<PAGE>
SECURITIES AND EXCHANGE COMMISSION
WASHINGTON, D.C. 20549
FORM 8-K
CURRENT REPORT
PURSUANT TO SECTION 13 OR 15(D) OF THE SECURITIES EXCHANGE ACT OF 1934
Date of Report (Date of earliest event reported): September 11, 1998
GOLDEN STATE FINANCIAL CORPORATION
(EXACT NAME OF REGISTRANT AS SPECIFIED IN ITS CHARTER)
<TABLE>
<CAPTION>
DELAWARE 333-4026 95-4669792
<S> <C> <C>
(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)
<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
<PAGE>
The board of directors of Golden State Financial consists of the following
three directors: Gerald J. Ford, Carl B. Webb and Christie Flanagan.
ITEM 7. FINANCIAL STATEMENTS, PRO FORMA FINANCIAL INFORMATION AND EXHIBITS.
The following exhibits are filed as part of this report:
2.1 Agreement and Plan of Reorganization, dated as of February 4, 1998, by
and among First Nationwide (Parent) Holdings Inc., First Nationwide
Holdings Inc., First Gibraltar Holdings Inc., Hunter's Glen/Ford,
Ltd., Golden State Bancorp 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 (Legal Acquiree).
(i) The following financial statements for Parent Holdings at December
31, 1997 and 1996, and for the years ended December 31, 1997, 1996
and 1995 are set forth in Exhibit 99.1 (a)(i) hereto:
Independent Auditors' Report
Consolidated Balance Sheets
Consolidated Statements of Operations
Consolidated Statements of Comprehensive Income
Consolidated Statements of Stockholder's Equity
Consolidated Statements of Cash Flows
Notes to Consolidated Financial Statements
(ii) The following unaudited financial statements for Parent Holdings
at June 30, 1998 and for the six months ended June 30, 1998 and
1997 are also set forth in Exhibit 99.1 (a)(ii)
hereto: Unaudited Consolidated Balance Sheets
Unaudited Consolidated Statements of Income
Unaudited Consolidated Statement of Comprehensive Income
Unaudited Consolidated Statements of Stockholder's Equity
Unaudited Consolidated Statements of Cash Flows
Notes to Unaudited Consolidated Financial Statements
2
<PAGE>
(iii) The following financial statements for Golden State Financial 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)(iii) 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
(b) Pro Forma Financial Information.
The following unaudited pro forma condensed combined financial
statements at June 30, 1998 are set forth in Exhibit 99.1(b)
hereto:
Pro Forma Condensed Combined Statement of Financial Condition at
June 30, 1998 (Unaudited)
Pro Forma Condensed Combined Statement of Operations for the six
months ended June 30, 1998 (Unaudited)
Pro Forma Condensed Combined Statement of Operations for the year
ended December 31, 1997 (Unaudited)
ITEM 8. CHANGE IN FISCAL YEAR.
Effective September 11, 1998, Golden State Financial changed its fiscal
year to conform to the calendar year.
3
<PAGE>
SIGNATURE
Pursuant to the requirements of the Securities Exchange Act of 1934, the
registrant has duly caused this report to be signed on its behalf by the
undersigned hereunder duly authorized.
Dated: September 25, 1998
GOLDEN STATE FINANCIAL CORPORATION
By: /s/ Richard H. Terzian
------------------------------------
Name: Richard H. Terzian
Title: Executive Vice
President and Chief Financial
Officer
4
<PAGE>
EXHIBIT INDEX
<TABLE>
<CAPTION>
EXHIBIT
NUMBER DESCRIPTION PAGE
- - ---------- --------------------------------------------------------------------------------- -----
<S> <C> <C>
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 Parent Holdings at December 31,
1997 and 1996, and for the years ended December 31, 1997, 1996 and 1995
are set forth in Exhibit 99.1(a)(i) hereto:
Independent Auditors' Report
Consolidated Balance Sheets
Consolidated Statements of Operations
Consolidated Statements of Comprehensive Income
Consolidated Statements of Stockholder's Equity
Consolidated Statements of Cash Flows
Notes to Consolidated Financial Statements
(ii) The following unaudited financial statements for Parent Holdings at June
30, 1998 and for the six months ended June 30, 1998 and 1997 are also set
forth in Exhibit 99.1(a)(ii) hereto:
Unaudited Consolidated Balance Sheets
Unaudited Consolidated Statements of Income
Unaudited Consolidated Statements of Comprehensive Income
Unaudited Consolidated Statements of Stockholder's Equity
Unaudited Consolidated Statements of Cash Flows
Notes to Unaudited Consolidated Financial Statements
</TABLE>
5
<PAGE>
<TABLE>
<CAPTION>
EXHIBIT
NUMBER DESCRIPTION PAGE
- - -------- -------------------------------------------------------------------------------- -----
<S> <C> <C>
(iii) The following financial statements for Golden State Financial 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)(iii) 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
(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
<PAGE>
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
<PAGE>
IN WITNESS WHEREOF, the Parties have caused this Amendment to be executed
by their respective officers thereunto duly authorized as of the date first
above written.
GOLDEN STATE BANCORP INC.
By: /s/ Richard A. Fink
-------------------------------------
Name: Richard A. Fink
Title: Vice Chairman
GOLDEN STATE FINANCIAL CORPORATION
By: /s/ Richard A. Fink
-------------------------------------
Name: Richard A. Fink
Title: Vice President
FIRST NATIONWIDE (PARENT) HOLDINGS INC.
By: /s/ Glenn P. Dickes
-------------------------------------
Name: Glenn P. Dickes
Title: Vice President
FIRST NATIONWIDE HOLDINGS INC.
By: /s/ Glenn P. Dickes
-------------------------------------
Name: Glenn P. Dickes
Title: Vice President
FIRST GIBRALTAR HOLDINGS INC.
By: /s/ Glenn P. Dickes
-------------------------------------
Name: Glenn P. Dickes
Title: Vice President
HUNTER'S GLEN/FORD, LTD.
By: /s/ Gerald J. Ford
-------------------------------------
Name: Gerald J. Ford
Title: General Partner
3
<PAGE>
EXHIBIT 23.1(a)
CONSENT OF INDEPENDENT AUDITORS
The Board of Directors
Golden State Financial Corporation:
We consent to the use of our report dated July 20, 1998, included herein,
relating to the consolidated statements of financial condition of Golden State
Financial Corporation 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 Financial Corporation dated
September 25, 1998.
/s/ KPMG Peat Marwick LLP
KPMG Peat Marwick LLP
Los Angeles, California
September 24, 1998
<PAGE>
EXHIBIT 23.1(b)
CONSENT OF INDEPENDENT AUDITORS
The Board of Directors
Golden State Financial Corporation
We consent to the use of our report dated February 23, 1998, included
herein, relating to the consolidated balance sheets of First Nationwide
(Parent) Holdings Inc. and subsidiaries as of December 31, 1997 and 1996, and
the related consolidated statements of income, comprehensive income,
stockholder's equity and cash flows for each of the years in the three-year
period ended December 31, 1997.
/s/ KPMG Peat Marwick LLP
KPMG Peat Marwick LLP
Dallas, Texas
September 24, 1998
<PAGE>
EXHIBIT 99.1(A)(I)
INDEPENDENT AUDITORS' REPORT
The Board of Directors
First Nationwide (Parent) Holdings Inc.:
We have audited the accompanying consolidated balance sheets of First
Nationwide (Parent) Holdings Inc. and subsidiaries (the "Company") as of
December 31, 1997 and 1996, and the related consolidated statements of income,
comprehensive income, stockholder's equity and cash flows for each of the years
in the three-year period ended December 31, 1997. These consolidated financial
statements are the responsibility of the Company's management. Our
responsibility is to express an opinion on these consolidated financial
statements based on our audits.
