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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 HOLDINGS INC.
(EXACT NAME OF REGISTRANT AS SPECIFIED IN ITS CHARTER)
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DELAWARE APPLIED FOR 13-3990512
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(STATE OR OTHER JURISDICTION (COMMISSION (IRS EMPLOYER
OF INCORPORATION) FILE NUMBER) IDENTIFICATION NO.)
135 MAIN STREET
SAN FRANCISCO, CALIFORNIA 94105
(ADDRESS OF PRINCIPAL EXECUTIVE OFFICES) (ZIP CODE)
</TABLE>
(415) 904-1100
(REGISTRANT'S TELEPHONE NUMBER, INCLUDING AREA CODE)
NONE
(FORMER NAME OR FORMER ADDRESS, IF CHANGED SINCE LAST REPORT)
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<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 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 was 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 7,503 and 1,876 additional shares of Common Stock, which FGH and
Hunter's Glen, respectively, 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 interests 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.
1
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The board of directors of Golden State Holdings Inc. consists of the
following four directors: Ronald O. Perelman, Gerald J. Ford, Howard Gittis and
Carl B. Webb.
ITEM 7. FINANCIAL STATEMENTS, PRO FORMA FINANCIAL INFORMATION AND EXHIBITS.
The following exhibits are filed as part of this report:
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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 (a) Consent of KPMG Peat Marwick LLP (Los Angeles)
(b) Consent of KPMG Peat Marwick LLP (Dallas)
99.1 (a) Financial Statements of Business Acquired.
(i) The following financial statements for Glendale Federal at June 30, 1998 and 1997, and for
the years ended June 30, 1998, 1997 and 1996 are set forth in Exhibit 99.1(a)(i) hereto:
Independent Auditors' Report
Consolidated Statements of Financial Condition
Consolidated Statements of Operations
Consolidated Statements of Stockholder's Equity
Consolidated Statements of Cash Flows
Notes to Consolidated Financial Statements
(ii) The following financial statements for FNH at December 31, 1997 and 1996, and for the
years ended December 31, 1997, 1996 and 1995 are incorporated by reference to the
Registrant's Annual Report on Form 10-K for the year ended December 31, 1997, dated
March 25, 1998:
Independent Auditors' Report
Consolidated Balance Sheets
Consolidated Statements of Income
Consolidated Statements of Comprehensive Income
Consolidated Statements of Stockholders' Equity
Consolidated Statements of Cash Flows
Notes to Consolidated Financial Statements
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2
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(iii) The following unaudited financial statements for FNH at June 30, 1998 and for the six
months ended June 30, 1998 and 1997 are incorporated by reference to the Registrant's
Quarterly Report on Form 10-Q for the quarter ended June 30, 1998, dated August 13,
1998:
Unaudited Consolidated Balance Sheets
Unaudited Consolidated Statements of Income
Unaudited Consolidated Statement of Comprehensive Income
Unaudited Consolidated Statements of Stockholders' 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)
</TABLE>
3
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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 25, 1998
GOLDEN STATE HOLDINGS INC.
By: /s/ Richard H. Terzian
------------------------------------
Name: Richard H. Terzian
Title: Executive Vice
President and Chief Financial
Officer
4
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EXHIBIT INDEX
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EXHIBIT
NUMBER DESCRIPTION PAGE
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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 (a) Consent of KPMG Peat Marwick LLP (Los Angeles)
(b) Consent of KPMG Peat Marwick LLP (Dallas)
99.1 (a) Financial Statements of Business Acquired.
(i) The following financial statements for Glendale Federal at June 30, 1998
and 1997, and for the years ended June 30, 1998, 1997 and 1996 are set
forth in Exhibit 99.1(a)(i) hereto:
Independent Auditors' Report
Consolidated Statements of Financial Condition
Consolidated Statements of Operations
Consolidated Statements of Stockholder's Equity
Consolidated Statements of Cash Flows
Notes to Consolidated Financial Statements
(ii) The following financial statements for FNH at December 31, 1997 and
1996, and for the years ended December 31, 1997, 1996 and 1995 are
incorporated by reference to the Registrant's Annual Report on Form
10-K for the year ended December 31, 1997, dated March 25, 1998:
Independent Auditors' Report
Consolidated Balance Sheets
Consolidated Statements of Income
Consolidated Statements of Comprehensive Income
Consolidated Statements of Stockholders' Equity
Consolidated Statements of Cash Flows
Notes to Consolidated Financial Statements
</TABLE>
5
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EXHIBIT
NUMBER DESCRIPTION PAGE
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(iii) The following unaudited financial statements for FNH at June 30, 1998 and
for the six months ended June 30, 1998 and 1997 are incorporated by
reference to the Registrant's Quarterly Report on Form 10-Q for the
quarter ended June 30, 1998, dated August 13, 1998:
Unaudited Consolidated Balance Sheets
Unaudited Consolidated Statements of Income
Unaudited Consolidated Statement of Comprehensive Income
Unaudited Consolidated Statements of Stockholders' 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)
</TABLE>
6
<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
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 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
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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.
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.
2
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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
3
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EXHIBIT 23.1(a)
CONSENT OF INDEPENDENT AUDITORS
The Board of Directors
Glendale Federal Bank, Federal Savings Bank
We consent to the use of our report dated July 20, 1998, included herein,
relating to the consolidated statements of financial condition of Glendale
Federal Bank, Federal Savings Bank and subsidiaries as of June 30, 1998 and
1997, and the related consolidated statements of operations, stockholder's
equity and cash flows for each of the years in the three-year period ended June
30, 1998, which report appears in the Form 8-K of Golden State Holdings Inc.
dated September 25, 1998.
/s/ KMPG Peat Marwick LLP
KMPG Peat Marwick LLP
Los Angeles, California
September 24, 1998
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EXHIBIT 23.1(b)
CONSENT OF INDEPENDENT AUDITORS
The Board of Directors
Golden State Holdings Inc.
We consent to the use of our report dated February 23, 1998, incorporated
herein by reference, relating to the consolidated balance sheets of First
Nationwide Holdings Inc. and subsidiaries as of December 31, 1997 and 1996, and
the related consolidated statements of income, comprehensive income,
stockholders' 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 Holdings Inc.
/s/ KPMG Peat Marwick LLP
KPMG Peat Marwick LLP
Dallas, Texas
September 24, 1998
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EXHIBIT 99.1(A)I
INDEX TO FINANCIAL STATEMENTS
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Annual Financial Statements
Independent Auditors' Report ................................................ F-1
Consolidated Statements of Financial Condition as of June 30, 1998 and 1997 . F-2
Consolidated Statements of Operations for years ended June 30, 1998, 1997 and
1996 ...................................................................... F-3
Consolidated Statements of Changes in Stockholder's Equity for years ended
June 30, 1998, 1997 and 1996 .............................................. F-4
Consolidated Statements of Cash Flows for years ended June 30, 1998, 1997 and
1996 ...................................................................... F-5
Notes to Consolidated Financial Statements .................................. F-7
</TABLE>
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GLENDALE FEDERAL BANK
INDEPENDENT AUDITORS' REPORT
The Board of Directors
Glendale Federal Bank
We have audited the accompanying consolidated statements of financial
condition of Glendale Federal Bank and subsidiaries (the Bank) as of June 30,
1998 and 1997, and the related consolidated statements of operations, changes
in stockholder's equity and cash flows for each of the years in the three-year
period ended June 30, 1998. These consolidated financial statements are the
responsibility of the Bank's management. Our responsibility is to express an
opinion on these consolidated financial statements based on our audits.
We conducted our audits in accordance with generally accepted auditing
standards. Those standards require that we plan and perform the audit to obtain
reasonable assurance about whether the financial statements are free of
material misstatement. An audit includes examining, on a test basis, evidence
supporting the amounts and disclosures in the financial statements. An audit
also includes assessing the accounting principles used and significant
estimates made by management, as well as evaluating the overall financial
statement presentation. We believe that our audits provide a reasonable basis
for our opinion.
In our opinion, the consolidated financial statements referred to above
present fairly, in all material respects, the financial position of Glendale
Federal Bank and subsidiaries as of June 30, 1998 and 1997 and the results of
their operations and their cash flows for each of the years in the three-year
period ended June 30, 1998 in conformity with generally accepted accounting
principles.
KPMG PEAT MARWICK LLP
Los Angeles, California
July 20, 1998
F-1
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GLENDALE FEDERAL BANK AND SUBSIDIARIES
CONSOLIDATED STATEMENTS OF FINANCIAL CONDITION
(DOLLARS IN THOUSANDS EXCEPT SHARE DATA)
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JUNE 30
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1998 1997
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ASSETS
Cash and amounts due from banks ................................................. $ 289,978 $ 221,557
Federal funds sold and assets purchased under resale agreements ................. 172,000 632,000
Certificates of deposit--substantially restricted ............................... 2,200 4,005
Other debt and equity securities available for sale, at fair value .............. 126,108 27,794
Mortgage-backed securities held to maturity, at amortized cost (fair value:
$921,555 in 1998 and $1,166,941 in 1997) ....................................... 914,593 1,162,825
Mortgage-backed securities available for sale, at fair value .................... 1,460,770 1,116,709
Loans receivable, net of allowance for loan losses of $156,482 in 1998 and
$163,759 in 1997 ............................................................... 13,742,673 11,886,090
Loans held for sale, at lower of cost or market ................................. 31,907 19,003
Real estate held for sale or investment ......................................... 6,327 8,689
Real estate acquired in settlement of loans ..................................... 37,393 61,500
Interest receivable ............................................................. 114,009 102,940
Investment in capital stock of Federal Home Loan Bank, at cost .................. 300,339 259,587
Premises and equipment, at cost, less accumulated depreciation .................. 146,893 134,936
Mortgage servicing assets ....................................................... 243,314 284,472
Goodwill and other intangible assets, less accumulated amortization
($31,261 in 1998 and $22,110 in 1997) .......................................... 180,463 99,533
Other assets .................................................................... 326,429 196,619
----------- -----------
$18,095,396 $16,218,259
=========== ===========
LIABILITIES AND STOCKHOLDER'S EQUITY
LIABILITIES:
Deposits ........................................................................ $10,701,157 $ 9,356,909
Securities sold under agreements to repurchase .................................. 175,551 768,682
Borrowings from the Federal Home Loan Bank ...................................... 5,613,458 4,788,000
Other borrowings ................................................................ 70 10,782
Other liabilities and accrued expenses .......................................... 281,603 221,540
Income taxes payable ............................................................ 45,158 60,272
----------- -----------
Total liabilities ............................................................ 16,816,997 15,206,185
=========== ===========
STOCKHOLDER'S EQUITY:
Preferred stock, Series A, $1.00 par value per share and $25.00 liquidation
preference per share (5,000,000 shares authorized; 4,621,982 shares issued
and outstanding at June 30, 1998 and 1997) ..................................... 4,622 4,622
Common stock, $1.00 par value per share (100,000,000 shares authorized;
57,754,480 shares issued and outstanding in 1998; 50,348,509 shares issued
and outstanding at June 30, 1997) .............................................. 57,754 50,349
Additional paid-in capital ...................................................... 1,008,464 793,111
Net unrealized holding loss on debt and equity securities available for sale .... (1,612) (1,154)
Retained earnings--substantially restricted ..................................... 209,171 165,146
----------- -----------
Total stockholder's equity ..................................................... 1,278,399 1,012,074
----------- -----------
$18,095,396 $16,218,259
=========== ===========
</TABLE>
See accompanying Notes to Consolidated Financial Statements
F-2
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GLENDALE FEDERAL BANK AND SUBSIDIARIES
CONSOLIDATED STATEMENTS OF OPERATIONS
(IN THOUSANDS)
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YEARS ENDED JUNE 30
-----------------------------------------
1998 1997 1996
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Interest income:
Loans receivable .................................................. $ 950,265 $ 861,858 $ 803,432
Mortgage-backed securities ........................................ 149,749 149,551 216,812
Investments ....................................................... 57,931 61,547 59,791
---------- ---------- ----------
Total interest income ........................................... 1,157,945 1,072,956 1,080,035
========== ========== ==========
Interest expense:
Deposits .......................................................... 408,300 405,182 433,834
Short-term borrowings ............................................. 37,591 18,642 108,839
Other borrowings .................................................. 271,430 270,148 204,297
---------- ---------- ----------
Total interest expense .......................................... 717,321 693,972 746,970
---------- ---------- ----------
Net interest income ............................................. 440,624 378,984 333,065
Provision for loan losses .......................................... (1,727) 25,204 40,350
---------- ---------- ----------
Net interest income after provision for loan losses ............. 442,351 353,780 292,715
Other income:
Loan servicing income, net ........................................ 28,550 33,795 24,208
Other fees and service charges .................................... 69,526 56,901 45,769
Gain (loss) on sale of loans, net ................................. 605 (291) (690)
Gain (loss) on sale of mortgage-backed securities, net ............ 4,562 (1,804) (34,222)
Other income (loss), net .......................................... 1,643 62 (707)
---------- ---------- ----------
Total other income .............................................. 104,886 88,663 34,358
---------- ---------- ----------
Other expenses:
Compensation and employee benefits ................................ 135,966 114,270 101,502
Computer support and item processing .............................. 37,686 25,545 20,474
Occupancy expense, net ............................................ 34,215 31,777 29,698
Advertising and promotion ......................................... 21,816 24,416 24,798
Furniture, fixtures and equipment ................................. 15,078 12,585 11,605
Stationery, supplies and postage .................................. 14,228 11,628 10,158
Regulatory insurance .............................................. 7,843 16,317 27,491
Other general and administrative expenses ......................... 26,857 26,686 21,209
---------- ---------- ----------
Total general and administrative expenses ....................... 293,689 263,224 246,935
SAIF special assessment ........................................... -- 55,519 --
Legal expense--goodwill lawsuit ................................... 19,045 24,058 1,929
Acquisition and restructuring costs ............................... 6,939 -- --
Operations of real estate held for sale or investment ............. (664) 935 1,242
Operations of real estate acquired in settlement of loans ......... (3,111) 6,623 8,426
Amortization of goodwill and other intangible assets .............. 9,151 5,530 5,147
---------- ---------- ----------
Total other expenses ............................................ 325,049 355,889 263,679
---------- ---------- ----------
Earnings before income tax provision ............................... 222,188 86,554 63,394
Income tax provision ............................................... 93,113 36,131 21,342
---------- ---------- ----------
Net earnings .................................................... $ 129,075 $ 50,423 $ 42,052
========== ========== ==========
</TABLE>
See accompanying Notes to Consolidated Financial Statements
F-3
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GLENDALE FEDERAL BANK AND SUBSIDIARIES
CONSOLIDATED STATEMENTS OF CHANGES IN STOCKHOLDER'S EQUITY
(DOLLARS IN THOUSANDS EXCEPT PER SHARE DATA)
<TABLE>
<CAPTION>
PREFERRED STOCK
SERIES A COMMON STOCK
--------------------------- -----------------------
SHARES AMOUNT SHARES AMOUNT
--------------- ----------- ------------ ----------
<S> <C> <C> <C> <C>
Balance, June 30, 1995 ............. 8,050,000 $ 8,050 40,719,718 $40,720
Exchange of Series A Preferred
Stock for common stock ............ (2,226,118) (2,226) 5,901,771 5,902
Net unrealized holding loss on
debt and equity securities
available for sale ................ -- -- -- --
Stock options exercised ............ 106,000 106
5-year warrants exercised .......... -- -- 2,209 2
Dividends declared on Series A
preferred stock ($2.188 per
share) ............................ -- -- -- --
Net earnings ....................... -- -- -- --
---------- --------- ---------- -------
Balance, June 30, 1996 ............. 5,823,882 5,824 46,729,698 46,730
Exchange of Series A Preferred
Stock for common stock ............ (1,201,900) (1,202) 3,103,872 3,104
Net unrealized holding gain on
debt and equity securities
available for sale ................ -- -- -- --
Stock options exercised ............ -- -- 512,125 512
5-year warrants exercised .......... -- -- 414 1
7-year warrants exercised .......... -- -- 2,400 2
Dividends declared on Series A
preferred stock ($2.188 per
share) ............................ -- -- -- --
Net earnings ....................... -- -- -- --
---------- --------- ---------- -------
Balance, June 30, 1997 ............. 4,621,982 4,622 50,348,509 50,349
Net unrealized holding loss on
debt and equity securities
available for sale ................ -- -- -- --
Stock options exercised ............ -- -- 15,376 15
5-year warrants exercised .......... -- -- 38 --
Acquisition of CenFed Bank ......... -- -- 7,390,557 7,390
Dividends paid to parent ........... -- -- -- --
Net earnings ....................... -- -- -- --
---------- --------- ---------- -------
Balance, June 30, 1998 ............. 4,621,982 $ 4,622 57,754,480 $57,754
========== ========= ========== =======
<CAPTION>
NET UNREALIZED
HOLDING GAIN
(LOSS) ON DEBT
ADDITIONAL AND EQUITY TOTAL
PAID-IN SECURITIES RETAINED STOCKHOLDER'S
CAPITAL AVAILABLE FOR SALE EARNINGS* EQUITY
-------------- -------------------- ------------ --------------
<S> <C> <C> <C> <C>
Balance, June 30, 1995 ............. $ 793,372 $ 37 $ 99,668 $ 941,847
Exchange of Series A Preferred
Stock for common stock ............ (3,676) -- -- --
Net unrealized holding loss on
debt and equity securities
available for sale ................ -- (11,428) -- (11,428)
Stock options exercised ............ 1,028 -- -- 1,134
5-year warrants exercised .......... -- -- -- 2
Dividends declared on Series A
preferred stock ($2.188 per
share) ............................ -- -- (16,156) (16,156)
Net earnings ....................... -- -- 42,052 42,052
---------- --------- --------- ----------
Balance, June 30, 1996 ............. 790,724 (11,391) 125,564 957,451
Exchange of Series A Preferred
Stock for common stock ............ (1,902) -- -- --
Net unrealized holding gain on
debt and equity securities
available for sale ................ -- 10,237 -- 10,237
Stock options exercised ............ 4,263 -- -- 4,775
5-year warrants exercised .......... -- -- -- 1
7-year warrants exercised .......... 26 -- -- 28
Dividends declared on Series A
preferred stock ($2.188 per
share) ............................ -- -- (10,841) (10,841)
Net earnings ....................... -- -- 50,423 50,423
---------- --------- --------- ----------
Balance, June 30, 1997 ............. 793,111 (1,154) 165,146 1,012,074
Net unrealized holding loss on
debt and equity securities
available for sale ................ -- (458) -- (458)
Stock options exercised ............ 28,883 -- -- 28,898
5-year warrants exercised .......... -- -- -- --
Acquisition of CenFed Bank ......... 186,470 -- -- 193,860
Dividends paid to parent ........... -- -- (85,050) (85,050)
Net earnings ....................... -- -- 129,075 129,075
---------- --------- --------- ----------
Balance, June 30, 1998 ............. $1,008,464 $ (1,612) $ 209,171 $1,278,399
========== ========= ========= ==========
</TABLE>
- - ----------
* substantially restricted
See accompanying Notes to Consolidated Financial Statements
F-4
<PAGE>
GLENDALE FEDERAL BANK AND SUBSIDIARIES
CONSOLIDATED STATEMENTS OF CASH FLOWS
(IN THOUSANDS)
<TABLE>
<CAPTION>
YEARS ENDED JUNE 30
---------------------------------------------------
1998 1997 1996
--------------- --------------- ---------------
<S> <C> <C> <C>
CASH FLOWS FROM OPERATING ACTIVITIES:
Net earnings ........................................................ $ 129,075 $ 50,423 $ 42,052
Adjustments to reconcile net earnings to net cash provided by
operating activities:
Amortization of discounts and accretion of premiums, net ........... 7,473 11,064 8,054
Accretion of deferred loan fees .................................... (3,305) (4,355) (5,546)
Provision for loan losses .......................................... (1,727) 25,204 40,350
Amortization of mortgage servicing assets .......................... 49,245 27,342 22,559
Provision for impairment of mortgage servicing assets .............. 6,142 4,047 --
(Gain) loss on sale of loans, net .................................. (605) 291 690
(Gain) loss on sale of mortgage-backed securities, net ............. (4,562) 1,804 34,222
Depreciation ....................................................... 16,186 15,065 16,115
Provision for losses on real estate ................................ 2,670 7,706 11,610
Gain on sale of real estate ........................................ (10,641) (7,220) (10,880)
Amortization of goodwill and other intangible assets ............... 9,151 5,530 5,147
(Benefit) provision for deferred income taxes ...................... (7,685) 10,364 19,132
Net change in loans originated or purchased for resale ............. 62,422 39,249 (2,649)
Decrease (increase) in interest receivable ......................... 460 (8,851) 7,158
FHLB stock dividend received ....................................... (16,096) (13,693) (9,612)
(Increase) decrease in other assets ................................ (127,001) 434 20,298
Increase (decrease) in other liabilities ........................... 119,641 177,937 (27,698)
Other items ........................................................ (2,669) 630 (24,286)
------------ ------------ ------------
Total adjustments .................................................. 99,099 292,548 104,664
------------ ------------ ------------
Net cash provided by operating activities ........................... 228,174 342,971 146,716
============ ============ ============
CASH FLOWS FROM INVESTING ACTIVITIES:
Net change in certificates of deposit with original maturities of 3
months or less ..................................................... 3,805 1,971 (5,027)
Net change in other debt and equity securities with original
maturities of 3 months or less ..................................... 390 (3,809) 9,268
Purchase of certificates of deposit ................................. (2,000) (3,000) (4,800)
Purchase of other debt and equity securities held to maturity ....... -- (3,000) (5,000)
Proceeds from maturities of certificates of deposit ................. -- 7,810 9,100
Proceeds from maturities of other debt and equity securities held
to maturity ........................................................ -- 7,800 20,045
Purchase of other debt and equity securities available for sale ..... (361) (2,113) --
Proceeds from sales and maturities of other debt and equity
securities available for sale ...................................... 6,156 161,760 --
Purchase of mortgage-backed securities held to maturity ............. -- -- (2,982)
Principal payments on mortgage-backed securities held to maturity 245,588 190,545 495,999
Purchase of mortgage-backed securities available for sale ........... (588,712) (505,083) (113,218)
Principal payments on mortgage-backed securities available for sale 457,318 285,404 355,975
Proceeds from sale of mortgage-backed securities available for sale 124,811 -- 1,671,934
Loans originated for investment, net of refinances .................. (720,064) (590,924) (364,471)
Loans purchased for investment ...................................... (2,707,817) (2,430,461) (2,107,509)
Net change in undisbursed loan funds ................................ (1,591) (10,353) 7,507
Principal payments on loans held for investment ..................... 2,859,780 1,894,857 1,428,501
Proceeds from sale of loans held for investment ..................... -- -- 159,079
Cash invested in real estate ........................................ (11,735) (12,515) (16,115)
Cash received from real estate investments and sale of real estate
acquired in settlement of loans .................................... 98,175 101,679 108,482
Purchase of FHLB stock .............................................. (1,067) (53,052) (17,187)
Redemption of FHLB stock ............................................ -- -- 19,756
Net (increase) decrease in premises and equipment ................... (18,191) (19,810) 20,559
Payments under agreements to purchase mortgage servicing assets ..... (21,558) (197,091) (26,479)
Payment for purchase of CENFED Financial Corporation ................ (3,232) -- --
Payment for purchase of TransWorld Bank ............................. -- (64,419) --
Payment for purchase of OneCentral Bank ............................. -- (11,111) --
------------ ------------ ------------
Net cash (used in) provided by investing activities ................. (280,305) (1,254,915) 1,643,417
============ ============ ============
</TABLE>
Statement continued on next page
F-5
<PAGE>
GLENDALE FEDERAL BANK AND SUBSIDIARIES
CONSOLIDATED STATEMENTS OF CASH FLOWS--(CONTINUED)
(IN THOUSANDS)
<TABLE>
<CAPTION>
YEARS ENDED JUNE 30
---------------------------------------------------
1998 1997 1996
--------------- --------------- ---------------
<S> <C> <C> <C>
CASH FLOWS FROM FINANCING ACTIVITIES:
Net (decrease) increase in deposits ............................. $ (93,221) $ 227,776 $ (10,904)
Net change in short-term borrowings with original maturities of 3
months or less ................................................. (717,197) 10,632 (1,937,126)
Proceeds from fundings of FHLB advances ......................... 4,024,000 2,300,000 2,988,000
Repayments of FHLB advances ..................................... (3,460,000) (1,350,000) (2,645,000)
Repayment of other borrowings ................................... (10,712) (2,492) (18,284)
Proceeds from issuance of common stock .......................... 206 4,804 1,136
Payment of dividends on preferred stock ......................... -- (11,827) (17,044)
Payment of dividends to parent company .......................... (82,524) -- --
------------ ------------ ------------
Net cash (used in) provided by financing activities ............ (339,448) 1,178,893 (1,639,222)
------------ ------------ ------------
Net (decrease) increase in cash and cash equivalents ............ (391,579) 266,949 150,911
Cash and cash equivalents at beginning of year .................. 853,557 586,608 435,697
------------ ------------ ------------
Cash and cash equivalents at end of year ........................ $ 461,978 $ 853,557 $ 586,608
============ ============ ============
</TABLE>
See accompanying Notes to Consolidated Financial Statements
F-6
<PAGE>
GLENDALE FEDERAL BANK AND SUBSIDIARIES
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
JUNE 30, 1998, 1997 AND 1996
NOTE 1: BASIS OF PRESENTATION AND SUMMARY OF SIGNIFICANT ACCOUNTING AND
REPORTING POLICIES
PRINCIPLES OF CONSOLIDATION AND PRESENTATION
The consolidated financial statements include the accounts of Glendale
Federal Bank, Federal Savings Bank and its subsidiaries ("Glendale Federal" or
the "Bank"). All significant intercompany balances and transactions have been
eliminated in consolidation, including 200,686 common shares of Glendale
Federal held by a subsidiary of the Bank at June 30, 1998. Certain
reclassifications have been made to prior years' consolidated financial
statements to conform to the June 30, 1998 presentation.
