, 1997.
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 Statement of Financial
Accounting Standards No. 14, "Financial Reporting for Segments of a
Business Enterprise," but retains the requirement to report information
about major customers. It amends Statement of Financial Accounting
Standards 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
informative 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.
5. SUPPLEMENTAL DISCLOSURE OF CASH FLOW INFORMATION (IN THOUSANDS)
Cash paid for interest for the years ended December 31, 1997, 1996 and
1995 was $1,459,676, $841,192, and $702,254, respectively.
During the year ended December 31, 1997, noncash activity consisted of
transfers from loans receivable and loans held for sale to foreclosed real
estate of $179.6 million, $19.4 million of loans made to facilitate sales of
real estate owned, and a contribution of capital through the redemption of
Additional FN Holdings Preferred Stock of $1.9 million. In addition, $50.8
million was transferred from loans held for sale to mortgage-backed securities
classified as trading securities upon the securitization of certain of the
Bank's qualifying single-family loans.
During the year ended December 31, 1996, noncash activity consisted of
transfers from loans receivable and loans held for sale to foreclosed real
estate of $109.8 million, $13.0 million of loans made to facilitate sales of
real estate owned, the reclassification of certain consumer loans from loans
held for sale (at lower of cost or market) to loans receivable totalling $27.7
million, a $46.8 million dividend paid in the form of a loan receivable from an
affiliate and the issuance of additional FN Holdings preferred stock through
preferred stock dividends to minority stockholders of $.8 million.
During the year ended December 31, 1995, the Financial Accounting
Standards Board issued a Special Report, "A Guide to Implementation of
Statement 115 on Accounting for Certain Investments in Debt and Equity
Securities" (the "Special Report"). The Special Report provided all entities an
opportunity to reassess their ability and intent to hold securities to maturity
and allowed a one time reclassification of securities from held-to-maturity to
available-for-sale without "tainting" the remaining held-to-maturity
securities. On December 29, 1995, the Company reclassified $1.5 billion and
$231.8 million in carrying value of mortgage-backed securities and U.S.
government and agency securities, respectively, from the respective
held-to-maturity categories to securities available for sale. In addition,
other noncash activity included $326.0 million of consumer loans reclassified
from loans receivable to loans held for sale, transfers from loans receivable
to foreclosed real estate of $79.6 million, and $376.3 million transferred from
loans receivable to mortgage-backed securities held to maturity representing
the securitization of certain of the Bank's qualifying single-family loans.
21
<PAGE>
FIRST NATIONWIDE (PARENT) HOLDINGS INC. AND SUBSIDIARIES
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS (CONTINUED)
6. SECURITIES AVAILABLE FOR SALE
At December 31, 1997 and 1996, securities available for sale and the
related unrealized gain or loss consisted of the following (in thousands):
<TABLE>
<CAPTION>
DECEMBER 31, 1997
----------------------------------------------------------------------
NET
AMORTIZED UNREALIZED UNREALIZED UNREALIZED CARRYING
COST GAINS LOSSES GAIN VALUE
----------- ------------ ------------ ------------ -----------
<S> <C> <C> <C> <C> <C>
Marketable equity securities ......... $ -- $ -- $ -- $ -- $ --
U.S. government and agency
obligations ......................... 812,716 957 (588) 369 813,085
-------- ---- ------ ----- --------
Total ............................ $812,716 $957 $ (588) 369 $813,085
======== ==== ====== ========
Minority interest -- Hunter's Glen (65)
Estimated tax effect ................. (47)
-----
Net unrealized holding gain in
stockholder's equity .............. $ 257
=====
</TABLE>
<TABLE>
<CAPTION>
DECEMBER 31, 1996
----------------------------------------------------------------------
NET
AMORTIZED UNREALIZED UNREALIZED UNREALIZED CARRYING
COST GAINS LOSSES GAIN VALUE
----------- ------------ ------------ ------------ -----------
<S> <C> <C> <C> <C> <C>
Marketable equity securities ......... $ 27,034 $34,954 $ -- $ 34,954 $ 61,988
U.S. government and agency
obligations ......................... 480,317 936 (1,222) (286) 480,031
-------- ------- -------- -------- --------
Total ............................ $507,351 $35,890 $ (1,222) 34,668 $542,019
======== ======= ======== ========
Minority interest -- Hunter's Glen (6,240)
Estimated tax effect ................. (3,466)
--------
Net unrealized holding gain in
stockholder's equity .............. $ 24,962
========
</TABLE>
The following represents a summary of the amortized cost, carrying value
and weighted average yield of securities available for sale with related
maturities (dollars in thousands):
<TABLE>
<CAPTION>
DECEMBER 31, 1997
-------------------------------------
ESTIMATED WEIGHTED
AMORTIZED FAIR AVERAGE
COST VALUE YIELD
----------- ----------- ---------
<S> <C> <C> <C>
Marketable equity securities .................. $ -- $ -- --%
U.S. government and agency obligations:
Maturing within 1 year ...................... 107,771 107,680 5.92
Maturing after 1 year but within 5 years 704,945 705,405 6.52
Maturing after 5 years through 10 years ..... -- -- --
-------- -------- ----
Total ....................................... $812,716 $813,085 6.44%
======== ======== ====
</TABLE>
At December 31, 1997, U.S. government and agency obligations available for
sale of $78.2 million were pledged as collateral for various obligations.
Marketable equity securities available for sale at December 31, 1996
represented approximately 5.93% of the outstanding stock of Affiliated Computer
Services ("ACS"), representing 2.24% of the voting
22
<PAGE>
FIRST NATIONWIDE (PARENT) HOLDINGS INC. AND SUBSIDIARIES
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS (CONTINUED)
power with a cost basis of $27 million. The ACS stock represents the only
marketable equity security classified as available for sale at December 31,
1996. Pursuant to the terms of a settlement agreement dated June 17, 1991
between the Bank, ACS, and the Federal Deposit Insurance Corporation ("FDIC"),
the FDIC was entitled to share in a defined portion of the proceeds from the
sale of the stock, which, at December 31, 1995, approximated $34.5 million, and
which was recorded in other liabilities. On June 28, 1996, the Bank sold
2,000,000 shares of its investment in common stock of ACS for gross proceeds
totalling $92.3 million from which it satisfied its full obligation to the
FDIC. A pre-tax gain of $40.4 million resulted from this transaction and was
recorded as a gain on sale of assets in the 1996 consolidated statement of
income. The Bank's remaining shares of ACS stock were sold in October 1997,
resulting in a pre-tax gain of approximately $25.0 million.
7. SECURITIES HELD TO MATURITY
At December 31, 1997 and 1996 securities held to maturity consist of the
following (in thousands):
<TABLE>
<CAPTION>
DECEMBER 31, 1997
-------------------------------------------------------
AMORTIZED UNREALIZED UNREALIZED ESTIMATED
COST GAINS LOSSES FAIR VALUE
----------- ------------ ------------ -----------
<S> <C> <C> <C> <C>
Municipal securities ......... $ 170 $-- $-- $ 170
Commercial paper ............. 58,129 -- -- 58,129
------- --- --- -------
Total ...................... $58,299 $-- $-- $58,299
======= === === =======
</TABLE>
<TABLE>
<CAPTION>
DECEMBER 31, 1996
-------------------------------------------------------
AMORTIZED UNREALIZED UNREALIZED ESTIMATED
COST GAINS LOSSES FAIR VALUE
----------- ------------ ------------ -----------
<S> <C> <C> <C> <C>
Municipal securities ........................... $ 190 $-- $-- $ 190
U.S. government and agency obligations ......... 3,800 15 -- 3,815
Commercial paper ............................... 282 -- -- 282
------ --- --- ------
Total ........................................ $4,272 $15 $-- $4,287
====== === === ======
</TABLE>
The weighted average stated interest rates on securities held to maturity
were 5.32% and 6.85% at December 31, 1997 and 1996, respectively.
The following represents a summary of the carrying values (amortized
cost), estimated fair values, and weighted average yield of securities held to
maturity with related maturities (dollars in thousands):
<TABLE>
<CAPTION>
DECEMBER 31, 1997
--------------------------------------
WEIGHTED
AMORTIZED ESTIMATED AVERAGE
COST FAIR VALUE YIELD
----------- ------------ ---------
<S> <C> <C> <C>
Municipal securities:
Maturing within 1 year ........................... $ -- $ -- --%
Maturing after 1 year but within 5 years ......... -- -- --
Maturing after 10 years .......................... 170 170 8.25
Commercial paper:
Maturing within 1 year ........................... 58,129 58,129 5.31
------- ------- ----
Total ............................................ $58,299 $58,299 5.32%
======= ======= ====
</TABLE>
23
<PAGE>
FIRST NATIONWIDE (PARENT) HOLDINGS INC. AND SUBSIDIARIES
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS (CONTINUED)
8. MORTGAGE-BACKED SECURITIES AVAILABLE FOR SALE
At December 31, 1997 and 1996, mortgage-backed securities available for
sale and the related unrealized gain or loss consisted of the following (in
thousands):
<TABLE>
<CAPTION>
DECEMBER 31, 1997
--------------------------------------------------------------------------
NET
AMORTIZED UNREALIZED UNREALIZED UNREALIZED CARRYING
COST GAINS LOSSES GAIN VALUE
------------- ------------ ------------ ------------ -------------
<S> <C> <C> <C> <C> <C>
GNMA ........................................ $ 249,023 $ 2,710 $ -- $ 2,710 $ 251,733
FNMA ........................................ 2,408,173 17,519 (5,923) 11,596 2,419,769
FHLMC ....................................... 1,197,867 20,097 (548) 19,549 1,217,416
Other MBS ................................... 574,625 5,371 (111) 5,260 579,885
Collateralized mortgage obligations ......... 606,965 2,698 (1,868) 830 607,795
---------- ------- -------- -------- ----------
Total ..................................... $5,036,653 $48,395 $ (8,450) 39,945 $5,076,598
========== ======= ======== ==========
Minority interest -- Hunter's Glen .......... (6,968)
Estimated tax effect ........................ (5,105)
--------
Net unrealized holding gain in
stockholder's equity ..................... $ 27,872
========
</TABLE>
<TABLE>
<CAPTION>
DECEMBER 31, 1996
--------------------------------------------------------------------------
NET
AMORTIZED UNREALIZED UNREALIZED UNREALIZED CARRYING
COST GAINS LOSSES GAIN VALUE
------------- ------------ ------------ ------------ -------------
<S> <C> <C> <C> <C> <C>
GNMA ........................................ $ 67,130 $ 652 $ (95) $ 557 $ 67,687
FNMA ........................................ 523,894 5,113 (5,042) 71 523,965
FHLMC ....................................... 626,267 17,115 (310) 16,805 643,072
Collateralized mortgage obligations ......... 364,675 497 (1,244) (747) 363,928
---------- ------- -------- -------- ----------
Total ..................................... $1,581,966 $23,377 $ (6,691) 16,686 $1,598,652
========== ======= ======== ==========
Minority interest -- Hunter's Glen .......... (3,004)
Estimated tax effect ........................ (1,669)
--------
Net unrealized holding gain in
stockholder's equity ..................... $ 12,013
========
</TABLE>
The following represents a summary of the amortized cost, carrying value
and weighted average yield of mortgage-backed securities available for sale
(dollars in thousands):
<TABLE>
<CAPTION>
DECEMBER 31, 1997
----------------------------------------
WEIGHTED
AMORTIZED ESTIMATED AVERAGE
COST FAIR VALUE YIELD
------------- ------------ ---------
<S> <C> <C> <C>
GNMA ........................................ $ 249,023 $ 251,733 7.09%
FNMA ........................................ 2,408,173 2,419,769 6.99
FHLMC ....................................... 1,197,867 1,217,416 7.49
Other MBS ................................... 574,625 579,885 6.93
Collateralized mortgage obligations ......... 606,965 607,795 6.80
---------- ---------- ----
Total ..................................... $5,036,653 $5,076,598 7.08%
========== ========== ====
</TABLE>
The weighted average stated interest rates on mortgage-backed securities
available for sale were 7.16% and 7.27% at December 31, 1997 and 1996,
respectively. At December 31, 1997 and 1996,
24
<PAGE>
FIRST NATIONWIDE (PARENT) HOLDINGS INC. AND SUBSIDIARIES
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS (CONTINUED)
mortgage-backed securities available for sale included securities totalling
$1.4 billion and $53.0 million, respectively, which resulted from the
securitization of certain qualifying mortgage loans from the Bank's, Old
California Federal's and San Francisco Federal's loan portfolios.
At December 31, 1997 and 1996, mortgage-backed securities available for
sale included $4.6 billion and $1.1 billion respectively, of variable-rate
securities.
At December 31, 1997, mortgage-backed securities available for sale of
$4.1 billion were pledged as collateral for various obligations as further
discussed in notes 19, 20 and 31. Further, at December 31, 1997,
mortgage-backed securities available for sale with a carrying value of $28.8
million were pledged to FNMA associated with the sales of certain securitized
multi-family loans.
9. MORTGAGE-BACKED SECURITIES HELD TO MATURITY
At December 31, 1997 and 1996, mortgage-backed securities held to maturity
consist of the following (in thousands):
<TABLE>
<CAPTION>
DECEMBER 31, 1997
-----------------------------------------------------------
AMORTIZED UNREALIZED UNREALIZED ESTIMATED
COST GAINS LOSSES FAIR VALUE
------------- ------------ ------------ -------------
<S> <C> <C> <C> <C>
FHLMC .................................... $ 317,766 $15,364 $-- $ 333,130
FNMA ..................................... 1,017,835 20,048 -- 1,037,883
Other mortgage-backed securities ......... 2,276 -- -- 2,276
---------- ------- --- ----------
Total .................................. $1,337,877 $35,412 $-- $1,373,289
========== ======= === ==========
</TABLE>
<TABLE>
<CAPTION>
DECEMBER 31, 1996
-----------------------------------------------------------
AMORTIZED UNREALIZED UNREALIZED ESTIMATED
COST GAINS LOSSES FAIR VALUE
------------- ------------ ------------ -------------
<S> <C> <C> <C> <C>
FHLMC .................................... $ 405,488 $14,811 $ -- $ 420,299
FNMA ..................................... 1,214,002 17,444 (70) 1,231,376
Other mortgage-backed securities ......... 2,172 -- -- 2,172
---------- ------- ----- ----------
Total .................................. $1,621,662 $32,255 $ (70) $1,653,847
========== ======= ===== ==========
</TABLE>
The following represents a summary of the amortized cost, carrying value
and weighted average yield of mortgage-backed securities held to maturity
(dollars in thousands):
<TABLE>
<CAPTION>
DECEMBER 31, 1997
----------------------------------------
WEIGHTED
AMORTIZED ESTIMATED AVERAGE
COST FAIR VALUE YIELD
------------- ------------ ---------
<S> <C> <C> <C>
FHLMC .................................... $ 317,766 $ 333,130 8.17%
FNMA ..................................... 1,017,835 1,037,883 7.03
Other mortgage-backed securities ......... 2,276 2,276 8.27
---------- ---------- ----
Total .................................. $1,337,877 $1,373,289 7.30%
========== ========== ====
</TABLE>
The weighted average stated interest rates on mortgage-backed securities
held to maturity were 7.33% and 7.06% at December 31, 1997 and 1996,
respectively. At December 31, 1997 and 1996, mortgage-backed securities held to
maturity included variable rate securities totalling $1.3 billion and $1.6
billion, respectively, which resulted from the securitization with FNMA and
FHLMC of certain qualifying mortgage loans from the Bank's, Old California
Federal's and San Francisco Federal's loan portfolios with full recourse to the
Bank.
25
<PAGE>
FIRST NATIONWIDE (PARENT) HOLDINGS INC. AND SUBSIDIARIES
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS (CONTINUED)
At December 31, 1997, mortgage-backed securities held to maturity of $1.3
billion were pledged as collateral for various obligations as further discussed
in notes 19, 20 and 31.
10. LOANS RECEIVABLE, NET
At December 31, 1997 and 1996 loans receivable, net, included the
following (in thousands):
<TABLE>
<CAPTION>
1997 1996
-------------- ---------------
<S> <C> <C>
Real estate loans:
1-4 unit residential ....................... $14,071,258 $ 6,117,974
5+ unit residential ........................ 3,035,195 2,163,992
Commercial ................................. 2,145,634 1,977,732
Construction ............................... 3,737 11,242
Land ....................................... 4,766 11,074
----------- -----------
19,260,590 10,282,014
Undisbursed loan funds ..................... (2,714) (4,669)
----------- -----------
Total real estate loans ................... 19,257,876 10,277,345
----------- -----------
Equity-line loans ........................... 354,966 243,011
Other consumer loans ........................ 320,599 55,016
Commercial loans ............................ 8,370 29,651
----------- -----------
Total consumer and other loans ............ 683,935 327,678
----------- -----------
Total loans receivable .................... 19,941,811 10,605,023
Deferred fees and unearned premiums ......... 47,219 4,740
Allowance for loan losses ................... (439,233) (246,556)
Purchase accounting discounts, net .......... (125,387) (150,624)
----------- -----------
Total loans receivable, net ............... $19,424,410 $10,212,583
=========== ===========
</TABLE>
The Bank's lending activities are principally conducted in California, New
York, Texas and Florida.
At December 31, 1997, $11.2 billion in residential loans were pledged as
collateral for FHLB advances as further discussed in note 20.
As a result of the FN and the Cal Fed Acquisitions, the Bank assumed
obligations for certain loans sold with recourse. The outstanding balances of
loans sold with recourse at December 31, 1997 totalled $2.8 billion. No loans
were sold with recourse during the years ended December 31, 1997, 1996 and
1995. The Bank evaluates the credit risk of loans sold with recourse and, if
necessary, records a liability (other liabilities) for estimated losses related
to these potential obligations. At December 31, 1997, such liability totalled
$52.4 million.
26
<PAGE>
FIRST NATIONWIDE (PARENT) HOLDINGS INC. AND SUBSIDIARIES
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS (CONTINUED)
The following table indicates the carrying value of loans which have been
placed on nonaccrual status as of the dates indicated (in thousands):
<TABLE>
<CAPTION>
AT DECEMBER 31,
-------------------------
1997 1996
----------- -----------
<S> <C> <C>
Nonaccrual loans:
Real estate loans:
1-4 unit residential ............ $164,923 $146,283
5+ unit residential ............. 12,128 12,713
Commercial and other ............ 6,240 9,406
Construction .................... 1,560 788
-------- --------
Total real estate .............. 184,851 169,190
Non-real estate .................. 7,344 3,032
-------- --------
Total nonaccrual loans ......... $192,195 $172,222
======== ========
</TABLE>
The following table indicates the carrying value of loans classified as
troubled debt restructuring, as of December 31, 1997 and 1996 (in thousands):
<TABLE>
<CAPTION>
AT DECEMBER 31,
----------------------
1997 1996
---------- ---------
<S> <C> <C>
1-4 unit residential ..................... $ 2,471 $ 3,113
5+ unit residential ...................... 6,718 55,642
Commercial and other real estate ......... 26,296 28,754
------- -------
Total restructured loans ................. $35,485 $87,509
======= =======
</TABLE>
At December 31, 1997, the Company's loan portfolio totalling $19.9 billion
is concentrated in California. The financial condition of the Company is
subject to general economic conditions such as the volatility of interest rates
and real estate market conditions and, in particular, to conditions in the
California residential real estate market. Any downturn in the economy
generally, and in California in particular, could reduce real estate values. An
increase in the general level of interest rates may adversely affect the
ability of certain borrowers to pay the interest on and principal of their
obligations. Accordingly, in the event interest rates rise or real estate
market values decline, particularly in California, the Company and the Bank may
find it difficult to maintain its asset quality and may require additional
allowances for loss above the amounts currently estimated by management.
For nonaccrual loans and loans classified as troubled debt restructurings,
the following table summarizes the interest income recognized ("Recognized")
and total interest income that would have been recognized had the borrowers
performed under the original terms of the loans ("Contractual") for the years
ended December 31, 1997 and 1996 (in thousands).
<TABLE>
<CAPTION>
DECEMBER 31, 1997 DECEMBER 31, 1996
---------------------------- ---------------------------
RECOGNIZED CONTRACTUAL RECOGNIZED CONTRACTUAL
------------ ------------- ------------ ------------
<S> <C> <C> <C> <C>
Restructured loans ......... $ 3,532 $ 3,583 $12,977 $13,430
Nonaccrual loans ........... 6,779 15,880 4,860 13,752
------- ------- ------- -------
$10,311 $19,463 $17,837 $27,182
======= ======= ======= =======
</TABLE>
At December 31, 1997 and 1996, the Bank and its wholly-owned subsidiary,
FGB Realty Advisors, Inc., managed principally non-performing loan and asset
portfolios totalling $1.2 million and $1.0 billion, respectively, for
investors. During 1997, substantially all the asset management and disposition
contracts
27
<PAGE>
FIRST NATIONWIDE (PARENT) HOLDINGS INC. AND SUBSIDIARIES
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS (CONTINUED)
held by FGB Realty Advisors, Inc. have expired, and operations of the
subsidiary have substantially ceased. Revenues related to such activities are
included in management fees in the accompanying statements of income.