We conducted our audits in accordance with generally accepted auditing
standards. Those standards require that we plan and perform the audit to obtain
reasonable assurance about whether the consolidated financial statements are
free of material misstatement. An audit includes examining, on a test basis,
evidence supporting the amounts and disclosures in the financial statements. An
audit also includes assessing the accounting principles used and significant
estimates made by management, as well as evaluating the overall financial
statement presentation. We believe that our audits provide a reasonable basis
for our opinion.
In our opinion, the consolidated financial statements referred to above
present fairly, in all material respects, the financial position of First
Nationwide (Parent) Holdings Inc. and subsidiaries as of December 31, 1997 and
1996, and the results of their operations and their cash flows for each of the
years in the three-year period ended December 31, 1997, in conformity with
generally accepted accounting principles.
KPMG PEAT MARWICK LLP
Dallas, Texas
February 23, 1998
<PAGE>
FIRST NATIONWIDE (PARENT) HOLDINGS INC. AND SUBSIDIARIES
CONSOLIDATED BALANCE SHEETS
DECEMBER 31, 1997 AND 1996
(DOLLARS IN THOUSANDS, EXCEPT PER SHARE DATA)
<TABLE>
<CAPTION>
1997 1996
------------- -------------
<S> <C> <C>
ASSETS
Cash and amounts due from banks ................................................ $ 350,214 $ 135,534
Interest-bearing deposits in other banks ....................................... 36,164 20,619
Short-term investment securities ............................................... 25,933 113,716
----------- -----------
Cash and cash equivalents ...................................................... 412,311 269,869
Securities available for sale, at fair value ................................... 813,085 542,019
Securities held to maturity (fair value $58,299 in 1997 and $4,287 in 1996)..... 58,299 4,272
Mortgage-backed securities available for sale, at fair value ................... 5,076,598 1,598,652
Mortgage-backed securities held to maturity (fair value $1,373,289 in 1997
and $1,653,847 in 1996)........................................................ 1,337,877 1,621,662
Loans held for sale, net ....................................................... 1,483,466 825,316
Loans receivable, net .......................................................... 19,424,410 10,212,583
Investment in Federal Home Loan Bank ("FHLB") System ........................... 468,191 220,962
Office premises and equipment, net ............................................. 159,349 100,164
Foreclosed real estate, net .................................................... 76,997 51,987
Accrued interest receivable .................................................... 188,203 106,034
Intangible assets (net of accumulated amortization of $60,294 in 1997 and
$11,141 in 1996)............................................................... 675,927 140,564
Mortgage servicing rights ...................................................... 536,703 423,692
Other assets ................................................................... 650,740 517,297
----------- -----------
Total assets ................................................................ $31,362,156 $16,635,073
=========== ===========
LIABILITIES, MINORITY INTEREST AND
STOCKHOLDER'S EQUITY
Deposits ....................................................................... $16,202,605 $ 8,501,883
Securities sold under agreements to repurchase ................................. 1,842,442 1,583,387
Borrowings ..................................................................... 11,232,530 5,364,894
Other liabilities .............................................................. 702,959 399,446
----------- -----------
Total liabilities ........................................................... 29,980,536 15,849,610
----------- -----------
Commitments and contingencies .................................................. -- --
Minority interest .............................................................. 1,175,704 613,852
Stockholder's equity:
Common stock, $1.00 par value, 1,000 shares authorized, issued and
outstanding ................................................................. 1 1
Additional paid-in capital .................................................... -- 161
Net unrealized holding gain on securities available for sale .................. 28,129 36,975
Retained earnings (substantially restricted) .................................. 177,786 134,474
----------- -----------
Total stockholder's equity .................................................. 205,916 171,611
----------- -----------
Total liabilities, minority interest and stockholder's equity ............... $31,362,156 $16,635,073
=========== ===========
</TABLE>
See accompanying notes to consolidated financial statements.
2
<PAGE>
FIRST NATIONWIDE (PARENT) HOLDINGS INC. AND SUBSIDIARIES
CONSOLIDATED STATEMENTS OF OPERATIONS
YEARS ENDED DECEMBER 31, 1997, 1996 AND 1995
(IN THOUSANDS)
<TABLE>
<CAPTION>
1997 1996 1995
------------- ------------- -------------
<S> <C> <C> <C>
Interest income:
Loans receivable ............................................. $1,553,210 $ 884,905 $ 799,607
Mortgage-backed securities available for sale ................ 297,816 115,983 --
Mortgage-backed securities held to maturity .................. 113,300 135,103 212,880
Covered assets ............................................... -- 1,413 10,705
Loans held for sale .......................................... 76,364 61,595 24,257
Securities available for sale ................................ 53,936 31,416 --
Securities held to maturity .................................. 2,436 257 26,885
Interest-bearing deposits in other banks ..................... 5,638 3,127 1,511
---------- ---------- ----------
Total interest income ...................................... 2,102,700 1,233,799 1,075,845
---------- ---------- ----------
Interest expense:
Deposits ..................................................... 746,985 419,174 447,359
Securities sold under agreements to repurchase ............... 140,547 120,280 104,957
Borrowings ................................................... 610,885 308,840 182,499
---------- ---------- ----------
Total interest expense ..................................... 1,498,417 848,294 734,815
---------- ---------- ----------
Net interest income ........................................ 604,283 385,505 341,030
Provision for loan losses ..................................... 79,800 39,600 37,000
---------- ---------- ----------
Net interest income after provision for loan losses ........ 524,483 345,905 304,030
---------- ---------- ----------
Noninterest income:
Loan servicing fees, net ..................................... 143,919 123,887 70,265
Customer banking fees and service charges .................... 100,048 45,044 47,493
Management fees .............................................. 6,211 9,694 15,141
Gain on sales of assets, net ................................. 38,230 38,118 173
Gain on sales of branches .................................... 3,569 363,342 --
Gain (loss) on sales of loans, net ........................... 24,721 17,802 (26)
Gain from termination of Assistance Agreement ................ -- 25,632 --
Dividends on FHLB stock ...................................... 24,790 11,670 6,546
Other income ................................................. 22,996 18,189 11,381
---------- ---------- ----------
Total noninterest income ................................... 364,484 653,378 150,973
---------- ---------- ----------
Noninterest expense:
Compensation and employee benefits ........................... 256,448 204,818 154,288
Occupancy and equipment ...................................... 81,914 51,936 49,897
Data processing .............................................. 12,402 10,491 9,787
Savings Association Insurance Fund ("SAIF") deposit
insurance premium .......................................... 10,680 81,149 22,262
Marketing .................................................... 20,186 10,908 10,810
Professional fees ............................................ 48,771 18,986 11,202
Loan expense ................................................. 60,437 31,282 12,431
Foreclosed real estate operations, net ....................... (3,304) (7,390) (927)
Amortization of intangible assets ............................ 49,153 9,445 1,474
Other ........................................................ 113,882 80,111 61,329
---------- ---------- ----------
Total noninterest expense .................................. 650,569 491,736 332,553
---------- ---------- ----------
Income before income taxes, extraordinary item and minority
interest ..................................................... 238,398 507,547 122,450
Income tax expense (benefit) .................................. 41,315 (75,807) (57,185)
---------- ---------- ----------
Income before extraordinary item and minority interest ........ 197,083 583,354 179,635
Extraordinary item--(loss) gain on early
extinguishment of debt, net .................................. -- (1,586) 1,967
---------- ---------- ----------
Income before minority interest ............................... 197,083 581,768 181,602
Minority interest ............................................. 131,851 161,191 59,138
---------- ---------- ----------
Net income ................................................. $ 65,232 $ 420,577 $ 122,464
========== ========== ==========
</TABLE>
See accompanying notes to consolidated financial statements.