Golden State Bancorp Inc. ("Golden State" or the "Company") was formed to
become the holding company for Glendale Federal in a reorganization that was
approved by Glendale Federal's stockholders and completed on July 24, 1997. As
part of the holding company formation, shares of Glendale Federal's common
stock automatically became an equal number of shares of Golden State common
stock and shares of Glendale Federal's Noncumulative Preferred Stock, Series E,
automatically became an equal number of shares of Golden State's Noncumulative
Convertible Preferred Stock, Series A. Glendale Federal's two classes of
warrants became exercisable solely to purchase common stock of Golden State.
The members of the board of directors of Glendale Federal also became the board
of directors of Golden State.
On November 26, 1997, Golden State Financial Corporation ("Golden State
Financial") was formed as a wholly-owned subsidiary of Golden State for the
purpose of becoming an intermediate holding company to effect the acquisition
of CENFED Financial Corporation ("CENFED"), the parent company of CenFed Bank,
A Federal Savings Bank ("CenFed Bank"). CENFED was merged with and into Golden
State Financial on April 21, 1998, with Golden State Financial as the surviving
entity in the merger. On May 8, 1998, Golden State Bancorp contributed its
shares of Glendale Federal to Golden State Financial and CenFed Bank was merged
into Glendale Federal, with Glendale Federal as the surviving entity.
Golden State has no significant assets or business other than its
ownership of Golden State Financial, and Golden State Financial has no
significant assets or business other than its ownership of Glendale Federal.
The Bank's business consists primarily of attracting checking and savings
deposits from the public; originating real estate, business and consumer loans;
and purchasing loans secured by mortgages on residential real estate. The Bank,
through its subsidiaries, also provides general insurance and securities
brokerage services.
RISKS AND UNCERTAINTIES
In the normal course of its business, the Bank encounters two significant
types of risk: economic risk and regulatory risk. There are four main
components of economic risk: interest rate risk, credit risk, market risk and
concentrations of credit risk. The Bank is subject to interest rate risk to the
degree that its interest-bearing liabilities mature or reprice at different
speeds, or on different bases, than its interest-earning assets. Credit risk is
the risk of default on the Bank's loan portfolio that results from borrowers'
inability or unwillingness to make contractually required payments. Market risk
refers to the risk of decline in the value of collateral underlying loans
receivable and the value of real estate held by the Bank, and in the valuation
of loans held for sale, mortgage-backed securities available for sale and
mortgage servicing assets. Concentration of credit risk refers to the risk
that, if the Bank extends a significant portion of its total outstanding credit
to borrowers in a specific geographical area or industry or on the security of
a specific form of collateral, the Bank may experience disproportionately high
levels of default and losses if those borrowers, or the value of the type of
collateral, is adversely affected by factors that are particularly applicable
to such borrowers or collateral. Glendale Federal's lending activities are
principally in California, with the largest concentration of the Bank's loan
portfolio being secured by real estate located in Southern California. The
ability of the Bank's borrowers to repay
F-7
<PAGE>
GLENDALE FEDERAL BANK AND SUBSIDIARIES
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS (CONTINUED)
JUNE 30, 1998, 1997 AND 1996
amounts owed is dependent on several factors, including the economic conditions
in the borrower's geographic region and the borrower's financial condition. The
Company and the Bank are subject to the regulations of various government
agencies. Regulatory risk refers, among other things, to the fact that these
regulations can and do change significantly from period to period. The Bank
undergoes periodic examinations by regulatory agencies, which may subject it to
further changes with respect to asset valuations, amounts of required loss
allowances and operating restrictions resulting from the regulators' judgments
based on information available to them at the time of their examination.
The Bank has had an ongoing program that was intended to ensure that its
operational and financial systems would not be adversely affected by Year 2000
data processing hardware and software failures arising from processing errors
involving calculations using the Year 2000 date. Enhancements to the Bank's
mainframe systems have been implemented with completion of all mission critical
repairs having been scheduled for November 1998. The Bank has initiated
renovation of its non-mainframe systems, with completion of all but one mission
critical system having been scheduled for December 1998 and the one remaining
mission critical system was to be completed in February 1999. The Bank halted
further implementation of its own Year 2000 efforts as of August 20, 1998 after
receiving both shareholder and Office of Thrift Supervision approvals for the
Cal Fed Merger. See Note 21: "Subsequent Events" for additional information
regarding the Cal Fed Merger. Future Year 2000 compliance will depend upon the
ongoing systems that will be maintained by Cal Fed. Expenses related to the
Year 2000 enhancements amounted to $10.0 million in fiscal 1998, compared to
$0.3 million in fiscal 1997. The Bank expected to incur approximately $37
million on this project, including $2 million to $3 million on software and
hardware expenditures, on its program to modify, redevelop or replace its
computer applications to try to make them "Year 2000" compliant. Year 2000
compliance failures could result in additional expense to the Bank and
significant disruption of its business.
In preparing the consolidated financial statements, management is required
to make estimates and assumptions that affect the reported amounts of assets
and liabilities and disclosure of contingent assets and liabilities as of the
dates of the balance sheets and revenues and expenses for the periods covered,
including the allowance for loan losses, mortgage servicing assets and the
realization of deferred tax assets. Actual results could differ significantly
from those estimates and assumptions.
SHORT-TERM HIGHLY LIQUID INVESTMENTS
The Bank's short-term highly liquid investments consist of federal funds
sold and assets purchased under agreements to resell. The Bank invests in these
assets to maximize its return on liquid funds.
Glendale Federal is required by the Federal Reserve System to maintain
non-interest earning cash reserves against certain of its transaction accounts
and term deposit accounts. At June 30, 1998 and 1997, the required reserves
totaled $92,688,000 and $61,892,000, respectively. Actual reserves totaled
$92,690,000 and $62,454,000 at June 30, 1998 and 1997, respectively.
INVESTMENTS IN DEBT AND EQUITY SECURITIES
Glendale Federal's investment in debt securities consists principally of
U.S. Treasury securities, obligations of municipalities and mortgage-backed
securities purchased by the Bank or created when the Bank exchanges pools of
loans for mortgage-backed securities ("securitized loans"). The Bank classifies
its investment in debt and equity securities as held to maturity securities,
trading securities and available for sale securities, as applicable.
Securities are designated as held to maturity if the Bank has the positive
intent and the ability to hold the securities to maturity. Held to maturity
securities are carried at amortized cost, adjusted for the amortization of any
related net deferred origination costs and premiums or the accretion of any
related
F-8
<PAGE>
GLENDALE FEDERAL BANK AND SUBSIDIARIES
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS (CONTINUED)
JUNE 30, 1998, 1997 AND 1996
net deferred origination fees and discounts into interest income using the
interest method over the estimated remaining period until maturity. Unrealized
losses on held to maturity securities, reflecting a decline in value judged by
the Bank to be other than temporary, are charged to income and reported under
the caption "Gain (loss) on sale of mortgage-backed securities, net" in the
Consolidated Statements of Operations.
Glendale Federal classifies securities as available for sale when at the
time of purchase it determines that such securities may be sold at a future
date or if the Bank does not have the positive intent or ability to hold such
securities to maturity. Securities designated as available for sale are
recorded at fair value. Changes in the fair value of debt and equity securities
available for sale are included in shareholders' equity as unrealized holding
gains or losses net of the related tax effect. Unrealized losses on available
for sale securities reflecting a decline in value judged to be other than
temporary are charged to income in the Consolidated Statement of Operations.
Realized gains or losses on available for sale securities are determined on the
specific identification basis. Deferred net origination costs or fees, and
purchased premiums and discounts, are amortized and accreted to interest income
using the interest method over the estimated remaining period until maturity.
Glendale Federal classifies securities it intends to sell presently as
trading securities. Such securities are generally comprised of securities
created by the Bank to facilitate the sale of loans originated and held for
sale. Trading securities are recorded at fair value, determined by the lesser
of quoted market prices for similar securities or commitment prices for those
securities under mandatory commitments to sell. Changes in fair value of debt
and equity securities are recognized in earnings in the period in which the
change occurs under the caption "Gain (loss) on sale of mortgage-backed
securities, net" in the Consolidated Statements of Operations. The Bank held no
trading securities at June 30, 1998 and 1997.
In November 1995, the Financial Accounting Standards Board (the "FASB")
issued implementation guidance for Statement of Financial Accounting Standards
No. 115, "Accounting for Certain Investments in Debt and Equity Securities"
("SFAS 115"). The guidance caused the Bank to reassess the appropriateness of
the classifications of its securities and account for resulting
reclassifications at fair value in accordance with SFAS 115. During the second
quarter of fiscal 1996, the Bank, in accordance with the implementation
guidance, reclassified $2.8 billion of mortgage-backed securities from held to
maturity to available for sale. Pursuant to the transfer to available for sale
and the subsequent sale of $1.7 billion of CMOs, the Bank recorded a pre-tax
loss on sale of mortgage-backed securities of $28.2 million during fiscal 1996.
See Note 6: "Mortgage-Backed Securities" for additional information.
LOANS HELD FOR SALE
Glendale Federal may designate certain of its loans receivable as being
held for sale. In determining the level of loans held for sale, the Bank
considers whether such loans would be sold in response to liquidity needs,
asset/liability management requirements, regulatory capital needs and other
factors. The Bank originates and/or purchases loans that meet certain yield and
other guidelines for its own portfolio. Such loans are designated as held for
investment at the time of origination or purchase based on a specific
identification method. Loans that do not meet such guidelines are designated as
held for sale.
Loans held for sale are recorded at the lower of aggregate cost or market
value. Unrealized losses are recorded as a reduction in earnings and are
included under the caption "Gain (loss) on sale of loans, net" in the
Consolidated Statements of Operations. Realized gains and losses from the sale
of loans receivable are computed under the specific identification method.
ALLOWANCE FOR LOAN LOSSES
The allowance for loan losses is maintained at an amount management deems
adequate to cover estimated inherent losses. In determining the allowance for
loan losses to be maintained, management
F-9
<PAGE>
GLENDALE FEDERAL BANK AND SUBSIDIARIES
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS (CONTINUED)
JUNE 30, 1998, 1997 AND 1996
evaluates many factors, including management's judgment as to appropriate asset
classifications, prevailing and forecasted economic and market conditions,
industry experience, historical loss experience, loan portfolio composition,
management's assessment of the borrowers' ability to repay and repayment
performance, and the fair value of the underlying collateral.
The determination of the allowance for loan losses is based on estimates
that are particularly susceptible to changes in the economic environment and
market conditions. Management believes that, as of June 30, 1998 and 1997, the
allowance for loan losses is adequate based on information currently available
to it. Deterioration in the economies of the Bank's principal market areas
could adversely impact the Bank's loan portfolios and increases in
non-performing assets and higher charge-offs could result. Such adverse effects
could also require a larger allowance for loan losses.
The Bank considers a loan to be impaired when, based upon current
information and events, it believes it is probable that the Bank will be unable
to timely collect all amounts due according to the contractual terms of the
loan agreement. Non-accrual income property loans, non-accrual single-family
loans or borrowing relationships with unpaid balances greater than $500,000,
non-accrual business banking loans with unpaid balances of greater than
$100,000, troubled debt restructurings, and certain performing loans are
measured individually for impairment. Loans not included in the preceding
categories are collectively measured for impairment. Specific valuation
allowances are established for impaired collateralized loans at the difference
between the loan amount and the fair value of the related collateral, reduced
by estimated selling costs, and for unsecured loans at either the present value
or the expected future cash flows from the loan, discounted at the loan's
effective interest rate, or at the loan's observable market price. Impairment
losses are recognized through an increase in the allowance for loan losses and
a corresponding charge to the provision for loan losses. Adjustments to
impairment losses due to changes in the fair value of the collateral properties
for impaired loans are included in the provision for loan losses. Impaired
loans may be left on accrual status during the period the Bank is pursuing
repayment of the loan. When an impaired loan is either sold, transferred to REO
or written down, any related valuation allowance is charged off against the
allowance for loan losses. Impaired loans are placed on non-accrual status at
the point that either: (1) they become 90 days delinquent; or (2) the Bank
determines the borrower is incapable of, or has ceased efforts toward,
continuing performance under the terms of the loan.
Increases to the general allowance are charged to the provision for loan
losses. Specific valuation allowances are provided for when management
identifies a loan or a portion thereof as to which default is deemed probable.
Charge-offs to the allowance for loan losses are made when all, or a portion,
of the loan is confirmed as a loss based upon management's review of the loan
or through repossession of the underlying security or through a troubled debt
restructuring transaction. Recoveries of previously charged-off amounts are
credited to the allowance.
TROUBLED DEBT RESTRUCTURINGS
Loans whose terms are modified due to borrower difficulties in repaying
amounts owed under the loan's original terms are classified as Troubled Debt
Restructurings ("TDRs"). TDRs are reported as such based on whether the
restructuring was made at an interest rate equal to or greater than the rate
that the Bank was willing to accept for loans presenting comparable credit risk
at the time of the restructuring for a loan of comparable risk and whether the
loan is impaired based on the terms of the restructuring agreement. Loans that
are restructured at rates greater than or equal to the rate the Bank was
willing to accept at the time of restructuring and that are not impaired based
on the terms of the restructuring are reported as TDRs only in the year of the
restructuring. All other TDRs are reported in years following the restructuring
until repaid.
F-10
<PAGE>
GLENDALE FEDERAL BANK AND SUBSIDIARIES
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS (CONTINUED)
JUNE 30, 1998, 1997 AND 1996
INTEREST INCOME RECOGNITION--LOANS RECEIVABLE
Interest income is accrued as it is earned. Loans are placed on
non-accrual status after being delinquent more than 90 days, or earlier if the
borrower is deemed by management to be unable to continue performance. When a
loan is placed on non-accrual status, interest accrued but not received is
reversed. While a loan is on non-accrual status, interest is recognized only as
cash is received and if no portion of the loan's carrying value is classified
"Doubtful". Loans are returned to accrual status only when the loan is
reinstated and ultimate collectibility of current interest is no longer in
doubt. Interest income on impaired loans is recognized based on the loan's
accrual and classification status as discussed above.
Loan origination fees and direct origination costs are deferred at
origination and the net amounts deferred are accreted or amortized to interest
income over the contractual lives of the loans, using the interest method.
Accretion of discounts and net deferred origination fees and amortization of
premiums and net deferred origination costs is discontinued when loans are
placed on non-accrual status.
GAINS AND LOSSES FROM SALE OF LOANS
Glendale Federal sells whole mortgage loans and participations in mortgage
loans to institutional and private investors. Gains and losses resulting from
the sales of loans are determined on the specific identification method and
reflect the extent that the sales proceeds and the allocated fair value of any
retained interests exceed or are less than the Bank's investment in the loans
(which includes the unpaid principal balance of the loans, unearned discounts,
premiums and deferred fees and costs at the time of sale). To the extent sales
of loans involve the sale of part of a loan or a pool of loans with
disproportionate credit or prepayment risks, the cost basis is allocated based
upon the relative fair market value of the portion sold to the portion retained
on the date of sale.
In most cases, the Bank sells loans and continues to service such loans
for the investor. During fiscal 1997, the Bank adopted Statement of Financial
Accounting Standards No. 122, "Accounting for Mortgage Servicing Rights" ("SFAS
122"). SFAS 122 was superseded, for transactions recorded after December 31,
1996, by Statement of Financial Accounting Standards No. 125, "Accounting for
Transfers and Servicing of Financial Assets and Extinguishment of Liabilities"
("SFAS 125"). Both SFAS 122 and SFAS 125 require, and the Bank recorded, the
recognition of a servicing asset or liability and other retained interests as
an allocation of the carrying amount of the assets sold between the asset sold
and the servicing obligation and other retained interests based on the relative
fair value of the assets sold to the interests retained. The resulting Mortgage
Servicing Asset ("MSA") or liability is amortized in proportion to and over the
period of estimated net servicing income or loss. The Bank evaluates the MSA
for impairment or increased obligation based on the MSA's fair value.
Glendale Federal estimates fair values by discounting servicing asset cash
flows using discount and prepayment rates that it believes market participants
would use. The assets are summarized by risk attribute strata and a valuation
allowance is recorded as the sum of the impairment amounts for all strata with
impairment. For purposes of defining impairment strata, the Bank groups loans
by interest rate, by whether the loan is government-insured, and by whether the
loan has a fixed or adjustable interest rate.
If loans are sold with recourse, the estimated liability under the
recourse provision is provided for in the computation of the gain or loss. For
loan sales after December 31, 1996, in accordance with the requirements of SFAS
125 (described under the caption "Current Accounting Pronouncements",
following), the liability for loans sold with recourse is recorded at the fair
value of the liability. For loan sales through December 31, 1996, the liability
is recorded at the present value of the future recourse obligation, discounted
at a risk-free rate of return as of the date of the sale. There were no loan
sales with recourse between December 31, 1996 and June 30, 1998.
F-11
<PAGE>
GLENDALE FEDERAL BANK AND SUBSIDIARIES
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS (CONTINUED)
JUNE 30, 1998, 1997 AND 1996
LOAN SERVICING AND MORTGAGE SERVICING RIGHTS
Glendale Federal services mortgage loans for investors. Fees earned for
servicing loans owned by investors are reported as income when the related
mortgage loan payments are due. Accrued servicing fees relating to loans past
due more than 90 days are reversed. Loan servicing costs are charged to expense
as incurred. Loans serviced for others are not included with loans receivable
or any other asset in the accompanying Consolidated Statements of Financial
Condition.