Activity in the allowance for loan losses for the years ended December 31,
1997, 1996 and 1995 is summarized as follows (in thousands):
<TABLE>
<CAPTION>
1997 1996 1995
----------- ----------- -----------
<S> <C> <C> <C>
Balance -- beginning of year .......... $ 246,556 $ 210,484 $ 202,780
Purchases, net ........................ 164,378 38,486 --
Provision for loan losses ............. 79,800 39,600 37,000
Charge-offs ........................... (56,124) (44,785) (32,344)
Recoveries ............................ 4,623 2,771 3,048
--------- --------- ---------
Balance -- end of year ................ $ 439,233 $ 246,556 $ 210,484
========= ========= =========
</TABLE>
FN Holdings loaned approximately $46.8 million to an affiliate on March 1,
1996. Such loan bore interest at the rate of 10.5% over the prevailing yield to
maturity of the five-year United States treasury note, and was an unsecured
subordinated obligation of the borrower guaranteed by certain other affiliates
of FN Holdings, which obligation to FN Holdings was evidenced by a promissory
note (the "Promissory Note"). Management believes that the terms and conditions
of such loan were at least as favorable to FN Holdings as might have been
obtained in a similar transaction with an unaffiliated party. On May 15, 1996,
FN Holdings distributed the Promissory Note to Parent Holdings as a partial
redemption of and dividends on class C common stock. Parent Holdings
distributed the Promissory Note in the form of a dividend to an affiliate.
During 1996 FN Holdings loaned approximately $19 million to an affiliate.
Such loan accrued interest at the rate of 14%, and was an unsecured
subordinated obligation of the borrower, which obligation to FN Holdings was
evidenced by a promissory note. Management believes that the terms and
conditions of such loan were at least as favorable to FN Holdings as might have
been obtained in a similar transaction with an unaffiliated party. On January
3, 1997, such loan, together with the accrued interest thereon, was repaid.
11. IMPAIRED LOANS
At December 31, 1997 and 1996, the carrying value of loans that are
considered to be impaired totalled $110.1 million and $102.1 million
respectively (of which $18.6 million and $22.6 million, respectively, were on
nonaccrual status). The average recorded investment in impaired loans during
the years ended December 31, 1997, 1996 and 1995 was approximately $112.9
million, $103.7 million and $125.5 million, respectively. For the years ended
December 31, 1997, 1996 and 1995, the Company recognized interest income on
those impaired loans of $10.5 million, $10.7 million and $12.9 million,
respectively, which included $.6 million, $.3 million and $.2 million,
respectively, of interest income recognized using the cash basis method of
income recognition.
Generally, specific allowances for loan losses relative to impaired
multi-family and commercial real estate loans, which comprised the majority of
impaired loans, have not been established. Generally, the carrying value of
such loans, net of purchase accounting adjustments, does not exceed the loans'
related collateral values less estimated selling costs. There have been no
significant multi-family or commercial real estate loans originated since
October 1, 1994.
12. PUT AGREEMENT
In connection with the FN Acquisition, the Bank assumed generally the same
rights under an agreement ("Put Agreement") Old FNB had with Granite Management
and Disposition, Inc.
28
<PAGE>
FIRST NATIONWIDE (PARENT) HOLDINGS INC. AND SUBSIDIARIES
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS (CONTINUED)
("Granite"), an indirect subsidiary of Ford Motor, whereby Old FNB had the
option to sell ("put") to Granite, on a quarterly basis, up to approximately
$500 million of certain assets, primarily non-performing commercial real estate
loans and residential mortgage loans with an original principal balance greater
than $250,000. The Put Agreement expired on November 30, 1996. The aggregate
purchase price of assets "put" to Granite equals $500 million, including assets
"put" to Granite by Old FNB through October 3, 1994. Granite purchased these
assets for an amount equal to the assets' outstanding principal balance,
accrued interest and certain other expenses.
13. RECEIVABLES FROM THE FSLIC/RF -- COVERED ASSETS
As part of First Gibraltar's 1988 acquisition of the five Closed
Associations, it entered into an assistance agreement (the "Assistance
Agreement") with the FSLIC. Assets subject to the Assistance Agreement were
known as "Covered Assets." The Assistance Agreement generally provided for
guaranteed yield amounts to be paid on the book value of the Covered Assets,
and paid the Bank for 90% of the losses incurred upon disposition of the
Covered Assets ("Capital Loss Coverage").
In June 1995, the FDIC, as manager of the FSLIC Resolution Fund
("FSLIC/RF"), as successor to the FSLIC, exercised its rights under the
Assistance Agreement to purchase substantially all of the remaining Covered
Assets as of June 1, 1995 at the fair market value of such assets and further
purchased additional assets from the remaining Covered Asset portfolio in
September 1995 (the "FDIC Purchase"). Any losses sustained by the Bank as a
result of the FDIC Purchase were reimbursed under the Capital Loss Coverage
provision of the Assistance Agreement. Proceeds from this transaction were
reinvested in the normal course of business.
On August 19, 1996, the Bank and the FSLIC/RF executed an agreement which
resulted in the termination of the Assistance Agreement. As a result of the
agreement, the FSLIC/RF paid the Bank the remaining Covered Asset balance of
$39 million and, among other things, assumed the responsibility for the
disposition of several litigation matters involving Covered Assets which had
been retained by the Bank following the FDIC Purchase. In connection with the
agreement, a pre-tax gain of $25.6 million was recorded.
14. INVESTMENT IN FHLB
The Company's investment in FHLB stock is carried at cost. The FHLB
provides a central credit facility for member institutions. As a member of the
FHLB system, the Bank is required to own capital stock in the FHLB in an amount
equal to the greater of (i) 1% of the aggregate outstanding principal amount of
its residential mortgage loans, home purchase contracts and similar obligations
at the beginning of each calendar year, (ii) .3% of total assets, or (iii) 5%
of its advances (borrowings) from the FHLB of San Francisco. The Bank was in
compliance with this requirement at December 31, 1997 and 1996. At December 31,
1997, the Bank's investment in FHLB stock was pledged as collateral for FHLB
advances as further discussed in note 20.
29
<PAGE>
FIRST NATIONWIDE (PARENT) HOLDINGS INC. AND SUBSIDIARIES
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS (CONTINUED)
15. OFFICE PREMISES AND EQUIPMENT, NET
Office premises and equipment, net, at December 31, 1997 and 1996 is
summarized as follows (dollars in thousands):
<TABLE>
<CAPTION>
ESTIMATED
DEPRECIABLE LIVES AT
1997 1996 DECEMBER 31, 1997
------------ ------------ ---------------------
<S> <C> <C> <C>
Land .......................................... $ 29,942 $ 19,084 --
Buildings and leasehold improvements .......... 74,141 40,103 25
Furniture and equipment ....................... 85,519 50,559 6
Construction in progress ...................... 5,253 10,601 --
--------- ---------
194,855 120,347
Accumulated depreciation and amortization ..... (35,506) (20,183)
--------- ---------
Total office premises and equipment, net ...... $ 159,349 $ 100,164
========= =========
</TABLE>
Depreciation and amortization expense related to office premises and
equipment for the years ended December 31, 1997, 1996 and 1995 totalled $16.8
million, $10.9 million and $8.9 million, respectively.
California Federal rents certain office premises and equipment under
long-term, noncancelable operating leases expiring at various dates through
2029. Rental expense under such operating leases, included in occupancy and
equipment expense, for the years ended December 31, 1997, 1996 and 1995
totalled $29.6 million, $19.3 million and $22.6 million, respectively. Rental
income from subleasing agreements for the years ended December 31, 1997, 1996
and 1995 totalled $2.0 million, $1.6 million and $2.2 million, respectively. At
December 31, 1997, the projected minimum rental commitments, net of sublease
agreements, under terms of the leases were as follows (in thousands):
<TABLE>
<CAPTION>
CASH EFFECT ON
YEAR ENDED COMMITMENT NET INCOME
- ---------------------- ------------ -----------
<S> <C> <C>
1998 ............... $ 31,218 $20,973
1999 ............... 31,085 18,602
2000 ............... 30,264 15,970
2001 ............... 27,914 10,492
2002 ............... 24,471 6,714
Thereafter ......... 116,193 24,480
-------- -------
Total ............. $261,145 $97,231
======== =======
</TABLE>
The effect of lease commitments on net income is different from the cash
commitment primarily as a result of lease commitments assumed in acquisitions
with related purchase accounting adjustments.
16. ACCRUED INTEREST RECEIVABLE
Accrued interest receivable at December 31, 1997 and 1996 is summarized as
follows (in thousands):
<TABLE>
<CAPTION>
1997 1996
---------- -----------
<S> <C> <C>
Cash and cash equivalents and securities .......... $ 10,832 $ 8,399
Mortgage-backed securities ........................ 43,700 24,110
Loans receivable and loans held for sale .......... 133,671 73,525
-------- --------
Total accrued interest receivable ................ $188,203 $106,034
======== ========
</TABLE>
30
<PAGE>
FIRST NATIONWIDE (PARENT) HOLDINGS INC. AND SUBSIDIARIES
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS (CONTINUED)
17. MORTGAGE SERVICING RIGHTS
The following is a summary of activity for mortgage servicing rights
("MSRs") and the hedge against the change in value of the mortgage servicing
rights ("MSR Hedge") for the years ended December 31, 1997, 1996 and 1995 (in
thousands):
<TABLE>
<CAPTION>
MSR
MSR HEDGE TOTAL
-------------- ----------- --------------
<S> <C> <C> <C>
Balance at December 31, 1994 .............................. $ 86,840 $ -- $ 86,840
Additions from Maryland Acquisition ..................... 76,369 -- 76,369
Additions from Lomas 1995 Purchase ...................... 93,362 -- 93,362
Additions -- other ...................................... 18,676 -- 18,676
Amortization ............................................ (33,892) -- (33,892)
---------- -------- ----------
Balance at December 31, 1995 .............................. 241,355 -- 241,355
Additions from Lomas 1996 Purchase ...................... 105,029 -- 105,029
Additions from SFFed Acquisition ........................ 16,000 -- 16,000
Additions from Home Federal Acquisition ................. 3,060 -- 3,060
Originated servicing .................................... 81,028 -- 81,028
Additions -- other ...................................... 64,421 -- 64,421
Premiums paid for interest rate floor contracts ......... -- 3,509 3,509
Payments received under interest rate floor
contracts ............................................... -- (13) (13)
Net paid under principal-only swap agreements ........... -- 284 284
Amortization ............................................ (90,706) (275) (90,981)
---------- -------- ----------
Balance at December 31, 1996 .............................. 420,187 3,505 423,692
Additions from Cal Fed Acquisition ...................... 44,497 -- 44,497
Additions from Weyerhaeuser Purchase .................... 41,949 -- 41,949
Originated servicing .................................... 120,465 -- 120,465
Additions -- other ...................................... 27,939 -- 27,939
Sales -- Servicing Sale ................................. (16,792) -- (16,792)
Sales -- other .......................................... (4) -- (4)
Premiums paid for interest rate floor contracts ......... -- 7,088 7,088
Payments received under interest rate floor
contracts ............................................... -- (471) (471)
Net received under principal-only swap agreements -- (1,378) (1,378)
Amortization ............................................ (106,972) (3,310) (110,282)
----------- -------- -----------
Balance at December 31, 1997 .............................. $ 531,269 $ 5,434 $ 536,703
=========== ======== ===========
</TABLE>
At December 31, 1997, 1996 and 1995, the outstanding balances of 1-4 unit
residential loan participations, whole loans and mortgage pass-through
securities serviced for other investors by FNMC totalled $46.6 billion, $43.1
billion and $28.6 billion, respectively. In addition, FNMC had $6.2 billion,
$5.7 billion and $3.0 billion of master servicing at December 31, 1997, 1996
and 1995, respectively.
The estimated fair value of the MSRs was $647 million and $529 million at
December 31, 1997 and 1996, respectively. The estimated market value of
interest rate floor contracts and swaps designated as hedges against MSRs at
December 31, 1997 was $18.0 million and $13.5 million, respectively. At
December 31, 1997 and 1996, no allowance for impairment of the MSRs was
necessary.
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
31
<PAGE>
FIRST NATIONWIDE (PARENT) HOLDINGS INC. AND SUBSIDIARIES
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS (CONTINUED)
of MSRs and generally will result in a reduction of 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 servicing rights based on changes in interest rates.
At December 31, 1997, the Company, through FNMC, was a party to several
interest rate floor contracts maturing from October 2001 through June 2002. The
Company paid counterparties a premium in exchange for cash payments in the
event that the 10-year Constant Maturity Treasury rate falls below the strike
prices. At December 31, 1997, the notional amount of the interest rate floors
was $970 million and the strike prices were between 5.0% and 6.5%. In addition,
the Company, through FNMC, entered into principal-only swap agreements with a
notional amount of $99 million.
At December 31, 1997 and 1996, servicing advances and other receivables
related to 1-4 unit residential loan servicing, net of valuation allowances of
$43.2 million and $12.7 million in 1997 and 1996, respectively, (included in
other assets) consisted of the following (in thousands):
<TABLE>
<CAPTION>
1997 1996
----------- -----------
<S> <C> <C>
Servicing advances ....................... $160,266 $152,465
Checks in process of collection .......... 157 55,601
Other .................................... 6,555 23,704
-------- --------
$166,978 $231,770
======== ========
</TABLE>
18. DEPOSITS
A summary of deposits carrying values at December 31, 1997 and 1996
follows (in thousands):
<TABLE>
<CAPTION>
1997 1996
------------- -------------
<S> <C> <C>
Passbook accounts ........................ $ 2,161,967 $ 840,685
Demand deposits:
Interest-bearing ........................ 1,149,294 509,788
Noninterest-bearing ..................... 1,179,344 729,648
Money market deposit accounts ............ 1,269,540 881,285
Term accounts ............................ 10,389,507 5,502,902
----------- ----------
16,149,652 8,464,308
Accrued interest payable ................. 51,538 31,901
Purchase accounting adjustments .......... 1,415 5,674
----------- ----------
Total deposits .......................... $16,202,605 $8,501,883
=========== ==========
</TABLE>
The aggregate amount of jumbo certificates of deposit (term deposits) with
a minimum denomination of $100,000 was approximately $2 billion and $868
million at December 31, 1997 and 1996, respectively. Brokered certificates of
deposit totalling $363 million and $470 million were included in deposits at
December 31, 1997 and 1996, respectively. Total deposits at December 31, 1997
and 1996 include escrow balances for loans serviced for others of $702 million
and $550 million, respectively.
32
<PAGE>
FIRST NATIONWIDE (PARENT) HOLDINGS INC. AND SUBSIDIARIES
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS (CONTINUED)
A summary of interest expense by deposit category for the years ended
December 31, 1997, 1996 and 1995 follows (in thousands):
<TABLE>
<CAPTION>
1997 1996 1995
---------- ---------- ----------
<S> <C> <C> <C>
Passbook accounts ......................... $ 68,408 $ 31,418 $ 14,668
Interest-bearing demand deposits .......... 12,331 5,398 6,953
Money market deposit accounts ............. 50,152 32,073 50,847
Term accounts ............................. 616,094 350,285 374,891
-------- -------- --------
$746,985 $419,174 $447,359
======== ======== ========
</TABLE>
At December 31, 1997, term accounts had scheduled maturities as follows
(in thousands):
<TABLE>
<S> <C>
1998 .................... $ 7,794,543
1999 .................... 2,065,788
2000 .................... 219,650
2001 .................... 131,782
2002 .................... 166,384
Thereafter .............. 11,360
-----------
$10,389,507
===========
</TABLE>
19. SECURITIES SOLD UNDER AGREEMENTS TO REPURCHASE
A summary of information regarding securities sold under agreements to
repurchase as of December 31, 1997 and 1996 follows (dollars in thousands):
<TABLE>
<CAPTION>
DECEMBER 31, 1997
-------------------------------------------------------
UNDERLYING COLLATERAL REPURCHASE LIABILITY
---------------------------- ------------------------
RECORDED MARKET INTEREST
VALUE (i) VALUE AMOUNT RATE
------------- ------------ ------------ ---------
<S> <C> <C> <C> <C>
Maturing within 30 days ............. $ -- $ -- $ -- --%
Maturing 30 days to 90 days ......... 1,848,385 1,859,169 1,774,950 5.75
Maturing 90 days to 1 year .......... 62,909 63,532 53,920 6.59
Maturing over 1 year ................ -- -- -- --
---------- ---------- ----------
Total (ii) ........................ 1,911,294 1,922,701 1,828,870
Purchase accounting adjustment (424) -- 99
Accrued interest payable ............ -- -- 13,473
---------- ---------- ----------
$1,910,870 $1,922,701 $1,842,442
========== ========== ==========
</TABLE>
33
<PAGE>
FIRST NATIONWIDE (PARENT) HOLDINGS INC. AND SUBSIDIARIES
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS (CONTINUED)
<TABLE>
<CAPTION>
DECEMBER 31, 1996
---------------------------------------------------------
UNDERLYING COLLATERAL REPURCHASE LIABILITY
----------------------------- -------------------------
RECORDED MARKET INTEREST
VALUE (i) VALUE AMOUNT RATE
------------- ------------- ------------- ---------
<S> <C> <C> <C> <C>
Maturing within 30 days ............. $ 626,260 $ 633,615 $ 609,949 5.61%
Maturing 30 days to 90 days ......... 573,904 585,767 550,409 5.48
Maturing 90 days to 1 year .......... 342,531 345,599 350,000 6.97
Maturing over 1 year ................ 67,845 68,203 53,920 6.59
---------- ---------- ----------
Total (ii) ........................ 1,610,540 1,633,184 1,564,278
Purchase accounting adjustment 2,578 -- 755
Accrued interest payable ............ -- -- 18,354
---------- ---------- ----------
$1,613,118 $1,633,184 $1,583,387
========== ========== ==========
</TABLE>
(i) Recorded value includes accrued interest at December 31, 1997 and
1996. In addition, the recorded values at December 31, 1997 and 1996
include adjustments for the unrealized gain or loss on
mortgage-backed securities available for sale.
(ii) Total mortgage-backed securities collateral at December 31, 1997 and
1996 includes $.6 billion and $1.1 billion, respectively, in
outstanding balances of loans securitized with full recourse to the
Bank. The market value of such collateral was $.6 billion and $1.1
billion at December 31, 1997 and 1996, respectively.
At December 31, 1997 and 1996, these agreements had weighted average
stated interest rates of 5.78% and 5.90%, respectively. The underlying
securities were delivered to, and are being held under the control of, third
party securities dealers. These dealers may have loaned the securities to other
parties in the normal course of their operations, but all agreements require
the dealers to resell to California Federal the identical securities at the
maturities of the agreements. The average daily balance of securities sold
under agreements to repurchase was $2.5 billion and $2.1 billion during 1997
and 1996, respectively, and the maximum amount outstanding at any month-end
during these periods was $3.1 billion and $2.7 billion, respectively.
At December 31, 1997, securities sold under agreements to repurchase were
collateralized with $1.9 billion of mortgage-backed securities.
34
<PAGE>
FIRST NATIONWIDE (PARENT) HOLDINGS INC. AND SUBSIDIARIES
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS (CONTINUED)
20. BORROWINGS
Borrowings at December 31, 1997 and 1996 are summarized as follows
(dollars in thousands):
<TABLE>
<CAPTION>
1997 1996
--------------------------- --------------------------
CARRYING AVERAGE CARRYING AVERAGE
VALUE RATE VALUE RATE
--------------- --------- ------------- ----------
<S> <C> <C> <C> <C>
Fixed-rate borrowings from FHLB ............... $ 5,447,168 5.88% $3,564,953 5.93%
Variable-rate borrowings from FHLB ............ 4,074,182 5.95 854,486 5.67
12 1/2% Senior notes .......................... 455,000 12.50 455,000 12.50
10% Subordinated debentures due 2006 .......... 92,100 10.00 92,100 10.00
11.20% Senior notes ........................... 6,000 11.20 6,000 11.20
12 1/4% Senior notes .......................... 200,000 12.25 200,000 12.25
9 1/8% Senior subordinated notes .............. 140,000 9.13 140,000 9.13
10 5/8% Senior subordinated notes ............. 575,000 10.63 -- --
10.668% Subordinated notes .................... 50,000 10.67 -- --
6 1/2% Convertible subordinated debentures 2,633 6.50 -- --
10% Subordinated debentures due 2003 .......... 4,299 10.00 -- --
Federal funds purchased ....................... 130,000 6.50 25,000 7.50
Other borrowings .............................. 570 8.89 885 8.54
----------- ----- ---------- -----
Total borrowings ............................ 11,176,952 6.64 5,338,424 6.85
Discount on 12 1/2% Senior notes .............. (3,907) -- (4,651) --
Accrued interest payable ...................... 58,682 -- 32,797 --
Purchase accounting adjustments, net .......... 803 -- (1,676) --
----------- ----- ---------- -----
$11,232,530 6.60% $5,364,894 6.85%
=========== ===== ========== =====
</TABLE>
Maturities and weighted average stated interest rates of borrowings at
December 31, 1997, not including accrued interest payable or purchase
accounting adjustments, are as follows (dollars in thousands):
<TABLE>
<CAPTION>
WEIGHTED
BALANCES MATURING AVERAGE RATES
MATURITIES DURING THE YEARS ---------------------------- -----------------------
ENDING DECEMBER 31 FHLB OTHER FHLB OTHER
- ----------------------------- ------------- ------------ ---------- ----------
<S> <C> <C> <C> <C>
1998 ..................... $5,263,042 $ 180,148 5.88% 7.66%
1999 ..................... 3,090,430 64 5.94 8.90
2000 ..................... 1,150,000 33 5.93 9.50
2001 ..................... 10,833 202,633 6.50 12.18
2002 ..................... 5,000 8 6.94 7.00
Thereafter ............... 2,045 1,272,716 7.83 11.09
---------- ---------- ---- -----
Total .................. $9,521,350 $1,655,602 5.91% 10.85%
========== ========== ==== =====
</TABLE>
35
<PAGE>
FIRST NATIONWIDE (PARENT) HOLDINGS INC. AND SUBSIDIARIES
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS (CONTINUED)
Interest expense on borrowings for the years ended December 31, 1997, 1996
and 1995 is summarized as follows (in thousands):
<TABLE>
<CAPTION>
1997 1996 1995
----------- ----------- -----------
<S> <C> <C> <C>
FHLB advances .................................. $ 443,966 $ 221,017 $ 139,051
Interest rate swap agreements .................. (10,743) (11,532) (15,177)
12 1/2% Senior notes ........................... 57,613 40,494 --
10% Subordinated debentures due 2006 ........... 9,210 9,210 9,210
11.20% Senior notes ............................ 672 3,641 --
12 1/4% Senior notes ........................... 24,500 24,504 24,500
9 1/8% Senior subordinated notes ............... 12,775 11,739 --
10 5/8% Senior subordinated notes .............. 60,648 -- --
10.668% Subordinated notes ..................... 5,291 -- --
6 1/2% Convertible subordinated debentures 172 -- --
10% Subordinated debentures due 2003 ........... 418 -- --
Federal funds purchased ........................ 5,300 3,529 2,268
Other borrowings ............................... 434 199 1,403
Purchase accounting adjustments ................ 629 6,039 21,244
--------- --------- ---------
Total ........................................ $ 610,885 $ 308,840 $ 182,499
========= ========= =========
</TABLE>
The following is a summary of the carrying value of assets pledged as
collateral for FHLB advances at December 31, 1997 (in thousands):
<TABLE>
<S> <C>
Real estate loans (primarily residential) ......... $11,183,138
Mortgage-backed securities ........................ 3,544,108
FHLB stock ........................................ 468,191
-----------
Total ........................................... $15,195,437
===========
</TABLE>
12 1/2% Senior Notes Due 2003
On April 17, 1996, Parent Holdings issued $455 million of its 12 1/2%
Senior Notes ("12 1/2% Senior Notes"). The notes will mature on April 15, 2003,
with interest payable semiannually on April 15 and October 15 of each year.