3
<PAGE>
FIRST NATIONWIDE (PARENT) HOLDINGS INC. AND SUBSIDIARIES
CONSOLIDATED STATEMENTS OF COMPREHENSIVE INCOME
YEARS ENDED DECEMBER 31, 1997, 1996 AND 1995
(IN THOUSANDS)
<TABLE>
<CAPTION>
1997 1996 1995
------------ ----------- -----------
<S> <C> <C> <C>
Net income ..................................................... $ 65,232 $ 420,577 $122,464
Other comprehensive income, net of tax:
Unrealized holding gain on securities available for sale:
Unrealized holding gains arising during the period .......... 8,726 14,580 43,185
Less: reclassification adjustment for gains included in net
income ..................................................... (17,572) (28,415) (1,175)
--------- --------- --------
Other comprehensive income .................................... (8,846) (13,835) 42,010
--------- --------- --------
Comprehensive income ........................................... $ 56,386 $ 406,742 $164,474
========= ========= ========
</TABLE>
See accompanying notes to consolidated financial statements.
4
<PAGE>
FIRST NATIONWIDE (PARENT) HOLDINGS INC. AND SUBSIDIARIES
CONSOLIDATED STATEMENTS OF STOCKHOLDER'S EQUITY
YEARS ENDED DECEMBER 31, 1997, 1996 AND 1995
(IN THOUSANDS)
<TABLE>
<CAPTION>
NET UNREALIZED
ADDITIONAL HOLDING GAIN ON TOTAL
COMMON PAID-IN SECURITIES RETAINED STOCKHOLDER'S
STOCK CAPITAL AVAILABLE FOR SALE EARNINGS EQUITY
-------- ------------ -------------------- ------------ --------------
<S> <C> <C> <C> <C> <C>
Balance at December 31, 1994 ......... $ 1 $ 267,055 $ 8,800 $ 53,811 $ 329,667
Net income .......................... -- -- -- 122,464 122,464
Dividends and distributions to
stockholder ....................... -- -- -- (89,986) (89,986)
Change in net unrealized
holding gains on securities
available for sale ................ -- -- 42,010 -- 42,010
--- ---------- --------- ---------- ----------
Balance at December 31, 1995 ......... 1 267,055 50,810 86,289 404,155
Net income .......................... -- -- -- 420,577 420,577
Contribution by parent .............. -- 1,819 -- -- 1,819
Dividends and distributions to
stockholder ....................... -- (267,055) -- (369,449) (636,504)
Issuance costs of FN Holdings
Preferred Stock ................... -- (1,658) -- (2,943) (4,601)
Change in net unrealized
holding gains on securities
available for sale ................ -- -- (13,835) -- (13,835)
--- ---------- --------- ---------- ----------
Balance at December 31, 1996 ......... 1 161 36,975 134,474 171,611
Net income .......................... -- -- -- 65,232 65,232
Merger of FN Escrow ................. -- -- -- (931) (931)
Redemption of Additional
FN Holdings Preferred
Stock ............................. -- -- -- 1,871 1,871
Issuance costs of subsidiary
preferred stock ................... -- -- -- (14,561) (14,561)
Contribution by parent .............. -- 49 -- -- 49
Dividends to parent ................. -- (210) -- (8,299) (8,509)
Change in net unrealized
holding gains on securities
available for sale ................ -- -- (8,846) -- (8,846)
--- ---------- --------- ---------- ----------
Balance at December 31, 1997 ......... $ 1 $ -- $ 28,129 $ 177,786 $ 205,916
=== ========== ========= ========== ==========
</TABLE>
See accompanying notes to consolidated financial statements.
5
<PAGE>
FIRST NATIONWIDE (PARENT) HOLDINGS INC. AND SUBSIDIARIES
CONSOLIDATED STATEMENTS OF CASH FLOWS
YEARS ENDED DECEMBER 31, 1997, 1996 AND 1995
(IN THOUSANDS)
<TABLE>
<CAPTION>
1997 1996 1995
--------------- --------------- ---------------
<S> <C> <C> <C>
CASH FLOWS FROM OPERATING ACTIVITIES:
Net income ..................................................... $ 65,232 $ 420,577 $ 122,464
Adjustments to reconcile net income to net cash (used
in) provided by operating activities:
Amortization of intangible assets .............................. 49,153 9,445 1,474
Amortization of discount on senior notes ....................... 744 523 --
(Accretion) amortization of purchase accounting
premiums and discounts, net .................................. (20,650) (15,771) (946)
Amortization of mortgage servicing rights ...................... 110,282 90,981 33,892
Provision for loan losses ...................................... 79,800 39,600 37,000
Provision for accrued termination and facilities costs ......... 1,233 8,679 12,772
Gain on sales of assets, net ................................... (38,230) (38,118) (173)
Gain on sale of branches ....................................... (3,569) (363,342) --
Gain on sales of foreclosed real estate ........................ (12,087) (12,951) (3,010)
Loss on sale of loans, net ..................................... 95,744 63,226 17,928
Gain from termination of Assistance Agreement .................. -- (25,632) --
Extraordinary loss (gain) on early extinguishment of
debt, net .................................................... -- 1,586 (1,967)
Depreciation and amortization of office premises and
equipment .................................................... 16,773 10,921 8,884
Amortization of deferred issuance costs ........................ 7,591 2,978 766
FHLB stock dividend ............................................ (24,790) (11,670) (6,546)
Capitalization of mortgage servicing rights .................... (120,465) (81,028) (17,902)
Purchases and originations of loans held for sale .............. (6,293,262) (4,822,753) (1,773,437)
Proceeds from the sale of loans held for sale .................. 5,510,777 5,157,186 1,191,281
Decrease (increase) in other assets ............................ 163,945 (91,552) (97,258)
(Increase) decrease in accrued interest receivable ............. (11,197) 20,991 (9,743)
(Decrease) increase in other liabilities ....................... (137,906) (39,118) 33,155
Minority interest .............................................. 123,399 160,041 59,138
------------ ------------ ------------
Net cash (used in) provided by operating activities ............ $ (437,483) $ 484,799 $ (392,228)
------------ ------------ ------------
</TABLE>
See accompanying notes to consolidated financial statements.