The Bank from time-to-time enters into transactions to acquire the rights
to service pools of loans for others and collect the servicing and related
fees. The amount paid by the Bank for these rights is capitalized as MSA. The
Bank also sells loans and retains the right to service the loans for the
investors. As discussed in "Gains and Losses from Sale of Loans," preceding,
the Bank also records MSA arising from sales of loans.
MSA is amortized in proportion to, and over the period that the servicing
rights generate net servicing fee income. SFAS 125 also requires that MSA be
evaluated for impairment based on the asset's fair value. The Bank estimates
fair values by discounting servicing asset cash flows using discount and
prepayment rates that it believes market participants would use. For purposes
of measuring impairment, MSA is stratified by the Bank based upon whether the
loans are fixed-rate or adjustable-rate, and whether the loans are
government-insured.
ACCOUNTING FOR REAL ESTATE
Real estate acquired in settlement of loans ("REO") is recorded at the
lower of fair value, generally as determined by recent appraisals, reduced by
estimated selling costs, or the recorded investment in the loan at the time of
foreclosure. Thereafter, the property is carried at the lower of acquisition
cost or fair value reduced by estimated selling costs, as reflected by
subsequent appraisals or sales agreements. Specific valuation allowances on REO
are recorded through a charge to operations for estimated costs to sell and if
there is a further deterioration in fair value. The Bank also provides a
general allowance for inherent losses on REO recorded through a charge to
operations.
Real estate held for sale or investment ("REI") is carried at the lower of
cost or fair value less estimated costs to sell.
Changes in estimated selling and disposal costs, and declines in fair
values are provided through a valuation allowance. Net gains or losses on
disposal of REO and REI are charged to operations as incurred.
Gains on real estate sales financed by the Bank are recognized only when
the transactions meet the down-payment and continuing investment criteria of
Statement of Financial Accounting Standards No. 66, "Accounting for Sales of
Real Estate." Losses are recognized when identified.
PREMISES AND EQUIPMENT AND DEPRECIATION
Depreciation and amortization of premises is included in "Occupancy
expense, net" and depreciation and amortization of equipment is included in
"Other general and administrative expenses" in the Consolidated Statements of
Operations. Depreciation and amortization of premises and equipment is computed
using the straight-line method over the estimated useful lives of the assets.
The cost of leasehold improvements is amortized using the straight-line method
over the lesser of the life of the asset or the remaining term of the related
lease. Maintenance and repairs on premises and equipment are charged to expense
as incurred. Material improvements are capitalized.
GOODWILL AND OTHER INTANGIBLE ASSETS
Assets acquired and liabilities assumed in acquisitions accounted for
under the purchase method of accounting were recorded at their fair value as of
the date of the acquisition. The excess cost over fair
F-12
<PAGE>
GLENDALE FEDERAL BANK AND SUBSIDIARIES
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS (CONTINUED)
JUNE 30, 1998, 1997 AND 1996
value of the net assets acquired was classified as goodwill and is being
amortized over periods ranging from 10 to 40 years on a straight-line basis.
The purchase accounting discount or premium resulting from each acquisition is
accreted or amortized into interest income using the interest method over the
loans' remaining contractual lives, adjusted for actual principal prepayments.
At June 30, 1998, goodwill totaled $149.8 million and had a weighted average
remaining life of 15.2 years.
In fiscal 1997, the Bank acquired OneCentral Bank ("OneCentral") with
total assets of $74.3 million for $11.1 million in cash, which includes
out-of-pocket expenses, and TransWorld Bancorp ("TransWorld") with total assets
of $372.4 million for $64.4 million in cash, including out-of-pocket expenses.
The Bank recorded goodwill of $5.8 million and $40.0 million, respectively, in
the OneCentral and TransWorld transactions, which is being amortized over 15
years using the straight-line method. The goodwill relating to these
acquisitions had a remaining balance of $42.0 million at June 30, 1998.
In fiscal 1998, the Company acquired CENFED. The terms of the transaction
provided for a tax-free exchange of 1.2 shares of Golden State common stock for
each outstanding share of CENFED's common stock. Pursuant to the terms of the
transaction, Golden State issued 7,390,557 shares of its common stock for a
total purchase price of $211.1 million, or $28.563 per share. The Bank recorded
goodwill of $90.5 million, which is being amortized over 15 years using the
straight-line method. The goodwill relating to this acquisition had a remaining
balance of $89.5 million at June 30, 1998.
As discussed in Note 21: "Subsequent Events," on July 11, 1998, the
Company completed its acquisition of RedFed Bancorp, parent company of Redlands
Federal Bank. Redlands Federal Bank was merged with the Bank, with Glendale
Federal as the ongoing entity. Pursuant to this acquisition, the Bank recorded
goodwill of $62.8 million.
In fiscal 1995, the Bank acquired $194 million in deposits of Independence
One Bank of California, Federal Savings Bank ("Independence One") and $812
million in deposits of Union Federal Bank ("Union Federal"). The Bank paid a
purchase premium of $4.4 million for the Independence One deposits and a
purchase premium of $6.9 million for the Union Federal deposits. The Bank
accepted as part of the consideration for assuming Union Federal's deposit
liabilities certain of Union Federal's assets at their existing gross book
values. These purchase premiums, together with an adjustment to record the
assets acquired from Union Federal at fair value, totaled $42.9 million, and
are reflected under the caption "Goodwill and other intangible assets" in the
Consolidated Statements of Financial Condition. These intangible assets are
being amortized over 10 years using the straight-line method. At June 30, 1998,
these intangible assets totaled $30.6 million with a remaining life of seven
years.
Periodically, the Bank evaluates the recoverability of its deposit
purchase premium assets based upon the rate of attrition of deposit
relationships acquired. Goodwill is evaluated for impairment on the basis of
the estimated undiscounted cash flows of the acquired franchise.
DERIVATIVE FINANCIAL INSTRUMENTS
Glendale Federal has in the past used various strategies to minimize
interest rate risk, including interest rate futures contracts and interest rate
exchange agreements ("swaps"). The Bank's accounting policy relating to
interest rate futures contracts is to amortize deferred gains and losses on
futures contracts into interest income or expense over the expected remaining
life of the hedged asset or liability. The conditions for obtaining and
maintaining hedge accounting treatment require identification of the asset or
liability to be hedged and linking the swap to the asset or liability being
hedged. The notional amounts of outstanding interest rate swaps are off-balance
sheet items and therefore are not reflected in the Consolidated Statements of
Financial Condition. Any gains or losses from selling the swaps simultaneously
with the underlying assets or liabilities are currently recognized. Any gains
or losses from selling only the swap, without the assets or liabilities, are
deferred and amortized over the life of the assets or liabilities. Net interest
income (expense) resulting from the differential between exchanging floating
F-13
<PAGE>
GLENDALE FEDERAL BANK AND SUBSIDIARIES
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS (CONTINUED)
JUNE 30, 1998, 1997 AND 1996
rate and fixed rate interest payments is recorded on a current basis and is
included with the interest income or expense of the related asset or liability
in the Consolidated Statements of Operations. The Bank does not hold any
derivative financial instruments for trading purposes. As of June 30, 1998 and
1997, there were no interest rate swaps outstanding.
As detailed under "Current Accounting Pronouncements" following, the FASB
issued Statement of Financial Accounting Standards No. 133, "Accounting for
Derivative Instruments and Hedging Activities" ("SFAS 133") in June of 1998. As
discussed under "Current Accounting Pronouncements," SFAS 133 will require
adjustments to the Bank's accounting policy during the quarter ending September
30, 1999. As the Bank presently does not use derivative financial instruments
in its hedging practices, changes to Glendale Federal's accounting policies
would have no effect on the Bank's statements of financial position or results
of operations at June 30, 1998 for the year then-ended.
SECURITIES SOLD UNDER AGREEMENTS TO REPURCHASE
Glendale Federal enters into sales of securities under agreements to
repurchase ("reverse repurchase agreements") only with selected primary
dealers. These reverse repurchase agreements are treated as financings: the
dollar amount of securities underlying the agreements remains in the asset
accounts, and the obligations to repurchase securities sold are reflected as
liabilities in the Consolidated Statements of Financial Condition.
INCOME TAXES
The Company and its subsidiaries, including the Bank, file a consolidated
Federal income tax return.
The Bank uses the asset and liability method of accounting for income
taxes. 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.
CURRENT ACCOUNTING PRONOUNCEMENTS
In February 1997, the FASB issued Statement of Financial Accounting
Standards No. 129, "Disclosure of Financial Information About Capital
Structure" ("SFAS 129"). SFAS 129 supersedes capital structure disclosure
requirements found in previous accounting pronouncements and consolidates them
into one statement for ease of retrieval and greater visibility for non-public
entities. These disclosures are required for financial statements for periods
ending after December 15, 1997. SFAS 129 makes no changes to previous
accounting pronouncements that applied to the Bank; accordingly, adoption of
SFAS 129 has no impact on the Bank's results of operations and financial
condition.
In June 1997, the FASB issued Statement of Financial Accounting Standards
No. 130, "Reporting Comprehensive Income" ("SFAS 130"). SFAS 130 requires the
inclusion of comprehensive income, either in a separate statement for
comprehensive income, or as part of a combined statement of income and
comprehensive income in a full-set of general-purpose financial statements.
Comprehensive income is defined as the change in equity of a business
enterprise during a period from transactions and other events and
circumstances, excluding those resulting from investments by and distributions
to owners. SFAS 130 requires that comprehensive income be presented beginning
with net income, adding the elements of comprehensive income not included in
the determination of net income,
F-14
<PAGE>
GLENDALE FEDERAL BANK AND SUBSIDIARIES
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS (CONTINUED)
JUNE 30, 1998, 1997 AND 1996
to arrive at comprehensive income. SFAS 130 also requires that an enterprise
display the accumulated balance of other comprehensive income separately from
retained earnings and additional paid-in capital in the equity section of a
statement of financial position.
SFAS 130 is effective for the Bank's fiscal year beginning July 1, 1998.
SFAS 130 requires the presentation of information already contained in the
Bank's financial statements and therefore is not expected to have an impact on
the Bank's financial position or results of operation.
In February 1998, the FASB issued Statement of Financial Accounting
Standards No. 132, "Employees' Disclosure about Pensions and Other
Postretirement Benefits" ("SFAS 132"). SFAS 132 changes disclosure
requirements, but does not change measurement standards, of pension and other
postretirement benefit plans. SFAS 132 standardizes the disclosure requirements
for retirement and other postretirement benefit plans that are subject to
previous accounting standards, and requires disclosure of additional
information regarding such plans that will facilitate financial analysis. SFAS
132 is effective for the Bank's fiscal year ending June 30, 1999. SFAS 132
requires changes in disclosures only, and therefore is not expected to have an
effect on the Bank's financial position or results of operations.
In June 1998, the FASB issued Statement of Financial Accounting Standards
No. 133, "Accounting for Derivative Instruments and Hedging Activities" ("SFAS
133"). SFAS 133 replaces, amends and nullifies previous statements of financial
accounting standards and Emerging Issues Task Force consensuses to provide a
comprehensive framework for accounting and reporting for derivative instruments
and hedging activities. SFAS 133 requires recognition of all derivative
instruments as either assets or liabilities in the statement of financial
condition. Gain or loss recognition is determined based on the intended use and
resulting designation of the derivative instrument:
o Gains or losses on derivative instruments not designated as hedging
instruments are recognized in the period of change in fair value.
o Gains or losses on derivative instruments designated as hedging the
exposure to changes in the fair value of a recognized asset,
liability or firm commitment are recognized in earnings in the period
of the fair value change, together with the offsetting fair value
loss or gain on the hedged item.
o Gains or losses on derivative instruments designated as hedging
exposure to variable cash flows arising from a forecasted transaction
are initially reported, to the extent the fair value change is offset
by the change in the forecasted cash flows, as a component of other
comprehensive income. The portion of the change in fair value in
excess of the offsetting change in forecasted cash flows is reported
in earnings in the period of the change.
o Gains or losses on derivative instruments designated as foreign
currency hedges of net investments in foreign operations are reported
in other comprehensive income as part of the foreign currency
translation adjustment.
SFAS 133 precludes the use of nonderivative financial instruments as
hedging instruments, except that nonderivative financial instruments
denominated in a foreign currency may be designated as a hedge of the foreign
currency exposure of an unrecognized firm commitment denominated in a foreign
currency or a net investment in a foreign operation.
SFAS 133 is effective for the Bank's quarter ending September 30, 1999.
During that quarter, all existing derivative instruments identified as hedging
instruments must be re-evaluated and designated and documented in compliance
with SFAS 133. At June 30, 1998, the Bank had no derivative financial
instruments. Therefore, as of June 30, 1998, SFAS 133 would have no impact on
the Bank's statement of financial condition or results of operations. However,
should the Bank enter into derivative instrument transactions during its fiscal
year ended June 30, 1999, there will be an indeterminate effect on the Bank's
financial condition and results of operations for the fiscal quarter ending
September 30, 1999.
F-15
<PAGE>
GLENDALE FEDERAL BANK AND SUBSIDIARIES
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS (CONTINUED)
JUNE 30, 1998, 1997 AND 1996
NOTE 2: SUPPLEMENTAL DISCLOSURE OF CASH FLOW INFORMATION
For the purpose of the statement of cash flows, cash and cash equivalents
include "Cash and amounts due from banks" and "Federal funds sold and assets
purchased under resale agreements".
Supplemental disclosure of cash flow information is as follows (in
thousands):
<TABLE>
<CAPTION>
YEARS ENDED JUNE 30
--------------------------------------
1998 1997 1996
----------- ----------- ------------
<S> <C> <C> <C>
Cash paid for:
Interest .......................................................... $714,435 $707,087 $ 738,407
Income taxes ...................................................... 64,024 24,672 12,623
Non-cash investing and financing activities:
Principal reductions to loans due to foreclosure .................. 96,448 156,820 186,157
Loans exchanged for mortgage-backed securities .................... 171,737 42,222 145,826
Loans made to facilitate the sale of real estate held for
investment and real estate acquired in settlement of loans ...... 35,576 60,118 85,157
Exchange of preferred stock for common stock ...................... -- 1,202 2,226
Issuance of common stock in exchange for preferred stock .......... -- 3,104 5,902
Issuance of common stock to parent in the acquisition of
CenFed Bank ..................................................... 193,860 -- --
Transfer of mortgage-backed and other debt and equity
securities to available for sale ................................ -- 7,935 2,818,831
Transfers of loans from held for investment to held for sale:
Liquidation of troubled credits ................................. 36,598 28,846 24,344
Sale of loans serviced by others ................................ 45,824 -- --
Loans originated for investment, subsequently identified to
sale portfolio ................................................. -- 1,596 --
Transfers of loans from held for sale to held for investment:
Loans originated for sale, subsequently identified to
investment portfolio ........................................... 5,677 -- 1,275
Troubled credits previously transferred to held for sale, but
deemed non-salable ............................................. -- 3,768 3,064
Other ........................................................... -- -- 73
Fair value of CenFed Bank net assets acquired ..................... 106,569 -- --
Fair value of TransWorld net assets acquired ...................... -- 24,377 --
Fair value of OneCentral net assets acquired ...................... -- 5,306 --
</TABLE>
The transfers from held for investment loans were primarily of troubled
loans which the Bank sold to remove the credit and/or collateral risk arising
from the credit. The transfer in fiscal 1996 of troubled credits back to held
for investment represents a single loan that was deemed unsalable in fiscal
1996.
During fiscal 1998, 1997 and 1996, the Bank received income tax refunds of
$314,000, $8,383,000 and $6,630,000, respectively.
NOTE 3: ACQUISITIONS
On April 21, 1998, Golden State acquired CENFED. Pursuant to the terms of
the transaction, Golden State issued 7,390,557 shares of its common stock for a
total purchase price of $211.1 million, and CenFed Bank was merged into
Glendale Federal. Under the purchase method of accounting, the goodwill of
$90.5 million recorded by the Bank in this transaction will be amortized over
15 years using the
F-16
<PAGE>
GLENDALE FEDERAL BANK AND SUBSIDIARIES
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS (CONTINUED)
JUNE 30, 1998, 1997 AND 1996
straight-line method. At April 21, 1998, CenFed Bank operated 18 branches and
had $1.9 billion in assets, including $1.4 billion of loans receivable, net,
and $354 million of mortgage-backed securities, net. CenFed Bank's liabilities
included $1.4 billion of deposits and $385.1 million of borrowings. These
amounts are unaudited. The merger of CenFed Bank with Glendale Federal was
completed on May 8, 1998.
The following table summarizes the composition of loans acquired in the
CenFed Bank merger at April 21, 1998 (in thousands):
<TABLE>
<CAPTION>
PERCENT OF
AMOUNT TOTAL
------------- -----------
<S> <C> <C>
Real estate ..................... $1,404,306 99.2%
---------- -----
Consumer:
Term loans ...................... 2,477 0.2
Lines of credit ................. 511 --
---------- -----
2,988 0.2
---------- -----
Commercial:
SBA loans ....................... 8,530 0.6
Lines of credit ................. 34 --
---------- -----
8,564 0.6
---------- -----
$1,415,858 100.0%
========== =====
</TABLE>
The following table summarizes the composition of deposits acquired in the
CenFed Bank merger at April 21, 1998 (in thousands):
<TABLE>
<CAPTION>
AMOUNT PERCENT OF TOTAL
------------- -----------------
<S> <C> <C>
Checking ................................ $ 110,832 7.7%
Savings ................................. 92,170 6.4
Money Market ............................ 170,402 11.9
---------- -----
Total daily access ..................... 373,404 26.0
---------- -----
Short-term certificates (1 year or less) 458,496 31.9
Long-term certificates (over 1 year) .... 513,066 35.7
Jumbo and brokered certificates ......... 92,410 6.4
---------- -----
Total certificates ..................... 1,063,972 74.0
---------- -----
$1,437,376 100.0%
========== =====
</TABLE>
The following unaudited pro forma financial information presents the
combined results of operations of Glendale Federal and CenFed Bank, after
giving effect to certain adjustments, including amortization of goodwill,
additional depreciation expense, and related income tax effects, and assuming
the acquisition occurred at the beginning of the periods presented. The pro
forma financial information does not necessarily reflect the results of
operations that would have occurred had Glendale Federal and CenFed Bank
constituted a single entity during such periods.
<TABLE>
<CAPTION>
YEARS ENDED JUNE 30,
-----------------------
1998 1997
----------- -----------
(IN THOUSANDS, EXCEPT
PER SHARE DATA)
-----------------------
(UNAUDITED)
-----------------------
<S> <C> <C>
Pro forma net interest income ..... $488,591 $438,778
Pro forma net earnings ............ $138,929 $ 60,573
</TABLE>
F-17
<PAGE>
GLENDALE FEDERAL BANK AND SUBSIDIARIES
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS (CONTINUED)
JUNE 30, 1998, 1997 AND 1996
On May 16, 1997, the Bank completed its acquisition of TransWorld Bancorp
("TransWorld") and its principal subsidiary TransWorld Bank, which added nine
bank offices to the Bank's retail network. At that date, TransWorld had $372.4
million in assets, including $163.2 million of U.S. Government and federal
agency debt securities and $135.8 million in gross real estate, commercial and
consumer loans, and $336.3 million in deposits. The Bank paid $64.4 million
which includes out-of-pocket expenses, for the transaction and, under the
purchase method of accounting, recognized goodwill of $40.0 million after
recording the net assets acquired from TransWorld at fair value.
On January 31, 1997, the Bank completed its acquisition of OneCentral Bank
("OneCentral"). At that date, OneCentral had $74.3 million in assets, including
$38.0 million in gross real estate, commercial and consumer loans, and $68.8
million in deposits. The Bank paid $11.1 million which includes out-of-pocket
expenses, for the transaction and, under the purchase method of accounting,
recognized goodwill of $5.8 million after recording the net assets acquired
from OneCentral at fair value.
The following table summarizes, as of the respective acquisition dates,
the composition of loans purchased from TransWorld and OneCentral (in
thousands):
<TABLE>
<CAPTION>
PERCENT OF
TRANSWORLD ONECENTRAL TOTAL TOTAL
------------ ------------ ---------- -----------
<S> <C> <C> <C> <C>
Real estate .............. $ 62,028 $16,741 $ 78,769 45%
-------- ------- -------- --
Consumer:
Term loans .............. 6,727 -- 6,727 4
Lines of credit ......... 6,155 3,699 9,854 6
-------- ------- -------- --
12,882 3,699 16,581 10
-------- ------- -------- --
Commercial:
Term loans .............. 52,780 16,356 69,136 40
SBA loans ............... 7,894 -- 7,894 5
Lines of credit ......... 182 1,196 1,378 --
-------- ------- -------- --
60,856 17,552 78,408 45
-------- ------- -------- --
$135,766 $37,992 $173,758 100%
======== ======= ======== ===
</TABLE>
The following table summarizes, as of the respective acquisition dates,
the composition of deposits purchased from TransWorld and OneCentral (in
thousands):
<TABLE>
<CAPTION>
PERCENT OF
TRANSWORLD ONECENTRAL TOTAL TOTAL
------------ ------------ ----------- -----------
<S> <C> <C> <C> <C>
Checking ......................................... $139,428 $ 33,969 $173,397 43%
Savings .......................................... 11,919 1,697 13,616 3
Money Market ..................................... 108,127 26,964 135,091 33
-------- -------- -------- --
Total daily access .............................. 259,474 62,630 322,104 79
-------- -------- -------- --
Short-term certificates (1 year or less) ......... 52,830 3,356 56,186 14
Long-term certificates (over 1 year) ............. 7,631 2,823 10,454 3
Jumbo and brokered certificates .................. 16,413 -- 16,413 4
-------- -------- -------- --
Total certificates .............................. 76,874 6,179 83,053 21
-------- -------- -------- --
$336,348 $ 68,809 $405,157 100%
======== ======== ======== ===
</TABLE>
F-18
<PAGE>
GLENDALE FEDERAL BANK AND SUBSIDIARIES
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS (CONTINUED)
JUNE 30, 1998, 1997 AND 1996
NOTE 4: FEDERAL FUNDS SOLD AND ASSETS PURCHASED UNDER RESALE AGREEMENTS
Federal funds sold and assets purchased under resale agreements at the
dates indicated are summarized below at cost, which approximates market (in
thousands):
<TABLE>
<CAPTION>
JUNE 30
-----------------------
1998 1997
---------- ----------
<S> <C> <C>
Federal funds sold ................................... $ 27,000 $ --
Securities purchased under resale agreements ......... 145,000 482,000
Whole loans purchased under resale agreements -- 150,000
-------- --------
$172,000 $632,000
======== ========
</TABLE>
The following table provides further information with respect to assets
purchased under resale agreements at June 30, 1998 (in thousands):
<TABLE>
<CAPTION>
JUNE 30,
1998
-----------
<S> <C>
Balance at year end ................................. $145,000
Average amount outstanding during the year .......... 554,140
Maximum amount outstanding at any month-end ......... 725,000
</TABLE>
No amounts outstanding with individual brokers at June 30, 1998 exceeded
ten percent of stockholder's equity.