Deferred issuance costs associated with the issuance of the 12 1/2% Senior
Notes totalling $18.1 million were recorded in other assets and are being
amortized using the interest method over the term of the 12 1/2% Senior Notes.
The 12 1/2% Senior Notes were issued with a $5.2 million discount that is
included in the carrying value of the liability and is being accreted using the
interest method over the term of the 12 1/2% Senior Notes.
The 12 1/2% Senior Notes are redeemable at the option of the Company, in
whole or in part at the following redemption prices: (i) on or after April 15,
2000, at 106.25% of the principal amount thereof, plus accrued interest and
unpaid interest to the date of redemption, (ii) on or after April 15, 2001, at
103.125% of the principal amount thereof, plus accrued interest and unpaid
interest to the date of redemption, and (iii) thereafter, at 100% of the
principal amount thereof, plus accrued interest and unpaid interest to the date
of redemption. In addition, at any time prior to April 15, 2000, the 12 1/2%
Senior Notes may be redeemed at the option of the Company, in whole but not in
part, at a redemption price of 100% of the principal amount thereof, plus
accrued and unpaid interest, if any, to the date of redemption, plus the
applicable premium.
The 12 1/2% Senior Notes are senior unsecured obligations of the Company
and rank pari passu in right of payment with all future senior debt of the
Company, if any is issued, and senior to all future subordinated debt of the
Company, if any is issued.
36
<PAGE>
FIRST NATIONWIDE (PARENT) HOLDINGS INC. AND SUBSIDIARIES
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS (CONTINUED)
Parent Holdings is a holding company, and therefore, the 12 1/2% Senior
Notes are subordinated to (i) all existing and future liabilities, including
deposits, indebtedness and trade payables of its subsidiaries, including FN
Holdings and the Bank, and (ii) all preferred stock issued by its subsidiaries,
including the Bank Preferred Stock (as defined herein) and the FN Holdings
Preferred Stock. The 12 1/2% Senior Notes are also subordinated to the
obligations of FN Holdings under the tax-sharing agreement between and among
the Bank, FN Holdings and Mafco Holdings.
The terms and conditions of the indenture and the FN Holdings indentures
impose restrictions that affect, among other things, the ability of the Company
or FN Holdings, as the case may be, to incur debt, pay dividends or make
distributions, engage in a business other than holding the common stock of FN
Holdings, in the case of the Company, or of California Federal Bank and similar
banking institutions, in the case of FN Holdings, make acquisitions, create
liens, sell assets and make certain investments.
12 1/4% Senior Notes Due 2001
In connection with the FN Acquisition, FN Holdings issued $200 million
principal amount of 12 1/4% Senior Notes ("12 1/4% Senior Notes"), including
$5.5 million principal amount of 12 1/4% Senior Notes to certain directors and
officers of the Bank. The notes will mature on May 15, 2001 with interest
payable semiannually on May 15 and November 15. Deferred issuance costs
associated with the 12 1/4% Senior Notes' issuance totalling $9.9 million were
recorded in other assets and are being amortized over the term of the 12 1/4%
Senior Notes.
The notes are redeemable at the option of FN Holdings, in whole or in
part, during the 12-month period beginning May 15, 1999, at a redemption price
of 106.125% plus accrued interest to the date of redemption, and thereafter at
100% plus accrued interest. The notes are subordinated to all existing and
future liabilities, including deposits and other borrowings of the Bank, and to
the 11 1/2% Preferred Stock (as defined herein).
The terms and conditions of the 12 1/4% Senior Notes indenture impose
restrictions that affect, among other things, the ability of FN Holdings to
incur debt, pay dividends, make acquisitions, create liens, sell assets and
make certain investments.
9 1/8% Senior Subordinated Notes Due 2003
On January 31, 1996, FN Holdings issued $140 million principal amount of
the 9 1/8% Senior Subordinated Notes. The 9 1/8% Senior Subordinated Notes will
mature on January 15, 2003 with interest payable semiannually on January 15 and
July 15. Deferred issuance costs associated with the issuance of the 9 1/8%
Senior Subordinated Notes totalling $7.0 million were recorded in other assets
and are being amortized over the term of the 9 1/8 1/8% Senior Subordinated
Notes.
The 9 1/8% Senior Subordinated Notes are redeemable at the option of FN
Holdings, in whole or in part, during the 12-month period beginning January 1,
2001, at a redemption price of 104.5625% of the principal amount thereof, plus
accrued interest and unpaid interest to the date of redemption, and thereafter
at 100% of the principal amount thereof, plus accrued and unpaid interest.
The 9 1/8% Senior Subordinated Notes are unsecured senior subordinated
obligations of FN Holdings and are subordinated in right of payment to all
existing and future senior indebtedness of FN Holdings and future to all
subordinated debt, if any is issued. The 9 1/8% Senior Subordinated Notes are
subordinated to all existing and future liabilities, including deposits,
indebtedness and trade payables of FN Holdings' subsidiaries, including the
Bank, and to preferred stock issued by the Bank.
The terms and conditions of the 9 1/8% Senior Subordinated Notes indenture
impose restrictions that affect, among other things, the ability of FN Holdings
to incur debt, pay dividends or make distributions, engage in a business other
than holding the common stock of the Bank and similar banking institutions,
make acquisitions, create liens, sell assets and make certain investments.
37
<PAGE>
FIRST NATIONWIDE (PARENT) HOLDINGS INC. AND SUBSIDIARIES
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS (CONTINUED)
10 5/8% Senior Subordinated Notes Due 2003
In connection with the Cal Fed Acquisition, FN Holdings acquired the net
proceeds from the issuance of FN Escrow's 10 5/8% Notes and assumed FN Escrow's
obligations under the 10 5/8% Notes and indenture. Deferred issuance costs
associated with the 10 5/8% Notes of $19 million were included in FN Escrow's
other assets and are being amortized over the term of the 10 5/8% Notes.
The 10 5/8% Notes are redeemable at the option of FN Holdings, in whole or
in part, during the 12-month period beginning January 1, 2001, at a redemption
price of 105.313% plus accrued and unpaid interest to the date of redemption,
during the 12-month period beginning January 1, 2002 at a redemption price of
102.656% plus accrued and unpaid interest to the date of redemption, and
thereafter at 100% plus accrued and unpaid interest to the date of redemption.
The 10 5/8% Notes are subordinate in right of payment to all existing and
future subordinated debt, if any is issued, of FN Holdings. The 10 5/8% Notes
are subordinated to all existing and future liabilities, including deposits,
indebtedness and trade payables, of the subsidiaries of FN Holdings, including
California Federal and all preferred stock issued by the Bank, including the
Bank Preferred Stock.
The terms and conditions of the 10 5/8% Notes indenture impose
restrictions that affect, among other things, the ability of FN Holdings to
incur debt, pay dividends, make acquisitions, create liens, sell assets and
make certain investments.
10% Subordinated Debentures Due 2006
As part of the FN Acquisition, California Federal assumed subordinated
debentures, which bear interest at 10% per annum and mature on October 1, 2006
(the "10% Subordinated Debentures Due 2006"). At December 31, 1997 the
aggregate principal amount of the 10% Subordinated Debentures Due 2006
outstanding was $92.1 million.
Events of Default under the indenture governing the 10% Subordinated
Debentures Due 2006 (the "Old FNB Indenture") include, among other things: (i)
a default in the payment of interest when due and such default continues for 30
days, (ii) a default in the payment of any principal when due, (iii) the
failure to comply with covenants in the Old FNB Indenture, provided that the
trustee or holders of at least 25% in principal amount of the outstanding 10%
Subordinated Debentures Due 2006 notify the Bank of the default and the Bank
does not cure the default within 60 days after receipt of such notice, (iv)
certain events of bankruptcy, insolvency or reorganization of the Bank, (v) the
FSLIC/RF (or a comparable entity) is appointed to act as conservator,
liquidator, receiver or other legal custodian for the Bank and (vi) a default
under other indebtedness of the Bank in excess of $10 million resulting in such
indebtedness becoming due and payable, and such default or acceleration has not
been rescinded or annulled within 60 days after the date on which written
notice of such failure has been given by the trustee to the Bank or by holders
of at least 25% in principal amount of the outstanding 10% Subordinated
Debentures Due 2006 to the Bank and the trustee.
11.20% Senior Notes Due 2004
As part of the SFFed Acquisition, California Federal assumed $50 million
of SFFed 11.20% Senior Notes due September 1, 2004 (the "11.20% Senior Notes").
In connection with the assumption of the 11.20% Senior Notes, the Bank and all
of the holders of the 11.20% Senior Notes entered into an agreement amending
certain provisions of the note purchase pursuant to which the 11.20% Senior
Notes were sold (as amended, the "Note Purchase Agreement"). On September 12,
1996, the Bank repurchased $44.0 million aggregate principal amount of the
11.20% Senior Notes at a price of approximately 116.45% of the principal
amount, plus the accrued interest thereon. The Bank recorded an extraordinary
loss, net of tax, of $1.6 million in connection with such repurchase. At
December 31, 1997, the aggregate principal amount of the 11.20% Senior Notes
outstanding was $6.0 million.
38
<PAGE>
FIRST NATIONWIDE (PARENT) HOLDINGS INC. AND SUBSIDIARIES
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS (CONTINUED)
Events of Default under the Note Purchase Agreement include, among other
things: (i) failure to make any payment of principal when due; (ii) any failure
to make any payment of interest when due and such payment is not made within 15
days after the date such payment was due; (iii) failure to comply with certain
covenants in the Note Purchase Agreement, provided that such failure continues
for more than 60 days; (iv) failure to deliver to holders a notice of default,
notice of event of default, or notice of claimed default as provided in the
Note Purchase Agreement; (v) failure to comply with any provision of the Note
Purchase Agreement, provided that such failure continues for more than 60 days
after notice is delivered to the Bank; (vi) a default under other indebtedness
provided that the aggregate amount of all obligations in respect of such
indebtedness exceeds $15 million; (vii) one or more final, non-appealable
judgments outstanding against the Bank or its subsidiaries for the payment of
money aggregating in excess of $15 million, any one of which has been
outstanding for 45 days and shall not have been discharged in full or stayed;
(viii) any warranty, representation or other statement contained in the Note
Purchase Agreement by the Bank or any of its subsidiaries being false or
misleading in any material respect when made; or (ix) certain events of
bankruptcy, insolvency or reorganization of the Bank or its subsidiaries.
As a result of the Cal Fed Acquisition, the Bank is obligated with respect
to the following outstanding securities of Old California Federal:
10.668% Subordinated Notes Due 1998
California Federal assumed $50 million of 10.668% unsecured senior
subordinated notes which matures on December 22, 1998 (the "10.668%
Subordinated Notes"). At December 31, 1997, the aggregate principal amount of
10.668% Subordinated Notes outstanding was $50 million.
Events of Default under the note agreement governing the 10.668%
Subordinated Notes include, among other things: (i) failure to make any payment
of principal when due; (ii) any failure to make any payment of interest when
due and such payment is not made within ten business days after the date such
payment was due; (iii) failure to comply with certain covenants in the note
agreement provided that such failure continues for more than 60 days after
notice is delivered to the Bank; (iv) the default or any event which, with the
giving of notice or the lapse of time or both, would constitute a default under
any indebtedness of the Bank and cause such indebtedness with an aggregate
principal amount exceeding $15 million to accelerate; and (v) certain events of
bankruptcy, insolvency or reorganization of the Bank.
6 1/2% Convertible Subordinated Debentures Due 2001
In 1986, Cal Fed Inc., Old California Federal's former parent company,
issued $125 million of 6.5% convertible subordinated debentures due February
20, 2001 (the "6 1/2% Convertible Subordinated Debentures"). As a result of a
corporate restructuring in December 1992, Cal Fed Inc. was merged with and into
XCF Acceptance Corporation ("XCF"), a subsidiary of Old California Federal. The
6 1/2% Convertible Subordinated Debentures are redeemable at the option of the
holders on February 20, 2000, at 123% of their principal amount. At December
31, 1997, $2.6 million of the 6 1/2% Convertible Subordinated Debentures were
outstanding. Due to the purchase of all of the Cal Fed stock by FN Holdings in
the Cal Fed Acquisition on January 3, 1997, the common stock conversion feature
has been eliminated.
Events of Default under the indenture governing the 6 1/2% Convertible
Subordinated Debentures include, among other things: (i) any failure to make
any payment of interest when due and such payment is not made within 30 days
after the date such payment was due; (ii) failure to make any payment of
principal when due; (iii) default in the performance, or breach, of any
covenant or warranty in the indenture, provided that such default or breach
continues for more than 60 days after notice is delivered to the Bank; or (iv)
certain events of bankruptcy, insolvency or reorganization of the Bank or its
subsidiaries.
39
<PAGE>
FIRST NATIONWIDE (PARENT) HOLDINGS INC. AND SUBSIDIARIES
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS (CONTINUED)
10% Subordinated Debentures Due 2003
On December 16, 1992, Old California Federal issued $13.6 million of 10.0%
unsecured subordinated debentures due 2003 (the "10% Subordinated Debentures").
During 1996 and 1995, Old California Federal repurchased $0.6 million and $8.7
million, respectively, of the 10% Subordinated Debentures, leaving $4.3 million
outstanding at December 31, 1997.
Events of Default under the indenture governing the 10% Subordinated
Debentures include, among other things: (i) failure to make any payment of
principal when due; (ii) any failure to make any payment of interest when due
and such payment is not made within 30 days after the date such payment was
due; (iii) failure to comply with certain covenants in the indenture; (iv)
failure to comply with certain covenants in the indenture provided that such
failure continues for more than 60 days after notice is delivered to the Bank;
(v) certain events of bankruptcy, insolvency or reorganization of the Bank; or
(vi) the default or any event which, with the giving of notice or lapse of time
or both, would constitute a default under any indebtedness of the Bank and
cause such indebtedness with an aggregate principal amount exceeding $15
million to accelerate.
21. INTEREST RATE SWAP AGREEMENTS
In connection with the FN Acquisition and the Cal Fed Acquisition, the
Bank acquired the rights and assumed the obligations under certain interest
rate swap agreements. Interest rate swap agreements outstanding and their
weighted average rates at December 31, 1997 and 1996 are as follows (dollars in
thousands):
<TABLE>
<CAPTION>
WEIGHTED
NOTIONAL AVERAGE RATE ESTIMATED
PRINCIPAL ---------------------- MATURITY VARIABLE
MATURITY DATE AMOUNT PAY RECEIVE IN YEARS RATE INDEX
- ------------------------ ----------- ---------- --------- ---------- --------------
<S> <C> <C> <C> <C> <C>
1997:
April 1998 ......... $400,000 5.76% 8.38% .26 3 month LIBOR
1996:
April 1998 ......... $400,000 5.64% 8.38% 1.26 3 month LIBOR
</TABLE>
The Bank uses interest rate swap agreements to hedge against interest rate
risk inherent in its FHLB advances. Under the agreements, the Bank receives or
makes payments based on the differential between fixed-rate and variable-rate
interest amounts on the notional amount of the agreement. The notional amounts
of these derivatives do not represent amounts exchanged by the parties and
thus, are not a measure of the Bank's exposure through its use of derivatives.
The Bank pays the variable-rate and receives the fixed-rate under these
agreements. The variable interest rates presented in the tables above are based
on LIBOR. The current LIBOR rates have been assumed implicitly, in the
aforementioned weighted average receive rate, to remain constant throughout the
term of the respective swaps. Any changes in LIBOR interest rates would affect
the variable-rate information disclosed above.
The Bank is exposed to credit-related losses in the event of
nonperformance by the counterparties to these agreements but does not expect
any counterparties to fail their obligations. The Bank deals only with national
investment banking firms and the FHLB of San Francisco.
22. SEGMENT REPORTING
The Company's operations include two primary business segments: mortgage
lending and retail banking. The Company's principal business consists of
operating retail deposit branches and originating and/or purchasing residential
real estate loans. The Company's mortgage lending activities are conducted
through FNMC and include the origination and purchase of residential mortgage
loans for sale to various investors, as well as the servicing of loans for
others.
40
<PAGE>
FIRST NATIONWIDE (PARENT) HOLDINGS INC. AND SUBSIDIARIES
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS (CONTINUED)
Selected financial information by business segment for the three years
ended December 31, 1997, 1996 and 1995 is presented in the following summary
(in thousands):
<TABLE>
<CAPTION>
MORTGAGE RETAIL CONSOLIDATED
LENDING BANKING TOTAL
------------- ------------- -------------
<S> <C> <C> <C>
1997
- -------
Total revenue (1) .......................... $ 288,360 $2,317,096 $2,467,184
Income before income taxes, extraordinary
item and minority interest ............... (27,782) 266,180 238,398
Office premises and equipment, net ......... 26,576 132,773 159,349
Identifiable assets (2) .................... 3,072,219 31,155,325 31,362,156
1996
- -------
Total revenue (3) .......................... $ 212,325 $1,751,852 $1,887,177
Income before income taxes, extraordinary
item and minority interest ............... 5,836 501,711 507,547
Office premises and equipment, net ......... 23,410 76,754 100,164
Identifiable assets (4) .................... 1,634,258 16,264,912 16,635,073
1995
- -------
Total revenue (5) .......................... $ 100,930 $1,166,180 $1,226,818
Income before income taxes, extraordinary
item and minority interest ............... (7,898) 130,348 122,450
Office premises and equipment, net ......... 17,376 76,133 93,509
Identifiable assets (6) .................... 1,383,451 14,425,200 14,666,781
</TABLE>
- ----------
(1) Excludes the elimination of $14.2 million in intercompany servicing fees
and $124.1 million in interest income on intercompany loans.
(2) Excludes the elimination of $20.2 million in deposits maintained with the
Bank and $2.8 billion in intercompany borrowings.
(3) Excludes the elimination of $6.9 million in intercompany servicing fees
and $70.1 million in interest income on intercompany loans.
(4) Excludes the elimination of $23.3 million in deposits maintained with the
Bank and $1.2 billion in intercompany borrowings.
(5) Excludes the elimination of $10.6 million in intercompany servicing fees
and $29.7 million in interest income on intercompany loans.
(6) Excludes the elimination of $13.7 million in deposits maintained with the
Bank and $1.1 billion in intercompany borrowings.
The Company typically reviews the results of operations for the mortgage
banking segment based on that segment's contribution as opposed to its income
before income taxes, extraordinary item and minority interest. The main
difference between the two measures of profitability are that contribution for
the mortgage lending segment includes custodial earnings that are reported in
the retail banking segment when computing net income and that intercompany
interest expense is computed using an internal cost of funds rate instead of a
market rate. The mortgage lending segment's contribution for the years ended
December 31, 1997, 1996 and 1995 was $35.9 million, $54.9 million and $24.5
million, respectively.