6
<PAGE>
FIRST NATIONWIDE (PARENT) HOLDINGS INC. AND SUBSIDIARIES
CONSOLIDATED STATEMENTS OF CASH FLOWS (CONTINUED)
YEARS ENDED DECEMBER 31, 1997, 1996 AND 1995
(IN THOUSANDS)
<TABLE>
<CAPTION>
1997 1996 1995
--------------- ------------- -------------
<S> <C> <C> <C>
CASH FLOWS FROM INVESTING ACTIVITIES:
Acquisitions and divestitures:
Auto One Acquisition ........................................ $ (2,845) $ -- $ --
SFFed Acquisition ........................................... -- (83,184) --
Home Federal Acquisition .................................... -- 79,044 --
Cal Fed Acquisition ......................................... (161,196) -- --
Mortgage loan servicing rights and operations ............... (34,260) (48,305) (214,727)
Branch Purchases ............................................ -- -- 501,351
Purchases of securities available for sale ................... (1,340,881) (497,963) --
Proceeds from sales of securities available for sale ......... 52,014 92,320 --
Proceeds from maturities of securities available for
sale ....................................................... 1,015,410 242,514 --
Purchases of securities held to maturity ..................... (58,965) (9,303) (162,845)
Principal payments from securities held to maturity .......... -- 5 --
Proceeds from maturities of securities held to
maturity ................................................... 4,938 1,250 344,475
Purchases of mortgage-backed securities available for
sale ....................................................... (2,589,257) (149,724) --
Principal payments on mortgage-backed securities
available for sale ......................................... 1,099,699 475,186 --
Proceeds from sales of mortgage-backed securities
available for sale ......................................... 50,772 -- --
Purchases of mortgage-backed securities held to
maturity ................................................... (458) -- (19,825)
Principal payments on mortgage-backed securities
held to maturity ........................................... 283,696 387,891 570,945
Proceeds from sales of loans receivable ...................... 21,179 123,026 431,247
Net decrease (increase) in loans receivable .................. 514,377 1,498,588 (85,149)
Decrease in covered assets ................................... -- 39,349 272,254
(Purchases) redemptions of FHLB stock, net ................... (50,721) (65,753) 25,565
Purchases of office premises and equipment ................... (66,131) (42,368) (15,331)
Proceeds from the disposal of office premises and
equipment .................................................. 31,400 4,071 1,667
Proceeds from sales of foreclosed real estate ................ 200,275 170,443 71,453
Purchases of mortgage servicing rights ....................... (29,627) (65,994) (774)
Proceeds from sales of mortgage servicing rights ............. 31,051 -- --
------------ ---------- ----------
Net cash (used in) provided by investing activities .......... $ (1,029,530) $2,151,093 $1,720,306
------------ ---------- ----------
</TABLE>
See accompanying notes to consolidated financial statements.
7
<PAGE>
FIRST NATIONWIDE (PARENT) HOLDINGS INC. AND SUBSIDIARIES
CONSOLIDATED STATEMENTS OF CASH FLOWS (CONTINUED)
YEARS ENDED DECEMBER 31, 1997, 1996 AND 1995
(IN THOUSANDS)
<TABLE>
<CAPTION>
1997 1996 1995
--------------- ---------------- ---------------
<S> <C> <C> <C>
CASH FLOWS FROM FINANCING ACTIVITIES:
Branch Sales ............................................. $ (79,900) $ (4,585,022) $ --
Net (decrease) increase in deposits ...................... (1,196,360) (56,694) 542,633
Proceeds from additional borrowings ...................... 19,595,218 11,144,414 6,151,319
Principal payments on borrowings ......................... (17,495,008) (8,484,883) (6,860,569)
Net decrease in securities sold under agreements to
repurchase ............................................. (40,289) (202,169) (913,103)
Proceeds from FN Escrow Merger ........................... 605,347 -- --
Issuance of FN Holdings Preferred Stock, net ............. (520) 145,399 --
Issuance of REIT Preferred Stock, net .................... 485,959 -- --
Redemption of FN Holdings Preferred Stock ................ (125,000) -- --
Redemption of FN Holdings/FN Escrow Preferred
Stock .................................................. (17,250) -- --
Dividends ................................................ (8,509) (322,680) (89,986)
Dividends paid to minority stockholders, net of taxes..... (114,282) (51,723) (34,584)
Capital contribution from parent ......................... 49 1,819 --
Capital distribution ..................................... -- (267,055) --
------------- ------------ ------------
Net cash provided by (used in) financing activities ..... 1,609,455 (2,678,594) (1,204,290)
------------- ------------ ------------
Net change in cash and cash equivalents .................. 142,442 (42,702) 123,788
Cash and cash equivalents at beginning of year ........... 269,869 312,571 188,783
------------- ------------ ------------
Cash and cash equivalents at end of year ................. $ 412,311 $ 269,869 $ 312,571
============= ============ ============
</TABLE>
See accompanying notes to consolidated financial statements.
8
<PAGE>
FIRST NATIONWIDE (PARENT) HOLDINGS INC. AND SUBSIDIARIES
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
1. ORGANIZATION
First Nationwide (Parent) Holdings Inc. (the "Company" or "Parent
Holdings") is a holding company with no business operations of its own. Parent
Holdings' only significant asset is its indirect ownership of 80% of the common
stock of California Federal Bank, A Federal Savings Bank ("California Federal"
or "Bank"), formerly First Nationwide Bank, A Federal Savings Bank ("First
Nationwide"), formerly First Madison Bank, FSB ("First Madison"). Parent
Holdings owns directly 80% of the common stock of First Nationwide Holdings
Inc. ("FN Holdings"), a holding company which owns all of the common stock of
California Federal. As such, Parent Holdings' principal business operations are
conducted by California Federal and its subsidiaries. Parent Holdings is a
subsidiary of First Gibraltar Holdings Inc. ("First Gibraltar Holdings"), an
indirect subsidiary of MacAndrews & Forbes Holdings Inc. ("M&F Holdings").
The Bank was organized and chartered as First Gibraltar Bank, FSB ("First
Gibraltar"), a federal stock savings bank, in December 1988 for the primary
purpose of acquiring substantially all of the assets and assuming deposit,
secured and certain other liabilities of five insolvent Texas savings and loan
associations ("Closed Associations") from the Federal Savings and Loan
Insurance Corporation ("FSLIC"), as receiver.
On February 1, 1993, First Gibraltar sold to BankAmerica Corporation
certain assets, liabilities and substantially all of the branch operations of
First Gibraltar located in Texas, including $829 million of loans and 130
branches with approximately $6.9 billion in deposits (the "BAC Sale"). A net
gain of $141 million was recorded in connection with this sale. Concurrently
with the BAC Sale, First Gibraltar changed its name to First Madison Bank, FSB.
On April 14, 1994, First Madison entered into the Asset Purchase Agreement
(the "Asset Purchase Agreement") with First Nationwide Bank, A Federal Savings
Bank ("Old FNB"), an indirect subsidiary of Ford Motor Company ("Ford Motor").
On October 3, 1994, effective immediately after the close of business on
September 30, 1994, First Madison acquired substantially all of the assets and
certain of the liabilities (the "FN Acquired Business") of Old FNB (the "FN
Acquisition") for approximately $715 million based on estimates prepared by Old
FNB. On March 2, 1995, an additional $11.5 million was paid to Old FNB pursuant
to certain settlement provisions of the Asset Purchase Agreement. Effective on
October 1, 1994, First Madison changed its name to First Nationwide Bank, A
Federal Savings Bank.
On January 3, 1997, pursuant to an Agreement and Plan of Merger (the
"Merger Agreement") among FN Holdings, Cal Fed Bancorp Inc. ("Cal Fed") and
California Federal Bank, A Federal Savings Bank ("Old California Federal"), FN
Holdings acquired 100% of the outstanding stock of Cal Fed and Old California
Federal, and First Nationwide merged with and into Old California Federal. The
aggregate consideration paid under the Merger Agreement consisted of
approximately $1.2 billion in cash and the issuance of litigation interests
(the "Cal Fed Acquisition"). Cal Fed, a savings and loan holding company, owned
100% of the common stock of Old California Federal. At December 31, 1996, Old
California Federal had total assets of approximately $14.1 billion and deposits
of $8.9 billion, and operated 119 branches in California and Nevada. Effective
on January 3, 1997, First Nationwide changed its name to California Federal
Bank, A Federal Savings Bank. In connection with the Cal Fed Acquisition, FN
Holdings made a capital contribution to the Bank on January 3, 1997 of
approximately $685 million.