The weighted average interest rate on federal funds sold and assets
purchased under resale agreements was 6.36% and 6.49% at June 30, 1998 and
1997, respectively. Interest receivable on these securities was approximately
$31,000 and $115,000 at June 30, 1998 and 1997, respectively, and is included
in "Interest receivable" in the accompanying Consolidated Statements of
Financial Condition.
Assets purchased under resale agreements were collateralized by certain
mortgage-backed securities and whole loans at June 30, 1998 and 1997. At June
30, 1998 and 1997, the Bank held only assets purchased under agreements to
resell identical assets. The assets underlying the agreements are held by a
third party trustee for the Bank until the maturities of the agreements.
F-19
<PAGE>
GLENDALE FEDERAL BANK AND SUBSIDIARIES
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS (CONTINUED)
JUNE 30, 1998, 1997 AND 1996
NOTE 5: OTHER DEBT AND EQUITY SECURITIES
The following tables summarize the Bank's other debt and equity securities
available for sale with related remaining maturity data as of the dates
indicated (in thousands):
<TABLE>
<CAPTION>
JUNE 30, 1998
------------------------------------------------------
GROSS GROSS
AMORTIZED UNREALIZED UNREALIZED FAIR
COST GAINS LOSSES VALUE
----------- ------------ ------------ ----------
<S> <C> <C> <C> <C>
Available for sale:
U.S. Government and Federal Agency obligations:
Maturing within 1 year ...................... $ 12,398 $ 6 $ -- $ 12,404
Maturing in 1-5 years ....................... 24,879 161 -- 25,040
Maturing in 5-10 years ...................... 1,948 79 -- 2,027
Obligations of municipalities:
Maturing after 10 years ..................... 82,372 1,391 -- 83,763
Equity securities ............................. 2,379 495 -- 2,874
-------- ------ ----- --------
Total ...................................... $123,976 $2,132 $ -- $126,108
======== ====== ===== ========
</TABLE>
<TABLE>
<CAPTION>
JUNE 30, 1997
------------------------------------------------------
GROSS GROSS
AMORTIZED UNREALIZED UNREALIZED FAIR
COST GAINS LOSSES VALUE
----------- ------------ ------------ ----------
<S> <C> <C> <C> <C>
Available for sale:
U.S. Government and Federal Agency obligations:
Maturing within 1 year ...................... $14,807 $ 6 $ -- $14,813
Maturing in 1-5 years ....................... 4,976 3 (5) 4,974
Maturing in 5-10 years ...................... 5,924 -- (21) 5,903
Equity securities ............................. 1,758 346 -- 2,104
------- ---- ------ -------
Total ...................................... $27,465 $355 $(26) $27,794
======= ==== ====== =======
</TABLE>
Fair values at June 30, 1998 and 1997 were based upon quotations for
similar or identical securities.
The weighted average interest rate on other debt and equity securities was
4.21% and 5.32% at June 30, 1998 and 1997, respectively. Interest receivable on
these securities was approximately $1,235,000 and $259,000 at June 30, 1998 and
1997, respectively, and is included in "Interest receivable" in the
accompanying Consolidated Statements of Financial Condition.
During fiscal 1998, the Bank sold $2.0 million of other debt securities
available for sale. No gain or loss was recorded on the sale.
During fiscal 1997, the Bank sold $156,357,000 in securities from the
TransWorld and OneCentral acquisitions at a gross realized loss of $2,000.
These securities were all classified as available for sale at the dates of the
acquisitions. There were no sales of other debt and equity securities during
fiscal 1996.
Other debt securities include net discounts amounting to approximately
$14,700,000 and $91,000 at June 30, 1998 and 1997, respectively.
Approximately $19,883,000 of other debt securities were pledged as
collateral for borrowings at June 30, 1998. No other debt securities were
pledged as collateral for securities sold under agreements to repurchase or
other borrowings at June 30, 1997.
F-20
<PAGE>
GLENDALE FEDERAL BANK AND SUBSIDIARIES
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS (CONTINUED)
JUNE 30, 1998, 1997 AND 1996
NOTE 6: MORTGAGE-BACKED SECURITIES
The following tables summarize the Bank's mortgage-backed securities held
to maturity and available for sale as of the dates indicated (in thousands):
<TABLE>
<CAPTION>
JUNE 30, 1998
------------------------------------------------------------
GROSS GROSS
AMORTIZED UNREALIZED UNREALIZED
COST GAINS LOSSES FAIR VALUE
------------- ------------ ------------- -------------
<S> <C> <C> <C> <C>
Held to maturity:
FNMA ........................................ $ 336,493 $ 9,371 $ (229) $ 345,635
FHLMC ....................................... 220,233 4,415 (195) 224,453
GNMA ........................................ 183,270 1,177 (694) 183,753
Pass-through securities ..................... 157,338 16 (4,449) 152,905
Other ....................................... 17,259 -- (2,450) 14,809
---------- -------- --------- ----------
$ 914,593 $ 14,979 $ (8,017) $ 921,555
========== ======== ========= ==========
Available for sale:
Pass-through securities ..................... $ 518,050 $ 543 $ (9,254) $ 509,339
GNMA ........................................ 490,263 2,780 (685) 492,358
FHLMC ....................................... 243,938 1,526 (541) 244,923
FNMA ........................................ 164,195 416 (38) 164,573
Collateralized mortgage obligations ......... 48,722 499 -- 49,221
Other ....................................... 516 29 (189) 356
---------- -------- --------- ----------
$1,465,684 $ 5,793 $ (10,707) $1,460,770
========== ======== ========= ==========
</TABLE>
<TABLE>
<CAPTION>
JUNE 30, 1997
------------------------------------------------------------
GROSS GROSS
AMORTIZED UNREALIZED UNREALIZED
COST GAINS LOSSES FAIR VALUE
------------- ------------ ------------- -------------
<S> <C> <C> <C> <C>
Held to maturity:
FNMA ................................................. $ 423,111 $ 10,462 $ (898) $ 432,675
FHLMC ................................................ 264,946 1,631 (413) 266,164
GNMA ................................................. 238,862 931 (1,774) 238,019
Pass-through securities .............................. 214,188 2,338 (5,080) 211,446
Other ................................................ 21,718 -- (3,081) 18,637
---------- -------- --------- ----------
$1,162,825 $ 15,362 $ (11,246) $1,166,941
========== ======== ========= ==========
Available for sale:
Pass-through securities .............................. $ 512,983 $ 606 $ (8,202) $ 505,387
GNMA ................................................. 521,586 5,500 -- 527,086
FHLMC ................................................ 44,837 130 (58) 44,909
FNMA ................................................. 14,066 41 (39) 14,068
Collateralized mortgage obligations .................. 24,823 6 (62) 24,767
Other ................................................ 634 88 (230) 492
Residual collateralized mortgage obligations ......... 100 -- (100) --
---------- -------- --------- ----------
$1,119,029 $ 6,371 $ (8,691) $1,116,709
========== ======== ========= ==========
</TABLE>
F-21
<PAGE>
GLENDALE FEDERAL BANK AND SUBSIDIARIES
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS (CONTINUED)
JUNE 30, 1998, 1997 AND 1996
The Bank recorded unrealized losses of $2.8 million and $1.3 million in
its stockholder's equity accounts at June 30, 1998 and 1997, respectively, net
of tax, on the mortgage-backed securities available for sale portfolio.
The carrying values of mortgage-backed securities as of June 30, 1998 and
1997 were net of unamortized premiums of approximately $19,348,000 and
$35,558,000, respectively, and deferred loan origination fees, net of deferred
loan origination costs, on loans securitized by the Bank of approximately
$2,139,000 and $2,636,000 at June 30, 1998 and 1997, respectively.
The weighted average interest rates of mortgage-backed securities were
6.37% and 6.78% at June 30, 1998 and 1997, respectively. Interest receivable
related to mortgage-backed securities outstanding at June 30, 1998 and 1997
totaled $15,825,000 and $15,276,000, respectively. The Bank uses
mortgage-backed securities as collateral for various borrowings. At June 30,
1998 and 1997, approximately $666,159,000 and $786,976,000, respectively, of
mortgage-backed securities were pledged as collateral for various borrowings.
During fiscal 1996, the Bank sold $1.7 billion of its fixed-rate
collateralized mortgage obligations ("CMOs") and recorded a pre-tax loss of
$28.2 million on the sale. The Bank's decision to sell most of its CMO
portfolio was part of a strategic realignment of the Bank's mortgage-backed
securities portfolio in which $2.8 billion of mortgage-backed securities were
reclassified from "held to maturity" to "available for sale" during the quarter
ended December 31, 1995, in compliance with implementation guidance for SFAS
115. The reclassification included the Bank's $1.8 billion fixed-rate CMO
portfolio and $1.0 billion of its adjustable-rate pass-through securities
portfolio. The Bank has no immediate plans to sell the remaining CMOs or the
pass-through securities.
The following table presents proceeds from the sale of mortgage-backed
securities and gross realized gains and losses for the periods indicated (in
thousands):
<TABLE>
<CAPTION>
YEARS ENDED JUNE 30
------------------------------------------
1998 1997 1996
----------- ------------ -------------
<S> <C> <C> <C>
Proceeds from sales ........... $297,029 $ 41,602 $1,816,876
-------- -------- ----------
Gross realized gains .......... $ 8,088 $ 638 $ 7,821
Gross realized losses ......... (3,526) (2,442) (42,043)
-------- -------- ----------
Net gain (loss) ............... $ 4,562 $ (1,804) $ (34,222)
======== ======== ==========
</TABLE>
The net gain (loss) on sale of mortgage-backed securities includes the
following components for the periods indicated (in thousands):
<TABLE>
<CAPTION>
YEARS ENDED JUNE 30
-------------------------------------------
1998 1997 1996
----------- ------------- -------------
<S> <C> <C> <C>
Cash gain (loss) ......................... $ 481 $ (620) $ (29,095)
Deferred fees recognized on sale ......... 1,491 469 1,402
Recourse provision and fees .............. 3,523 (1,499) (6,568)
Pair-offs gain (loss) .................... (853) (119) 315
Sale expenses ............................ (80) (35) (276)
------- --------- ----------
$ 4,562 $ (1,804) $ (34,222)
======= ========= ==========
</TABLE>
See Note 7: "Loans Receivable," for a discussion of loans sold with
recourse.
F-22
<PAGE>
GLENDALE FEDERAL BANK AND SUBSIDIARIES
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS (CONTINUED)
JUNE 30, 1998, 1997 AND 1996
NOTE 7: LOANS RECEIVABLE
COMPOSITION
Loans receivable held for investment at the dates indicated are summarized
as follows (in thousands):
<TABLE>
<CAPTION>
JUNE 30
----------------------------
1998 1997
-------------- -------------
<S> <C> <C>
Residential loans:
Existing structures:
1-4 units .................................. $10,270,699 $ 8,766,536
5-36 units ................................. 1,504,288 1,472,654
37 or more units ........................... 313,575 345,052
Construction:
1-4 units .................................. -- 7,726
5-36 units ................................. 570 4,895
Non-residential loans:
Existing structures ........................ 1,333,879 1,196,703
Construction ............................... -- 531
Land loans .................................... 22,754 9,779
Home equity and improvement loans ............. 56,335 28,563
----------- -----------
Total real estate loans ................... 13,502,100 11,832,439
=========== ===========
Commercial loans .............................. 289,459 160,061
Consumer loans:
Equity ....................................... 69,594 45,709
Unsecured .................................... 50,502 39,712
Deposit account .............................. 16,737 15,702
Auto and recreational vehicle ................ 8,699 13,838
Mobile home .................................. 4,518 5,724
----------- -----------
Total consumer loans ...................... 150,050 120,685
----------- -----------
Total gross loans receivable .............. 13,941,609 12,113,185
Less:
Unearned discounts (net of premiums) ......... 21,861 38,824
Undisbursed loan funds ....................... 216 1,807
Deferred loan origination fees ............... 20,377 22,705
Allowance for loan losses .................... 156,482 163,759
----------- -----------
Loans receivable, net ..................... $13,742,673 $11,886,090
=========== ===========
</TABLE>
The Bank had residential real estate loans and SBA loans held for sale
totaling $28.6 million and $3.3 million, respectively, as of June 30, 1998,
compared with $19.0 million of residential real estate loans and no SBA loans
as of June 30, 1997.
The weighted average interest rate of loans receivable (including those
classified as held for sale), giving effect to accretion of discounts and
deferred loan fees, was 7.75% and 7.73% at June 30, 1998 and 1997,
respectively. These rates were reduced by the effect of non-accrual loans,
which resulted in a decrease of the weighted average interest rate on loans of
six and nine basis points at June 30, 1998 and 1997, respectively. Interest
receivable on loans receivable (including interest on loans classified as held
for
F-23
<PAGE>
GLENDALE FEDERAL BANK AND SUBSIDIARIES
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS (CONTINUED)
JUNE 30, 1998, 1997 AND 1996
sale) was approximately $92,125,000 and $82,680,000 at June 30, 1998 and 1997,
respectively, and is included in "Interest receivable" in the accompanying
Consolidated Statements of Financial Condition.
The carrying value of loans pledged to secure certain deposits and
borrowings was $6.4 billion and $5.4 billion at June 30, 1998 and 1997,
respectively.
CREDIT RISK AND CONCENTRATION
A summary of activity in the allowance for loan losses during fiscal 1998,
1997 and 1996 is as follows (dollars in thousands):
<TABLE>
<CAPTION>
REAL ESTATE CONSUMER COMMERCIAL
LOANS LOANS LOANS TOTAL
------------- ----------- ----------- -----------
<S> <C> <C> <C> <C>
Balance--June 30, 1995 ............................ $ 200,874 $ 4,092 $ 4,176 $ 209,142
Provision for loan losses ......................... 43,517 926 (4,093) 40,350
Charge-offs ....................................... (69,205) (2,842) (974) (73,021)
Recoveries ........................................ 3,597 1,098 5,590 10,285
--------- -------- -------- ---------
Balance--June 30, 1996 ............................ 178,783 3,274 4,699 186,756
Provision for loan losses ......................... 23,008 6,707 (4,511) 25,204
Charge-offs ....................................... (55,385) (3,043) (68) (58,496)
Recoveries ........................................ 1,582 1,062 3,575 6,219
Acquisition of OneCentral Bank .................... -- -- 1,030 1,030
Acquisition of TransWorld Bank .................... 219 -- 2,827 3,046
--------- -------- -------- ---------
Balance--June 30, 1997 ............................ 148,207 8,000 7,552 163,759
Provision for loan losses ......................... (20,434) 16,859 1,848 (1,727)
Charge-offs ....................................... (23,652) (3,408) (1,992) (29,052)
Recoveries ........................................ 1,357 901 4,341 6,599
Acquisition of CENFED ............................. 16,889 14 -- 16,903
--------- -------- -------- ---------
Balance--June 30, 1998 ............................ $ 122,367 $ 22,366 $ 11,749 $ 156,482
========= ======== ======== =========
Percent of type of gross loans receivable ......... 0.90% 14.91% 4.04% 1.12%
</TABLE>
The following is a summary of non-accrual loans, troubled debt
restructurings and other impaired loans (in thousands):
<TABLE>
<CAPTION>
JUNE 30
--------------------------------------
1998 1997 1996
---------- ----------- -----------
<S> <C> <C> <C>
Non-accrual loans ................................... $ 95,994 $140,295 $192,445
Troubled debt restructurings ........................ 21,465 31,064 9,194
Recorded investment in other impaired loans ......... 54,060 51,846 70,289
-------- -------- --------
$171,519 $223,205 $271,928
======== ======== ========
</TABLE>
F-24
<PAGE>
GLENDALE FEDERAL BANK AND SUBSIDIARIES
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS (CONTINUED)
JUNE 30, 1998, 1997 AND 1996
At June 30, 1998 and 1997, impaired loans and the related specific loan
loss allowances were as follows (in thousands):
<TABLE>
<CAPTION>
JUNE 30
-----------------------------------------------------------------------
1998 1997
----------------------------------- -----------------------------------
ALLOWANCE ALLOWANCE
RECORDED FOR CARRYING RECORDED FOR CARRYING
INVESTMENT LOSSES VALUE INVESTMENT LOSSES VALUE
------------ ----------- ---------- ------------ ---------- -----------
<S> <C> <C> <C> <C> <C> <C>
Non-accrual loans:
With specific allowances ........ $ 10,220 $ 2,652 $ 7,568 $ 20,036 $ 4,550 $ 15,486
Without specific allowances ..... 24,204 -- 24,204 39,845 -- 39,845
-------- ------- ------- -------- ------- --------
34,424 2,652 31,772 59,881 4,550 55,331
-------- ------- ------- -------- ------- --------
TDRs:
With specific allowances ........ 1,581 582 999 16,648 323 16,325
Without specific allowances ..... 19,884 -- 19,884 14,416 -- 14,416
-------- ------- ------- -------- ------- --------
21,465 582 20,883 31,064 323 30,741
-------- ------- ------- -------- ------- --------
Other impaired loans:
With specific allowances ........ 42,555 10,175 32,380 42,046 9,078 32,968
Without specific allowances ..... 11,505 -- 11,505 9,800 -- 9,800
-------- ------- ------- -------- ------- --------
54,060 10,175 43,885 51,846 9,078 42,768
-------- ------- ------- -------- ------- --------
Total impaired loans ............. $109,949 $13,409 $96,540 $142,791 $13,951 $128,840
======== ======= ======= ======== ======= ========
</TABLE>
Other impaired loans without specific allowances, totaling $11.5 million
and $9.8 million as of June 30, 1998 and 1997, respectively, in the table
above, include loans for which a portion of the loan balance has been charged
off.
The average carrying value of impaired loans for the years ended June 30,
1998, 1997 and 1996 was $108 million, $164 million and $175 million,
respectively. Interest income of $4.3 million, $7.4 million and $7.8 million
for fiscal 1998, 1997 and 1996, respectively, was recognized on impaired loans
during the period of impairment.
Loans on non-accrual status as of June 30, 1998, 1997 and 1996 had
interest due but not recognized of approximately $6.1 million, $7.1 million and
$10.5 million, respectively. The amount of interest income on these loans that
was included in net earnings in fiscal 1998, 1997 and 1996 was $3.0 million,
$5.3 million and $5.8 million, respectively. Net interest forgone related to
troubled debt restructurings totaled $0.4 million, $0.5 million and $0.2
million in 1998, 1997 and 1996, respectively. Interest income recorded on
troubled debt restructurings for fiscal 1998, 1997 and 1996 was $1.8 million,
$2.4 million and $0.7 million, respectively. The Bank has no commitments to
lend additional funds to borrowers whose loans were classified as
non-performing or troubled debt restructurings.
F-25
<PAGE>
GLENDALE FEDERAL BANK AND SUBSIDIARIES
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS (CONTINUED)
JUNE 30, 1998, 1997 AND 1996
The following table further identifies the Bank's non-accrual loans by
state and by property type as of June 30, 1998 (in thousands):
<TABLE>
<CAPTION>
CALIFORNIA FLORIDA OTHER TOTAL
------------ --------- ---------- -----------
<S> <C> <C> <C> <C>
Single-family 1-4 units ........... $ 44,922 $11,754 $13,512 $ 70,188
Multi-family:
5-36 units ....................... 7,615 -- -- 7,615
37 or more units ................. 417 -- -- 417
Non-residential:
Office buildings ................. 6,333 -- -- 6,333
Shopping centers ................. 3,146 604 -- 3,750
Warehouse/Storage ................ 24 386 -- 410
Hotels/Motels .................... 607 -- -- 607
Commercial/industrial ............ 3,404 -- -- 3,404
-------- ------- ------- --------
Total non-residential .......... 13,514 990 -- 14,504
-------- ------- ------- --------
Commercial ........................ 1,828 -- -- 1,828
Consumer .......................... 1,442 -- -- 1,442
-------- ------- ------- --------
$ 69,738 $12,744 $13,512 $ 95,994
======== ======= ======= ========
</TABLE>
The following table further identifies the Bank's non-accrual loans by
state and by property type as of June 30, 1997 (in thousands):
<TABLE>
<CAPTION>
CALIFORNIA FLORIDA OTHER TOTAL
------------ --------- --------- -----------
<S> <C> <C> <C> <C>
Single-family 1-4 units .......... $ 61,776 $13,815 $7,398 $ 82,989
Multi-family:
5-36 units ...................... 21,087 -- -- 21,087
37 or more units ................ 3,121 -- -- 3,121
Non-residential:
Office buildings ................ 5,014 314 -- 5,328
Shopping centers ................ 21,341 -- -- 21,341
Mobile home park ................ 1,503 -- -- 1,503
Commercial/industrial ........... 2,323 177 -- 2,500
-------- ------- ------ --------
Total non-residential ........... 30,181 491 -- 30,672
-------- ------- ------ --------
Commercial ....................... 859 -- -- 859
Consumer ......................... 1,567 -- -- 1,567
-------- ------- ------ --------
$118,591 $14,306 $7,398 $140,295
======== ======= ====== ========
</TABLE>
As of June 30, 1998 and 1997, except for $222,000 and $516,000 of
single-family restructured loans in Florida, respectively, all of the Bank's
restructured loans were in California.