41
<PAGE>
FIRST NATIONWIDE (PARENT) HOLDINGS INC. AND SUBSIDIARIES
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS (CONTINUED)
23. COMPREHENSIVE INCOME
The tax effect associated with unrealized gain on securities for the years
ended December 31, 1997, 1996 and 1995 is summarized as follows (dollars in
thousands):
<TABLE>
<CAPTION>
BEFORE-TAX TAX (EXPENSE) NET-OF-TAX
AMOUNT BENEFIT AMOUNT
------------ --------------- -------------
<S> <C> <C> <C>
1997
- -------
Unrealized gains on securities:
Unrealized holding gains arising during the
period ...................................... $ 10,004 $ (1,278) $ 8,726
Less: reclassification adjustments for gains in
net income ............................... (20,146) 2,574 (17,572)
--------- -------- ---------
Other comprehensive income ................ . $ (10,142) $ 1,296 $ (8,846)
========= ======== =========
1996
- -------
Unrealized gains on securities:
Unrealized holding gains arising during the
period ...................................... $ 16,200 $ (1,620) $ 14,580
Less: reclassification adjustments for gains in
net income ............................... (31,572) 3,157 (28,415)
--------- -------- ---------
Other comprehensive income ................ . $ (15,372) $ 1,537 $ (13,835)
========= ======== =========
1995
- -------
Unrealized gains on securities:
Unrealized holding gains arising during the
period ...................................... $ 47,983 $ (4,798) $ 43,185
Less: reclassification adjustments for gains in
net income ............................... (1,305) 130 (1,175)
--------- -------- ---------
Other comprehensive income ................ . $ 46,678 $ (4,668) $ 42,010
========= ======== =========
</TABLE>
Unrealized gains on securities is the only component of other
comprehensive income and accumulated other comprehensive income for the years
ended December 31, 1997, 1996 and 1995.
24. MINORITY INTEREST AND STOCKHOLDER'S EQUITY
(a) 11 1/2% Preferred Stock
In connection with the FN Acquisition, California Federal issued 3,007,300
shares of its 11 1/2% noncumulative perpetual preferred stock ("11 1/2%
Preferred Stock") with a par value of $.01 per share, having a liquidation
preference of $300.7 million. This stock has a stated liquidation value of $100
per share. Costs related to the 11 1/2% Preferred Stock issuance were deducted
from additional paid-in capital. At or after September 1, 1999, the 11 1/2%
Preferred Stock is redeemable at the option of the Bank, in whole or in part,
at $105.75 per share prior to September 1, 2000, and at prices which will
decrease annually thereafter to the stated liquidation value of $100 per share
on or after September 1, 2004, plus declared but unpaid dividends. Dividends
are payable quarterly at an annual rate of 11.50% per share when declared by
the Bank's Board of Directors. Dividends paid on the 11 1/2% Preferred Stock
for each year during 1997 and 1996 totalled $34.6 million.
(b) 10 5/8 5/8% Preferred Stock
In connection with the Cal Fed Acquisition, California Federal assumed Cal
Fed's 10 5/8% preferred stock with liquidation value of $172.5 million (the
"10 5/8% Preferred Stock" and, together with the 11 1/2%
42
<PAGE>
FIRST NATIONWIDE (PARENT) HOLDINGS INC. AND SUBSIDIARIES
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS (CONTINUED)
Preferred Stock, "Bank Preferred Stock"). The 10 5/8% Preferred Stock resulted
in a $172.5 million increase in the Bank's stockholders' equity. Cash dividends
on the 10 5/8% Preferred Stock are noncumulative and are payable at an annual
rate of 10 5/8% per share if, when, and as declared by the Board of Directors
of the Bank. The 10 5/8% Preferred Stock is generally not redeemable prior to
April 1, 1999. The 10 5/8% Preferred Stock is redeemable at the option of the
Bank, in whole or in part, at $105.313 per share on or after April 1, 1999 and
prior to April 1, 2000, and at prices decreasing annually thereafter to the
liquidation preference of $100.00 per share on or after April 1, 2003, plus
declared but unpaid dividends. In addition, in the event of a change of
control, the 10 5/8% Preferred Stock is redeemable at the option of the Bank or
its successor on or after April 1, 1996 and prior to April 1, 1999 in whole,
but not in part, at $114.50 per share. Dividends paid on the 10 5/8% Preferred
Stock during 1997 were $18.3 million.
(c) REIT Preferred Stock
On January 31, 1997, Preferred Capital Corp. issued 20,000,000 shares of
the REIT Preferred Stock for $500 million. The REIT Preferred Stock has a
stated liquidation value of $25 per share, plus declared and unpaid dividends,
if any. The annual cash dividends on the 20,000,000 shares of REIT Preferred
Stock, assuming such dividends are declared by the Board of Directors of
Preferred Capital Corp., are expected to approximate $45.6 million per year. As
long as Preferred Capital Corp. qualifies as a REIT, distributions on the REIT
Preferred Stock will be a dividends-paid deduction by Preferred Capital Corp.
for tax purposes. Dividends paid on the REIT Preferred Stock during 1997 were
$36.6 million, net of the income tax benefit.
(d) Hunter's Glen
Minority interest -- Hunter's Glen represents that portion of
stockholders' equity of FN Holdings attributable to its class B common stock,
which is owned by a limited partnership controlled by the Bank's Chairman of
the Board and Chief Executive Officer.
(e) FN Holdings Preferred Stock
On September 19, 1996, FN Holdings issued 10,000 shares of preferred stock
("FN Holdings Preferred Stock") with a liquidation value of $150 million to a
corporation owned by the Chairman of the Board of the Bank, ("Special Purpose
Corp."). Cash dividends on the FN Holdings Preferred Stock are cumulative and
are payable: (i) in cash at an annual rate of the cost of funds to an affiliate
of FN Holdings under such affiliate's bank credit facility (the "Cost of Funds
Rate") and (ii) in newly issued shares of another series of cumulative
perpetual preferred stock of FN Holdings ("Additional FN Holdings Preferred
Stock") at an annual rate of 2% of the stated liquidation value of the FN
Holdings Preferred Stock, if, when, and as declared by the Board of Directors
of FN Holdings. Dividends on the Additional FN Holdings Preferred Stock are
cumulative and accrue and are payable in shares of Additional FN Holdings
Preferred Stock at an annual rate equal to the Cost of Funds Rate plus 2% of
the stated liquidation value of the Additional FN Holdings Preferred Stock if,
when and as declared by the Board of Directors of FN Holdings. Additional FN
Holdings Preferred Stock will have substantially the same relative rights,
terms and preferences as the FN Holdings Preferred Stock except as set forth
above with respect to the payment of dividends. Dividends on the FN Holdings
Preferred Stock are payable quarterly each year, commencing January 1, 1997,
out of funds legally available therefor. In addition, the payment of dividends
by FN Holdings is subject to certain federal laws applicable to savings and
loan holding companies. The FN Holdings Preferred Stock ranks prior to the
common stock of FN Holdings and to all other classes and series of equity
securities subsequently issued.
The FN Holdings Preferred Stock and the Additional FN Holdings Preferred
Stock are redeemable so long as Special Purpose Corp. is the sole holder
thereof, at any time, and, if Special Purpose Corp. is not the sole holder
thereof, at any time after the fifth anniversary of the issuance of the FN
Holdings
43
<PAGE>
FIRST NATIONWIDE (PARENT) HOLDINGS INC. AND SUBSIDIARIES
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS (CONTINUED)
Preferred Stock, in each case, upon prior written notice, at the option of FN
Holdings, in whole or in part, at a redemption price equal to the stated
liquidation value of $15,000 per share plus any accrued and unpaid dividends.
Upon the redemption of the FN Holdings Preferred Stock by FN Holdings, all
outstanding shares of the Additional FN Holdings Preferred Stock will be
contributed to the capital of FN Holdings, without any payment therefor, and
such shares will be retired and canceled.
(f) Common Stock
In connection with the FN Acquisition and the offering of the 12 1/4%
Senior Notes, First Gibraltar Holdings incorporated Parent Holdings and FN
Holdings to hold 100% of the common stock of First Nationwide. First Gibraltar
Holdings contributed all of its shares of capital stock of the Bank to Parent
Holdings, which contributed such shares to FN Holdings in exchange for 1,000
shares of common stock of FN Holdings.
In 1994, FN Holdings amended its certificate of incorporation to create
800 shares of class A common stock having one vote per share, 200 shares of
class B common stock having .75 votes per share, and 230.3 shares of nonvoting
class C common stock. Parent Holdings exchanged its 1,000 shares of common
stock of FN Holdings for 800 shares of class A common stock.
Pursuant to the terms of an exchange agreement between FN Holdings, the
Bank's Chairman and Parent Holdings (the "Exchange Agreement"), and in
connection with the consummation of the FN Acquisition, FN Holdings issued 100%
of its class C common stock to Parent Holdings for approximately $210.3
million, and the Bank's Chairman acquired 100% of the class B common stock of
FN Holdings in exchange for his 6.25% of the class A common stock of First
Gibraltar Holdings.
As a result of the consummation of the transactions contemplated by the
Exchange Agreement, the Bank's Chairman owns 100% of the class B common stock
of FN Holdings, representing 20% of its voting common stock (representing
approximately 15% of the voting power of its common stock), and Parent Holdings
owns (i) 100% of the class A common stock of FN Holdings, representing 80% of
its voting common stock (representing approximately 85% of the voting power of
its common stock) and (ii) 100% of the class C common stock of FN Holdings. The
class C common stock was redeemed out of distributions from the Bank for $230.3
million plus accrued interest during 1995 and 1996. On December 29, 1995, the
Bank's Chairman transferred his shares of class B common stock to a limited
partnership, Hunter's Glen/Ford Ltd. ("Hunter's Glen"), over which he maintains
control.
There were no dividends or distributions on common stock in 1997.
Dividends and distributions on the Company's common stock during 1996 and 1995
totalled $636,504 and $89,986, respectively.
(g) Payment of Dividends
The terms of the 12 1/2% Senior Notes indenture generally will permit the
Company to make distributions of up to 65% of the consolidated net income of
the Company if, after giving effect to such distribution, (i) the Bank is "well
capitalized" under applicable OTS regulations and (ii) the Consolidated Common
Shareholders' Equity (as defined therein) of the Bank is at least equal to the
Minimum Common Equity Amount (as defined therein). The terms of the 9 1/8%
Senior Subordinated Notes indenture and the 12 1/4% Senior Notes indenture
apply similar restrictions except FN Holdings can make distributions of up to
75% of the consolidated net income of FN Holdings. The Federal thrift laws and
regulations of the Office of Thrift Supervision (the "OTS") limit the Bank's
ability to pay dividends on its preferred or common stock. The Bank generally
may not pay dividends without the consent of the OTS if, after the payment of
the dividends, it would not be deemed "adequately capitalized" under the prompt
corrective action standards of the Federal Deposit Insurance Corporation
Improvement Act of 1991.
As of December 31, 1997, the Bank could pay dividends of $502.4 million
without the consent of the OTS and it could pay dividends of $153.8 million and
still be "well capitalized." As of December 31, 1997,
44
<PAGE>
FIRST NATIONWIDE (PARENT) HOLDINGS INC. AND SUBSIDIARIES
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS (CONTINUED)
FN Holdings and the Company could pay dividends of $254.0 million and $168.2
million, respectively, without violating the most restrictive terms of their
respective indentures.
25. REGULATORY CAPITAL OF THE BANK
The Bank is subject to various regulatory capital requirements
administered by the Federal banking agencies. Failure to meet minimum capital
requirements can initiate certain mandatory -- and possibly additional
discretionary -- actions by regulators that, if undertaken, could have a direct
material effect on the Company's and the Bank's consolidated financial
statements. Under capital adequacy guidelines and the regulatory framework for
prompt corrective action, the Bank must meet specific capital guidelines that
involve quantitative measures of the Bank's assets, liabilities, and certain
off-balance-sheet items as calculated under regulatory accounting practices.
The Bank's capital amounts and classification are also subject to qualitative
judgments by the regulators about components, risk weightings, and other
factors.
Quantitative measures established by regulation to insure capital adequacy
require the Bank to maintain minimum amounts and ratios (set forth in the table
below) of tangible and leverage capital to adjusted total assets, and of Tier 1
and total risk-based capital to risk-weighted assets. Management believes, as
of December 31, 1997, that the Bank meets all capital adequacy requirements to
which it is subject.
As of December 31, 1997 and 1996, the most recent notification from the
OTS categorized the Bank as well capitalized under the regulatory framework for
prompt corrective action. To be categorized as well capitalized, the Bank must
maintain minimum leverage, Tier 1 risk-based and total risk-based ratios as set
forth in the table. There are no conditions or events since the most recent
notification that management believes have changed the institution's category.
45
<PAGE>
FIRST NATIONWIDE (PARENT) HOLDINGS INC. AND SUBSIDIARIES
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS (CONTINUED)
The Bank's actual capital amounts and ratios as of December 31, 1997 and
1996 are also presented in the table (dollars in thousands):
<TABLE>
<CAPTION>
ACTUAL FOR CAPITAL ADEQUACY TO BE WELL CAPITALIZED
--------------------------- -------------------------- --------------------------
AS A % AS A % AS A %
1997 AMOUNT OF ASSETS AMOUNT OF ASSETS AMOUNT OF ASSETS
- -------------------------------------- ------------- ----------- ------------ ----------- ------------- ----------
<S> <C> <C> <C> <C> <C> <C>
Stockholders' equity of the
Bank per financial statements $2,260,044
Minority interest in Preferred
Capital Corp. ....................... 500,000
Net unrealized holding gains ......... (35,162)
----------
2,724,882
Adjustments for tangible and
leverage capital:
Goodwill litigation asset ........... (100,000)
Intangible assets ................... (675,927)
Non-allowable minority
interest in Preferred
Capital Corp. ...................... (71,099)
Non-qualifying MSRs ................. (53,670)
Non-includable subsidiaries ......... (53,582)
Excess deferred tax asset ........... (55,000)
----------
Total tangible capital ............... $1,715,604 5.65% $ 455,457 1.50% N/A N/A
========== ==========
Total leverage capital ............... $1,715,604 5.65% $ 910,915 3.00% $1,518,191 5.00%
========== ========== ===========
Tier 1 risk-based capital ............ $1,715,604 10.14% N/A N/A $1,015,036 6.00%
========== ===========
Adjustments for risk-based
capital:
Qualifying subordinated debt
debentures ......................... 93,847
General loan loss allowance ......... 214,217
Assets required to be
deducted ........................... (5,648)
----------
Total risk-based capital ............ $2,018,020 11.93% $1,353,382 8.00% $1,691,727 10.00%
========== ========== ===========
</TABLE>
46
<PAGE>
FIRST NATIONWIDE (PARENT) HOLDINGS INC. AND SUBSIDIARIES
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS (CONTINUED)
<TABLE>
<CAPTION>
ACTUAL FOR CAPITAL ADEQUACY TO BE WELL CAPITALIZED
--------------------------- ------------------------- -------------------------
AS A AS A AS A
1996 AMOUNT % OF ASSETS AMOUNT % OF ASSETS AMOUNT % OF ASSETS
- ---------------------------------------- ------------- ------------- ----------- ------------- ------------ ------------
<S> <C> <C> <C> <C> <C> <C>
Stockholders' equity of the Bank
per financial statements .............. $1,463,862
Net unrealized holding gains ........... (46,219)
----------
1,417,643
Adjustments for tangible and
leverage capital:
Intangible assets ..................... (140,564)
Non-qualifying MSRs ................... (42,369)
Non-includable subsidiaries ........... (6,001)
Excess deferred tax asset ............. (68,000)
----------
Total tangible capital ................. $1,160,709 7.17% $242,828 1.50% N/A N/A
========== ========
Total leverage capital ................. $1,160,709 7.17% $485,655 3.00% $ 809,426 5.00%
========== ======== ==========
Tier 1 risk-based capital .............. $1,160,709 11.50% N/A N/A $ 605,843 6.00%
========== ==========
Adjustments for risk-based capital:
Qualifying subordinated debt
debentures ............................ 89,907
General loan loss allowance ............ 127,708
Assets required to be deducted ......... (2,882)
----------
Total risk-based capital ............... $1,375,442 13.62% $807,791 8.00% $1,009,738 10.00%
========== ========= ==========
</TABLE>
26. OTHER NONINTEREST INCOME AND EXPENSE
Other noninterest income and expense amounts are summarized as follows for
the years ended December 31, 1997, 1996 and 1995 (in thousands):
<TABLE>
<CAPTION>
1997 1996 1995
---------- ---------- ----------
<S> <C> <C> <C>
Other noninterest income:
Disbursement float ............................ $ 8,169 $ 5,369 $ 2,622
Other ......................................... 14,827 12,820 8,759
-------- ------- -------
$ 22,996 $18,189 $11,381
======== ======= =======
Other noninterest expense:
Telephone ..................................... $ 15,932 $11,727 $ 7,652
Insurance and surety bonds .................... 5,642 3,811 4,005
Postage ....................................... 8,070 7,141 6,856
Printing, copying and office supplies ......... 9,230 6,549 6,096
Employee travel ............................... 8,745 6,112 5,244
Clerical and other losses ..................... 11,410 2,636 4,345
Other ......................................... 54,853 42,135 27,131
-------- ------- -------
$113,882 $80,111 $61,329
======== ======= =======
</TABLE>
47
<PAGE>
FIRST NATIONWIDE (PARENT) HOLDINGS INC. AND SUBSIDIARIES
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS (CONTINUED)
27. INCOME TAXES
Total income tax expense (benefit) for the years ended December 31, 1997,
1996 and 1995 was allocated as follows (in thousands):
<TABLE>
<CAPTION>
1997 1996 1995
---------- ------------- -------------
<S> <C> <C> <C>
Income before income taxes, extraordinary item and
minority interest ............................... $41,315 $ (75,807) $ (57,185)
Extraordinary item ............................... -- (176) 221
Net unrealized holding (loss) gain on securities
available for sale .............................. 17 (1,921) 7,055
------- --------- ---------
$41,332 $ (77,904) $ (49,909)
======= ========= =========
</TABLE>
Income tax expense (benefit) attributable to income before income taxes,
extraordinary item and minority interest for the years ended December 31, 1997,
1996 and 1995 consisted of (in thousands):
<TABLE>
<CAPTION>
1997 1996 1995
---------- ------------- ------------
<S> <C> <C> <C>
Federal
Current .......... $ 4,687 $ 10,900 $ 285
Deferred ......... -- (125,000) (69,000)
------- ---------- ---------
4,687 (114,100) (68,715)
------- ---------- ---------
State and local
Current .......... 36,628 38,293 11,530
Deferred ......... -- -- --
------- ---------- ---------
36,628 38,293 11,530
------- ---------- ---------
$41,315 $ (75,807) $ (57,185)
======= ========== =========
</TABLE>
48
<PAGE>
FIRST NATIONWIDE (PARENT) HOLDINGS INC. AND SUBSIDIARIES
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS (CONTINUED)
The consolidated income tax expense (benefit) for the years ended December
31, 1997, 1996 and 1995 differs from the amounts computed by applying the
statutory federal corporate tax rate of 35% for 1997, 1996 and 1995 to income
before income taxes, extraordinary item and minority interest (in thousands):
<TABLE>
<CAPTION>
1997 1996 1995
-------------- ------------- -------------
<S> <C> <C> <C>
Computed "expected" income tax expense ..................... $ 83,439 $ 177,642 $ 42,858
Increase (decrease) in taxes resulting from:
State income taxes, net of federal income tax
benefit ................................................. 23,808 24,890 7,495
Tax exempt income ......................................... (5) (584) (2,636)
Amortization of excess cost over fair value of net
assets acquired ......................................... 16,959 33 --
Adjustment to prior year's tax expense .................... -- 595 (1,675)
Unrealized holding (loss) gain on securities
available for sale recognized for tax purposes .......... (12,234) (3,703) 15,937
REIT preferred dividend ................................... (14,682) -- --
Other ..................................................... 2,762 1,214 (1,747)
Adjustment to deferred tax asset fully offset by
valuation allowance:
Temporary differences from acquisitions ................ (115,633) 6,196 --
Adjustment to deferred tax asset ....................... (17,130) 2,821 7,644
Change in the beginning-of-the-year balance of the
valuation allowance for deferred tax assets
allocated to income tax expense ......................... 74,031 (284,911) (125,061)
----------- ---------- ----------
$ 41,315 $ (75,807) $ (57,185)
=========== ========== ==========
</TABLE>
The significant components of deferred income tax (benefit) expense
attributable to income before income taxes, extraordinary item and minority
interest for the years ended December 31, 1997, 1996 and 1995 are as follows
(in thousands):
<TABLE>
<CAPTION>
1997 1996 1995
------------- -------------- -------------
<S> <C> <C> <C>
Deferred tax expense (exclusive of the effects of
other components listed below) ............................. $ 58,732 $ 150,894 $ 56,061
Adjustments to deferred tax asset fully offset by
valuation allowance ........................................ (132,763) 9,017 --
Increase (decrease) in beginning-of-the-year balance
of the valuation allowance for deferred tax assets ......... 74,031 (284,911) (125,061)
---------- ---------- ----------
$ -- $ (125,000) $ (69,000)
========== ========== ==========
</TABLE>
49
<PAGE>
FIRST NATIONWIDE (PARENT) HOLDINGS INC. AND SUBSIDIARIES
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS (CONTINUED)
The tax effects of temporary differences that give rise to significant
portions of the deferred tax assets and deferred tax liabilities at December
31, 1997 and 1996 are presented below (in thousands):
<TABLE>
<CAPTION>
1997 1996
------------- -------------
<S> <C> <C>
Deferred tax assets:
Net operating loss carryforwards .......................... $ 750,193 $ 737,815
Foreclosed real estate .................................... 6 312
Loans receivable .......................................... 60,835 4,774
Securities ................................................ -- 95
Miscellaneous accruals .................................... 31,520 11,851
Accrued liabilities ....................................... 86,617 30,017
Deferred interest ......................................... 5,369 6,440
State taxes ............................................... 38,704 15,429
Other intangible assets ................................... 39,848 35,476
Alternative minimum tax credit and investment tax
credit carryforwards .................................... 14,911 13,324
Other ..................................................... 5,732 3,165
---------- ----------
Total gross deferred tax assets ......................... 1,033,735 858,698
Less valuation allowance ................................ (600,161) (526,130)
---------- ----------
Net deferred tax assets ................................. 433,574 332,568
---------- ----------
Deferred tax liabilities:
Change in accounting method ............................... 30,000 23,362
Securities ................................................ 8,166 --
Other intangible assets ................................... 73,872 48,280
Purchase accounting adjustments ........................... 18,137 29,881
FHLB stock ................................................ 52,337 12,688
Unrealized gains on securities available for sale ......... 5,152 1,640
Goodwill litigation ....................................... 58,450
Other ..................................................... 65,279 24,357
---------- ----------
Net deferred tax liabilities ............................. 311,393 140,208
---------- ----------
Net deferred tax assets and liabilities .................. $ 122,181 $ 192,360
========== ==========
</TABLE>
The net change in the total valuation allowance for the year ended
December 31, 1997 was an increase of $74.0 million which is attributable to
income before income taxes and minority interest.