In November 1996, the Bank created California Federal Preferred Capital
Corporation ("Preferred Capital Corp."), a real estate investment trust
("REIT"), for the purpose of acquiring, holding and managing real estate
mortgage assets. All of Preferred Capital Corp.'s common stock is owned by the
Bank. Pursuant to a subservicing agreement with the Bank's wholly-owned
mortgage banking subsidiary, First Nationwide Mortgage Corporation ("FNMC"),
FNMC services Preferred Capital Corp.'s mortgage assets. On January 31, 1997,
Preferred Capital Corp. issued to the public $500 million of its 9 1/8%
9
<PAGE>
FIRST NATIONWIDE (PARENT) HOLDINGS INC. AND SUBSIDIARIES
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS (CONTINUED)
Noncumulative Exchangeable Preferred Stock (the "REIT Preferred Stock"), which
is reflected in the Company's 1997 consolidated balance sheet as minority
interest. Preferred Capital Corp. used the proceeds from such offering to
acquire mortgage assets from the Bank.
The Bank is a diversified financial services company that primarily serves
consumers in California, and to a lesser extent, in Florida and Nevada. The
Bank's principal business consists of (i) operating retail deposit branches,
(ii) originating and/or purchasing 1-4 unit residential loans and, to a lesser
extent, certain commercial real estate and consumer loans, for investment and
(iii) mortgage banking activities, including originating and servicing 1-4 unit
residential loans for others. Recently, with its entry into the sub-prime
automobile finance business, the Bank broadened its complement of consumer
lending products. These operating activities are financed principally with
customer deposits, secured short-term and long-term borrowings, collections on
loans, asset sales and retained earnings.
2. FN ESCROW MERGER
On January 3, 1997 and prior to the consummation of the Cal Fed
Acquisition, First Nationwide Escrow Corp. ("FN Escrow"), an affiliate of FN
Holdings, was merged with and into FN Holdings, pursuant to a merger agreement
by and between FN Holdings and FN Escrow (the "FN Escrow Merger"). In
connection therewith, FN Holdings acquired the net proceeds from the issuance
of FN Escrow's $575 million of senior subordinated notes due 2003 (the "10 5/8%
Notes") and assumed FN Escrow's obligations under the 10 5/8% Notes and
indenture. Deferred issuance costs associated with the 10 5/8% Notes of $19
million were included in FN Escrow's other assets and are being amortized over
the term of the 10 5/8% Notes.
Concurrent with the issuance of the 10 5/8% Notes, FN Escrow issued
approximately $36 million aggregate liquidation value of cumulative perpetual
preferred stock (the "FN Escrow Preferred Stock") to Trans Network Insurance
Services Inc., an affiliate of FN Escrow. The FN Escrow Preferred Stock had a
stated liquidation value of $10,000 per share, plus accrued and unpaid
dividends, if any. Cash dividends on the FN Escrow Preferred Stock were
cumulative and accrued at an annual rate of approximately 7.3% of the stated
liquidation value. In connection with the FN Escrow Merger, each share of FN
Escrow Preferred Stock was converted into and became one share of cumulative
perpetual preferred stock of FN Holdings (the "FN Holdings/FN Escrow Preferred
Stock"), which stock had the same relative rights, terms and preferences as the
FN Escrow Preferred Stock. Immediately after issuance, FN Holdings redeemed the
FN Holdings/FN Escrow Preferred Stock at a redemption price of $36.8 million,
representing its stated liquidation value and accrued and unpaid dividends to
January 3, 1997. At the same time, a $19 million loan receivable from an
affiliate of FN Holdings was repaid.
3. ACQUISITIONS AND DIVESTITURES
LMUSA Purchases
On October 2, 1995, FNMC purchased from Lomas Mortgage USA, Inc. ("LMUSA")
a loan servicing portfolio of approximately $11.1 billion (including a
sub-servicing portfolio of $3.1 billion), a $2.9 billion master servicing
portfolio in which FNMC monitors the performance and consolidates the reporting
and remittances of multiple servicers for various investors (a "master
servicing portfolio") and other assets for $100.9 million, and the assumption
of certain indebtedness relating to an acquired loan portfolio totalling
approximately $274 million (the "LMUSA 1995 Purchase"). On January 31, 1996,
FNMC purchased LMUSA's remaining $14.1 billion loan servicing portfolio
(including a sub-servicing portfolio of $2.4 billion), a master servicing
portfolio of $2.7 billion, $5.9 million in foreclosed real estate, $46.8
million in net other servicing receivables, $2.6 million in mortgage loans, and
$6.2 million in net other assets (including $1.4 million in cash and cash
equivalents) for a purchase price of approximately $160.9 million (the "LMUSA
1996 Purchase" and, together with the LMUSA 1995 Purchase, the "LMUSA
Purchases").
10
<PAGE>
FIRST NATIONWIDE (PARENT) HOLDINGS INC. AND SUBSIDIARIES
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS (CONTINUED)
1996 Acquisitions
On February 1, 1996, the Bank acquired SFFed Corp. ("SFFed") and its
wholly-owned subsidiary, San Francisco Federal Savings and Loan Association
(the "SFFed Acquisition"). The following is a summary of the assets acquired
and liabilities assumed in connection with the SFFed Acquisition at February 1,
1996.
<TABLE>
<CAPTION>
ESTIMATED
SFFED BANK REMAINING
CARRYING FAIR VALUE CARRYING LIVES
VALUE ADJUSTMENTS VALUE (IN YEARS)
--------------- ------------- --------------- -----------
(DOLLARS IN THOUSANDS)
<S> <C> <C> <C> <C>
Cash and cash equivalents ......................... $ 181,061 $ -- $ 181,061 --
Mortgage-backed securities ........................ 918,817 11,007 929,824 1-5
Loans receivable, net ............................. 2,715,758 (23,245) 2,692,513 2-12
Office premises and equipment ..................... 20,581 (11,672) 8,909 3-10
Investment in FHLB System ......................... 31,989 -- 31,989 --
Foreclosed real estate, net ....................... 30,018 -- 30,018 --
Accrued interest receivable ....................... 22,740 -- 22,740 --
Mortgage servicing rights ......................... 2,238 13,762 16,000 2-4
Other assets ...................................... 44,938 (7,773) 37,165 2-5
Deposits .......................................... (2,678,692) (10,950) (2,689,642) 1-5
Securities sold under agreements to repurchase .... (815,291) (3,640) (818,931) --
Borrowings ........................................ (227,203) (8,831) (236,034) 1-9
Other liabilities ................................. (50,805) (6,075) (56,880) 1-5
------------ ---------- ------------
$ 196,149 $ (47,417) 148,732
============ ==========
Purchase price .................................... 264,245
------------
Excess cost over fair value of net assets acquired $ 115,513 15
============
</TABLE>
In connection with the SFFed Acquisition, FN Holdings issued $140 million
of 9 1/8% Senior Subordinated Notes Due 2003 (the "9 1/8% Senior Subordinated
Notes") and contributed the proceeds thereof of $133 million to the Bank as
additional paid-in capital.