F-26
<PAGE>
GLENDALE FEDERAL BANK AND SUBSIDIARIES
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS (CONTINUED)
JUNE 30, 1998, 1997 AND 1996
The following table summarizes the Bank's gross loan portfolio, including
loans held for sale, by state and by property type as of June 30, 1998 (in
thousands):
<TABLE>
<CAPTION>
CALIFORNIA FLORIDA OTHER(1) TOTAL
-------------- ----------- ------------- ---------------
<S> <C> <C> <C> <C>
Single-family 1-4 units ........... $ 7,123,809 $610,984 $2,620,845 $ 10,355,638
Multi-family:
5-36 units ....................... 1,464,327 40,531 -- 1,504,858
37 or more units ................. 270,639 40,741 2,195 313,575
Non-residential:
Office buildings ................. 365,532 25,771 901 392,204
Shopping centers ................. 317,364 28,006 5,988 351,358
Warehouse/storage ................ 120,868 12,697 -- 133,565
Hotels/motels .................... 61,613 7,082 1,889 70,584
Industrial parks ................. 89,716 1,692 -- 91,408
Land ............................. 16,343 6,209 202 22,754
Commercial/industrial ............ 271,427 25,580 -- 297,007
----------- -------- ---------- ------------
Total non-residential .......... 7,242,863 107,037 8,980 1,358,880
----------- -------- ---------- ------------
Commercial ........................ 290,515 -- -- 290,515
Consumer .......................... 150,050 -- -- 150,050
----------- -------- ---------- ------------
$10,542,203 $799,293 $2,632,020 $ 13,973,516
=========== ======== ========== ============
</TABLE>
- - ----------
(1) The state with the largest loan balance in this category is Virginia with
$232 million, substantially all of which is single-family.
The following table summarizes the Bank's gross loan portfolio, including
loans held for sale, by state and by property type as of June 30, 1997 (in
thousands):
<TABLE>
<CAPTION>
CALIFORNIA FLORIDA OTHER(1) TOTAL
------------ ----------- ------------- --------------
<S> <C> <C> <C> <C>
Single-family 1-4 units ........... $5,898,034 $657,266 $2,266,528 $ 8,821,828
Multi-family:
5-36 units ....................... 1,431,089 46,189 271 1,477,549
37 or more units ................. 282,970 59,566 2,516 345,052
Non-residential:
Office buildings ................. 359,341 33,437 6,934 399,712
Shopping centers ................. 299,034 32,558 8,981 340,573
Warehouse/storage ................ 69,626 17,574 -- 87,200
Hotels/motels .................... 10,487 8,987 7,245 26,719
Industrial parks ................. 90,563 2,124 -- 92,687
Land ............................. 6,825 2,745 207 9,777
Mobile home parks ................ 21,771 7,296 2,240 31,307
Commercial/industrial ............ 190,331 28,707 -- 219,038
---------- -------- ---------- -----------
Total non-residential .......... 1,047,978 133,428 25,607 1,207,013
---------- -------- ---------- -----------
Commercial ........................ 156,966 -- 3,095 160,061
Consumer .......................... 118,480 2,174 31 120,685
---------- -------- ---------- -----------
$8,935,517 $898,623 $2,298,048 $12,132,188
========== ======== ========== ===========
</TABLE>
- - ----------
(1) The state with the largest loan balance in this category is New York with
$245 million, substantially all of which is single-family.
F-27
<PAGE>
GLENDALE FEDERAL BANK AND SUBSIDIARIES
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS (CONTINUED)
JUNE 30, 1998, 1997 AND 1996
The Bank's collateral requirements are the same, regardless of the region
in which the loans are originated. Loans originated and purchased are secured
by real estate with a principal amount of generally no more than 80% of the
appraised value. Loans with LTV ratios in excess of 80% require private
mortgage insurance ("PMI"), or if they meet certain criteria, can be made at
higher interest rates and fees at the option of the loan applicant. These loans
are priced higher in rate, fee and margin than those for which mortgage
insurance is obtained to recognize the increased credit risk assumed by the
Bank. This option is available only on loans with a maximum loan amount of
$300,000 and an LTV ratio of no more than 90% without negative amortization
features, where the purpose of the loan is to purchase, or to refinance an
existing loan secured by, a one-unit, single-family residence.
The following table summarizes the Bank's first trust deed real estate
loan portfolio by original loan-to-value ratio, including those classified as
held for sale, at the dates indicated (dollars in thousands):
<TABLE>
<CAPTION>
JUNE 30
------------------------------------------------------
1998 1997
-------------------------- -------------------------
AMOUNT PERCENT AMOUNT PERCENT
-------------- --------- -------------- --------
<S> <C> <C> <C> <C>
Loans with LTV ratio less than or equal to 80% ......... $11,675,044 87% $10,107,249 86%
Loans with LTV ratio greater than 80%:
With PMI .............................................. 713,240 5 715,165 6
Without PMI ........................................... 1,025,262 8 964,844 8
----------- -- ----------- --
$13,413,546 100% $11,787,258 100%
=========== === =========== ===
</TABLE>
In previous years, the Bank sold certain loans with limited credit loss
recourse provisions. These provisions require the Bank to repurchase loans on
which the borrower has defaulted. The present value of all future estimated
loan losses are provided for at the time of such sales. Subsequent adjustments
to estimates of future losses are charged to gain or loss on sale of
mortgage-backed securities. In fiscal 1991, the Bank entered into certain
transactions whereby its recourse obligations were reduced to reduce risk-based
capital requirements (the "recourse reduction transactions"). In each
transaction, the Bank retained the risk of first loss up to a specified level
for which the Bank maintains a liability for recourse obligations. The
remainder of the Bank's recourse obligations were transferred to an independent
third party. In fiscal 1996, for certain recourse reduction transactions, the
recourse reduction agreements expired or were canceled by the Bank and the full
amount of the recourse obligations reverted back to the Bank from the
independent third party. There were no sales of loans and mortgage-backed
securities with recourse provisions in fiscal 1998, 1997 or 1996. The Bank had
recourse obligations for approximately $886.0 million of loans sold with
recourse at June 30, 1998 for which the Bank is contingently liable for up to
$465.5 million in future losses. The Bank's recorded liability under these
obligations was $10.2 million and $13.7 million at June 30, 1998 and 1997,
respectively, and is included in "Other liabilities and accrued expenses" in
the accompanying Consolidated Statements of Financial Condition.
F-28
<PAGE>
GLENDALE FEDERAL BANK AND SUBSIDIARIES
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS (CONTINUED)
JUNE 30, 1998, 1997 AND 1996
A summary of the balance of loans sold with recourse at the dates
indicated is as follows (in thousands):
<TABLE>
<CAPTION>
JUNE 30
---------------------------
1998 1997
------------ ------------
<S> <C> <C>
Loans with original loan-to-value ("LTV") ratios less
than or equal to 80% ............................... $ 537,589 $ 713,078
Loans with original LTV ratios greater than 80%:
With Private Mortgage Insurance ("PMI") ............ 40,789 84,675
Without PMI ........................................ 126,045 46,660
--------- ----------
704,423 844,413
Recourse reduction transactions ..................... 181,530 246,282
--------- ----------
$ 885,953 $1,090,695
========= ==========
Recorded liability for recourse ..................... $ 10,210 $ 13,724
========= ==========
</TABLE>
NOTE 8: REAL ESTATE ACQUIRED IN SETTLEMENT OF LOANS, NET
A summary of REO, net of specific valuation allowances, by property type
is as follows (in thousands):
<TABLE>
<CAPTION>
JUNE 30
-----------------------
1998 1997
---------- ----------
<S> <C> <C>
Single-family ............. $23,006 $ 34,116
Multi-family .............. 3,087 10,347
Non-residential ........... 12,182 5,955
Land ...................... -- 14,214
------- --------
38,275 64,632
General allowance ......... (882) (3,132)
------- --------
$37,393 $ 61,500
======= ========
</TABLE>
A summary of the activity in the allowance for losses on REO, including
specific and general allowances, is as follows (in thousands):
<TABLE>
<CAPTION>
YEARS ENDED JUNE 30
------------------------------------------
<S> <C> <C> <C>
1998 1997 1996
---- ---- ----
Beginning balance .......................... $ 22,906 $ 26,688 $ 30,719
Provision for losses ....................... 2,670 7,539 12,110
Addition due to CENFED acquisition ......... 750 -- --
Charge-offs ................................ (21,534) (11,321) (16,141)
--------- --------- ---------
Ending balance ............................. $ 4,792 $ 22,906 $ 26,688
========= ========= =========
</TABLE>
F-29
<PAGE>
GLENDALE FEDERAL BANK AND SUBSIDIARIES
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS (CONTINUED)
JUNE 30, 1998, 1997 AND 1996
The following table identifies the Bank's REO by state and property type
as of June 30, 1998 (in thousands):
<TABLE>
<CAPTION>
CALIFORNIA FLORIDA OTHER TOTAL
------------ --------- --------- ----------
<S> <C> <C> <C> <C>
Single-family 1-4 units ........... $16,778 $2,758 $3,470 $23,006
Multi-family 5-36 units ........... 3,087 -- -- 3,087
Non-residential:
Office buildings ................. 5,208 197 -- 5,405
Shopping centers ................. 1,929 -- -- 1,929
Mobile home park ................. 526 -- -- 526
Hotels/motels .................... 53 -- 3,276 3,329
Commercial/industrial ............ 993 -- -- 993
------- ------ ------ -------
Total non-residential .......... 8,709 197 3,276 12,182
------- ------ ------ -------
$28,574 $2,955 $6,746 38,275
======= ====== ====== =======
General allowance ................ (882)
-------
$37,393
=======
</TABLE>
The following table identifies the Bank's REO by state and property type
as of June 30, 1997 (in thousands):
<TABLE>
<CAPTION>
CALIFORNIA FLORIDA OTHER TOTAL
------------ --------- --------- ----------
<S> <C> <C> <C> <C>
Single-family 1-4 units ........... $28,207 $ 4,170 $1,739 $ 34,116
Multi-family:
5-36 units ....................... 8,309 105 -- 8,414
37 or more units ................. 1,933 -- -- 1,933
Non-residential:
Office buildings ................. 1,625 60 -- 1,685
Shopping centers ................. 298 -- -- 298
Hotels/motels .................... 102 -- 3,468 3,570
Land ............................. 365 13,849 -- 14,214
Industrial park .................. 402 -- -- 402
------- ------- ------ --------
Total non-residential .......... 2,792 13,909 3,468 20,169
------- ------- ------ --------
$41,241 $18,184 $5,207 64,632
======= ======= ====== ========
General allowance ................ (3,132)
--------
$ 61,500
========
</TABLE>
Income (loss) from REO operations is summarized as follows (in thousands):
<TABLE>
<CAPTION>
YEARS ENDED JUNE 30
------------------------------------------
1998 1997 1996
----------- ------------- ------------
<S> <C> <C> <C>
Gain on sale of REO ............ $ 9,866 $ 7,164 $ 10,880
Provision for losses ........... (2,670) (7,539) (12,110)
Net operating expenses ......... (4,085) (6,248) (7,196)
-------- --------- ---------
$ 3,111 $ (6,623) $ (8,426)
======== ========= =========
</TABLE>
F-30
<PAGE>
GLENDALE FEDERAL BANK AND SUBSIDIARIES
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS (CONTINUED)
JUNE 30, 1998, 1997 AND 1996
NOTE 9: INVESTMENT IN CAPITAL STOCK OF FEDERAL HOME LOAN BANK ("FHLB")
The Bank's investment in capital stock of FHLB, at cost, totaled
$300,339,000 and $259,587,000 at June 30, 1998 and 1997, respectively. The Bank
earned 5.9%, 6.3% and 5.4% from dividends received during fiscal 1998, 1997 and
1996, respectively. Dividends receivable on FHLB stock totaled approximately
$4,096,000 and $3,871,000 at June 30, 1998 and 1997, respectively, and is
included in "Interest receivable" in the accompanying Consolidated Statements
of Financial Condition. As a member of the FHLB system, the Bank is required to
maintain an investment in the capital stock of the FHLB in an amount at least
equal to the greatest of 1% of residential mortgage assets, 5% of outstanding
borrowings (advances) from the FHLB, or 0.3% of total assets. FHLB capital
stock is pledged to secure FHLB advances.
NOTE 10: PREMISES AND EQUIPMENT
Premises and equipment at the dates indicated are summarized as follows
(in thousands):
<TABLE>
<CAPTION>
JUNE 30
-----------------------------
1998 1997
------------- -------------
<S> <C> <C>
Buildings and leasehold improvements ................... $ 166,680 $ 163,780
Furniture, fixtures and equipment ...................... 125,414 105,062
Land ................................................... 22,764 22,726
---------- ----------
314,858 291,568
Less accumulated depreciation and amortization ......... (167,965) (156,632)
---------- ----------
$ 146,893 $ 134,936
========== ==========
</TABLE>
In fiscal 1996, the Bank sold its former headquarters facility for
approximately $30 million. The Bank recorded a pre-tax loss on this sale of
$2.5 million during fiscal 1996, which is included in "Other income (loss),
net" in the Consolidated Statements of Operations.
Operating expenses include provisions for depreciation and amortization of
$16,186,000, $14,849,000 and $15,755,000 for fiscal 1998, 1997 and 1996,
respectively.
The Bank leases certain of its office buildings and branch offices, as
well as certain equipment, under non-cancelable operating leases. Rental
expense incurred in fiscal 1998, 1997 and 1996 was $17,266,000, $16,093,000,
and $15,140,000, respectively. Minimum future lease payments on building and
equipment leases at June 30, 1998 were as follows (in thousands):
<TABLE>
<S> <C>
Due in one year ............ $20,435
Due in two years ........... 18,183
Due in three years ......... 15,795
Due in four years .......... 11,703
Due in five years .......... 10,410
Due thereafter ............. 51,105
</TABLE>
F-31
<PAGE>
GLENDALE FEDERAL BANK AND SUBSIDIARIES
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS (CONTINUED)
JUNE 30, 1998, 1997 AND 1996
NOTE 11: MORTGAGE SERVICING ASSETS
In accordance with SFAS 125, the Bank combined its mortgage servicing
rights and capitalized servicing fees beginning with the year ended June 30,
1997. The following table summarizes the activity in mortgage servicing assets
and related valuation allowance for the periods indicated (in thousands):
<TABLE>
<CAPTION>
YEARS ENDED JUNE 30
-------------------------------------------
1998 1997 1996
-------------- ----------- ------------
<S> <C> <C> <C>
MORTGAGE SERVICING ASSETS ACTIVITY:
Beginning balance .................................. $288,519 $ 127,399 $ 99,122
Purchases .......................................... 1,021(1) 187,343 50,836
Addition due to CENFED acquisition ................. 8,318 -- --
Servicing rights arising from the sale of loans
with servicing rights retained ................... 4,890 1,119 --
Amortization ....................................... (49,245) (27,342) (22,559)
---------- --------- ---------
Ending balance ..................................... $253,503 $ 288,519 $ 127,399
========== ========= =========
VALUATION ALLOWANCE ACTIVITY:
Beginning balance .................................. $ (4,047) $ --
Additions charged to loan servicing income ......... (6,142) (4,047)
---------- ---------
Ending balance ..................................... $(10,189) $ (4,047)
========== =========
</TABLE>
- - ----------
(1) Consists of capitalized costs and adjustments related to prior years'
purchases.
The following table summarizes activity in the portfolio of mortgage loans
serviced for others (in millions):
<TABLE>
<CAPTION>
YEARS ENDED JUNE 30
------------------------------------
1998 1997 1996
---------- ---------- ----------
<S> <C> <C> <C>
Beginning portfolio of mortgage loans serviced for others ..... $ 29,598 $ 14,168 $ 11,678
Add: Servicing purchased ...................................... 447 17,184 3,696
Servicing retained on loans sold ............................. 386 92 --
Less: Amortization, prepayments and foreclosures .............. (5,162) (1,846) (1,206)
-------- -------- --------
Ending portfolio of mortgage loans serviced for others ........ $ 25,269 $ 29,598 $ 14,168
======== ======== ========
</TABLE>
F-32
<PAGE>
GLENDALE FEDERAL BANK AND SUBSIDIARIES
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS (CONTINUED)
JUNE 30, 1998, 1997 AND 1996
NOTE 12: DEPOSITS
Deposits at the dates indicated are summarized as follows (dollars in
thousands):
<TABLE>
<CAPTION>
JUNE 30
--------------------------------------------------------------------------------
1998 1997
--------------------------------------- --------------------------------------
WEIGHTED PERCENT WEIGHTED PERCENT
AVERAGE OF TOTAL AVERAGE OF TOTAL
RATE AMOUNT DEPOSITS RATE AMOUNT DEPOSITS
---------- ------------- ---------- ---------- ------------- ---------
<S> <C> <C> <C> <C> <C> <C>
Checking ...................... 0.31% $ 1,815,761 16.9% 0.37% $1,198,011 12.8%
Savings ....................... 2.00 477,199 4.5 2.15 452,225 4.8
Money market .................. 3.93 2,379,249 22.2 4.25 2,119,553 22.7
Certificates:
5.00% and lower .............. 4.77 1,503,191 14.1 4.83 1,046,824 11.2
5.01%--6.00% ................. 5.52 4,095,310 38.3 5.56 4,277,651 45.7
6.01%--7.00% ................. 6.28 340,288 3.2 6.24 227,948 2.4
7.01%--8.00% ................. 7.28 84,266 0.8 7.24 32,839 0.4
8.01%--9.00% ................. 8.59 5,222 0.0 8.27 1,595 0.0
9.01%--10.00% ................ 9.43 671 0.0 9.45 263 0.0
----------- ----- ---------- -----
Total certificates ......... 5.41 6,028,948 56.4 5.46 5,587,120 59.7
----------- ----- ---------- -----
4.06% $10,701,157 100.0% 4.37% $9,356,909 100.0%
=========== ===== ========== =====
</TABLE>
The average interest rate is based upon stated interest rates without
giving consideration to daily compounding of interest or forfeiture of interest
because of premature withdrawal.
Interest payable on deposits at June 30, 1998 and 1997 was $3,728,000 and
$3,186,000, respectively, which is included in "Other liabilities and accrued
expenses" in the Consolidated Statements of Financial Condition.
The aggregate remaining maturities of deposits at June 30, 1998 are as
follows (in thousands):
<TABLE>
<S> <C>
No stated maturity .................. $ 4,672,209
Maturing within one year:
1st quarter ........................ 2,073,745
2nd quarter ........................ 1,397,799
3rd quarter ........................ 627,468
4th quarter ........................ 641,943
Maturing within two years ........... 1,074,087
Maturing within three years ......... 91,230
Maturing within four years .......... 79,496
Maturing within five years .......... 31,564
Maturing thereafter ................. 11,616
-----------
Total ............................ $10,701,157
===========
</TABLE>
F-33
<PAGE>
GLENDALE FEDERAL BANK AND SUBSIDIARIES
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS (CONTINUED)
JUNE 30, 1998, 1997 AND 1996
Certificates of deposit with balances greater than $100,000 had the
following remaining maturities at June 30, 1998 (in thousands):
<TABLE>
<S> <C>
3 months and under ................. $ 366,975
Over 3 months to 6 months .......... 320,416
Over 6 months to 12 months ......... 208,376
Over 12 months ..................... 251,048
----------
$1,146,815
==========
</TABLE>
Interest expense on deposits by type is summarized as follows (in
thousands):
<TABLE>
<CAPTION>
YEARS ENDED JUNE 30
---------------------------------------
1998 1997 1996
----------- ----------- -----------
<S> <C> <C> <C>
Checking ............. $ 4,610 $ 4,099 $ 4,290
Savings .............. 9,192 9,848 11,381
Money market ......... 88,484 84,149 69,257
Certificates ......... 306,014 307,086 348,906
-------- -------- --------
$408,300 $405,182 $433,834
======== ======== ========
</TABLE>
At June 30, 1998 and 1997, approximately $307,894,000 and $113,564,000,
respectively, of the Bank's real estate loans and mortgage-backed securities
were pledged as collateral for certain public deposits.
NOTE 13: BORROWINGS
SECURITIES SOLD UNDER AGREEMENTS TO REPURCHASE
Securities sold under agreements to repurchase are summarized as follows
(dollars in thousands):
<TABLE>
<CAPTION>
YEARS ENDED JUNE 30
-----------------------------------------------
1998 1997 1996
-------------- ------------- --------------
<S> <C> <C> <C>
Balance at year end ..................................... $ 175,551 $ 768,682 $ 758,050
Average amount outstanding during the year .............. 660,467 335,809 1,869,194
Maximum amount outstanding at any month-end ............. 1,355,403 776,302 2,987,948
Weighted average interest rate during the year .......... 5.69% 5.55% 5.82%
Weighted average interest rate on year-end balances ..... 5.72% 5.66% 5.50%
</TABLE>
Securities sold under agreements to repurchase are collateralized as
follows (in thousands):
<TABLE>
<CAPTION>
JUNE 30
--------------------------------------------------
1998 1997
------------------------- ------------------------
BOOK VALUE BOOK VALUE
INCLUDING INCLUDING
ACCRUED MARKET ACCRUED MARKET
INTEREST VALUE INTEREST VALUE
------------ ------------ ----------- ------------
<S> <C> <C> <C> <C>
Mortgage-backed securities; book value includes interest
receivable of $1,189 in 1998 and $5,167 in 1997 ........ $ 180,614 $ 180,534 $ 788,516 $ 788,638
</TABLE>
The Bank incurred interest expense on securities sold under agreements to
repurchase of $37.6 million, $18.6 million, and $108.8 million during fiscal
1998, 1997 and 1996, respectively.