Based on a historical earnings trend since the consummation of the FN
Acquisition and future earnings expectations, management changed its judgment
about the realizability of the Company's net deferred tax assets and recognized
a deferred tax benefit (i.e., reduced valuation allowance) of $125.0 million in
the second quarter of 1996 and $69.0 million in the fourth quarter of 1995.
Management believes that the realization of the resulting deferred tax asset is
more likely than not, based upon the expectation that the Company will generate
the necessary amount of taxable income in future periods.
At December 31, 1997, if the Company had filed a consolidated federal
income tax return on behalf of itself (as common parent), and its subsidiaries
for each year since the formation of the Company, it would have had regular and
alternative minimum tax net operating losses for federal income tax purposes of
approximately $2.1 billion and $878 million, respectively, which expire in 2004
through 2010.
If for any reason the Company was to deconsolidate from the Mafco Group
(see note 33, "Subsequent Event"), only the amount of the net operating loss
carryovers of the Company not already
50
<PAGE>
FIRST NATIONWIDE (PARENT) HOLDINGS INC. AND SUBSIDIARIES
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS (CONTINUED)
utilized by the Mafco Group would be available to offset the taxable income
subsequent to the date of deconsolidation. If the Company had deconsolidated as
of December 31, 1997, the Company would have had approximately $970 million of
regular net operating loss carryforwards. It cannot be predicted to what extent
the Mafco Group will utilize the net operating losses of the Company in the
future or the amount, if any, of net operating loss carryforwards that the
Company may have upon deconsolidation. Additionally, the net operating loss
carryovers are subject to review and potential disallowance, in whole or in
part, by the Internal Revenue Service.
On August 20, 1996, the Small Business Job Protection Act of 1996 (the
"Act") was enacted into law generally effective for tax years beginning after
1995. One provision of the Act repealed the Section 593 reserve method of
accounting for bad debts by thrift institutions which are treated as large
banks. Another provision of the Act requires the Company to take into income
the balance of its post-1987 bad debt reserves over a six year period beginning
in 1996 subject to a two-year deferral if certain residential loan tests are
satisfied. As of December 31, 1995, the Company had approximately $279 million
of post-1987 bad debt reserves that are subject to recapture. The Company has
fully provided for the tax related to this recapture.
In accordance with SFAS No. 109 "Accounting for Income Taxes," a deferred
tax liability has not been recognized for the base year reserves of the
Company. The base year reserves are generally the balance of the tax bad debt
reserve as of December 31, 1987 reduced proportionately for reductions in the
Company's loan portfolio since that date. At December 31, 1997, the amount of
those reserves was approximately $152 million. The amount of the unrecognized
deferred tax liability at December 31, 1997 was approximately $53 million.
Pursuant to the Act, circumstances that may require an accrual of this
unrecorded tax liability are a failure to meet the definition of a "bank" for
federal income tax purposes, dividend payments in excess of tax earnings and
profits, and other distributions, dissolution, liquidation or redemption of
stock, excluding preferred stock meeting certain conditions.
28. EMPLOYEE BENEFIT PLANS
Post-retirement Benefits Plan
The Bank provides certain post-retirement medical benefits to certain
eligible employees and their dependents through age 65. In general, early
retirement is age 55 with 10 years of service. Retirees participating in the
plans generally pay Consolidated Omnibus Budget Reduction Act premiums for the
period of time they participate.
The estimated cost for post-retirement health care benefits has been
accrued on an actuarial net present value basis.
The following table sets forth the plans' combined liabilities included in
the Bank's consolidated balance sheet at December 31, 1997 and 1996 (in
thousands):
<TABLE>
<CAPTION>
1997 1996
--------- ---------
<S> <C> <C>
Accumulated post-retirement benefit obligation:
Retirees ................................................................. $2,228 $2,212
Eligible active plan participants ........................................ 554 471
Ineligible active plan participants ...................................... 1,343 733
------ ------
Accuulated post-retirement benefit obligation (other liabilities) ....... $4,125 $3,416
====== ======
</TABLE>
The projected benefit obligation at December 31, 1997 and 1996 was
determined using a discount rate of 7.5%. At December 31, 1997, an increase of
1% in the health care cost trend rate would cause the accumulated
post-retirement benefit obligation to increase by $.4 million, and the service
and interest costs to increase by less than $.1 million.
51
<PAGE>
FIRST NATIONWIDE (PARENT) HOLDINGS INC. AND SUBSIDIARIES
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS (CONTINUED)
Net periodic post-retirement benefits cost for the years ended December
31, 1997 and 1996 included the following components (in thousands):
<TABLE>
<CAPTION>
1997 1996
------ -------
<S> <C> <C>
Service cost -- benefits attributable to service during the current
period ................................................................. $364 $301
Interest cost on accumulated post-retirement benefit obligation ......... 498 231
Amortization of loss .................................................... -- 19
---- ----
Periodic post-retirement benefit cost ................................... $862 $551
==== ====
</TABLE>
The initial health care cost trend rate for medical benefits in 1997 was
9%, the average trend rate was 7.25% and the ultimate trend rate was 5.5%,
which will be reached in eight years. Similar trend rates were utilized for the
1996 valuation.
In connection with the SFFed Acquisition, the Bank assumed SFFed's defined
benefit pension plan which covered substantially all employees of San Francisco
Federal. The SFFed benefit plan was frozen effective September 30, 1995 and no
additional benefits accrued after such time.
The following table sets forth the funded status and amounts recognized in
the Bank's consolidated balance sheet for its defined benefit pension plan (in
thousands):
<TABLE>
<CAPTION>
1997 1996
---------- ----------
<S> <C> <C>
Actuarial present value of benefit obligations:
Accumulated benefit obligations, including vested benefits of
$40,995 in 1997 and $21,720 in 1996 .................................. $40,995 $21,720
======= =======
Projected benefit obligations ......................................... $40,995 $21,720
Plan assets at fair value ............................................. 42,292 23,085
------- -------
Excess (deficiency) of plan assets over projected benefit obligations 1,297 1,365
Unrecognized net gain (loss) .......................................... 5,506 5,414
------- -------
Accrued (prepaid) pension liability .................................. $ 4,209 $ 4,049
======= =======
</TABLE>
52
<PAGE>
FIRST NATIONWIDE (PARENT) HOLDINGS INC. AND SUBSIDIARIES
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS (CONTINUED)
Net periodic expense for 1997, 1996 and 1995 included the following
components (in thousands):
<TABLE>
<CAPTION>
1997 1996 1995
----------- ----------- -----
<S> <C> <C> <C>
Service cost benefit earned during the period ........... $ -- $ -- $--
Interest cost on projected benefit obligations .......... 2,796 2,143 --
Expected return on plan assets .......................... (3,306) (2,349) --
Net amortization and deferral ........................... (91) 1,278 --
Curtailment gain ........................................ (404) -- --
-------- -------- ---
Total net periodic pension expense ..................... $ (1,005) $ 1,072 $--
======== ======== ===
</TABLE>
Assumptions used in computing the funded status were:
<TABLE>
<CAPTION>
1997 1996 1995
---------- ---------- -----
<S> <C> <C> <C>
Discount rate ........................................... 7.75% 8.50% --%
Rate of increase in future compensation levels .......... -- -- --
Long-term rate of return on assets ...................... 9.00% 8.50% --
</TABLE>
In the Cal Fed Acquisition, the Bank assumed sponsorship of the Old
California Federal defined benefit plan which was frozen effective May 31, 1993
and at which time, all accrued benefits became 100% vested. Effective April 30,
1997, the SFFed benefit plan was merged with and into the Old California
Federal benefit plan. The fair value of assets transferred was $23.6 million.
Investment Plan
The Bank offers a defined contribution plan which is available to
substantially all employees with at least one year of employment. Employee
contributions are voluntary. The plan provides for deferral of up to 12% of
qualifying compensation of plan participants. The Bank's matching contribution
was a maximum of 100% of up to the first 3% of employee deferrals. The annual
discretionary employer profit sharing contribution is a maximum of 3% of
eligible compensation. It can be declared at any level in the range from 0% to
3%. Employees vest immediately in their own deferrals and any employer profit
sharing contributions and vest in employer matching contributions based on
completed years of service. The Bank's contributions to such plan totalled $3.8
million, $2.3 million, and $2.8 million for the years ended December 31, 1997,
1996 and 1995, respectively.
During 1996, defined contribution plans assumed in the SFFed and Home
Federal Acquisitions were merged with and into Old FNB's defined contribution
plan. The fair value of assets transferred was $14.4 million.
In the Cal Fed Acquisition, contributions made to Old California Federal's
defined contribution plan became 100% vested at the date of acquisition.
Effective December 31, 1997, the Old California Federal contribution plan was
merged with and into the Bank's plan. The fair value of assets transferred was
$33.6 million.
29. INCENTIVE PLAN
Effective October 1, 1995, FN Holdings entered into a management incentive
plan ("Incentive Plan") with certain executive officers of the Bank
("Participants"). Awards under the Incentive Plan will be made in the form of
performance units. Each performance unit entitles Incentive Plan Participants
to receive cash and/or stock options ("Bonuses") based upon the Participants'
vested interest in a bonus pool. Generally, the Incentive Plan provides for the
payment of Bonuses, on a quarterly basis, to the Participants upon the
occurrence of certain events. Bonuses vest at 20% per year beginning October 1,
1995 and are subject to a cap of $50 million.
53
<PAGE>
FIRST NATIONWIDE (PARENT) HOLDINGS INC. AND SUBSIDIARIES
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS (CONTINUED)
Bonuses are recorded by a charge to compensation and employee benefits and
an increase to other liabilities. During 1997 and 1996, accruals relative to
the Incentive Plan totalled $12.4 million and $35.6 million, respectively.
30. SPECIAL SAIF ASSESSMENT
On September 30, 1996, the Economic Growth and Regulatory Paperwork
Reduction Act ("Act") of 1996 was enacted. The Act included a special
assessment ("Special SAIF Assessment") related to the recapitalization of the
SAIF, which was levied based on a rate of 65.7 cents per $100 of SAIF-insured
domestic deposits held as of March 31, 1995. As a result of the Act, the
Company recorded a pre-tax charge of $60.1 million on September 30, 1996. The
1997 SAIF deposit premiums declined to 6.42 cents per $100 of SAIF-insured
deposits per year from the prior rate of 23 cents.
31. COMMITMENTS AND CONTINGENCIES
In the ordinary course of business the Company has commitments and
contingent liabilities that are not reflected in the accompanying consolidated
financial statements. The Company, through FNMC, enters into financial
instruments with off-balance sheet risk through the origination and sale of
mortgage loans and the management of the related loss exposure caused by
fluctuations in interest rates. These financial instruments include commitments
to extend credit and purchase loans (mortgage loan pipeline) and mandatory and
optional forward commitments to sell loans.
The following is a summary of the Company's pipeline of loans in process
and mandatory forward commitments to sell loans at December 31, 1997 (in
thousands):
<TABLE>
<S> <C>
Commitments to originate and purchase loans ......... $1,718,729
Mandatory commitments to sell loans ................. 1,368,123
</TABLE>
The Company's pipeline of loans in process include loan applications in
various stages of processing. Until all required documentation is provided and
underwritten, there is no credit risk to the Company. There is no interest rate
risk until a rate commitment is extended by the Company to a borrower. Some of
these commitments will ultimately be denied by the Company or declined by the
borrower and therefore, the commitment amounts do not necessarily represent
future cash requirements.
Loans in process for which rates were committed to the borrower totalled
approximately $691.7 million at December 31, 1997. On a daily basis, the
Company determines what percentage of the portfolio of loans in process for
which rate commitments have been extended to a borrower to hedge. Both the
anticipated percentage of the pipeline that is expected to fund and the
inherent risk position of the portfolio are considered in making this
determination.
Mandatory and optional delivery forward commitments to sell loans are used
by the Company to hedge its interest rate exposure from the time a loan has a
committed rate to the time the loan is sold. These instruments involve varying
degrees of credit and interest rate risk. Credit risk on these instruments is
controlled through credit approvals, limits and monitoring procedures. To the
extent that counterparties are not able to fulfill forward commitments, the
Company is at risk for any fluctuations in the market value of the mortgage
loans and locked pipeline.
Realized gains and losses on mandatory and optional-delivery forward
commitments are recognized in the period settlement occurs. Unrealized gain and
losses on mandatory and optional-delivery forward commitments are included in
the lower of cost or market valuation adjustment to mortgage loans held for
sale.
On September 28, 1994, the Company entered into an agreement with FNMA
pursuant to which FNMA provided credit enhancements for certain bond-financed
real estate projects originated by Old
54
<PAGE>
FIRST NATIONWIDE (PARENT) HOLDINGS INC. AND SUBSIDIARIES
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS (CONTINUED)
FNB. The agreement requires that the Company pledge to FNMA collateral in the
form of certain eligible securities which are held by a third party trustee.
The collateral requirement varies based on the balance of the bonds
outstanding, losses incurred (if any), as well as other factors. At December
31, 1997 and 1996, the Company had pledged as collateral certain securities
available for sale with a carrying value of $78.2 million and $91.6 million.
At December 31, 1997 and 1996, mortgage-backed securities available for
sale with a carrying value of $28.8 million and $33.4 million, respectively,
were pledged to FNMA associated with the sales of certain securitized
multi-family loans.
At December 31, 1997, mortgage-backed securities available for sale and
mortgage-backed securities held to maturity of $4.1 billion and $1.3 billion,
respectively, were pledged as collateral for various obligations as discussed
in notes 8, 9, 19 and 20. At December 31, 1996, mortgage-backed securities
available for sale and mortgage-backed securities held to maturity of $936.2
million and $1.4 billion, respectively, were pledged as collateral for various
obligations.
At December 31, 1997, $11.2 billion in residential loans were pledged as
collateral for FHLB advances.
At December 31, 1997 and 1996, loans receivable included approximately
$7.5 billion and $2.3 billion, respectively, of loans that had the potential to
experience negative amortization.
The Bank is the plaintiff in a claim against the United States in the
lawsuit, California Federal Bank v. United States (the "Cal Fed Litigation"),
which it assumed in the Cal Fed Acquisition. In connection with this lawsuit,
the Company recorded as an asset the estimated after-tax cash recovery from the
Cal Fed Litigation that will inure to the Company, net of amounts payable to
holders of certain publicly-traded rights in any such recovery (the "Goodwill
Litigation Asset"). In connection with the Cal Fed Acquisition, 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
Company's consolidated balance sheet as of December 31, 1997.
In addition, the Company is involved in various claims and lawsuits
arising in the ordinary course of business. Management is of the opinion that
the effect, if any, of these claims and lawsuits is not material to the
Company.
55
<PAGE>
FIRST NATIONWIDE (PARENT) HOLDINGS INC. AND SUBSIDIARIES
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS (CONTINUED)
32. FAIR VALUE OF FINANCIAL INSTRUMENTS
The following table presents the carrying amounts and fair values of the
Company's financial instruments at December 31, 1997 and 1996 (in thousands):
<TABLE>
<CAPTION>
1997 1996
-------------------------------- -------------------------------
CARRYING FAIR CARRYING FAIR
VALUE VALUE VALUE VALUE
-------------- --------------- -------------- --------------
<S> <C> <C> <C> <C>
Financial Assets:
Cash and cash equivalents .............. $ 412,311 $ 412,311 $ 269,869 $ 269,869
Securities available for sale .......... 813,085 813,085 542,019 542,019
Securities held to maturity ............ 58,299 58,299 4,272 4,287
Mortgage-backed securities
available for sale ................... 5,076,598 5,076,598 1,598,652 1,598,652
Mortgage-backed securities held to
maturity ............................. 1,337,877 1,373,289 1,621,662 1,653,847
Loans held for sale .................... 1,483,466 1,493,867 825,316 825,316
Loans receivable, net .................. 19,424,410 19,786,805 10,212,583 10,428,934
Investment in FHLB ..................... 468,191 468,191 220,962 220,962
Accrued interest receivable ............ 188,203 188,203 106,034 106,034
Mortgage servicing rights .............. 536,703 673,975 423,692 531,726
Financial Liabilities:
Deposits ............................... 16,202,605 16,224,399 8,501,883 8,514,099
Securities sold under agreements to
repurchase ........................... 1,842,442 1,842,737 1,583,387 1,585,964
Borrowings:
Gross ................................. 11,232,931 11,427,457 5,370,285 5,453,811
Interest rate swap
agreements (1) ...................... (401) (2,954) (5,391) (13,763)
----------- ----------- ----------- -----------
Total borrowings ..................... $11,232,530 $11,424,503 $ 5,364,894 $ 5,440,048
=========== =========== =========== ===========
Off-balance sheet net unrealized
gains (losses):
Commitments to originate loans ......... $ 1,652 $ (503)
Forward commitments to sell loans (7,099) 1,022
Principal-only swap agreements ......... 13,520 112
</TABLE>
- ----------
(1) Designated as a hedge against FHLB advances.
The carrying amounts in the table are included in the accompanying
consolidated balance sheet under the indicated captions, except for off-balance
sheet net unrealized gains (losses).
The following summary presents a description of the methodologies and
assumptions used to estimate the fair value of the Company's financial
instruments. Much of the information used to determine fair value is highly
subjective. When applicable, readily available market information has been
utilized. However, for a significant portion of the Company's financial
instruments, active markets do not exist. Therefore, considerable judgment was
required in estimating fair value for certain items. The subjective factors
include, among other things, the estimated timing and amount of cash flows,
risk characteristics, and interest rates, all of which are subject to changes.
56
<PAGE>
FIRST NATIONWIDE (PARENT) HOLDINGS INC. AND SUBSIDIARIES
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS (CONTINUED)
Cash and cash equivalents: Cash and cash equivalents are valued at their
carrying amounts included in the consolidated statement of financial condition,
which are reasonable estimates of fair value due to the relatively short period
to maturity of the instruments.
Securities and mortgage-backed securities: Securities and mortgage-backed
securities are valued at quoted market prices where available. If quoted market
prices are not available, fair values are based on quoted market prices of
comparable instruments.
Loans held for sale: Loans held for sale are valued based on quoted market
prices for mortgage-backed securities backed by similar loans.
Loans receivable, net: Fair values are estimated for loans in groups with
similar financial and risk characteristics. Loans are segregated by type
including residential, multi-family and commercial. Each loan type is further
segmented into fixed and variable interest rate terms and by performing and
non-performing categories in order to estimate fair values.
For performing residential mortgage loans, fair value is estimated by
discounting contractual cash flows adjusted for prepayment estimates using
discount rates based on secondary market sources. The fair value of performing
commercial and multi-family loans is calculated by discounting scheduled
principal and interest cash flows through the estimated maturity using
estimated market discount rates that reflect the credit and interest rate risk
inherent in the respective loan type.
Fair value for non-performing loans is based on discounting estimated cash
flows using a rate commensurate with the risk associated with the estimated
cash flows, or underlying collateral values, where appropriate.
Investment in FHLB: Since no secondary market exists for FHLB stock and
the stock is bought and sold at par by FHLB, fair value of these financial
instruments approximates the carrying value.
Accrued interest: The carrying amounts of accrued interest approximate
their fair values.
Mortgage servicing rights: The fair value of mortgage servicing rights is
based on market prices for comparable mortgage servicing contracts, when
available, or alternatively a valuation model that calculates the present value
of future net servicing income. In using the valuation model, the Company
incorporates assumptions that market participants would use in estimating
future net servicing income, which include estimates of the cost of servicing,
the discount rate, mortgage escrow earnings rate, an inflation rate, ancillary
income, prepayment speeds and default rates and losses.
Deposits: The fair values of demand deposits, passbook accounts, money
market accounts, and other deposits immediately withdrawable, by definition,
approximate carrying values for the respective financial instruments. For fixed
maturity deposits, the fair value was estimated by discounting expected cash
flows by the current offering rates of deposits with similar terms and
maturities.