11
<PAGE>
FIRST NATIONWIDE (PARENT) HOLDINGS INC. AND SUBSIDIARIES
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS (CONTINUED)
On June 1, 1996, the Bank acquired Home Federal Financial Corporation
("HFFC"), and its wholly-owned federally chartered savings association, Home
Federal Savings and Loan Association of San Francisco (the "Home Federal
Acquisition," and together with the SFFed Acquisition, the "1996
Acquisitions"). The aggregate consideration paid in connection with the Home
Federal Acquisition was approximately $67.8 million. The following is a summary
of the assets acquired and liabilities assumed in the Home Federal Acquisition
at June 1, 1996:
<TABLE>
<CAPTION>
ESTIMATED
HFFC BANK REMAINING
CARRYING FAIR VALUE CARRYING LIVES
VALUE ADJUSTMENTS VALUE (IN YEARS)
------------- ------------- ------------- -----------
(DOLLARS IN THOUSANDS)
<S> <C> <C> <C> <C>
Cash and cash equivalents .................................. $ 146,867 $ -- $ 146,867 --
Mortgage-backed securities ................................. 4,053 (65) 3,988 1-5
Loans receivable, net ...................................... 538,722 4,020 542,742 2-12
Office premises and equipment .............................. 4,202 (2,125) 2,077 3-10
Investment in FHLB System .................................. 6,259 -- 6,259
Foreclosed real estate, net ................................ 2,421 (198) 2,223 --
Accrued interest receivable ................................ 3,594 -- 3,594 --
Mortgage servicing rights .................................. 817 2,243 3,060 2-4
Other assets ............................................... 10,016 2,392 12,408 2-5
Deposits ................................................... (632,399) (1,875) (634,274) 1-5
Borrowings ................................................. (30,000) 241 (29,759) 1-6
Other liabilities .......................................... (3,602) (3,293) (6,895) 1-5
---------- -------- ----------
$ 50,950 $ 1,340 52,290
========== ========
Purchase price ............................................. 67,823
----------
Excess cost over fair value of net assets acquired ......... $ 15,533 15
==========
</TABLE>
The 1996 Acquisitions and the LMUSA Purchases were accounted for as
purchases and, accordingly, their respective purchase prices were allocated to
the assets acquired and liabilities assumed in each transaction based on
estimates of fair values at the date of purchase. Since the respective dates of
purchase, the results of operations related to such assets and liabilities have
been included in the Company's consolidated statements of income.
12
<PAGE>
FIRST NATIONWIDE (PARENT) HOLDINGS INC. AND SUBSIDIARIES
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS (CONTINUED)
Cal Fed Acquisition
The following is a summary of the assets acquired and liabilities assumed
in connection with the Cal Fed Acquisition at January 3, 1997.
<TABLE>
<CAPTION>
ESTIMATED
CAL FED BANK REMAINING
CARRYING FAIR VALUE CARRYING LIVES
VALUE ADJUSTMENTS VALUE (IN YEARS)
--------------- ------------- --------------- -----------
(DOLLARS IN THOUSANDS)
<S> <C> <C> <C> <C>
Cash and cash equivalents .................. $ 1,027,491 $ -- $ 1,027,491 --
Securities ................................. 6,013 12 6,025 1
Mortgage-backed securities ................. 1,963,869 4,532 1,968,401 6-9
Loans receivable, net ...................... 10,084,170 (23,991) 10,060,179 2-12
Office premises and equipment, net ......... 58,900 (17,592) 41,308 3-10
Investment in FHLB System .................. 166,786 -- 166,786 --
Foreclosed real estate, net ................ 18,482 (16) 18,466 --
Accrued interest receivable ................ 71,868 -- 71,868 --
Mortgage servicing rights .................. 4,759 39,738 44,497 2-7
Other assets ............................... 87,096 142,634 229,730 2-5
Deposits ................................... (8,985,630) (9,699) (8,995,329) 1-8
Borrowings ................................. (3,468,004) (2,918) (3,470,922) 1-5
Other liabilities .......................... (198,454) (188,892) (387,346) 1-10
Preferred stock ............................ (172,500) -- (172,500) --
------------ ---------- ------------
$ 664,846 $ (56,192) 608,654
============ ==========
Purchase price ............................. 1,188,687
------------
Excess cost over fair value of net
assets acquired ........................... $ 580,033 15
============
</TABLE>
The Cal Fed Acquisition was accounted for as a purchase and accordingly,
the purchase price was allocated to the assets acquired and liabilities assumed
in the transaction based on estimates of fair value at the date of purchase.
Since the date of purchase, the results of operations related to such assets
and liabilities have been included in the Company's 1997 consolidated statement
of income.
Weyerhaeuser Purchase
On May 31, 1997, FNMC acquired a 1-4 unit residential loan servicing
portfolio of approximately $3.2 billion and approximately 40,000 loans from WMC
Mortgage Corporation (the "Weyerhaeuser Purchase") for $37.1 million. The
Company's consolidated statement of income for the year ended December 31, 1997
includes the results of the acquired servicing portfolio from June 1, 1997.
Auto One Acquisition
On September 1, 1997, the Bank acquired Auto One Acceptance Corporation
("Auto One") in a purchase transaction (the "Auto One Acquisition"). Auto One
primarily engages in indirect sub-prime auto financing activities, providing
loan processing, funding and loan servicing for over 800 franchised automobile
dealers. Auto One is a licensed lender in 47 states. Auto One is headquartered
in Dallas, Texas, and is a wholly-owned subsidiary of the Bank. The results of
operations for Auto One for the period from September 1, 1997 are included in
the Company's consolidated statement of income for the year ended December 31,
1997.
13
<PAGE>
FIRST NATIONWIDE (PARENT) HOLDINGS INC. AND SUBSIDIARIES
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS (CONTINUED)
Servicing Sale
On September 30, 1997, FNMC sold servicing rights for approximately 52,000
loans with an unpaid principal balance of approximately $2.3 billion,
recognizing a pre-tax gain of $14.0 million (the "Servicing Sale").
Branch Sales
During the first six months of 1996, the Bank consummated the sale of its
retail deposits and the related retail banking assets comprised of cash on
hand, loans on deposits, and facilities in Ohio, New York, New Jersey and
Michigan (collectively, the "Branch Sales") at gross prices which represented
an average premium of 7.96% of the approximately $4.6 billion deposits sold.
The Bank recorded a pre-tax gain of $363.3 million in connection with the
Branch Sales. The Company's consolidated statement of income for the year ended
December 31, 1996 includes the results of operations of those branches sold in
the Branch Sales for the period prior to sale.
Garberville Branch Sale
On May 9, 1997, the Bank consummated the sale of deposit accounts and
related retail banking assets comprised of cash on hand, loans on deposits and
facilities totalling $21.7 million to Humboldt Bank at a gross price
representing a deposit premium of 4.5% (the "Garberville Branch Sale"), and
resulting in a net pre-tax gain on sale of $1.1 million.
Texas Branch Sale
On December 12, 1997, the Bank sold its retail deposits and all related
retail banking facilities in the state of Texas (consisting of three branches)
totalling $57.6 million at a gross price representing a deposit premium of 4.1%
and resulting in a pre-tax net gain on sale of $2.5 million (the "Texas Branch
Sale").