Mortgage-backed securities sold under agreements to repurchase at June 30,
1998 were contractually due July 1998. These agreements require the Bank to
repurchase identical securities to those which were
F-34
<PAGE>
GLENDALE FEDERAL BANK AND SUBSIDIARIES
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS (CONTINUED)
JUNE 30, 1998, 1997 AND 1996
sold. The securities underlying the agreements were delivered to the dealers
who arranged the transactions. No amounts outstanding with individual brokers
at June 30, 1998 exceeded ten percent of stockholder's equity.
FEDERAL HOME LOAN BANK
At June 30, 1998, Glendale Federal had a line of credit with the Federal
Home Loan Bank of San Francisco enabling the Bank to borrow up to 35% of the
amount of its total consolidated assets. Based on the amount of these assets at
June 30, 1998, the Bank's credit limit with the FHLB was approximately $6.3
billion. At June 30, 1997, the Bank had a fixed amount credit limit of
approximately $5.7 billion. All advances from the FHLB are collateralized with
mortgage loans and FHLB stock.
FHLB advances are summarized as follows (dollars in thousands):
<TABLE>
<CAPTION>
WEIGHTED WEIGHTED
BALANCE AT AVERAGE BALANCE AT AVERAGE
JUNE 30, 1998 RATE JUNE 30, 1997 RATE
--------------- ---------- --------------- ---------
<S> <C> <C> <C> <C>
Fixed-rate, fixed-term ............... $2,989,000 5.59% $1,900,000 5.75%
Variable-rate, fixed-term ............ 2,624,000 5.54 2,888,000 5.70
---------- ----------
Subtotal ............................ 5,613,000 5.57% 4,788,000 5.72%
Purchase accounting premium ......... 458 -- -- --
---------- ----------
$5,613,458 $4,788,000
========== ==========
</TABLE>
The purchase accounting premium of $458,000 was recorded in connection
with the FHLB advances assumed as part of the April 1998 CENFED acquisition.
The Bank incurred interest expense on FHLB advances of approximately $270
million, $269 million, and $202 million during fiscal 1998, 1997, and 1996,
respectively. These advances are secured by investments in stock of the FHLB
totaling $300.3 million and $259.6 million at June 30, 1998 and 1997,
respectively, as well as certain mortgage loans and mortgage-backed and other
debt securities aggregating approximately $6.6 billion and $5.3 billion at June
30, 1998 and 1997, respectively.
The maturities of FHLB advances, with corresponding weighted average
interest rates, at June 30, 1998 are as follows (dollars in thousands):
<TABLE>
<CAPTION>
WEIGHTED
AVERAGE
AMOUNT RATE
------------- ---------
<S> <C> <C>
Maturing in one year ................. $3,928,000 5.48%
Maturing in two years ................ 245,000 5.53
Maturing in three years .............. 1,000,000 5.74
Maturing in five years ............... 440,000 5.97
----------
Subtotal ............................ 5,613,000 5.57%
Purchase accounting premium ......... 458 --
----------
$5,613,458
==========
</TABLE>
F-35
<PAGE>
GLENDALE FEDERAL BANK AND SUBSIDIARIES
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS (CONTINUED)
JUNE 30, 1998, 1997 AND 1996
Included in the "Maturing in one year" category are $700 million of
fixed-rate FHLB advances with a weighted average interest rate of 5.12% and an
original maturity date of 2003, but which the FHLB has the option to call in
fiscal 1999.
At June 30, 1998, interest rates, both fixed and variable, ranged from
4.86% to 6.42%. At June 30, 1997, the range was 5.39% to 5.98%.
OTHER BORROWINGS
Other borrowings are summarized as follows (dollars in thousands):
<TABLE>
<CAPTION>
JUNE 30
-------------------
1998 1997
------ ----------
<S> <C> <C>
Notes payable with weighted average interest rates of
8.75% and 7.82% at June 30, 1998 and 1997,
respectively ....................................... $ 70 $ 276
Convertible subordinated debentures due
March 2001, with interest at 7.75% ................. -- 10,506
---- -------
$ 70 $10,782
==== =======
</TABLE>
Convertible Subordinated Debentures
All of the convertible subordinated debentures outstanding at June 30,
1997, were redeemed in September 1997 at a redemption price equal to 100% of
the principal amount, together with accrued and unpaid interest.
The Bank incurred interest expense on other borrowings of $1.2 million,
$1.5 million and $2 million during fiscal 1998, 1997 and 1996, respectively.
No collateral was pledged for other borrowings at June 30, 1998 or 1997.
NOTE 14: INCOME TAXES
Following is a summary of the Bank's income tax expense (in thousands):
<TABLE>
<CAPTION>
YEARS ENDED JUNE 30
-------------------------------------
1998 1997 1996
------------ ---------- ---------
<S> <C> <C> <C>
Current taxes:
Federal ..................... $ 77,973 $ 14,481 $ 2,210
State ....................... 22,825 11,286 --
-------- -------- -------
$100,798 $ 25,767 $ 2,210
-------- -------- -------
Deferred taxes:
Federal ..................... (9,435) 12,153 12,755
State ....................... 1,750 (1,789) 6,377
-------- -------- -------
(7,685) 10,364 19,132
-------- -------- -------
Income tax provision ......... $ 93,113 $ 36,131 $21,342
======== ======== =======
</TABLE>
F-36
<PAGE>
GLENDALE FEDERAL BANK AND SUBSIDIARIES
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS (CONTINUED)
JUNE 30, 1998, 1997 AND 1996
The following is a summary of the income tax liability (in thousands):
<TABLE>
<CAPTION>
JUNE 30
----------------------
1998 1997
--------- ----------
<S> <C> <C>
Current taxes ................ $ 8,048 $15,150
Deferred taxes ............... 37,110 45,122
------- -------
$45,158 $60,272
======= =======
</TABLE>
A reconciliation from the statutory Federal income tax provision rate to
the consolidated effective income tax provision rate follows:
<TABLE>
<CAPTION>
YEARS ENDED JUNE 30
------------------------------------
1998 1997 1996
---------- ---------- ----------
<S> <C> <C> <C>
Statutory Federal income tax rate ................................... 35.0% 35.0% 35.0%
Increases (reductions) in taxes resulting from:
State franchise tax rate, net of Federal income tax effect ......... 6.9 7.2 6.6
Valuation allowance on deferred tax assets ......................... -- (0.1) (12.5)
Other .............................................................. (0.4) 4.6
---- -----
Consolidated effective income tax rate .............................. 41.9% 41.7% 33.7%
==== ==== =====
</TABLE>
The components of the net deferred tax liability are as follows (in
thousands):
<TABLE>
<CAPTION>
JUNE 30
-----------------------
1998 1997
---------- ----------
<S> <C> <C>
Deferred tax liabilities:
Loan fees ............................................................. $ 46,737 $ 50,367
Settlement of pension obligations ..................................... 8,442 8,204
FHLB stock dividends .................................................. 45,692 35,109
Gains on sales of loans ............................................... 11,110 7,253
Other ................................................................. 14,195 9,146
-------- --------
Gross deferred tax liabilities ......................................... 126,176 110,079
-------- --------
Deferred tax assets:
State franchise tax ................................................... 8,071 5,432
Net operating loss and tax credit carryovers .......................... 4,571 9,764
Provision for losses on loans ......................................... 45,531 28,169
Mortgage servicing assets ............................................. 12,089 6,285
Net unrealized holding loss on mortgage-backed securities available for
sale ................................................................ 1,166 839
Other ................................................................. 17,638 14,468
-------- --------
Gross deferred tax assets .............................................. 89,066 64,957
-------- --------
Net deferred tax liability ............................................. $ 37,110 $ 45,122
======== ========
</TABLE>
Management has assessed the realizability of the Bank's deferred tax
assets and has concluded that it is more likely than not that all deferred tax
assets will be realized.
For taxable years beginning prior to January 1, 1996, a savings
institution that met certain definitional tests relating to the composition of
its assets and the sources of its income (a "qualifying savings institution")
was permitted to establish reserves for bad debts, and to make annual additions
thereto
F-37
<PAGE>
GLENDALE FEDERAL BANK AND SUBSIDIARIES
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS (CONTINUED)
JUNE 30, 1998, 1997 AND 1996
under the "experience" method. Alternatively, a qualifying savings institution
could elect, on an annual basis, to use the "percentage of taxable income"
method to compute its allowable addition to its bad debt reserve on qualifying
real property loans (generally loans secured by an interest in improved real
estate). The applicable percentage was 8% for tax periods after 1987. The Bank
utilized the experience method in these years.
On August 20, 1996, the President signed the Small Business Job Protection
Act (the "Act") into law. One provision of the Act repealed the reserve method
of accounting for bad debts for savings institutions effective for taxable
years beginning after 1995. The Bank, therefore, is required to use the
"specific charge-off" method on its 1996 and subsequent federal income tax
returns. The Bank is required to recapture its "applicable excess reserves",
which are its federal tax bad debt reserves in excess of the base year reserve
amount described in the following paragraph. The Bank will include one-sixth of
its applicable excess reserves in taxable income in each year from 1996 through
2001. As of December 31, 1995, the Bank had approximately $72 million of
applicable excess reserves. As of June 30, 1996, the Bank had fully provided
for the tax related to this recapture. The base year reserves will continue to
be subject to recapture and the Bank could be required to recognize a tax
liability if: (1) the Bank fails to qualify as a "bank" for federal income tax
purposes; (2) certain distributions are made with respect to the stock of the
Bank; (3) the bad debt reserves are used for any purpose other than to absorb
bad debt losses; or (4) there is a change in federal tax law. The enactment of
this legislation is expected to have no material impact on the Bank's
operations or financial position.
In accordance with Statement of Financial Accounting Standards No. 109
"Accounting for Income Taxes," a deferred tax liability has not been recognized
for the tax bad debt base year reserves of the Bank. The base year reserves are
generally the balance of reserves as of December 31, 1987 reduced
proportionately for reductions in the Bank's loan portfolio since that date.
The amount of those reserves was approximately $153 million at December 31,
1987. The amount of the unrecognized deferred tax liability at June 30, 1998
was approximately $54 million. This deferred tax liability could be recognized
in the future under the conditions described in the preceding paragraph.
In July 1993, GLENFED, Inc., the former holding company of the Bank,
received notices from the California Franchise Tax Board proposing to assess
taxes for the years 1988, 1989 and 1990 in the amount of $5.3 million. GLENFED,
Inc. protested the proposed taxes and, in September 1996, made a payment to the
Franchise Tax Board in settlement of the disputed amount. The payment was
charged to existing reserves.
NOTE 15: FINANCIAL INSTRUMENTS
FAIR VALUE
Fair value estimates, methods, and assumptions are set forth below for the
Bank's financial instruments.
Short-Term Investments and Debt and Equity Securities
The fair value of short-term investments and debt and equity securities is
estimated based on bid prices published in financial newspapers or bid
quotations received from securities dealers.
F-38
<PAGE>
GLENDALE FEDERAL BANK AND SUBSIDIARIES
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS (CONTINUED)
JUNE 30, 1998, 1997 AND 1996
The following table represents the carrying amount and fair value of
investments and mortgage-backed securities at June 30, 1998 and 1997 (in
thousands):
<TABLE>
<CAPTION>
JUNE 30, 1998 JUNE 30, 1997
------------------------- ---------------------------
CARRYING CARRYING
AMOUNT FAIR VALUE AMOUNT FAIR VALUE
------------ ------------ ------------- -------------
<S> <C> <C> <C> <C>
Short-term investments ........... $ 174,200 $ 174,200 $ 636,005 $ 651,254
========== ========== ========== ==========
Debt securities:
Maturing within 1 year .......... $ 12,404 $ 12,404 $ 14,813 $ 14,813
Maturing in 1-5 years ........... 25,040 25,040 4,974 4,974
Maturing in 5-10 years .......... 2,027 2,027 5,903 5,903
Maturing after 10 years ......... 83,763 83,763 -- --
Equity securities ................ 2,874 2,874 2,104 2,104
---------- ---------- ---------- ----------
$ 126,108 $ 126,108 $ 27,794 $ 27,794
========== ========== ========== ==========
Mortgage-backed securities:
Adjustable-rate ................. $2,033,912 $2,038,363 $1,975,116 $1,977,454
Fixed-rate ...................... 341,451 343,962 304,418 306,196
---------- ---------- ---------- ----------
$2,375,363 $2,382,325 $2,279,534 $2,283,650
========== ========== ========== ==========
</TABLE>
Loans
Fair values are estimated for portfolios of loans with similar financial
characteristics. Loans are segregated by type such as single-family residential
mortgage, multi-family, non-residential, commercial and consumer. Each loan
category is further segmented into fixed and adjustable rate interest terms and
by performing and non-performing categories.
The fair value of performing loans is calculated by discounting cash flows
through their estimated maturity using estimated market discount rates that
reflect the credit and interest rate risk inherent in the loan, adjusted to
reflect differences in servicing costs. The estimate of maturity is based on
market prepayment estimates for each loan classification.
Fair value for non-performing loans is based on estimated cash flows
discounted using a rate commensurate with the risk associated with the
estimated cash flows. Assumptions regarding credit risk, cash flows, and
discount rates are judgmentally determined by using available market
information.
F-39
<PAGE>
GLENDALE FEDERAL BANK AND SUBSIDIARIES
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS (CONTINUED)
JUNE 30, 1998, 1997 AND 1996
The following table presents information for loans, including loans held
for sale and net of allowance for loan losses as of June 30, 1998 and 1997 (in
thousands):
<TABLE>
<CAPTION>
JUNE 30, 1998 JUNE 30, 1997
----------------------------- -----------------------------
CARRYING CARRYING
AMOUNT FAIR VALUE AMOUNT FAIR VALUE
-------------- -------------- --------------- -------------
<S> <C> <C> <C> <C>
Single-family 1-4 units: $10,307,070 $10,333,005 $ 8,769,249 $ 8,821,167
Multi-family:
5-36 units ................................... 1,473,771 1,439,368 1,433,697 1,354,117
37 or more units ............................. 301,851 296,006 328,556 313,512
Non-residential ............................... 1,327,892 1,307,366 1,171,733 1,127,805
Consumer ...................................... 127,684 127,187 112,685 112,262
Commercial .................................... 278,766 278,455 152,509 153,585
13,817,034 13,781,387 11,968,429 11,882,448
Less unearned discounts, undisbursed loan funds
and deferred loan fees ....................... (42,454) -- (63,336) --
----------- ----------- ----------- -----------
$13,774,580 $13,781,387 $11,905,093 $11,882,448
=========== =========== =========== ===========
</TABLE>
Deposit Liabilities
The fair value of deposits with no stated maturity, such as savings
accounts, checking and NOW accounts, and money market checking/savings
accounts, is equal to the amount payable on demand as of June 30, 1998 and
1997. The fair value of certificates of deposit is based on the discounted
value of contractual cash flows using estimated market rates that reflect
certificates of deposit with similar terms and maturities.
The following table presents information for deposit liabilities (in
thousands):
<TABLE>
<CAPTION>
JUNE 30, 1998 JUNE 30, 1997
---------------------------- ---------------------------
CARRYING CARRYING
AMOUNT FAIR VALUE AMOUNT FAIR VALUE
------------- -------------- ------------- -------------
<S> <C> <C> <C> <C>
Checking .................................. $ 1,815,761 $ 1,815,761 $1,198,011 $1,198,011
Savings ................................... 477,199 477,199 452,225 452,225
Money market .............................. 2,379,249 2,379,249 2,119,553 2,119,553
Certificates with remaining maturities:
In six months or less .................... 3,471,544 3,471,560 2,551,447 2,552,549
Between six months and one year .......... 1,269,411 1,268,341 1,628,382 1,629,630
Between one and three years .............. 1,165,317 1,168,130 1,336,395 1,337,201
Beyond three years ....................... 122,676 123,505 70,896 69,330
----------- ----------- ---------- ----------
$10,701,157 $10,703,745 $9,356,909 $9,358,499
=========== =========== ========== ==========
</TABLE>
Borrowings
The estimate of the fair value of the Bank's borrowings was based on the
discounted value of the future cash flows expected to be paid on such
borrowings using estimated market discount rates that reflect borrowings with
similar terms and maturities.
F-40
<PAGE>
GLENDALE FEDERAL BANK AND SUBSIDIARIES
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS (CONTINUED)
JUNE 30, 1998, 1997 AND 1996
The following table represents the carrying amount and fair value of the
Bank's borrowings at June 30, 1998 and 1997 (in thousands):
<TABLE>
<CAPTION>
JUNE 30, 1998 JUNE 30, 1997
------------------------- ---------------------------
CARRYING CARRYING
AMOUNT FAIR VALUE AMOUNT FAIR VALUE
------------ ------------ ------------- -------------
<S> <C> <C> <C> <C>
Securities sold under agreements to repurchase .. $ 175,551 $ 174,879 $ 768,682 $ 766,068
Borrowings from the FHLB ........................ 5,613,458 5,614,652 4,788,000 4,765,643
Convertible subordinated debentures ............. -- -- 10,506 10,506
Notes payable ................................... 70 70 276 276
---------- ---------- ---------- ----------
$5,789,079 $5,789,601 $5,567,464 $5,542,493
========== ========== ========== ==========
</TABLE>
Mortgage Servicing Assets
The carrying amount and fair value of the Bank's MSA at June 30, 1998 were
$243 million and $298 million, respectively. The carrying amount and fair value
of the Bank's MSA at June 30, 1997 were $284 million and $353 million,
respectively.
The fair value of the Bank's servicing portfolio is estimated by applying
market assumptions for the serviced loans to estimate servicing-related income
and expenses over the underlying loans' estimated lives, and discounting the
estimated future net servicing income at the current market discount rate. Fair
value is significantly influenced by market prepayment expectations. Prepayment
expectations are influenced by the difference between the loans' interest rates
and current market interest rates. During periods of decreasing interest rates,
the market anticipates that homeowners will be more likely to refinance their
existing mortgage loans; during periods of increasing interest rates, the
market anticipates that homeowners will be less inclined to refinance their
existing mortgage loans. The slower prepayments anticipated in times of rising
interest rates result in a longer estimated period of net servicing income for
the existing servicing portfolio, and therefore increases its value.
Conversely, the faster prepayments anticipated in times of declining interest
rates result in a shorter estimated period of net servicing income and
therefore decreases the value of the Bank's servicing portfolio.
Other Financial Instruments
Financial instruments of the Bank, as included in the Consolidated
Statements of Financial Condition, for which fair value approximates the
carrying amount at June 30, 1998 and 1997 include "Cash and amounts due from
banks", "Interest receivable", "Investment in capital stock of Federal Home
Loan Bank", recourse liability, and accounts payable and accrued expenses.
Commitments
As discussed further in Note 16: "Commitments and Contingent Liabilities,"
the Bank had various commitments outstanding as of June 30, 1998 and 1997 which
are not reflected in the accompanying consolidated financial statements. The
fair value of the commitments is estimated to approximate the fees currently
charged or paid to enter into similar agreements, taking into account the
remaining terms of the agreements and the present creditworthiness of the
counterparties. The uncertainty involving the attempt to determine the
likelihood, as well as the timing of a commitment being drawn upon, coupled
with the lack of established markets and the diversity of fee structures that
exist, would not result in what the Bank believes to be a meaningful estimate
of fair value.
Limitations
Fair value estimates are made at a specific point in time, based on
relevant market information and information about the financial instrument.
These estimates do not reflect any premium or discount that
F-41
<PAGE>
GLENDALE FEDERAL BANK AND SUBSIDIARIES
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS (CONTINUED)
JUNE 30, 1998, 1997 AND 1996
could result from offering for sale at one time the Bank's entire holdings of a
particular financial instrument. Fair value estimates are based on judgments
regarding future expected loss experience, current economic conditions, risk
characteristics of various financial instruments, and other factors. These
estimates are subjective in nature and involve uncertainties and matters of
significant judgment and therefore cannot be determined with precision. Changes
in assumptions could significantly affect the estimates.
Fair value estimates are based on existing on-and off-balance sheet
financial instruments without attempting to estimate the value of anticipated
future business and value of assets and liabilities that are not considered
financial instruments. Other significant assets and liabilities that are not
considered financial assets or liabilities include deferred tax liabilities,
premises and equipment, mortgage servicing assets and goodwill. In addition,
the tax ramifications related to the realization of the unrealized gains and
losses can have a significant effect on fair value estimates and have not been
considered in any of the estimates.
NOTE 16: COMMITMENTS AND CONTINGENT LIABILITIES
In the normal course of business there are outstanding various commitments
and contingent liabilities which are not reflected in the accompanying
consolidated financial statements. Management does not anticipate any material
loss as a result of these transactions. The following is a summary of
commitments and contingent liabilities (in thousands):
<TABLE>
<CAPTION>
JUNE 30
------------------------
1998 1997
----------- ----------
<S> <C> <C>
Commitments to sell loans and mortgage-backed securities ......... $122,820 $ 14,000
Standby and commercial letters of credit ......................... 4,767 1,432
Unused lines of credit ........................................... 556,777 363,203
Commitments to originate loans receivable:
Adjustable-rate ................................................. 20,173 18,961
Fixed-rate ...................................................... 77,243 24,884
Commitments to purchase loans receivable:
Adjustable-rate ................................................. -- 90,419
Fixed-rate ...................................................... 75,000 207,162
</TABLE>
Agreements to sell loans and mortgage-backed securities contain
representations and warranties regarding the underwriting and documentation of
the underlying loans. To the extent the Bank is deemed to have breached any of
these representations and warranties, the sales agreement allows the purchaser
to demand repurchase of the loans causing the breach. The Bank does not
anticipate it will be required to make material repurchases or incur material
losses related to loans and mortgage-backed securities it has sold or committed
to sell at June 30, 1998.