Securities sold under agreements to repurchase: The fair value of
securities sold under agreements to repurchase is estimated using a discounted
cash flow analysis based on interest rates currently offered on such repurchase
agreements with similar maturities.
Borrowings: The fair value of borrowings, other than FHLB advances, is
estimated using discounted cash flow analyses based on current incremental
rates for similar borrowing arrangements. The fair values of FHLB advances are
estimated using a discounted cash flow analysis based on interest rates
currently offered on advances with similar maturities. Fair values of the
Company's interest rate swap agreements, which effectively hedge certain of the
Company's FHLB advances, are based on the net present value of the estimated
interest due to the Company as compared to the estimated interest due to the
counterparties of the agreements.
Off-balance sheet financial instruments: Fair values of the Company's
commitments to originate loans is estimated using the fees currently charged to
enter into similar agreements, taking into account
57
<PAGE>
FIRST NATIONWIDE (PARENT) HOLDINGS INC. AND SUBSIDIARIES
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS (CONTINUED)
the remaining terms of the agreements and the present creditworthiness of the
counterparties. For fixed-rate commitments, fair value also considers the
difference between current levels of interest rates and the committed rates.
Fair values of forward commitments to sell loans are determined using current
estimated replacement costs. Fair values of the Company's floors are based on
quoted market prices for comparable floors. To calculate the value of the
principal-only swaps, dealer bids are obtained on the underlying principal-only
swaps. The change in the market price of a principal-only swap from the date of
inception to the termination date is applied to the remaining principal-only
swap.
33. SELECTED QUARTERLY FINANCIAL DATA (UNAUDITED)
The following table presents selected quarterly financial data for the
years ended December 31, 1997 and 1996 (in thousands) (unaudited):
<TABLE>
<CAPTION>
QUARTER ENDED
----------------------------------------------------------------
DECEMBER 31, SEPTEMBER 30, JUNE 30, MARCH 31, TOTAL
1997 1997 1997 1997 1997
-------------- --------------- ------------- ------------- ---------------
<S> <C> <C> <C> <C> <C>
Total interest income ................... $ 530,809 $ 531,303 $ 527,837 $ 512,751 $ 2,102,700
Total interest expense .................. (383,286) (380,268) (375,468) (359,395) (1,498,417)
---------- ---------- ---------- ---------- ------------
Net interest income ..................... 147,523 151,035 152,369 153,356 604,283
Provision for loan losses ............... (19,950) (19,950) (19,950) (19,950) (79,800)
---------- ---------- ---------- ---------- ------------
Net interest income after provision
for loan losses ........................ 127,573 131,085 132,419 133,406 524,483
Total noninterest income ................ 108,351 94,846 82,448 78,839 364,484
Total noninterest expense ............... (170,443) (154,758) (171,644) (153,724) (650,569)
---------- ---------- ---------- ---------- ------------
Income before income taxes,
extraordinary item and minority
interest ............................... 65,481 71,173 43,223 58,521 238,398
Income taxes ............................ (9,888) (12,208) (9,025) (10,194) (41,315)
---------- ---------- ---------- ---------- ------------
Income before extraordinary item
and minority interest .................. 55,593 58,965 34,198 48,327 197,083
Extraordinary item ...................... -- -- -- -- --
---------- ---------- ---------- ---------- ------------
Income before minority interest ......... 55,593 58,965 34,198 48,327 197,083
Minority interest ....................... (33,701) (35,250) (31,061) (31,839) (131,851)
---------- ---------- ---------- ---------- ------------
Net income available to
common stockholder ................... $ 21,892 $ 23,715 $ 3,137 $ 16,488 $ 65,232
========== ========== ========== ========== ============
</TABLE>
58
<PAGE>
FIRST NATIONWIDE (PARENT) HOLDINGS INC. AND SUBSIDIARIES
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS (CONTINUED)
<TABLE>
<CAPTION>
QUARTER ENDED
----------------------------------------------------------------
DECEMBER 31, SEPTEMBER 30, JUNE 30, MARCH 31, TOTAL
1996 1996 1996 1996 1996
-------------- --------------- ------------- ------------- -------------
<S> <C> <C> <C> <C> <C>
Total interest income ................... $ 299,386 $ 308,137 $ 318,100 $ 308,176 $1,233,799
Total interest expense .................. (208,515) (219,453) (220,205) (200,121) (848,294)
---------- ---------- ---------- ---------- ----------
Net interest income ..................... 90,871 88,684 97,895 108,055 385,505
Provision for loan losses ............... (9,900) (9,900) (9,900) (9,900) (39,600)
---------- ---------- ---------- ---------- ----------
Net interest income after provision
for loan losses ........................ 80,971 78,784 87,995 98,155 345,905
Total noninterest income ................ 57,917 75,870 154,652 364,939 653,378
Total noninterest expense ............... (112,090) (157,443) (103,982) (118,221) (491,736)
---------- ---------- ---------- ---------- ----------
Income before income taxes,
extraordinary item and minority
interest ............................... 26,798 (2,789) 138,665 344,873 507,547
Income taxes ............................ (5,641) (527) 110,978 (29,003) 75,807
---------- ---------- ---------- ---------- ----------
Income before extraordinary item
and minority interest .................. 21,157 (3,316) 249,643 315,870 583,354
Extraordinary item ...................... -- (1,586) -- -- (1,586)
---------- ---------- ---------- ---------- ----------
Income before minority interest ......... 21,157 (4,902) 249,643 315,870 581,768
Minority interest ....................... (17,656) (8,802) (58,610) (76,123) (161,191)
---------- ---------- ---------- ---------- ----------
Net income available to
common stockholder ................... $ 3,501 $ (13,704) $ 191,033 $ 239,747 $ 420,577
========== ========== ========== ========== ==========
</TABLE>
34. CONDENSED PARENT COMPANY FINANCIAL INFORMATION
The following represents condensed balance sheets of the Company (parent
company only) at December 31, 1997 and 1996 (in thousands):
<TABLE>
<CAPTION>
1997 1996
----------- -----------
<S> <C> <C>
Assets
Investment in FN Holdings .............................................. $843,507 $919,217
Other assets and deferred charges ...................................... 15,077 19,582
-------- --------
Total assets .......................................................... $858,584 $938,799
======== ========
Liabilities, Minority Interest and Stockholder's Equity
Senior notes ........................................................... $455,000 $455,000
Discount on senior notes ............................................... (3,907) (4,651)
Accrued interest payable ............................................... 11,843 11,849
Other liabilities ...................................................... 484 514
-------- --------
Total liabilities ..................................................... 463,420 462,712
Minority interest -- FN Holdings preferred stock ....................... 25,680 150,792
Minority interest -- Hunter's Glen ..................................... 163,568 153,684
Total stockholder's equity ............................................. 205,916 171,611
-------- --------
Total liabilities, minority interest and stockholder's equity ......... $858,584 $938,799
======== ========
</TABLE>
59
<PAGE>
FIRST NATIONWIDE (PARENT) HOLDINGS INC. AND SUBSIDIARIES
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS (CONTINUED)
The following represents parent company only condensed statements of
income for the years ended December 31, 1997, 1996 and 1995 (in thousands):
<TABLE>
<CAPTION>
1997 1996 1995
----------- ------------ ----------
<S> <C> <C> <C>
Dividends received from FN Holdings ........................ $ 56,876 $ 57,902 $ 29,185
-------- -------- --------
56,876 57,902 29,185
Interest expense ........................................... 57,613 40,494 --
Noninterest expense ........................................ 1,850 1,167 --
-------- -------- --------
59,463 41,661 --
Income before equity in undistributed net income of
FN Holdings ............................................... (2,587) 16,241 29,185
Equity in undistributed net income of FN Holdings .......... 104,493 519,621 117,833
-------- -------- --------
Income before income taxes and minority interest ........... 101,906 535,862 147,018
Income tax benefit ......................................... (5,833) (2,676) --
-------- -------- --------
Income before minority interest ............................ 107,739 538,538 147,018
Minority interest -- Hunter's Glen ......................... 29,716 113,146 24,554
Minority interest -- FN Holdings preferred stock
dividends ................................................. 12,791 4,815 --
-------- -------- --------
Net income ................................................ $ 65,232 $420,577 $122,464
======== ======== ========
</TABLE>
60
<PAGE>
FIRST NATIONWIDE (PARENT) HOLDINGS INC. AND SUBSIDIARIES
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS (CONTINUED)
The following represents parent company only statements of cash flows for
the years ended December 31, 1997, 1996 and 1995 (in thousands):
<TABLE>
<CAPTION>
1997 1996 1995
--------------- ------------- -------------
<S> <C> <C> <C>
Cash flows from operating activities:
Net income ............................................ $ 65,232 $ 420,577 $ 122,464
Adjustments to reconcile net income to net cash
provided by operating activities:
Amortization of discount on senior notes ............ 744 523 --
Amortization of deferred issuance costs ............. 1,825 1,167 --
Decrease (increase) other assets and deferred
charges ............................................ 876 (2,332) --
Increase (decrease) in other liabilities ............ 1,775 (2,163) --
(Decrease) increase in accrued interest payable ..... (6) 11,849 --
Minority interest -- FN Holdings preferred stock 12,791 4,815 --
Minority interest -- Hunter's Glen .................. 29,716 113,146 24,554
Equity in undistributed net income of FN
Holdings ........................................... (104,493) (519,621) (117,833)
----------- ---------- ----------
Net cash provided by operating activities ........... 8,460 27,961 29,185
----------- ---------- ----------
Cash flows provided by investing activities:
Redemption of FN Holdings' class C common
stock ............................................... -- 124,670 60,801
----------- ---------- ----------
Net cash provided by investing activities ........... -- 124,670 60,801
----------- ---------- ----------
Cash flows used in financing activities:
Proceeds from issuance of senior notes ................ -- 434,083 --
Capital contribution .................................. 49 1,819 --
Capital distribution .................................. -- (434,083) --
Dividends ............................................. (8,509) (154,450) (89,986)
----------- ---------- ----------
Net cash used in financing activities ............... (8,460) (152,631) (89,986)
----------- ---------- ----------
Net change in cash and cash equivalents ............. -- -- --
Cash and cash equivalents at beginning of year ...... -- -- --
----------- ---------- ----------
Cash and cash equivalents at end of year ............ $ -- $ -- $ --
=========== ========== ==========
</TABLE>
Noncash investing and financing activities:
During 1996, Parent Holdings received a $46.8 million loan receivable from
FN Holdings in exchange for the redemption of and dividends on FN Holdings'
class C common stock in amounts totalling $44.8 million and $2 million,
respectively. Parent Holdings distributed such loan receivable in the form of a
dividend to an affiliate.
35. SUBSEQUENT EVENTS (UNAUDITED)
GSAC Acquisition
On February 4, 1998, Auto One completed the GSAC Acquisition in a
transaction accounted for under the purchase method of accounting. GSAC engaged
in sub-prime automobile financing activities
61
<PAGE>
FIRST NATIONWIDE (PARENT) HOLDINGS INC. AND SUBSIDIARIES
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS (CONTINUED)
and provided loan processing, funding and loan servicing primarily in the
states of Texas, Louisiana and Georgia. The purchase price paid was $22.5
million and the issuance of 250 shares of Auto One's common stock. The
estimated fair value of assets acquired was approximately $102.9 million
consisting of approximately 7,400 loans.
Golden State Merger
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"). Following the
Golden State Merger, the combined parent company, Golden State, will have 135
to 145 million common shares outstanding and will continue to be a publicly
traded company. As part of the Golden State Merger Agreement, Glendale Federal
will be merged with and into California Federal.
The terms of the Golden State Merger Agreement provide for Golden State
shareholders to retain ownership of approximately 55% to 58% of the merged
entity, based on the average trading price of Golden State shares during a
period preceding the close of the transaction, as determined after distribution
of Golden State's share of certain litigation interests. The remaining
ownership of the merged entity will be retained by the principal shareholders
of California Federal, Gerald J. Ford, chairman and chief executive officer of
the Bank, and MacAndrews & Forbes Holdings Inc. As part of the Golden State
Merger Agreement, the owners of Parent Holdings will receive, after a final
resolution of the Cal Fed Litigation, additional Golden State stock.
The Golden State Merger will be accounted for as a purchase. Golden
State's assets, liabilities and other items will be adjusted to their estimated
fair value at the closing date of the merger.
As a result of the Golden State Merger, Parent Holdings and its
subsidiaries will deconsolidate from the Mafco Group. Therefore, the amount of
net operating loss carryovers available to offset the taxable income of Parent
Holdings and its subsidiaries will be reduced. See note 27.
As of December 31, 1997, Glendale Federal had total assets of
approximately $16.0 billion and deposits of $9.5 billion, and operated 181
branches and 26 loan offices in California. During 1997, Golden State entered
into agreements to acquire RedFed Bancorp Inc. ("RedFed") and its federal
savings bank subsidiary, Redlands Federal Bank, in a tax-free stock-for-stock
merger, and CENFED Financial Corporation ("CENFED") and its federal savings
bank subsidiary, CenFed Bank, in a tax-free exchange of shares. At December 31,
1997, RedFed and CENFED had total assets of approximately $1.0 billion and $2.2
billion, respectively, and deposits of $.8 billion and $1.2 billion,
respectively. On a pro forma basis at December 31, 1997, Golden State would
have consolidated assets of $19.2 billion and deposits of $11.9 billion.
Further, on a pro forma basis, the merged entities (including RedFed and CENFED
would have consolidated assets of $51.9 billion and deposits of $28.1 billion
at December 31, 1997.
The Golden State Merger is subject to regulatory and stockholder approval
and is expected to close during the third quarter of 1998.
62
<PAGE>
Exhibit 99.1(a)(ii)
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.
1
<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.
2
<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.
3
<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.
4
<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)
5
<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.
6
<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 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 six month
period 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
7
<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.
8
<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.
9
<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).
10
<PAGE>
Exhibit 99.1(b)
UNAUDITED PRO FORMA CONDENSED COMBINED FINANCIAL STATEMENTS
The following Unaudited Pro Forma Condensed Combined Financial
Statements have been prepared to reflect the Mergers, the Refinancing (assuming
that (i) 100% of the FNH Notes are acquired in connection with the Refinancing,
and (ii) all outstanding shares of Cal Fed Preferred Stock are acquired in
connection with the Refinancing or are subsequently redeemed by Cal Fed), the
RedFed Merger and the CENFED Merger. The Mergers, the RedFed Merger and the
CENFED Merger will each be accounted for as a purchase. The recorded assets,
liabilities and other items of RedFed will be recorded in Golden State's
consolidated financial statements at their estimated fair value at the closing
date of the RedFed Merger. Golden State's assets, liabilities and other items
will be adjusted to their estimated fair value at the closing date of the
Mergers and combined with the historical book values of the assets and
liabilities of Parent Holdings. Applicable income tax effects of such
adjustments are included as a component of the combined entity's deferred tax
asset or liability. The difference between the estimated fair value of the
assets, liabilities and other items, adjusted as discussed above, and the
purchase price, is recorded as goodwill.
The Unaudited Pro Forma Condensed Combined Financial Statements reflect
preliminary purchase accounting adjustments in compliance with generally
accepted accounting principles. Estimates relating to the fair value of certain
assets, liabilities, and other events requiring recognition have been made as
more fully described in the Notes to the Unaudited Pro Forma Condensed Combined
Financial Statements. Actual adjustments will be made on the basis of actual
assets, liabilities and other items as of the respective closing dates of the
Mergers and the RedFed Merger on the basis of appraisals and evaluations and,
therefore, actual fair value amounts are expected to differ from those
reflected in the Unaudited Pro Forma Condensed Combined Financial Statements.
The Unaudited Pro Forma Condensed Combined Statement of Financial
Condition assumes that each of the proposed mergers and the Refinancing were
consummated on June 30, 1998. However, for purposes of computing the purchase
price, the daily volume weighted average price of Golden State common stock and
the Litigation Tracking Warrants (trademark) for the three days ended September
10, 1998 was used, as such prices are considered to provide more relevant
information to investors. See Note B. The Unaudited Pro Forma Condensed
Combined Statements of Operations for the six months ended June 30, 1998 and
for the year ended December 31, 1997 assume that each of the proposed mergers
and the Refinancing were consummated on January 1, 1997. For purposes of pro
forma presentation, Golden State's consolidated statements of operations have
been recast to conform to the calendar year end used by Parent Holdings.
The Unaudited Pro Forma Condensed Combined Financial Statements should be
read in conjunction with the consolidated historical financial statements and
the related notes thereto of Golden State and Parent Holdings, which are
included or incorporated by reference herein.
The Unaudited Pro Forma Condensed Combined Financial Statements presented
are not necessarily indicative of the combined financial condition or results
of the future operations of the combined entity or the actual results that
would have been achieved had the proposed mergers been consummated prior to the
periods indicated.
All terms used but not defined elsewhere herein have meanings ascribed
to them in Golden State's Proxy Statement dated July 15, 1998 for its special
meeting of stockholders on August 17, 1998.
1
<PAGE>
GOLDEN STATE BANCORP
UNAUDITED PRO FORMA CONDENSED COMBINED
STATEMENT OF FINANCIAL CONDITION
AS OF JUNE 30, 1998
(IN THOUSANDS)
<TABLE>
<CAPTION>
PARENT PRO FORMA REFINANCING
HOLDINGS GOLDEN STATE ADJUSTMENTS BEFORE ADJUSTMENTS PRO FORMA
(HISTORICAL) (HISTORICAL) REDFED(1) (NOTE D) REFINANCING (NOTE I) COMBINED
-------------- -------------- ------------- ------------- ------------- --------------- --------------
<S> <C> <C> <C> <C> <C> <C> <C>
ASSETS
Cash and amounts due
from banks ............... $ 345,921 $ 311,278 $ 54,553 $ -- $ 711,752 ($ 45,002) $ 666,750
Federal funds sold and
assets purchased
under resale
agreements ............... -- 172,000 -- -- 172,000 -- 172,000
Other investments ......... 879,071 128,349 9,407 -- 1,016,827 -- 1,016,827
Loans receivable, net ..... 20,351,922 13,774,580 910,718 6,807 35,044,027 -- 35,044,027
Mortgage-backed
securities, net .......... 9,180,282 2,375,363 10,242 6,962 11,572,849 -- 11,572,849
Real estate held for
sale or investment ....... -- 6,327 1,372 -- 7,699 -- 7,699
Real estate acquired in
settlement of loans ...... 64,892 37,393 6,716 -- 109,001 -- 109,001
Investment in capital
stock of FHLB, at
cost ..................... 540,127 300,339 9,734 -- 850,200 -- 850,200
Mortgage servicing
assets ................... 669,056 243,314 -- 54,243 966,613 -- 966,613
Goodwill and other
intangible assets ........ 656,177 180,463 48,767 61,875 947,282 -- 947,282
Other assets .............. 1,362,577 587,331 24,934 184,446 2,159,288 (42,915) 2,154,956
28,625
9,958
----------- ----------- ---------- ----------- ----------- ------------ ------------
$34,050,025 $18,116,737 $1,076,443 $ 314,333 $53,557,538 ($ 49,334) $53,508,204
=========== =========== ========== =========== =========== ============ ===========
LIABILITIES, MINORITY INTEREST
AND STOCKHOLDERS' EQUITY
Deposits .................. $16,044,288 $10,698,265 $ 859,589 $ 2,588 $27,604,730 $ -- $27,604,730
Securities sold under
agreements to
repurchase ............... 2,861,604 175,551 -- -- 3,037,155 -- 3,037,155
Borrowings from the
FHLB ..................... 10,993,707 5,613,458 70,079 1,194 16,678,438 -- 16,678,438
Other borrowings .......... 1,745,884 63,936 8,693 993 1,819,506 (1,366,465) 2,446,960
2,000,000
(6,081)
Other liabilities ......... 729,599 326,850 1,262 770,560 1,828,271 (19,579) 1,821,920
13,228
Minority interest ......... 1,213,967 -- -- (227,671) 986,296 (486,458) 499,838
Stockholders' equity....... 460,976 1,238,677 136,820 (233,331) 1,603,142 (183,979) 1,419,163
----------- ----------- ---------- ----------- ----------- ------------ -----------
$34,050,025 $18,116,737 $1,076,443 $ 314,333 $53,557,538 ($ 49,334) $53,508,204
=========== =========== ========== =========== =========== ============ ===========
</TABLE>
- ----------
(1) Represents the RedFed Merger, accounted for as a purchase, together with
related pro forma purchase accounting adjustments and the repurchase by
Golden State of shares of Golden State Common Stock in the open market
in an amount equal to the number of shares to be issued in the RedFed
Merger.
See accompanying Notes to Unaudited Pro Forma Condensed Combined Financial
Statements.