Pro Forma Financial Information
The following unaudited pro forma financial information combines the
historical results of the Company as if the Cal Fed Acquisition and the
issuances of the REIT Preferred Stock, the 10 5/8% Notes and the 12 1/2% Senior
Notes (as defined herein) had occurred as of the beginning of the first year
presented (in thousands):
<TABLE>
<CAPTION>
YEAR ENDED DECEMBER 31,
-------------------------
1997 1996
----------- -----------
<S> <C> <C>
Net interest income ......... $605,871 $668,156
Net income .................. 63,760 147,986
</TABLE>
The gains recognized related to the Branch Sales, net of related taxes,
and certain sales of branches by Cal Fed are excluded from the above table. The
pro forma information does not include the effect of the Home Federal
Acquisition, the SFFed Acquisition, the LMUSA 1996 Purchase, the Weyerhaeuser
Purchase, the Auto One Acquisition, the Servicing Sale, the Branch Sales, the
Garberville Branch Sale, the Texas Branch Sale, the sales of certain branches
by Cal Fed or the issuance of the 9 1/8% Senior Subordinated Notes because such
effect is not significant. The pro forma results are not necessarily indicative
of the results which would have actually been obtained if the Cal Fed
Acquisition and the issuances of the REIT Preferred Stock, the 10 5/8% Notes or
the 12 1/2% Senior Notes had been consummated in the past nor do they project
the results of operations in any future period.
Purchase Accounting Adjustments
Premiums and discounts related to interest-earning assets acquired and
interest-bearing liabilities assumed are amortized (accreted) to operations
using the interest method over the estimated remaining lives of the respective
assets and liabilities.
14
<PAGE>
FIRST NATIONWIDE (PARENT) HOLDINGS INC. AND SUBSIDIARIES
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS (CONTINUED)
GSAC Acquisition
On September 5, 1997, the Bank entered into an agreement with Gulf States
Acceptance Company, a Delaware limited partnership ("GSAC") and its general
partner, Gulf States Financial Services, a Texas corporation, pursuant to which
Auto One will acquire 100% of the partnership interests in GSAC and GSAC will
be liquidated and its assets and liabilities will be transferred to Auto One
(the "GSAC Acquisition"). The aggregate consideration to be paid in connection
with the GSAC Acquisition is approximately $22.5 million and a 20% interest in
the common stock of Auto One. This transaction closed on February 4, 1998. See
note 35 "Subsequent Events" for further discussion.
4. SUMMARY OF SIGNIFICANT ACCOUNTING POLICIES
The accounting and reporting policies of Parent Holdings conform to
generally accepted accounting principles and general practices within the
savings and loan industry. The following summarizes the more significant of
these policies.
(a) Basis of Presentation
The accompanying consolidated financial statements include the accounts of
Parent Holdings, FN Holdings, the Bank and the Bank's wholly-owned subsidiaries
not subject to the Assistance Agreement (as defined herein). Earnings per share
data is not presented due to the limited ownership of the Company. All
significant intercompany accounts and transactions have been eliminated.
(b) Cash and Cash Equivalents
For purposes of the consolidated statements of cash flows, cash and cash
equivalents include cash and amounts due from banks, interest-bearing deposits
in other banks, and other short-term investment securities with original
maturities of three months or less. Savings and loan associations are required
by the Federal Reserve System to maintain non-interest bearing cash reserves
equal to a percentage of certain deposits. The reserve balance for California
Federal at December 31, 1997 was $51.0 million.
(c) Securities and Mortgage-backed Securities
The Company's investment in securities consists primarily of U.S.
government and agency securities and mortgage-backed securities. Parent
Holdings classifies debt and equity securities, including mortgage-backed
securities, into one of three categories: held to maturity, available for sale
or trading securities. Securities held to maturity represent securities which
management has the positive intent and ability to hold to maturity and are
reported at amortized cost. Securities bought and held principally for the
purpose of selling them in the near term are classified as trading securities
and reported at fair value, with unrealized gains and losses included in
income. All other securities are classified as available for sale and are
carried at fair value, with unrealized holding gains and losses, net of tax,
reported as a separate component of stockholder's equity until realized. Should
an other than temporary decline in the fair value of a security classified as
held to maturity or available for sale occur, the carrying value of such
security would be written down to fair value by a charge to operations.
Realized gains or losses on securities available for sale are computed on a
specific identification basis and are accounted for on a trade-date basis.
Amortization and accretion of premiums and discounts relating to
mortgage-backed securities is recognized using the interest method over the
estimated lives of the underlying mortgages with adjustments based on
prepayment experience.
(d) Loans Held for Sale, Net
One-to-four unit residential loans originated and intended for sale in the
secondary market are carried at the lower of aggregate cost or market value as
determined by outstanding commitments from investors or current investor yield
requirements calculated on an aggregate basis. Net unrealized losses are
recognized in a valuation allowance by charges to income.
15
<PAGE>
FIRST NATIONWIDE (PARENT) HOLDINGS INC. AND SUBSIDIARIES
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS (CONTINUED)
(e) Loans Receivable, Net
Loans receivable, net, is stated at unpaid principal balances, less the
allowance for loan losses, and net of deferred loan origination fees and
purchase discounts or premiums.
Discounts or premiums on 1-4 unit residential loans are accreted or
amortized to income using the interest method over the remaining period the
loans are expected to be outstanding. Discounts or premiums on consumer and
other loans are recognized over the lives of the loans using the interest
method.
A significant portion of the Company's real estate loan portfolio is
comprised of adjustable-rate mortgages. The interest rate and payment terms of
these mortgages adjust on a periodic basis in accordance with various published
indices. The majority of these adjustable-rate mortgages have terms which limit
the amount of interest rate adjustment that can occur each year and over the
life of the mortgage. During periods of limited payment increases, negative
amortization may occur on certain adjustable-rate mortgages. See note 31.
The allowance for loan losses is increased by charges to income and
decreased by charge-offs (net of recoveries). Management's periodic evaluation
of the adequacy of the allowance is based on such factors as the Company's past
loan loss experience, delinquency trends, known and inherent risks in the
portfolio, adverse situations that may affect the borrower's ability to repay,
the estimated value of any underlying collateral, and current economic
conditions. As management utilizes information currently available to make such
evaluation, the allowance for loan losses is subjective and may be adjusted in
the future depending on changes in economic conditions or other factors.
Additionally, regulatory authorities, as an integral part of their regular
examination process, review the Bank's allowance for estimated losses on a
periodic basis. These authorities may require the Bank to recognize additions
to the allowance based on their judgment of information available to them at
the time of their examination.
Uncollectible interest on loans that are contractually ninety days or more
past due is charged off, or an allowance is established, based on management's
periodic evaluation. The allowance is established by a charge to interest
income equal to all interest previously accrued, and income is subsequently
recognized only to the extent that cash payments are received. When, in
management's judgment, the borrower's ability to make periodic interest and
principal payments resumes, the loan is returned to accrual status.
(f) Auto One Loans
Since the consummation of the Auto One Acquisition, California Federal has
purchased sub-prime auto financing contracts from an established dealer network
throughout the United States. Any premium or discount is amortized using the
interest method over the estimated lives of the loans. The allowance for
estimated losses is regularly assessed by management, and such allowances are
maintained on a static pool basis.
(g) Impaired Loans
The Company considers a loan is impaired when it is "probable" that a
creditor will be unable to collect all amounts due (i.e., both principal and
interest) according to the contractual terms of the loan agreement. Any
insignificant delay (i.e., 60 days or less) or insignificant shortfall in
amount of payments will not cause a loan to be considered impaired. In
determining impairment, the Company considers large non-homogeneous loans
including nonaccrual loans, troubled debt restructurings, and performing loans
which exhibit, among other characteristics, high loan-to-value ratios, low
debt-coverage ratios, or other indications that the borrowers are experiencing
increased levels of financial difficulty. The Company bases the measurement of
collateral-dependent impaired loans on the fair value of the loan's collateral.