As more fully discussed in Note 7: "Loans Receivable," in the past, the
Bank sold loans and mortgage-backed securities with recourse for credit losses.
The Bank provided for the estimated recourse losses at the time of sale, and
evaluates, on a quarterly basis, the adequacy of the liability for recourse
losses. However, significant changes in future losses may require additions to
the recourse liability recorded in the caption "Other liabilities and accrued
expenses" in the Consolidated Statements of Financial Condition.
Commitments to sell residential mortgage loans for a fixed price are
generally entered into between the date the application is taken and the date
the loans are sold into the secondary market. Risks arise from the possible
inability of counter-parties to meet the terms of commitments and movement in
interest rates and related prices.
F-42
<PAGE>
GLENDALE FEDERAL BANK AND SUBSIDIARIES
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS (CONTINUED)
JUNE 30, 1998, 1997 AND 1996
The Bank makes contractual commitments to extend credit, which are legally
binding agreements to lend money to customers at predetermined interest rates
for a specified period of time. The Bank applies its credit standards when
underwriting and extending these commitments, and periodically reassesses the
customers' credit worthiness through ongoing credit reviews. Additional risks
associated with providing these commitments arise when these commitments are
drawn upon, such as the demands on liquidity that the Bank would experience if
a significant portion were drawn down at once. However, this is considered
unlikely, as many commitments expire without having been drawn upon.
Upon approval of a loan application, the Bank normally gives the applicant
a commitment that the Bank will make the approved loan within a specified time
period, normally 10 to 45 days, at a rate of interest and on other terms
determined on the basis of market conditions as of the date of the commitment.
The Bank evaluates each customer's creditworthiness on a case-by-case
basis. The amount of collateral obtained, if it is deemed necessary by the Bank
upon extension of credit, is based on management's credit evaluation of the
borrower. Collateral held varies, but may include accounts receivable;
inventory, property, plant and equipment; income-producing commercial
properties; and agricultural products. For single-family lending, collateral
consists of trust-deeds on one-to four-unit residential real estate. The Bank
does not anticipate any significant loss as a result of its commitments to
originate loans as of June 30, 1998.
On February 1, 1994, the Bank entered into a five-year contract for the
outsourcing of its data processing and item processing operations. The contract
is based on certain volume levels. If the contract is terminated prior to its
expiration, a termination charge would be incurred, the amount of which would
be dependent upon the nature of the termination and the time remaining on the
contract.
The Bank and certain of its subsidiaries are involved in litigation
arising in the normal course of business. Although the legal responsibility and
financial impact with respect to such litigation cannot presently be
ascertained, the Bank does not anticipate that the final resolution of these
matters will result in the payment of monetary damages that would be material
in relation to the consolidated financial condition or results of operations of
the Bank.
NOTE 17: REGULATORY CAPITAL
FIRREA and the regulations promulgated thereunder established certain
minimum levels of regulatory capital for savings institutions subject to Office
of Thrift Supervision ("OTS") supervision. The Bank must follow specific
capital guidelines stipulated by the OTS which involve quantitative measures of
the Bank's assets, liabilities and certain off-balance sheet items. An
institution that fails to comply with its regulatory capital requirements must
obtain OTS approval of a capital plan and can be subject to a capital directive
and certain restrictions on its operations. At June 30, 1998, the minimum
regulatory capital requirements were:
o Tangible and core capital, consisting principally of stockholder's
equity, but excluding most intangible assets such as goodwill and any net
unrealized holding gains or losses on debt securities available for sale
equal to 1.5% and 3% of assets, respectively.
o Risk-based capital consisting of core capital plus certain subordinated
debt and other capital instruments and, subject to certain limitations,
general valuation allowances on loans receivable, equal to 8 percent of
the amount of risk-weighted assets.
At June 30, 1998, the Bank was "well capitalized" under the prompt
corrective action ("PCA") regulations adopted by the OTS pursuant to the
Federal Deposit Insurance Corporation Improvement Act of 1991 ("FDICIA"). To be
categorized as "well capitalized", the Bank must maintain minimum core capital,
Tier I risk-based capital and risk-based capital ratios as set forth in the
table below. The Bank's
F-43
<PAGE>
GLENDALE FEDERAL BANK AND SUBSIDIARIES
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS (CONTINUED)
JUNE 30, 1998, 1997 AND 1996
capital amounts and classification are subject to review by federal regulators
about components, risk-weightings and other factors. There are no conditions or
events since June 30, 1998 that management believes have changed the
institution's category.
The following table summarizes the Bank's actual capital and required
capital as of June 30, 1998 and 1997 (dollars in thousands):
<TABLE>
<CAPTION>
TIER 1
TANGIBLE CORE RISK-BASED RISK-BASED
CAPITAL CAPITAL CAPITAL CAPITAL
--------------- --------------- --------------- ---------------
<S> <C> <C> <C> <C>
JUNE 30, 1998
Actual capital:
Amount ................................. $ 1,077,884 $ 1,077,884 $ 1,077,884 $ 1,177,116
Ratio .................................. 6.02% 6.02% 10.57% 11.54%
FIRREA minimum required capital:
Amount ................................. $ 268,427 $ 536,854 N/A $ 816,080
Ratio .................................. 1.50% 3.00% N/A 8.00%
FDICIA well capitalized required capital:
Amount ................................. N/A $ 894,756 $ 612,060 $ 1,020,099
Ratio .................................. N/A 5.00% 6.00% 10.00%
JUNE 30, 1997
Actual capital:
Amount ................................. $ 913,333 $ 913,333 $ 913,333 $ 1,017,226
Ratio .................................. 5.67% 5.67% 10.02% 11.17%
FIRREA minimum required capital:
Amount ................................. $ 241,781 $ 483,562 N/A $ 731,890
Ratio .................................. 1.50% 3.00% N/A 8.00%
FDICIA well capitalized required capital:
Amount ................................. N/A $ 805,936 $ 551,818 $ 911,963
Ratio .................................. N/A 5.00% 6.00% 10.00%
</TABLE>
F-44
<PAGE>
GLENDALE FEDERAL BANK AND SUBSIDIARIES
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS (CONTINUED)
JUNE 30, 1998, 1997 AND 1996
The following table reconciles the Bank's capital in accordance with
generally accepted accounting principles ("GAAP") to the Bank's tangible, core
and risk-based capital as of June 30, 1998 and 1997 (in thousands):
<TABLE>
<CAPTION>
JUNE 30
-----------------------------
1998 1997
------------- -------------
<S> <C> <C>
Capital of Glendale Federal in accordance with GAAP ................... $1,278,399 $1,012,074
Adjustments for tangible and core capital:
Net unrealized holding loss on available for sale securities ......... 1,612 1,154
Goodwill and other intangible assets ................................. (180,463) (99,533)
Disallowed mortgage servicing ........................................ (10,788) --
Disallowed capitalized software ...................................... (10,094) --
Investments in and advances to non-permissible subsidiaries .......... (782) (362)
---------- ----------
Total tangible capital ................................................ 1,077,884 913,333
Adjustments for core capital .......................................... -- --
---------- ----------
Total core capital .................................................... 1,077,884 913,333
Adjustments for risk-based capital:
Allowance for general loan losses(1) ................................. 127,705 113,006
Equity risk investments required to be deducted ...................... (17,735) (9,113)
Low level recourse deduction ......................................... (10,738) --
---------- ----------
Total risk-based capital .............................................. $1,177,116 $1,017,226
========== ==========
</TABLE>
- - ----------
(1) Limited to 1.25% of risk-weighted assets.
NOTE 18: STOCKHOLDER'S EQUITY
On July 23, 1997, shareholders of Glendale Federal Bank, Federal Savings
Bank approved the formation of Golden State Bancorp Inc. as the holding company
for the Bank. The formation of the holding company became effective on July 24,
1997 and the Bank became a wholly-owned subsidiary of Golden State on that
date. Shares of Glendale Federal's common stock automatically became an equal
number of shares of Golden State common stock and shares of Glendale Federal's
Noncumulative Preferred Stock, Series E, automatically became an equal number
of shares of Golden State's Noncumulative Convertible Preferred Stock, Series
A. Glendale Federal's two classes of warrants became exercisable solely to
purchase common stock of Golden State. The board of directors of Glendale
Federal are also the board of directors of Golden State. Golden State was
funded with a dividend of $14.9 million from Glendale Federal to be used for
general working capital purposes and for payment of dividends on Golden State's
preferred stock.
DESCRIPTION OF BANK SECURITIES
Common Stock
The Bank's Charter authorizes the issuance of 100 million shares of common
stock with a par value of $1.00 per share. Holders of common stock are entitled
to receive dividends when, as and if declared by the Board of Directors of the
Bank out of assets of the Bank legally available for payment, subject to the
superior rights of the holders of any series of preferred stock that may be
issued.
Preferred Stock
As described in Note 1: "Basis of Presentation and Summary of Significant
Accounting and Reporting Policies," all of the Series A Preferred Stock
(formerly Series E) was acquired by Golden State
F-45
<PAGE>
GLENDALE FEDERAL BANK AND SUBSIDIARIES
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS (CONTINUED)
JUNE 30, 1998, 1997 AND 1996
on July 24, 1997. The Series A Preferred Stock has a par value of $1.00 per
share and a liquidation preference of $25 per share. The Series A Preferred
Stock provides for noncumulative dividends, when, as and if declared, at an
annual rate of 8.75% of its liquidation preference and is convertible, at the
option of the holders thereof, into common stock at any time at a conversion
price of $10.40 per share, subject to adjustment in certain events. Subject to
applicable laws and regulations, the Series A Preferred Stock will be
redeemable, in whole or in part, at the option of the Bank, on 20 to 45 days
notice, from time to time at any time on or after October 1, 1998 at the
following per share redemption prices, plus in each case an amount equal to any
dividends that have been declared thereon but remain unpaid as of the date of
redemption, if redeemed during the twelve-month period beginning October 1 of
each of the following years:
<TABLE>
<CAPTION>
REDEMPTION PRICE PER SHARE OF
SERIES A CONVERTIBLE
YEAR PREFERRED STOCK
- - --------------------------------- ------------------------------
<S> <C>
1998 ........................ $ 26.09375
1999 ........................ 25.87500
2000 ........................ 25.65625
2001 ........................ 25.43750
2002 ........................ 25.21875
2003 and thereafter ......... 25.00000
</TABLE>
The Bank intends to redeem all of its Series A Preferred Stock on October
1, 1998 at a redemption price of $26.09375 per share. As of June 30, 1998,
there were 4,617,484 shares of Series A Preferred Stock issued and outstanding.
During fiscal 1997 the Bank entered into separately negotiated agreements
with certain holders of its then Series E (now Series A) preferred stock
providing, in the aggregate, for exchanges of 1,201,900 shares of the preferred
stock for 3,103,872 shares of the Bank's common stock. The exchanges were made
at premiums above the stated conversion rate of 2.404 shares of the Bank's
common stock for each share of the preferred stock.
RESTRICTION ON STOCKHOLDER'S EQUITY AND DIVIDENDS
Dividends on the Bank's common stock may not be paid unless full cash
dividends on the Bank's Series A Preferred Stock have been declared and paid or
set aside for payment for the immediately preceding dividend period. OTS
regulations limit a savings institution's ability to make capital
distributions, which include the payment of dividends, based on the
institution's capital position. The rule establishes "safe-harbor" amounts of
capital distributions that institutions can make after providing notice to the
OTS, but without needing prior approval. Institutions can distribute amounts in
excess of the safe harbor only with the prior approval of the OTS.
An institution that exceeds its minimum capital requirements is permitted
to make capital distributions in specified amounts based on its regulatory
capital levels without prior OTS approval unless it is deemed to be "in need of
more than normal supervision," in which case OTS approval of the distribution
may be required. The OTS retains the authority in all cases, however, to
prohibit any capital distribution that would otherwise be authorized under its
regulations if the OTS determines that the capital distribution would
constitute an unsafe or unsound practice and in each case requires prior
notification of any proposed dividend or other capital distribution. The Bank
does not currently expect to pay cash dividends on its common stock or make
other capital distributions, other than preferred stock dividends and the
aforementioned redemption of the Series A Preferred Stock, in the foreseeable
future.
Retained earnings at June 30, 1998 and 1997 include approximately $48
million for which no provision for Federal income tax has been made. These
amounts represent allocations of earnings to bad
F-46
<PAGE>
GLENDALE FEDERAL BANK AND SUBSIDIARIES
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS (CONTINUED)
JUNE 30, 1998, 1997 AND 1996
debt reserves for tax purposes and are a restriction upon retained earnings.
If, in the future, this portion of retained earnings and an additional
approximately $105 million of similar tax basis reserves from acquired
associations are reduced for any purpose other than tax bad debt losses,
Federal income taxes may be imposed at the then applicable rates.
NOTE 19: EMPLOYEE BENEFIT PLAN
The Bank has several pension plans (collectively, the "Plan") covering
substantially all of its employees. The benefits are based on years of service
and the employees' average earnings in the five highest consecutive Plan years
for the last 10 years of employment.
The Bank uses, for financial reporting purposes, the projected unit credit
method and continues to base its funding policy on the individual entry age
normal method.
The following table sets forth the Plan's funded status as of March 31,
1998 and 1997 and amounts recognized in the Bank's statements of financial
condition at June 30, 1998 and 1997 (in thousands):
<TABLE>
<CAPTION>
JUNE 30
-----------------------
1998 1997
---------- ----------
<S> <C> <C>
Actuarial present value of benefit obligations:
Vested accumulated benefits ............................................. $ 58,958 $ 46,896
Non-vested accumulated benefits ......................................... 2,366 1,780
-------- --------
Total accumulated benefits ............................................ $ 61,324 $ 48,676
======== ========
Projected benefit obligation for service rendered to date ................ $ 73,033 $ 57,902
Plan assets at fair value; primarily listed stocks, U.S. Government
obligations and savings certificates of the Bank ........................ 96,493 80,129
-------- --------
Funded status--Plan assets in excess of projected benefit obligation ..... 23,460 22,227
Items not yet recognized in earnings:
Unrecognized net gain ................................................... (5,421) (4,724)
Prior service cost not yet recognized in net periodic pension cost ...... 176 193
-------- --------
Prepaid pension cost included in "Other assets" at end of period ......... $ 18,215 $ 17,696
======== ========
</TABLE>
Net periodic pension income for fiscal 1998, 1997 and 1996 included the
following components (in thousands):
<TABLE>
<CAPTION>
YEARS ENDED JUNE 30
-----------------------------------------
1998 1997 1996
------------ ----------- ------------
<S> <C> <C> <C>
Service cost-benefits earned during the period ......... $ 2,325 $ 2,376 $ 2,246
Interest cost on projected benefit obligation .......... 4,874 4,483 4,306
Actual return on Plan assets ........................... (18,895) (2,621) (11,566)
Net amortization and deferral .......................... 11,177 (5,095) 3,732
--------- -------- ---------
Net periodic pension income ............................ $ (519) $ (857) $ (1,282)
========= ======== =========
</TABLE>
F-47
<PAGE>
GLENDALE FEDERAL BANK AND SUBSIDIARIES
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS (CONTINUED)
JUNE 30, 1998, 1997 AND 1996
The following table presents certain significant assumptions used in
determining plan obligations and net pension expense at the dates indicated:
<TABLE>
<CAPTION>
YEARS ENDED JUNE 30
------------------------------------
1998 1997 1996
---------- ---------- ----------
<S> <C> <C> <C>
Weighted average discount rate used to calculate benefit
obligations ............................................. 7.00% 8.25% 8.00%
Assumed rate of increase in future compensation .......... 4.00% 4.50% 4.50%
Expected long-term rate of return on plan assets ......... 9.50% 9.50% 9.50%
</TABLE>
The Bank has established a savings plan for its employees which allows
participants to make contributions by salary deduction equal to 15% or less of
their salary pursuant to section 401(k) of the Internal Revenue Code.
Employees' contributions vest immediately; the Bank's partial matching
contributions vest over five years. The Bank's contributions to the plan in
fiscal 1998, 1997 and 1996 were $1,981,000, $1,713,000 and $739,000,
respectively.
KEY EXECUTIVE RETIREMENT SUPPLEMENT PLANS
During fiscal 1992, GLENFED, Inc., the former holding company of Glendale
Federal, substantially terminated two non-qualified post-retirement pension
supplement plans previously maintained for certain senior executive officers of
GLENFED, Inc., as well as one other such plan assumed by the Bank in its
acquisition of another association. Participants fully vested at the time of
such substantial termination (as well as one officer scheduled to vest within
four months of such date) were offered the opportunity to receive a lump-sum
settlement in lieu of the contractual benefits under the plans. Three
non-vested participants will receive no benefits under the plans. During fiscal
1998, five vested participants were receiving benefits under the plans.
DIRECTORS' RETIREMENT PLANS
The Bank maintains directors' retirement plans for non-employee directors
who serve on its Board of Directors (the "Directors' Plan"). The Directors'
Plan provides that a non-employee director shall, after termination of Board
membership, be entitled to receive a monthly payment equal to: (1) the monthly
Board retainer in effect at the time of termination; plus (2) the fee paid at
such time for attending a Board meeting, for the number of years equal to the
number of years of Board service, but not to exceed twenty years. Payments of
such amounts normally commence at the later of the director's termination date
or the director's attainment of age 65.
NOTE 20: STOCK OPTION PLAN
The Bank has a stock option plan (the "Option Plan") that provides for the
granting of options of Golden State common stock to employees and directors.
The Option Plan has a term of five years and allows for awards totaling up to
7.2 million shares of common stock. Options granted generally have terms of ten
years each. All options granted will become exercisable upon a change in
control of the Company.
In October 1994, the Bank's shareholders approved amendments to the Option
Plan which, among other things: (1) provide for annual grants of options to
acquire 5,000 shares to each non-employee Director; and (2) provide for
equitable adjustments of the exercise or purchase price and the number or class
of shares covered by outstanding awards to preserve the benefit of such awards
in the event of payment of a dividend or distribution to shareholders of the
Company in property or cash in an amount in excess of the Company's normal
dividend or distribution policy in effect at the time. Grants to directors are
made on the first day following each annual meeting of the Company's
shareholders with an exercise price equal to the closing price on the New York
Stock Exchange of the Company's common stock on such date and vest on the date
of the next succeeding annual meeting.
F-48
<PAGE>
GLENDALE FEDERAL BANK AND SUBSIDIARIES
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS (CONTINUED)
JUNE 30, 1998, 1997 AND 1996
The following is a summary of the transactions under the Bank's stock
option plan:
<TABLE>
<CAPTION>
NUMBER OF RANGE OF WEIGHTED AVERAGE
SHARES OPTION PRICES EXERCISE PRICE
--------------- ------------------- -----------------
<S> <C> <C> <C>
Outstanding at June 30, 1995 ......... 3,316,250 $ 6.375-$12.625 $ 9.99
Granted .............................. 742,000 14.50-16.125 14.58
Canceled or expired .................. (73,750) 9.00-14.50 13.16
Exercised ............................ (106,000) 6.375-14.50 10.71
---------
Outstanding at June 30, 1996 ......... 3,878,500 6.375-16.125 10.79
Granted .............................. 1,830,000 17.50-17.75 17.57
Canceled or expired .................. (51,250) 12.625-17.75 14.11
Exercised ............................ (512,125) 6.375-16.125 9.00
---------
Outstanding at June 30, 1997 ......... 5,145,125 6.375-17.75 13.34
Granted .............................. 925,500 28.50-35.00 28.78
Canceled or expired .................. (36,166) 14.50-28.50 21.39
Exercised ............................ (2,344,951) 6.375-17.75 11.22
----------
Outstanding at June 30, 1998 ......... 3,689,508 $ 6.375-$35.00 $ 18.49
==========
</TABLE>
The number of options exercisable at June 30, 1998, 1997 and 1996 was
1,453,884, 2,869,750 and 2,244,293, respectively, and the weighted average
exercise price of those exercisable options was $13.17, $10.57 and $9.76,
respectively. All options will become exercisable at the completion of the Cal
Fed Merger, which is expected to take place on September 11, 1998.
The number of options available for future grants under the Bank's stock
option plan at June 30, 1998, 1997 and 1996 was 493,041, 1,382,375 and 661,125,
respectively.