2
<PAGE>
GOLDEN STATE BANCORP
UNAUDITED PRO FORMA CONDENSED COMBINED STATEMENT OF OPERATIONS
FOR THE SIX MONTHS ENDED JUNE 30, 1998
(IN THOUSANDS, EXCEPT PER SHARE DATA)
<TABLE>
<CAPTION>
PARENT
HOLDINGS GOLDEN STATE CENFED
(HISTORICAL) (HISTORICAL) AND REDFED(1)
-------------- -------------- ---------------
<S> <C> <C> <C>
Interest income ......................$1,091,523 $581,626 $85,711
Interest expense ..................... 781,402 354,291 49,855
---------- -------- -------
Net interest income ................. 310,121 227,335 35,856
Provision for loan losses ............ 20,000 (3,721) 804
---------- -------- -------
Net interest income after
provision for loan losses .......... 290,121 231,056 35,052
Other income:
Fee income .......................... 71,363 48,357 5,358
Gain on sale of loans, net .......... 36,124 796 --
Gain on sale of
mortgage-backed securities,
net ................................ -- 4,430 725
Other income, net ................... 62,685 212 108
---------- -------- -------
Total other income ................. 170,172 53,795 6,191
Other expenses:
Compensation and employee
benefits ........................... 127,620 70,449 19,568
Occupancy expense, net .............. 41,406 16,887 2,606
Regulatory insurance ................ 5,054 4,015 586
Advertising and promotion ........... 9,914 10,434 385
Furniture, fixtures and
equipment .......................... -- 8,109 --
Other general and
administrative expenses ............ 100,632 40,269 7,626
---------- -------- -------
Total general and
administrative expenses ........... 284,626 150,163 30,771
Restructuring charges ............... -- 4,452 4,244
Legal expense--goodwill
lawsuit ............................ -- 9,068 --
Operations of real estate held
for sale or investment ............. -- 46 --
Operations of real estate
acquired in settlement of
loans .............................. (5,138) (4,329) 2,396
Amortization of goodwill and
other intangible assets ............ 23,229 5,052 4,880
---------- -------- -------
Total other expenses ............... 302,717 164,452 42,291
Earnings before income tax
provision (benefit) ................. 157,576 120,399 (1,048)
Income tax provision (benefit) ....... (223,818) 49,078 178
---------- -------- -------
Earnings before minority interest..... 381,394 71,321 (1,226)
Minority interest .................... 118,660 -- --
---------- -------- -------
Net earnings ........................ $ 262,734 $71,321 ($ 1,226)
========== ======== =======
Net earnings applicable to
common shareholders:
Net earnings ........................ $ 262,734 $71,321 ($ 1,226)
Dividends declared on
preferred stock .................... -- (5,053) --
---------- -------- -------
$ 262,734 $66,268 ($ 1,226)
========== ======== =======
<CAPTION>
PRO FORMA REFINANCING
ADJUSTMENTS BEFORE ADJUSTMENTS PRO FORMA
(NOTE D) REFINANCING (NOTE I) COMBINED
----------------- ------------- ------------------ -------------
<S> <C> <C> <C> <C>
Interest income ...................... ($ 5,129) $1,753,731 ($ 1,238) $1,752,493
Interest expense ..................... (1,616) 1,183,932 (78,030) 1,177,175
70,455
818
---------- ---------- ---------- ----------
Net interest income ................. (3,513) 569,799 5,519 575,318
Provision for loan losses ............ -- 17,083 -- 17,083
---------- ---------- ---------- ----------
Net interest income after
provision for loan losses .......... (3,513) 552,716 5,519 558,235
Other income:
Fee income .......................... (4,068) 121,010 -- 121,010
Gain (loss) on sale of loans,
net ................................ -- 36,920 -- 36,920
Gain on sale of
mortgage-backed securities,
net ................................ -- 5,155 -- 5,155
Other income, net ................... -- 63,005 -- 63,005
---------- ---------- ---------- ----------
Total other income ................. (4,068) 226,090 -- 226,090
<PAGE>
Other expenses:
Compensation and employee
benefits ........................... -- 217,637 -- 217,637
Occupancy expense, net .............. -- 60,899 -- 60,899
Regulatory insurance ................ -- 9,655 -- 9,655
Advertising and promotion ........... -- 20,733 -- 20,733
Furniture, fixtures and
equipment .......................... -- 8,109 -- 8,109
Other general and
administrative expenses ............ -- 148,527 (4,336) 146,945
2,754
---------- ---------- ---------- ----------
Total general and
administrative expenses ........... -- 465,560 (1,582) 463,978
Restructuring charges ............... -- 8,696 -- 8,696
Legal expense--goodwill
lawsuit ............................ -- 9,068 -- 9,068
Operations of real estate held
for sale or investment ............. -- 46 -- 46
Operations of real estate
acquired in settlement of
loans .............................. -- (7,071) -- (7,071)
Amortization of goodwill and
other intangible assets ............ 2,063 35,224 -- 35,224
---------- ---------- ---------- ----------
Total other expenses ............... 2,063 511,523 (1,582) 509,941
Earnings before income tax
provision (benefit) ................. (9,644) 267,283 7,101 274,384
Income tax provision (benefit) ....... 46,572 (2) (127,990) 2,982 (4) (125,008)
---------- ---------- ---------- ----------
Earnings before minority interest..... (56,216) 395,273 4,119 399,392
Minority interest .................... (79,134)(3) 39,526 (26,456)(5) 13,070
---------- ---------- ---------- ----------
Net earnings ........................ $ 22,918 $ 355,747 $ 30,575 (6) $ 386,322 (8)
========== ========== ============ ==========
Net earnings applicable to
common shareholders:
Net earnings ........................ $ 22,918 $ 355,747 $ 30,575 $ 386,322
Dividends declared on
preferred stock .................... -- (5,053) -- (5,053)
---------- ---------- ---------- ----------
$ 22,918 $ 350,694 $ 30,575 $ 381,269
========== ========== ========== ==========
</TABLE>
See accompanying Notes to Unaudited Pro Forma Condensed Combined Financial
Statements.
3
<PAGE>
<TABLE>
<CAPTION>
PARENT PRO FORMA REFINANCING
HOLDINGS GOLDEN STATE CENFED ADJUSTMENTS BEFORE ADJUSTMENTS PRO FORMA
(HISTORICAL) (HISTORICAL) AND REDFED(1) (NOTE D) REFINANCING (NOTE I) COMBINED
-------------- -------------- --------------- ------------- ------------- ------------- ----------
<S> <C> <C> <C> <C> <C> <C> <C>
Earnings per share:
Basic ................... $4.63 (7) $ 1.31 $ 3.15 $ 3.42 (8)
Diluted ................. $4.63 (7) $ 1.03 $ 2.70 $ 2.93 (8)
ighted average
shares outstanding:
Common shares ........... 56,714 (7) 54,124 111,344 111,344
Common shares
and dilutive
potential
common shares ......... 56,714 (7) 74,378 131,598 131,598
</TABLE>
- ----------
(1) Represents the CENFED Merger and the RedFed Merger, each accounted for as
a purchase, together with related pro forma purchase accounting
adjustments and the repurchase by Golden State of Golden State Common
Stock in the open market in an amount equal to the number of shares to be
issued in the RedFed Merger.
(2) The adjustment to income tax expense includes adjustments for
nondeductible goodwill amortization and to adjust Parent Holdings'
historical effective tax rate to 42%.
(3) Represents the exchange of Hunter's Glen minority interest in FNH for
Golden State Common Stock and reflects a 42% effective tax rate related
to the REIT Preferred Stock.
(4) Represents tax expense at 42% related to pro forma Refinancing
adjustments.
(5) Represents historical dividends paid related to the Cal Fed Preferred
Stock.
(6) Does not reflect the extraordinary loss that will be realized as a result
of the Refinancing. See Note I.
(7) Per share information for Parent Holdings reflects the number of shares
of Golden State common stock issued to FGH and Hunter's Glen in
connection with the Mergers.
(8) Proforma combined net earnings for the six months ended June 30, 1998
includes the recognition of a $250 million tax benefit, representing a
reduction in the valuation allowance established against Parent Holdings'
deferred tax asset. If this $250 million tax benefit is not considered,
net earnings for the six months ended June 30, 1998 would be as follows
(in thousands):
Parent Holdings historical .............................. $ 12,734
Proforma before Refinancing ............................. 105,747
Proforma combined ....................................... 136,322
These net earnings would yield the following earnings per share:
Basic Fully Diluted
----- -------------
Parent Holdings historical ............... $0.22 $0.22
Proforma before Refinancing .............. 0.90 0.80
Proforma combined ........................ 1.18 1.04
See accompanying Notes to Unaudited Pro Forma Condensed Combined Financial
Statements.
4
<PAGE>
GOLDEN STATE BANCORP
UNAUDITED PRO FORMA CONDENSED COMBINED STATEMENT OF OPERATIONS
FOR THE YEAR ENDED DECEMBER 31, 1997
(IN THOUSANDS, EXCEPT PER SHARE DATA)
<TABLE>
<CAPTION>
PARENT
HOLDINGS GOLDEN STATE CENFED
(HISTORICAL) (HISTORICAL) AND REDFED(1)
-------------- -------------- ---------------
<S> <C> <C> <C>
Interest income .............. $2,127,490 $1,121,021 $236,033
Interest expense ............. 1,498,417 711,807 147,953
---------- ---------- --------
Net interest income ......... 629,073 409,214 88,080
Provision for loan losses..... 79,800 12,015 7,139
---------- ---------- --------
Net interest income
after provision for
loan losses ................ 549,273 397,199 80,941
Other income:
Fee income .................. 143,919 96,867 13,904
Gain (loss) on sale of
loans, net ................. 24,721 (363) 16
Gain (loss) on sale of
mortgage-backed
securities, net ............ -- (226) 2,029
Other income, net ........... 171,054 1,217 1,249
---------- ---------- --------
Total other income.......... 339,694 97,495 17,198
Other expenses:
Compensation and
employee benefits .......... 256,448 124,693 29,450
Occupancy expense,
net ........................ 81,914 33,468 12,832
Regulatory insurance......... 10,680 8,949 2,433
Advertising and
promotion .................. 20,186 22,708 2,146
Furniture, fixtures and
equipment .................. -- 13,649 --
Other general and
administrative
expenses ................... 235,492 71,221 9,719
---------- ---------- --------
Total general and
administrative
expenses .................. 604,720 274,688 56,580
SAIF special
assessment ................. -- (3,153) --
Legal expense--
goodwill lawsuit ........... -- 28,517 --
Operations of real
estate held for sale
or investment .............. -- (387) --
Operations of real
estate acquired in
settlement of loans......... (3,304) 4,021 2,745
Acquisition and
restructuring charges -- 2,487 397
Amortization of
goodwill and other
intangible assets .......... 49,153 7,056 9,733
---------- ---------- --------
Total other
expenses .................. 650,569 313,229 69,455
Earnings before income
tax provision ............... 238,398 181,465 28,684
Income tax provision ......... 41,315 76,851 10,063
---------- ---------- --------
Earnings before minority
interest .................... 197,083 104,614 18,621
Minority interest ............ 131,851 -- --
---------- ---------- --------
Net earnings ................ $ 65,232 $ 104,614 $ 18,621
========== ========== ========
<PAGE>
<CAPTION>
PRO FORMA REFINANCING
ADJUSTMENTS BEFORE ADJUSTMENTS PRO FORMA
(NOTE D) REFINANCING (NOTE I) COMBINED
----------------- ------------- ------------------ -------------
<S> <C> <C> <C> <C>
Interest income .............. $ (10,256) $3,474,288 $ (2,475) $3,471,813
Interest expense ............. (3,231) 2,354,946 (156,060) 2,341,432
140,910
1,636
----------- ---------- ----------- ----------
Net interest income ......... (7,025) 1,119,342 11,039 1,130,381
Provision for loan losses..... -- 98,954 -- 98,954
----------- ---------- ----------- ----------
Net interest income
after provision for
loan losses ................ (7,025) 1,020,388 11,039 1,031,427
Other income:
Fee income .................. (8,136) 246,554 -- 246,554
Gain (loss) on sale of
loans, net ................. -- 24,374 -- 24,374
Gain (loss) on sale of
mortgage-backed
securities, net ............ -- 1,803 -- 1,803
Other income, net ........... -- 173,520 -- 173,520
----------- ---------- ----------- ----------
Total other income.......... (8,136) 446,251 -- 446,251
Other expenses:
Compensation and
employee benefits .......... -- 410,591 -- 410,591
Occupancy expense,
net ........................ -- 128,214 -- 128,214
Regulatory insurance......... -- 22,062 -- 22,062
Advertising and
promotion .................. -- 45,040 -- 45,040
Furniture, fixtures and
equipment .................. -- 13,649 -- 13,649
Other general and
administrative
expenses ................... -- 316,432 (8,672) 313,267
5,507
----------- ---------- ----------- ----------
Total general and
administrative
expenses .................. -- 935,988 (3,165) 932,823
SAIF special
assessment ................. -- (3,153) -- (3,153)
Legal expense--
goodwill lawsuit ........... -- 28,517 -- 28,517
Operations of real
estate held for sale
or investment .............. -- (387) -- (387)
Operations of real
estate acquired in
settlement of loans......... -- 3,462 -- 3,462
Acquisition and
restructuring charges -- 2,884 -- 2,884
Amortization of
goodwill and other
intangible assets .......... 4,125 70,067 -- 70,067
----------- ---------- ----------- ----------
Total other
expenses .................. 4,125 1,037,378 (3,165) 1,034,213
Earnings before income
tax provision ............... (19,286) 429,261 14,204 443,465
Income tax provision ......... 73,089 (2) 201,318 5,966 (4) 207,284
----------- ---------- ----------- ----------
Earnings before minority
interest .................... (92,375) 227,943 8,238 236,181
Minority interest ............ (42,047)(3) 89,804 (52,912)(5) 36,892
----------- ---------- ----------- ----------
Net earnings ................ $ (50,328) $ 138,139 $ 61,150 (6) $ 199,289
=========== ========== ============= ==========
</TABLE>
See accompanying Notes to Unaudited Pro Forma Condensed
Combined Financial Statements.
5
<PAGE>
<TABLE>
<CAPTION>
PARENT
HOLDINGS GOLDEN STATE CENFED
(HISTORICAL) (HISTORICAL) AND REDFED(1)
-------------- -------------- ---------------
<S> <C> <C> <C>
Net earnings (loss)
applicable to common
shareholders:
Net earnings (loss) ......... $ 65,232 $ 104,614 $ 18,621
Dividends declared on
preferred stock ............ -- (10,110) --
Premium on exchange
of preferred stock
for common stock ........... -- (241) --
---------- ---------- --------
$ 65,232 $ 94,263 $ 18,621
========== ========== ========
Earnings (loss) per
share:
Basic ....................... $1.15 (7) $ 1.87
Diluted ..................... $1.15 (7) $ 1.50
Weighted average shares
outstanding;
Common shares ............... 56,714 (7) 50,424
Common shares and
dilutive potential
common shares .............. 56,714 (7) 69,432
<CAPTION>
PRO FORMA REFINANCING
ADJUSTMENTS BEFORE ADJUSTMENTS PRO FORMA
(NOTE D) REFINANCING (NOTE I) COMBINED
------------- ------------- ------------- ------------
<S> <C> <C> <C> <C>
Net earnings (loss)
applicable to common
shareholders:
Net earnings (loss) ......... $ (50,328) $ 138,139 $ 61,150 $ 199,289
Dividends declared on
preferred stock ............ -- (10,110) -- (10,110)
Premium on exchange
of preferred stock
for common stock ........... -- (241) -- (241)
---------- --------- ------- ----------
$ (50,328) $ 127,788 $ 61,150 $ 188,938
========== ========= ======= ==========
Earnings (loss) per
share:
Basic ....................... $ 1.19 $ 1.76
Diluted ..................... $ 1.09 $ 1.58
Weighted average shares
outstanding;
Common shares ............... 107,138 107,138
Common shares and
dilutive potential
common shares .............. 126,146 126,146
</TABLE>
- ----------
(1) Represents the CENFED Merger and the RedFed Merger, each accounted for as
a purchase, together with related pro forma purchase accounting
adjustments and the repurchase by Golden State of shares of Golden State
Common Stock in the open market in an amount equal to the number of
shares to be issued in the RedFed Merger.
(2) The adjustment to income tax expense includes adjustments for
nondeductible goodwill amortization and to adjust Parent Holdings'
historical effective tax rate to 42%.
(3) Represents the exchange of Hunter's Glen minority interest in FNH for
Golden State Common Stock and reflects a 42% effective tax rate related
to the REIT Preferred Stock.
(4) Represents tax expense at 42% related to pro forma refinancing
adjustments.
(5) Represents historical dividends paid related to the Cal Fed Preferred
Stock.
(6) Does not reflect the extraordinary loss that will be realized as a result
of the Refinancing. See Note I.
(7) Per share information for Parent Holdings reflects the number of shares
of Golden State common stock issued to FGH and Hunter's Glen in
connection with the Mergers.
See accompanying Notes to Unaudited Pro Forma Condensed Combined Financial
Statements.
6
<PAGE>
GOLDEN STATE BANCORP
NOTES TO UNAUDITED PRO FORMA
CONDENSED COMBINED FINANCIAL STATEMENTS
AS OF JUNE 30, 1998 AND FOR THE SIX MONTH AND TWELVE MONTH PERIODS
ENDED JUNE 30, 1998 AND DECEMBER 31, 1997, RESPECTIVELY
NOTE A: BASIS OF PRESENTATION
The Unaudited Pro Forma Condensed Combined Statement of Financial
Condition combines the unaudited pro forma condensed combined statement of
financial condition of RedFed and the historical consolidated statements of
financial condition of Parent Holdings and Golden State as of June 30, 1998, as
if the Mergers, the RedFed Merger and the Refinancing were consummated on
June 30, 1998. The Unaudited Pro Forma Condensed Combined Statement of
Operations for the six months ended June 30, 1998 combines the unaudited pro
forma condensed combined statements of operations of CENFED and RedFed and the
historical unaudited consolidated statements of operations of Parent Holdings
and Golden State for the six months ended June 30, 1998, as if the Mergers, the
RedFed Merger, the CENFED Merger and the Refinancing were consummated on
January 1, 1997. The Unaudited Pro Forma Condensed Combined Statement of
Operations for the year ended December 31, 1997 combines the pro forma
condensed combined statements of operations of CENFED and RedFed and the
historical statements of operations of Parent Holdings and Golden State as if
the Mergers, the RedFed Merger, the CENFED Merger and the Refinancing were
consummated on January 1, 1997. Certain items in the unaudited pro forma
condensed combined financial statements related to Parent Holdings have been
reclassified to conform to the Golden State presentation.
The Mergers will be accounted for using the "purchase" method of
accounting. Golden State is treated as the acquired corporation for financial
reporting purposes. Golden State's assets, liabilities, and other items will be
adjusted to their estimated fair value at the closing date of the Mergers and
combined with the historical book values of the assets and liabilities of
Parent Holdings. Applicable income tax effects of such adjustments are included
as a component of the combined entity's deferred tax asset/liability. The
difference between the estimated fair value of the assets, liabilities and
other items, adjusted as discussed above, and the purchase price, is recorded
as goodwill.
For purposes of the Unaudited Pro Forma Condensed Combined Financial
Statements, estimates relating to the fair value of certain assets, liabilities
and other items have been made as of June 30, 1998. Actual adjustments will be
made on the basis of actual assets, liabilities and other items as of the date
of the respective mergers on the basis of appraisals and evaluations made as of
that time and, therefore, actual fair value amounts are expected to differ from
those reflected in the Unaudited Pro Forma Condensed Combined Financial
Statements.
It should be noted that management's expectations of cost savings and
other operating efficiencies are not reflected in the Unaudited Pro Forma
Condensed Combined Financial Statements. Further, it should be noted that net
interest income may increase or decrease from historical levels based upon
changes in the shape of the yield curve and current market conditions. The pro
forma financial data do not necessarily reflect the results of operations or
the financial position of Golden State that actually would have resulted had
the Mergers, the RedFed Merger, the CENFED Merger and the Refinancing occurred
at the dates indicated, or project the results of operations or financial
position of Golden State for any future date or period.
NOTE B: PURCHASE PRICE
The terms of the Agreement call for Golden State Stockholders to own 58
percent of the outstanding common stock of the combined entity, immediately
after giving effect to the Mergers, on a fully-diluted basis (without giving
effect to shares issuable pursuant to the Litigation Tracking Warrants
(Trademark) or the issuance of Contingent Shares). The Agreement also provides
for the contingent issuance to FGH and Hunter's Glen of additional shares of
Golden State Common Stock in connection with (i) the use by Golden State of
certain tax benefits of Parent Holdings and the realization of certain other
potential tax benefits and liabilities of Golden State and Parent Holdings and
(ii) the receipt by the combined company of a net after-tax recovery in certain
litigation, including a portion of the net recovery, if any, in the Cal Fed
Goodwill Litigation against the United States government.
7
<PAGE>
GOLDEN STATE BANCORP
NOTES TO UNAUDITED PRO FORMA
CONDENSED COMBINED FINANCIAL STATEMENTS--(CONTINUED)
AS OF JUNE 30, 1998 AND FOR THE SIX MONTH AND TWELVE MONTH PERIODS
ENDED JUNE 30, 1998 AND DECEMBER 31, 1997, RESPECTIVELY
Using the daily volume weighted average price of $18.875 and $4.776 for
the fully diluted Golden State common stock and Litigation Tracking Warrants
(Trade Mark) , respectively, for the three days ended September 10, 1998,
Golden State's fully diluted outstanding shares as of June 30, 1998, applying
the treasury stock method under Statement of Financial Accounting Standards No.