Information about stock options outstanding at June 30, 1998 was as
follows:
<TABLE>
<CAPTION>
OUTSTANDING EXERCISABLE
WEIGHTED --------------------------------- --------------------------------
AVERAGE REMAINING WEIGHTED WEIGHTED
RANGE OF CONTRACTUAL LIFE AVERAGE EXERCISE AVERAGE EXERCISE
EXERCISE PRICES (IN YEARS) NUMBER PRICE NUMBER PRICE
- - ---------------------- ------------------ ------------ ------------------ ------------ -----------------
<S> <C> <C> <C> <C> <C>
$6.375-$9.00.......... 5.2 206,250 $ 8.68 206,250 $ 8.68
9.75-14.50 .......... 6.6 1,029,234 12.79 891,234 12.53
15.50-17.75 ......... 8.1 1,543,024 17.52 356,400 17.36
28.50-35.00 ......... 9.2 911,000 28.79 -- --
--------- -------
$6.375-$35.00......... 8.2 3,689,508 $ 18.49 1,453,884 $ 13.17
========= =========
</TABLE>
The Bank applies APB Opinion 25 in accounting for its stock-based
compensation plan. Accordingly, no compensation expense has been recognized for
its stock options. Had the Bank determined compensation cost based on the fair
value at the grant dates of its stock options consistent with SFAS 123, the
Bank's net earnings would have been reduced to the pro forma amounts as
follows:
<TABLE>
<CAPTION>
YEARS ENDED JUNE 30
---------------------------------
1998 1997 1996
----------- ---------- ----------
(IN THOUSANDS, EXCEPT PER SHARE
DATA)
<S> <C> <C> <C>
Net earnings:
As reported ......... $129,075 $50,423 $42,052
Pro forma ........... 122,141 45,223 39,634
</TABLE>
F-49
<PAGE>
GLENDALE FEDERAL BANK AND SUBSIDIARIES
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS (CONTINUED)
JUNE 30, 1998, 1997 AND 1996
The weighted average grant-date fair value of stock options granted during
fiscal 1998, 1997 and 1996 was $14.99, $9.41 and $8.06, respectively. The fair
value of each option is estimated on the date of grant using the Black-Scholes
option-pricing model with the following weighted average assumptions:
<TABLE>
<CAPTION>
YEARS ENDED JUNE 30
---------------------------------
1998 1997 1996
--------- --------- ---------
<S> <C> <C> <C>
Dividend yield .................. 0% 0% 0%
Expected volatility ............. 37.7% 38.6% 42.1%
Risk-free interest rate ......... 6.4% 6.8% 6.5%
Expected life of option ......... 7 years 7 years 7 years
</TABLE>
During the initial phase-in period, the effects of applying SFAS 123 for
these pro forma disclosures are not likely to be representative of the effects
on reported income for future years as options vest over several years and
additional awards are generally made each year.
NOTE 21: SUBSEQUENT EVENTS
On July 11, 1998, Golden State acquired RedFed Bancorp Inc. ("RedFed") and
its federal savings bank subsidiary, Redlands Federal Bank, in a tax-free,
stock-for-stock merger. Pursuant to the terms of the transaction, Golden State
issued 5,221,995 shares of its common stock, resulting in a total recorded
purchase price of $158.3 million. Pursuant to the merger, Redlands Federal Bank
was merged into the Bank. Under the purchase method of accounting, the goodwill
of $62.8 million recorded in this transaction by the Bank will be amortized
over 15 years using the straight-line method. At July 11, 1998, RedFed operated
15 branches and had $1.0 billion in assets, including $893.7 million of loans
receivable, net. RedFed's liabilities included $864.1 million of deposits and
$78.7 million of borrowings. These amounts are unaudited.
On February 4, 1998, and as amended as of July 13, 1998, Golden State
entered into an Agreement and Plan of Reorganization (the "Cal Fed Merger
Agreement") with First Nationwide (Parent) Holdings, Inc. ("First Nationwide"),
First Nationwide Holdings, Inc. ("FNH"), and certain other parent entities of
California Federal Bank, A Federal Savings Bank ("Cal Fed"). FNH is controlled,
through intermediate entities, by MacAndrews and Forbes Holdings Inc. ("MAF")
and Gerald J. Ford ("Ford"), the Chairman of the Board and Chief Executive
Officer of Cal Fed. After giving effect to the Cal Fed Merger, the combined
parent company, Golden State, will continue to be a publicly traded company,
FNH will be merged with and into Golden State Financial, and Glendale Federal
will be merged with and into Cal Fed.
At June 30, 1998, First Nationwide, through its subsidiary Cal Fed,
operated 225 branches and had $34.1 billion in assets, including $20.4 billion
in loans receivable, net and $16.0 billion in deposits. These amounts are
unaudited.
The Cal Fed Merger received Office of Thrift Supervision approval on
August 12, 1998 and the approval of the stockholders of the Company on August
17, 1998, and is expected to close on September 11, 1998.
F-50
<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 Glendale Federal's
consolidated financial statements at their estimated fair value at the closing
date of the RedFed Merger. Glendale Federal'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 FNH 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 (Trade Mark) 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, Glendale Federal's consolidated statements of
operations have been recast to conform to the calendar year end used by FNH.
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 Glendale Federal and FNH, 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.
<PAGE>
GOLDEN STATE HOLDINGS
UNAUDITED PRO FORMA CONDENSED COMBINED
STATEMENT OF FINANCIAL CONDITION
AS OF JUNE 30, 1998
(IN THOUSANDS)
<TABLE>
<CAPTION>
GLENDALE
FNH FEDERAL
(HISTORICAL) (HISTORICAL) REDFED(1)
-------------- -------------- -------------
<S> <C> <C> <C>
ASSETS
Cash and amounts due
from banks ................... $ 345,921 $ 289,978 $ 71,197
Federal funds sold and
assets purchased under
resale agreements ............ -- 172,000 --
Other investments ............. 879,071 128,308 7,997
Loans receivable, net ......... 20,351,922 13,774,580 910,718
Mortgage-backed
securities, net .............. 9,180,282 2,375,363 10,242
Real estate held for sale
or investment ................ -- 6,327 --
Real estate acquired in
settlement of loans .......... 64,892 37,393 6,716
Investment in capital stock
of FHLB, at cost ............. 540,127 300,339 9,734
Mortgage servicing assets ..... 669,056 243,314 --
Goodwill and other
intangible assets ............ 656,177 180,463 48,767
Other assets .................. 1,348,509 587,331 28,054
----------- ----------- ----------
$34,035,957 $18,095,396 $1,093,425
=========== =========== ==========
LIABILITIES, MINORITY
INTEREST AND
STOCKHOLDERS' EQUITY
Deposits ...................... $16,044,288 $10,701,157 $ 864,861
Securities sold under
agreements to
repurchase ................... 2,861,604 175,551 --
Borrowings from the
FHLB ......................... 10,993,707 5,613,458 70,079
Other borrowings .............. 1,282,580 70 8,693
Other liabilities ............. 729,131 326,761 1,226
Minority interest ............. 986,296 -- --
Stockholders' equity .......... 1,138,351 1,278,399 148,566
----------- ----------- ----------
$34,035,957 $18,095,396 $1,093,425
=========== =========== ==========
<CAPTION>
PRO FORMA REFINANCING
ADJUSTMENTS BEFORE ADJUSTMENTS PRO FORMA
(NOTE D) REFINANCING (NOTE G) COMBINED
------------- ------------- ------------- --------------
<S> <C> <C> <C> <C>
ASSETS
Cash and amounts due
from banks ................... $ -- $ 707,096 $ (45,002) $ 662,094
Federal funds sold and
assets purchased under
resale agreements ............ -- 172,000 -- 172,000
Other investments ............. -- 1,015,376 -- 1,015,376
Loans receivable, net ......... 6,807 35,044,027 -- 35,044,027
Mortgage-backed
securities, net .............. 6,962 11,572,849 -- 11,572,849
Real estate held for sale
or investment ................ -- 6,327 -- 6,327
Real estate acquired in
settlement of loans .......... -- 109,001 -- 109,001
Investment in capital stock
of FHLB, at cost ............. -- 850,200 -- 850,200
Mortgage servicing assets ..... 54,243 966,613 -- 966,613
Goodwill and other
intangible assets ............ 61,875 947,282 -- 947,282
Other assets .................. 184,446 2,148,340 (28,847) 2,158,076
28,625
9,958
----------- ----------- ---------- -----------
$ 314,333 $53,539,111 $ (35,266) $53,503,845
=========== =========== ========== ===========
LIABILITIES, MINORITY
INTEREST AND
STOCKHOLDERS' EQUITY
Deposits ...................... $ 2,588 $27,612,894 $ -- $27,612,894
Securities sold under
agreements to
repurchase ................... -- 3,037,155 -- 3,037,155
Borrowings from the
FHLB ......................... 1,194 16,678,438 -- 16,678,438
Other borrowings .............. 993 1,292,336 (915,000) 2,371,255
2,000,000
(6,081)
Other liabilities ............. 563,578 1,620,696 (12,159) 1,621,765
13,228
Minority interest ............. -- 986,296 (486,458) 499,838
Stockholders' equity .......... (254,020) 2,311,296 (134,600) 1,682,500
(494,196)
----------- ----------- ---------- -----------
$ 314,333 $53,539,111 $ (35,266) $53,503,845
=========== =========== ========== ===========
</TABLE>
- - ----------
(1) Represents the RedFed Merger, accounted for as a purchase, together with
related pro forma purchase accounting adjustments.
See accompanying Notes to Unaudited Pro Forma Condensed Combined Financial
Statements.
2
<PAGE>
GOLDEN STATE HOLDINGS
UNAUDITED PRO FORMA CONDENSED COMBINED STATEMENT OF OPERATIONS
FOR THE SIX MONTHS ENDED JUNE 30, 1998
(IN THOUSANDS, EXCEPT PER SHARE DATA)
<TABLE>
<CAPTION>
GLENDALE
FNH FEDERAL CENFED
(HISTORICAL) (HISTORICAL) AND REDFED(1)
-------------- -------------- ---------------
<S> <C> <C> <C>
Interest income ................ $1,091,523 $581,626 $85,568
Interest expense ............... 752,596 353,826 49,745
Net interest income ............ 338,927 227,800 35,823
Provision for loan losses ...... 20,000 (3,721) 804
---------- -------- -------
Net interest income after
provision for loan losses ..... 318,927 231,521 35,019
Other income:
Fee income ..................... 71,363 48,357 5,002
Gain on sale of loans, net ..... 36,124 796 --
Gain on sale of
mortgage-backed
securities, net ............... -- 4,430 725
Other income, net .............. 62,685 209 158
---------- -------- -------
Total other income ............ 170,172 53,792 5,885
Other expenses:
Compensation and
employee benefits ............. 127,620 70,449 18,333
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 ....... 99,611 40,288 8,518
Total general and
administrative
expenses ..................... 283,605 150,182 30,428
Restructuring charges .......... -- 4,452 3,761
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) 2,415
Amortization of goodwill
and other intangible
assets ........................ 23,229 5,052 4,880
---------- -------- -------
Total other expenses .......... 301,696 164,471 41,484
Earnings before income tax
provision (benefit) ........... 187,403 120,842 (580)
Income tax provision
(benefit) ..................... (221,134) 49,195 (120)
---------- -------- -------
Earnings before minority
interest ...................... 408,537 71,647 (460)
Minority interest .............. 45,614 -- --
---------- -------- -------
Net earnings ................... $ 362,923 $ 71,647 $ (460)
========== ======== =======
<CAPTION>
PRO FORMA REFINANCING
ADJUSTMENTS BEFORE ADJUSTMENTS PRO FORMA
(NOTE D) REFINANCING (NOTE G) COMBINED
----------------- ------------- ------------------- -----------------
<S> <C> <C> <C> <C>
Interest income ................ $ (5,129) $1,753,588 $ (1,238) $1,752,350
Interest expense ............... (1,616) 1,154,551 (49,185) 1,176,639
70,455
818
-----------
Net interest income ............ (3,513) 599,037 (23,326) 575,711
Provision for loan losses ...... -- 17,083 -- 17,083
---------- ---------- ----------- ----------
Net interest income after
provision for loan losses ..... (3,513) 581,954 (23,326) 558,628
Other income:
Fee income ..................... (4,068) 120,654 -- 120,654
Gain on sale of loans, net ..... -- 36,920 -- 36,920
Gain on sale of
mortgage-backed
securities, net ............... -- 5,155 -- 5,155
Other income, net .............. -- 63,052 -- 63,052
---------- ---------- ----------- ----------
Total other income ............ (4,068) 225,781 -- 225,781
Other expenses:
Compensation and
employee benefits ............. -- 216,402 -- 216,402
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 ....... -- 148,417 (3,336) 147,835
2,754
----------- ----------- ----------- ----------
Total general and
administrative
expenses ..................... -- 464,215 (582) 463,633
Restructuring charges .......... -- 8,213 -- 8,213
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 ......................... -- (7,052) -- (7,052)
Amortization of goodwill
and other intangible
assets ........................ 2,063 35,224 -- 35,224
---------- ---------- ----------- ----------
Total other expenses .......... 2,063 509,714 (582) 509,132
Earnings before income tax
provision (benefit) ........... (9,644) 298,021 (22,744) 275,277
Income tax provision
(benefit) ..................... 56,415 (2) (115,644) (9,552) (4) (125,196)
---------- ---------- ----------- ----------
Earnings before minority
interest ...................... (66,059) 413,665 (13,192) 400,473
Minority interest .............. (6,666)(3) 38,948 (26,456)(5) 12,492
---------- ---------- ----------- ----------
Net earnings ................... $ (59,393) $ 374,717 $ 13,264(6) $ 387,981(7)
========== ========== ============= ============
</TABLE>
See accompanying Notes to Unaudited Pro Forma Condensed Combined Financial
Statements.
3
<PAGE>
GOLDEN STATE HOLDINGS
UNAUDITED PRO FORMA CONDENSED COMBINED STATEMENT OF OPERATIONS
FOR THE SIX MONTHS ENDED JUNE 30, 1998
(IN THOUSANDS, EXCEPT PER SHARE DATA)
- - ----------
(1) Represents the CENFED Merger and the RedFed Merger, each accounted for as
a purchase, together with related pro forma purchase accounting
adjustments.
(2) The adjustment to income tax expense includes adjustments for
nondeductible goodwill amortization and to adjust FNH's historical
effective tax rate to 42%.
(3) 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 G.
(7) Pro forma 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 FNH's 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):
<TABLE>
<S> <C>
FNH historical ............ $112,923
Pro forma before Refinancing 124,717
Pro forma combined ........ 137,981
</TABLE>
See accompanying Notes to Unaudited Pro Forma Condensed Combined Financial
Statements.
4
<PAGE>
GOLDEN STATE HOLDINGS
UNAUDITED PRO FORMA CONDENSED COMBINED STATEMENT OF OPERATIONS
FOR THE YEAR ENDED DECEMBER 31, 1997
(IN THOUSANDS, EXCEPT PER SHARE DATA)
<TABLE>
<CAPTION>
GLENDALE
FNH FEDERAL CENFED
(HISTORICAL) (HISTORICAL) AND REDFED(1)
-------------- -------------- ---------------
<S> <C> <C> <C>
Interest income ................ $2,127,490 $1,121,021 $236,033
Interest expense ............... 1,440,804 711,807 147,953
Net interest income ........... 686,686 409,214 88,080
Provision for loan losses ...... 79,800 12,015 7,139
---------- ---------- --------
Net interest income after
provision for loan losses .... 606,886 397,199 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 ...... 233,642 71,221 9,719
---------- ---------- --------
Total general and
administrative expenses 602,870 274,688 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 ......... 648,719 313,229 69,455
Earnings before income tax
provision ..................... 297,861 181,465 28,684
Income tax provision ........... 47,148 76,851 10,063
---------- ---------- --------
Earnings before minority
interest ...................... 250,713 104,614 18,621
Minority interest .............. 89,344 -- --
---------- ---------- --------
Net earnings .................. $ 161,369 $ 104,614 $ 18,621
========== ========== ========
<CAPTION>
PRO FORMA REFINANCING
ADJUSTMENTS BEFORE ADJUSTMENTS PRO FORMA
(NOTE D) REFINANCING (NOTE G) COMBINED
----------------- ------------- -------------------- -------------
<S> <C> <C> <C> <C>
Interest income ................ $ (10,256) $3,474,288 $ (2,475) $3,471,813
Interest expense ............... (3,231) 2,297,333 (98,369) 2,341,510
140,910
1,636
------------
Net interest income ........... (7,025) 1,176,955 (46,652) 1,130,303
Provision for loan losses ...... -- 98,954 -- 98,954
----------- ---------- ------------ ----------
Net interest income after
provision for loan losses .... (7,025) 1,078,001 (46,652) 1,031,349
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 ...... -- 314,582 (6,672) 313,417
5,507
----------- ---------- ------------ ----------
Total general and
administrative expenses -- 934,138 (1,165) 932,973
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 1,035,528 (1,165) 1,034,363
Earnings before income tax
provision ..................... (19,286) 488,724 (45,487) 443,237
Income tax provision ........... 92,230 (2) 226,292 (19,105)(4) 207,187
----------- ---------- ------------ ----------
Earnings before minority
interest ...................... (111,516) 262,432 (26,382) 236,050
Minority interest .............. (12,331)(3) 77,013 (52,912)(5) 24,101
----------- ---------- ------------ ----------
Net earnings .................. $ (99,185) $ 185,419 $ 26,530 (6) $ 211,949
=========== ========== ============== ==========
</TABLE>
See accompanying Notes to Unaudited Pro Forma Condensed Combined Financial
Statements.
5
<PAGE>
GOLDEN STATE HOLDINGS
UNAUDITED PRO FORMA CONDENSED COMBINED STATEMENT OF OPERATIONS
FOR THE YEAR ENDED DECEMBER 31, 1997
(IN THOUSANDS, EXCEPT PER SHARE DATA)
- - ----------
(1) Represents the CENFED Merger and the RedFed Merger, each accounted for as
a purchase, together with related pro forma purchase accounting
adjustments.
(2) The adjustment to income tax expense includes adjustments for
nondeductible goodwill amortization and to adjust FNH's historical
effective tax rate to 42%.
(3) 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 G.
See accompanying Notes to Unaudited Pro Forma Condensed Combined Financial
Statements.
6
<PAGE>
GOLDEN STATE HOLDINGS
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 FNH and Glendale Federal 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 FNH and Glendale Federal 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
FNH and Glendale Federal 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
FNH have been reclassified to conform to the Glendale Federal presentation.
The Mergers will be accounted for using the "purchase" method of
accounting. Glendale Federal is treated as the acquired corporation for
financial reporting purposes. Glendale Federal'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 FNH. 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 Holdings 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 Holdings 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 (Trade
Mark) 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
7
<PAGE>
GOLDEN STATE HOLDINGS
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
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.
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>
<CAPTION>
GOLDEN STATE
- - ------------
<S> <C>
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 ................................................. $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 HOLDINGS
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
ASSETS ASSETS GOODWILL
-------------- ------------- ------------
(IN THOUSANDS)
<S> <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
Other integration costs, net of taxes
(Note E) ......................................... -- -- --
Value of Golden State Holdings'
retained participation in the Glendale
Goodwill Litigation after issuance of
the Litigation Tracking Warrants (Trade Mark)
(Note F) ......................................... -- -- (64,930)
Dividend of tax benefits to FGH as a
result of deconsolidation caused by
the Mergers ...................................... -- -- --
---------- --------- ---------
$ 13,769 $ 54,243 $ 61,875
========== ========= =========
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-
OTHER BEARING OTHER STOCKHOLDERS'
ASSETS LIABILITIES LIABILITIES 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) ............... 41,433 -- 126,300 --
Other integration costs, net of taxes
(Note E) ......................................... 31,065 -- 73,700 (42,635)
Value of Golden State Holdings'
retained participation in the Glendale
Goodwill Litigation after issuance of
the Litigation Tracking Warrants (Trade Mark)
(Note F) ......................................... 111,948 -- 47,018 --
Dividend of tax benefits to FGH as a
result of deconsolidation caused by
the Mergers ...................................... -- -- 290,000 (290,000)
-------- ------ -------- ----------
$184,446 $4,775 $563,578 $ (254,020)
======== ====== ======== ==========
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>
<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
9
<PAGE>
GOLDEN STATE HOLDINGS
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
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 Holdings' 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 Holdings'
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 HOLDINGS
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 Holdings' 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 (Trade Mark)
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 Holdings............... 15%
------------
Estimated fair value of Glendale Goodwill Litigation owned by Golden
State Holdings ..................................................................... $ 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.
11
<PAGE>
GOLDEN STATE HOLDINGS
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 G: REFINANCING ADJUSTMENTS
In connection with the Refinancing, Golden State Holdings 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 AMORTIZATION OF
OR LIQUIDATION DEFERRED INTEREST DEFERRED
PREFERENCE ISSUANCE COSTS EXPENSE/DIVIDEND ISSUANCE COSTS
---------------- ---------------- ------------------ ----------------
<S> <C> <C> <C> <C>
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 6,388 426
FNH 10 5/8% Senior Subordinated
Notes ................................ 575,000 14,686 30,547 1,428
-------- ------- ------- ------
Total Debt Reduction ................. $915,000 $28,847 $49,185 $3,336
======== ======= ======= ======
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
======== =======
</TABLE>
<TABLE>
<CAPTION>
IMPACT ON PRE-TAX EARNINGS
-----------------------------
YEAR ENDED
DECEMBER 31, 1997
-----------------------------
INTEREST AMORTIZATION OF
EXPENSE/ DEFERRED
DIVIDEND ISSUANCE COSTS
---------- ----------------
<S> <C> <C>
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 ........................................ $98,369 $6,672
======= ======
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>
12
<PAGE>
GOLDEN STATE HOLDINGS
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 deferred issuance costs reflected above, net of taxes of approximately
$12,159, 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 Golden State Holdings in an amount
totalling approximately $134,600 on an after-tax basis.
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>
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>
In connection with the Refinancing, a dividend will be paid to Parent
Holdings totaling $494,196, representing the principal amount of the Parent
Holdings Notes and the after-tax expenses related to the redemption of such
notes.
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
13
<PAGE>
GOLDEN STATE HOLDINGS
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
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
- - ---------------------- ------------------------------------------
CAL FED
FNH PREFERRED FOR SIX MONTHS FOR YEAR ENDED
NOTES STOCK ENDED JUNE 30, 1998 DECEMBER 31, 1997
- - -------- ----------- --------------------- ------------------
<S> <C> <C> <C>
100% 100% $13,264 $26,530
95% 80% 9,067 18,135
90% 75% 7,490 14,981
80% 65% 4,308 8,618
</TABLE>
14