128, "Earnings Per Share," as required by the Agreement, would be as follows:
<TABLE>
<S> <C>
Golden State
- ------------
Common shares outstanding as of June 30, 1998 ........................................ 55,485,151
Treasury shares to be issued as part of RedFed Merger ................................ 4,565,534
Shares issuable pursuant to outstanding Series A Preferred Stock convertible to common
stock (i) ........................................................................... 11,099,721
Shares issuable pursuant to outstanding 5 Year Warrants on common stock (ii) ......... 1,278
Shares issuable pursuant to outstanding 7 Year Warrants on common stock (iii) ........ 5,305,443
Shares issuable pursuant to outstanding Stock Options on common stock (iv) ........... 581,900
----------
Total--fully diluted outstanding shares .............................................. 77,039,027
===========
</TABLE>
- ----------
(i) Based on 4,617,484 shares, each convertible into 2.404 shares of
Golden State Common Stock.
(ii) Warrants convertible at an exchange rate of 10 warrants for one
share of Golden State Common Stock.
(iii) 10,769,807 warrants with $12.00 exercise price per warrant.
(iv) Based on 2,778,508 stock options with a weighted average exercise
price per share of Golden State Common Stock of $15.111.
<TABLE>
<S> <C>
Purchase Price:
Number of Golden State fully diluted outstanding shares ......... 77,039,027
Price per share ................................................. x $18.875
------------
Purchase price (in thousands) .................................. $ 1,454,112
============
</TABLE>
NOTE C: PURCHASE ACCOUNTING ADJUSTMENTS
<TABLE>
<CAPTION>
(IN THOUSANDS)
---------------
<S> <C>
Golden State stockholders' equity, giving effect to the RedFed Merger ....... $1,375,497
Goodwill due to the Mergers (Note D) ........................................ 61,875
Fair value adjustments, net of taxes (Note D) ............................... 36,677
Merger costs, net of taxes (Note E) ......................................... (84,867)
Goodwill litigation proceeds participation (Note F) ......................... 64,930
----------
Total purchase price ....................................................... $1,454,112
==========
</TABLE>
8
<PAGE>
GOLDEN STATE BANCORP
NOTES TO UNAUDITED PRO FORMA
CONDENSED COMBINED FINANCIAL STATEMENTS--(CONTINUED)
AS OF JUNE 30, 1998 AND FOR THE SIX MONTH AND TWELVE MONTH PERIODS
ENDED JUNE 30, 1998 AND DECEMBER 31, 1997, RESPECTIVELY
NOTE D: PURCHASE ACCOUNTING ADJUSTMENTS
The estimated purchase accounting adjustments relating to the Mergers are
detailed below:
<TABLE>
<CAPTION>
INTEREST- MORTGAGE
EARNING SERVICING OTHER
ASSETS ASSETS GOODWILL ASSETS
------------- ----------- ------------ ----------
(IN THOUSANDS)
<S> <C> <C> <C> <C>
Purchase price in excess of
Golden State's net
stockholders' equity,
giving effect to the
RedFed Merger ................... $ -- $ -- $ 78,615 $ --
Fair value adjustments, net
of taxes ........................ 13,769 54,243 (36,677) --
Merger costs, net of taxes
(Note E) ........................ -- -- 84,867 41,433
Other integration costs,
net of taxes (Note E) ........... -- -- -- 31,065
Value of Golden State's
retained participation in
the Glendale Goodwill
Litigation after issuance
of the Litigation
Tracking Warrants (Trademark)
(Note F) ........................ -- -- (64,930) 111,948
Liability reflecting value of
Golden State Common
Stock to be distributed
to FGH and Hunter's
Glen in respect of their
proportionate ownership
of the Cal Fed Goodwill
Litigation asset
(Note G) ........................ -- -- -- --
Liability reflecting value of
Golden State Common
Stock to be distributed
to FGH and Hunter's
Glen upon use of Parent
Holdings' pre-merger
tax benefits (Note H) ........... -- -- -- --
Dividend of tax benefits to
FGH as a result of deconsolidation
caused by the Mergers ........... -- -- -- --
Conversion of minority
interest triggered by the
Mergers ......................... -- -- -- --
--------- -------- --------- --------
$ 13,769 $ 54,243 $ 61,875 $184,446
========= ======== ========= ========
IMPACT ON PRE-TAX
EARNINGS FOR:
Six months ended June 30,
1998............................. $ (5,129) $ (4,068) $ (2,063) $ --
Year ended December 31,
1997............................. $ (10,256) $ (8,136) $ (4,125) $ --
<CAPTION>
INTEREST-
BEARING OTHER MINORITY STOCKHOLDERS'
LIABILITIES LIABILITIES INTEREST EQUITY
------------- ------------- ------------- --------------
(IN THOUSANDS)
<S> <C> <C> <C> <C>
Purchase price in excess of
Golden State's net
stockholders' equity,
giving effect to the
RedFed Merger ................... $ -- $ -- $ -- $ 78,615
Fair value adjustments, net
of taxes ........................ 4,775 26,560 -- --
Merger costs, net of taxes
(Note E) ........................ -- 126,300 -- --
Other integration costs,
net of taxes (Note E) ........... -- 73,700 -- (42,635)
Value of Golden State's
retained participation in
the Glendale Goodwill
Litigation after issuance
of the Litigation
Tracking Warrants (Trademark)
(Note F) ........................ -- 47,018 -- --
Liability reflecting value of
Golden State Common
Stock to be distributed
to FGH and Hunter's
Glen in respect of their
proportionate ownership
of the Cal Fed Goodwill
Litigation asset
(Note G) ........................ -- 52,982 -- (52,982)
Liability reflecting value of
Golden State Common
Stock to be distributed
to FGH and Hunter's
Glen upon use of Parent
Holdings' pre-merger
tax benefits (Note H) ........... -- 154,000 -- (154,000)
Dividend of tax benefits
to FGH as a result of
deconsolidation caused by
the Mergers ..................... -- 290,000 -- (290,000)
Conversion of minority
interest triggered by the
Mergers ......................... -- -- (227,671) 227,671
--------- -------- ---------- ----------
$ 4,775 $770,560 $ (227,671) $ (233,331)
========= ======== ========== ==========
IMPACT ON PRE-TAX
EARNINGS FOR: TOTAL
----------
Six months ended June 30,
1998............................. $ 1,616 $ -- $ -- $ (9,644)
==========
Year ended December 31,
1997............................. $ 3,231 $ -- $ -- $ (19,286)
==========
</TABLE>
9
<PAGE>
GOLDEN STATE BANCORP
NOTES TO UNAUDITED PRO FORMA
CONDENSED COMBINED FINANCIAL STATEMENTS--(CONTINUED)
AS OF JUNE 30, 1998 AND FOR THE SIX MONTH AND TWELVE MONTH PERIODS
ENDED JUNE 30, 1998 AND DECEMBER 31, 1997, RESPECTIVELY
<TABLE>
<CAPTION>
IMPACT ON PRE-TAX EARNINGS
------------------------------------
SIX MONTHS YEAR
ENDED ENDED
AMOUNT JUNE 30, 1998 DECEMBER 31, 1997
---------- --------------- ------------------
(IN THOUSANDS)
<S> <C> <C> <C>
Interest-Earning Assets:
Loans receivable, net .............. $ 6,807 $ (4,144) $ (8,287)
Mortgage-backed securities ......... 6,962 (985) (1,969)
------- -------- ---------
$13,769 $ (5,129) $ (10,256)
======= ======== =========
Interest-Bearing Liabilities
Deposits ........................... $ 2,588 $ 599 $ 1,198
Borrowings from the FHLB ........... 1,194 520 1,040
Other borrowings ................... 993 497 993
------- -------- ---------
$ 4,775 $ 1,616 $ 3,231
======= ======== =========
</TABLE>
Premiums relating to mortgage-backed securities and loans receivable are
amortized to interest income using an interest method over the weighted average
life of the related asset. The premium on mortgage servicing assets is
amortized in proportion to, and over the period of, estimated net servicing
income. Goodwill is amortized on the straight line basis over fifteen years.
Premiums relating to deposits and borrowings are amortized to interest expense
using an interest method over the weighted average life of the related
liability.
NOTE E: MERGER AND INTEGRATION COSTS
The table below reflects Golden State's current estimate, for purposes of
pro forma presentation, of the aggregate merger and integration costs, net of
taxes, expected to be incurred in connection with the Mergers. While a portion
of these costs may be required to be recognized in the combined entity's
results of operations as incurred, the current estimate of these costs has been
reflected in the pro forma condensed combined statement of financial condition
to disclose the effect of these activities on Golden State's pro forma
condensed combined financial position.
<TABLE>
<CAPTION>
RELATED
GROSS TAX NET
COSTS BENEFIT COSTS
---------- --------- ----------
(IN THOUSANDS)
<S> <C> <C> <C>
Merger costs:
Severance costs ............................................... $ 55,000 $23,183 $ 31,817
Contract termination costs .................................... 23,100 9,737 13,363
Investment banking, legal and other professional fees ......... 40,000 5,058 34,942
Benefit plan termination costs ................................ 5,000 2,107 2,893
Branch consolidation costs .................................... 3,200 1,348 1,852
-------- ------- --------
Subtotal--merger costs included in the allocation of
the purchase price ......................................... 126,300 41,433 84,867
-------- ------- --------
Other Integration costs:
Conversion costs .............................................. 27,900 11,760 16,140
Branch consolidation costs .................................... 9,600 4,046 5,554
Transition staffing expenses .................................. 17,000 7,166 9,834
Officer benefits .............................................. 10,000 4,215 5,785
Other costs ................................................... 9,200 3,878 5,322
-------- ------- --------
Subtotal--other integration costs reflected as an
adjustment to stockholders' equity ......................... 73,700 31,065 42,635
-------- ------- --------
Total merger and integration costs ............................. $200,000 $72,498 $127,502
======== ======= ========
</TABLE>
10
<PAGE>
GOLDEN STATE BANCORP
NOTES TO UNAUDITED PRO FORMA
CONDENSED COMBINED FINANCIAL STATEMENTS--(CONTINUED)
AS OF JUNE 30, 1998 AND FOR THE SIX MONTH AND TWELVE MONTH PERIODS
ENDED JUNE 30, 1998 AND DECEMBER 31, 1997, RESPECTIVELY
Golden State's cost estimates are forward looking statements. While the
costs represent management's current estimate of merger and integration costs
that will be incurred, the ultimate level and timing of recognition of such
costs will be based on the final merger and integration plan to be completed in
the coming months; the types and amounts of actual costs incurred could vary
materially from these estimates if future developments differ from the
underlying assumptions used by management in determining its current estimate
of these costs.
NOTE F: LITIGATION TRACKING WARRANTS (TRADEMARK)
Represents the estimated fair value of the 15% interest in the after-tax
recovery, if any, in the Glendale Goodwill Litigation to be excluded in
calculating the number of shares issuable upon exercise of the Litigation
Tracking Warrants (Trademark) , as follows:
<TABLE>
<CAPTION>
(DOLLARS IN THOUSANDS,
EXCEPT PER SHARE DATA)
-----------------------
<S> <C>
Fully diluted Litigation Tracking Warrants (Trade Mark) outstanding as of June 30, 1998 . 77,039,027
Daily volume weighted average price of Litigation Tracking Warrants (Trade Mark) for the
three days ended September 10, 1998 ..................................................... $ 4.776
------------
Market value of Litigation Tracking Warrants (Trade Mark) ............................... $ 367,938
Percent of Goodwill Litigation owned by Litigation Tracking Warrants (Trade Mark) Holders 85%
------------
Total market value of Glendale Goodwill Litigation ....................................... $ 432,869
Percent of Glendale Goodwill Litigation owned by Golden State ............................ 15%
------------
Estimated fair value of Glendale Goodwill Litigation owned by Golden State ............... $ 64,930
============
</TABLE>
The amount of the litigation proceeds reflected above is provided for
illustrative purposes only. Such amount does not necessarily represent
management's evaluation of the likely outcome of the Glendale Goodwill
Litigation.
NOTE G: GOODWILL EQUALIZATION ADJUSTMENT
As part of the Agreement, FGH and Hunter's Glen will receive, after a
final resolution of the Cal Fed Goodwill Litigation, additional Golden State
Common Stock in an amount equal to the net after-tax proceeds, if any, from
that litigation, net of (i) the amount paid to holders of the CALGZs and the
CALGLs and (ii) an amount equal to the 15% of the net after-tax recovery in the
Glendale Goodwill Litigation to be excluded for purposes of calculating the
number of shares of Golden State Common Stock issuable upon exercise of the
Litigation Tracking Warrants (Trademark) , adjusted to reflect the pro forma
ownership interest of FGH and Hunter's Glen in the combined company at the time
of the Mergers. The estimated pre-tax difference between the amount calculated
pursuant to the preceding sentence and the amount of the Cal Fed Goodwill
Litigation asset as of June 30, 1998, $91 million, will be recorded as a
liability. The combined entity will reflect an offsetting benefit to deferred
taxes of $38 million and a $53 million reduction to stockholders' equity.
NOTE H: INCOME TAX BENEFITS
As part of the Agreement, FGH and Hunter's Glen will receive additional
Golden State Common Stock in the amount of the Federal Net Tax Benefits. The
portion of the related tax benefits currently recognized as deferred tax assets
on the books of Parent Holdings is approximately $154 million. The pro forma
adjustment reflects this transaction in a manner similar to a dividend,
resulting in a reduction to stockholders' equity and an increase in other
liabilities. The historical financial statements of Parent Holdings and pro
forma adjustments have been adjusted to reflect a 42% tax rate as all the
Federal Net Tax Benefits will accrue to the benefit of FGH and Hunter's Glen.
11
<PAGE>
GOLDEN STATE BANCORP
NOTES TO UNAUDITED PRO FORMA
CONDENSED COMBINED FINANCIAL STATEMENTS--(CONTINUED)
AS OF JUNE 30, 1998 AND FOR THE SIX MONTH AND TWELVE MONTH PERIODS
ENDED JUNE 30, 1998 AND DECEMBER 31, 1997, RESPECTIVELY
NOTE I: REFINANCING ADJUSTMENTS
In connection with the Refinancing, Parent Holdings and FNH will make
offers to purchase or will redeem the following issues of debt and preferred
stock (dollars in thousands):
<TABLE>
<CAPTION>
IMPACT ON PRE-TAX EARNINGS
----------------------------
SIX MONTHS ENDED
AT JUNE 30, 1998 JUNE 30, 1998
--------------------------------- ----------------------------
PRINCIPAL INTEREST AMORTIZATION OF
OR LIQUIDATION DEFERRED EXPENSE/ DEFERRED
PREFERENCE ISSUANCE COSTS DIVIDEND ISSUANCE COSTS
---------------- ---------------- ---------- -----------------
<S> <C> <C> <C> <C>
Parent Holdings 12 1/2% Senior Notes ..... $ 455,000 $14,068 $28,438 $1,000
Remaining Original Issue
Discount .............................. (3,535) -- 408 --
FNH 12 1/4% Senior Notes ................. 200,000 9,704 12,250 1,482
FNH 9 1/8% Senior Subordinated
Notes ................................... 140,000 4,457 6,387 426
FNH 10 5/8% Senior Subordinated
Notes ................................... 575,000 14,686 30,547 1,428
---------- ------- ------- ------
Total Debt Reduction ..................... $1,366,465 $42,915 $78,030 $4,336
========== ======= ======= ======
Cal Fed 11 1/2% Preferred Stock .......... 300,730 17,292
Cal Fed 10 5/8% Preferred Stock .......... 172,500 9,164
plus: Accrued and Unpaid
Dividends ............................. 13,228 --
---------- -------
Total Preferred Stock Reduction
(Minority Interest) ..................... $ 486,458 $26,456
========== =======
<CAPTION>
IMPACT ON PRE-TAX EARNINGS
---------------------------
YEAR ENDED
DECEMBER 31, 1997
---------------------------
INTEREST AMORTIZATION OF
EXPENSE/ DEFERRED
DIVIDEND ISSUANCE COSTS
---------- ----------------
<S> <C> <C>
Parent Holdings 12 1/2% Senior Notes ..... $ 56,875 $2,000
Remaining Original Issue
Discount .............................. 816 --
FNH 12 1/4% Senior Notes ................. 24,500 2,964
FNH 9 1/8% Senior Subordinated
Notes ................................... 12,775 852
FNH 10 5/8% Senior Subordinated
Notes ................................... 61,094 2,856
-------- ------
Total Debt Reduction ..................... $156,060 $8,672
======== ======
Cal Fed 11 1/2% Preferred Stock .......... 34,584
Cal Fed 10 5/8% Preferred Stock .......... 18,328
plus: Accrued and Unpaid
Dividends ............................. --
--------
Total Preferred Stock Reduction
(Minority Interest) ..................... $ 52,912
========
</TABLE>
The deferred issuance costs and discount reflected above, net of taxes of
approximately $19,579, will be written off as part of the Refinancing. These
items and the premiums paid will be reflected as an "extraordinary item--early
extinguishment of debt" on the financial statements of Parent Holdings in an
amount totalling approximately $183,979 on an after-tax basis.
<PAGE>
The following debt was issued (in thousands):
<TABLE>
<CAPTION>
IMPACT ON PRE-TAX EARNINGS
--------------------------------------------------------
SIX MONTHS ENDED YEAR ENDED
JUNE 30, 1998 DECEMBER 31, 1997
---------------------------- ---------------------------
AMORTIZATION OF AMORTIZATION OF
DEFERRED INTEREST DEFERRED INTEREST DEFERRED
PRINCIPAL ISSUANCE COSTS EXPENSE ISSUANCE COSTS EXPENSE ISSUANCE COSTS
------------- ---------------- ---------- ----------------- ---------- ----------------
<S> <C> <C> <C> <C> <C> <C>
Total New Notes in multiple-tranche
transaction-- 7.0455% aggregate
yield, net of original issue discount
of $6,081............................ $1,993,919 $28,625 $70,455 $2,754 $140,910 $5,507
========== ======= ======= ====== ======== ======
</TABLE>
12
<PAGE>
GOLDEN STATE BANCORP
NOTES TO UNAUDITED PRO FORMA
CONDENSED COMBINED FINANCIAL STATEMENTS--(CONTINUED)
AS OF JUNE 30, 1998 AND FOR THE SIX MONTH AND TWELVE MONTH PERIODS
ENDED JUNE 30, 1998 AND DECEMBER 31, 1997, RESPECTIVELY
The use of proceeds from the Refinancing is estimated as follows (in
thousands):
<TABLE>
<S> <C> <C>
Sale of New Notes ...................................................... $ 1,993,919
FNH Debt Offers:
FNH 12 1/4% Senior Notes .............................................. 200,000
FNH 9 1/8% Senior Subordinated Notes .................................. 140,000
FNH 10 5/8% Senior Subordinated Notes ................................. 575,000
Cal Fed Preferred Stock Offers:
Cal Fed 11 1/2% Preferred Stock ....................................... 300,730
Cal Fed 10 5/8% Preferred Stock ....................................... 172,500 (1,388,230)
-------
Parent Holdings Defeasance:
FNPH 12 1/2% Senior Notes ............................................. (455,000)
Premiums, Fees and Other Expenses (net of taxes) ....................... (195,691)
------------
Net Cash Payment to be made by Golden State Holdings (from Cal Fed
dividend) ............................................................. $ (45,002)
============
</TABLE>
At an assumed rate of 5.5%, the net cash payment made of $45,002 would
reduce pre-tax earnings by approximately $1,238 and $2,475 for the six months
ended June 30, 1998 and the year ended December 31, 1997, respectively.
The hedging transaction effected under the Rate Lock Agreements resulted
in a net loss of approximately $9,958, which will be deferred and amortized
over the life of the related Fixed Rate New Notes through interest expense.
This amortization will reduce pre-tax earnings by approximately $818 and $1,636
for the six months ended June 30, 1998 and the year ended December 31, 1997,
respectively.
There can be no assurance that all of the outstanding FNH Notes and Cal
Fed Preferred Stock will be purchased in connection with the Refinancing. The
pro forma financial results assume that 100% of the outstanding principal
amount of the FNH Notes and all of the Cal Fed Preferred Stock is purchased in
the Refinancing. If FNH does not purchase all of the outstanding Cal Fed 11
1/2% and 10 5/8% Preferred Stock, Golden State Holdings intends to cause Cal
Fed to redeem any remaining Cal Fed 10 5/8% Preferred Stock on April 1, 1999
and any remaining Cal Fed 11 1/2% Preferred Stock on September 1, 1999 (which
are the respective dates on which each series of such Preferred Stock first
becomes redeemable). As shown below, pro forma results will vary if less than
100% of the FNH Notes or Cal Fed Preferred Stock is purchased and excess
proceeds from the Refinancing invested at 5.5% (dollars in thousands, except
per share data):
<TABLE>
<CAPTION>
PERCENT OFFERED
TO PURCHASE INCREASE IN NET EARNINGS AT JUNE 30, 1998
- --------------------- -------------------------------------------- ---------------------------------------
CAL FED
FNH PREFERRED FOR SIX MONTHS FOR YEAR ENDED BOOK VALUE PER TANGIBLE BOOK VALUE
NOTES STOCK ENDED JUNE 30, 1998 DECEMBER 31, 1997 COMMON SHARE PER COMMON SHARE
- ------- ----------- ---------------------- ------------------- ---------------- --------------------
<S> <C> <C> <C> <C> <C>
100% 100% $30,575 $61,150 $11.62 $3.18
95% 80% 26,378 52,755 11.83 3.39
90% 75% 24,801 49,602 11.92 3.48
80% 65% 21,618 43,239 12.09 3.64
</TABLE>
13