The amount, if any, by which the recorded investment of the loan exceeds the
measure of the impaired loan's value is recognized by recording a valuation
allowance.
16
<PAGE>
FIRST NATIONWIDE (PARENT) HOLDINGS INC. AND SUBSIDIARIES
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS (CONTINUED)
The measurement of impairment may be based on (i) the present value of the
expected future cash flows of the impaired loan discounted at the loan's
original effective interest rate, (ii) the observable market price of the
impaired loan, or (iii) the fair value of the collateral of a
collateral-dependent loan. Large groups of smaller balance homogeneous loans
are collectively evaluated for impairment. For the Company, loans collectively
reviewed for impairment include all single-family loans, and performing
multi-family and commercial real estate loans under $500,000, excluding loans
which have entered the workout process.
Cash receipts on impaired loans not performing according to contractual
terms are generally used to reduce the carrying value of the loan, unless the
Company believes it will recover the remaining principal balance of the loan.
Impairment losses are included in the allowance for loan losses through a
charge to provision for loan losses. Adjustments to impairment losses due to
changes in the fair value of collateral of impaired loans are included in
provision for loan losses. Upon disposition of an impaired loan, loss of
principal, if any, is recorded through a charge-off to the allowance for loan
losses.
(h) Loan Origination and Commitment Fees and Related Costs
Loan origination fees, net of direct underwriting and closing costs, are
deferred and amortized to interest income using the interest method over the
contractual term of the loans, adjusted for actual loan prepayment experience.
Unamortized fees on loans sold or paid in full are recognized as income.
Adjustable-rate loans with lower initial interest rates during the introductory
period result in the amortization of a substantial portion of the net deferred
fee during the introductory period.
Fees received in connection with loan commitments are deferred and
recognized as fee revenue on a straight-line basis over the term of the
commitment. If the commitment is subsequently exercised during the commitment
period, the remaining unamortized commitment fee at the time of exercise is
recognized over the term of the loan using the interest method.
Commitment fees paid to investors, for the right to deliver permanent
residential mortgages in the future to the investors at a specified yield, are
deferred. Amounts are included in the recognition of gain (loss) on sale of
loans as loans are delivered to the investor in proportion to the percentage
relationship of loans delivered to the total commitment amount. Any unused fee
is recognized as an expense at the expiration of the commitment date, or
earlier, if it is determined that the commitment will not be filled.
Other loan fees and charges, which represent income from the prepayment of
loans, delinquent payment charges, and miscellaneous loan services, are
recognized as income when collected.
(i) Office Premises and Equipment
Land is carried at cost. Premises, equipment and leasehold improvements
are stated at cost, less accumulated depreciation and amortization. Premises,
equipment and leasehold improvements are depreciated or amortized on a
straight-line basis over the lesser of the lease term or the estimated useful
lives of the various classes of assets. Maintenance and repairs on premises and
equipment are charged to expense in the period incurred.
Closed facilities of the Company and its subsidiaries are carried at fair
value. In the case of leased premises that are vacated by the Company, a
liability is recorded representing the difference between the net present value
of future lease payments and holding costs and the net present value of
anticipated sublease income, if any, for the remaining term of the lease.
(j) Foreclosed Real Estate
Real estate acquired through foreclosure is initially recorded at fair
value less estimated disposal costs at the time of foreclosure. Subsequent to
foreclosure, the Company charges current earnings with a provision for
estimated losses when the carrying value of the collateral property exceeds its
fair value. Gains or losses on the sale of real estate are recognized upon
disposition of the property. Carrying costs such as maintenance and property
taxes are expensed as incurred.
17
<PAGE>
FIRST NATIONWIDE (PARENT) HOLDINGS INC. AND SUBSIDIARIES
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS (CONTINUED)
(k) Intangible Assets
Intangible assets, which primarily consist of the excess of cost over fair
value of net assets acquired in business combinations accounted for as a
purchase, are amortized on a straight-line basis over the expected period to be
benefited of 15 years. The Company periodically reviews the operations of the
businesses acquired to determine that income from operations continues to
support the recoverability of its intangible assets and the amortization
periods used.
(l) Mortgage Servicing Rights
The Company purchases mortgage servicing rights separately and acquires
mortgage servicing rights by purchasing or originating mortgage loans and
selling those loans with servicing rights retained. Generally, purchased
mortgage servicing rights are capitalized at the cost to acquire the rights and
are carried at the lower of cost, net of accumulated amortization, or fair
value. Originated mortgage servicing rights are capitalized based on the
relative fair value of the servicing right to the fair value of the loan and
the servicing right and are carried at the lower of the capitalized amount, net
of accumulated amortization, or fair value.
A portion of the cost of originating a mortgage loan is allocated to the
mortgage servicing right based on its fair value. To determine the fair value
of mortgage servicing rights, the Company uses market prices for comparable
mortgage servicing contracts, when available, or alternatively uses a valuation
model that calculates the present value of future net servicing income. In
using this valuation method, the Company incorporates assumptions that market
participants would use in estimating future net servicing income, which include
estimates of the cost of servicing, the discount rate, mortgage escrow earnings
rate, an inflation rate, ancillary income, prepayment speeds and default rates
and losses.
Mortgage servicing rights are amortized in proportion to, and over the
period of, estimated net servicing income. The amortization of the mortgage
servicing rights is analyzed periodically and is adjusted to reflect changes in
prepayment rates and other estimates. A decline in long-term interest rates
generally results in an acceleration in mortgage loan prepayments.
The Company measures the impairment of servicing rights based on the
difference between the carrying amount and current fair value of the servicing
rights. In determining impairment, the Company aggregates all mortgage
servicing rights and stratifies them based on the predominant risk
characteristics of interest rate, loan type and investor type. A valuation
allowance is established for any excess of amortized cost over the current fair
value, by risk stratification, by a charge to income.
The Company employs hedging techniques through the use of interest rate
floor contracts and principal-only swap agreements to reduce the sensitivity of
its earnings and value of its servicing rights to declining interest rates and
borrower prepayments as further discussed in note 17. The Company uses hedge
accounting because mortgage servicing rights expose the Company to interest
rate risk and at the inception and throughout the hedge period, high
correlation of changes in the market value of the hedge instruments and the
fair value of the mortgage servicing rights are probable so that the results of
the hedge instruments will substantially offset the effects of interest rate
changes on the mortgage servicing rights. If these requirements are not met,
the hedge instruments are considered speculative and are marked to market with
changes in market value reflected in current earnings.
The premium paid by the Company on the interest rate floor contracts is
amortized based on the option decay rate. Amounts receivable or payable under
the principal-only swap agreements and amounts receivable under the interest
rate floor contracts or terminated hedges are included in the carrying value of
mortgage servicing rights and are amortized as part of the mortgage servicing
rights basis.
(m) Gains/Losses on Sales of Mortgage Loans
Mortgage loans are generally sold with the mortgage servicing rights
retained by the Company. The carrying value of mortgage loans sold is reduced
by the cost allocated to the associated mortgage servicing
18
<PAGE>
FIRST NATIONWIDE (PARENT) HOLDINGS INC. AND SUBSIDIARIES
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS (CONTINUED)
rights. Gains or losses on sales of mortgage loans are recognized based on the
difference between the selling price and the carrying value of the related
mortgage loans sold. Deferred origination fees and expenses, net of commitment
fees paid in connection with the sale of the loans, are recognized at the time
of sale in the gain or loss determination.
(n) Servicing Fee Income
Servicing fee income is recorded for the fees earned for servicing
mortgage loans under servicing agreements with Fannie Mae ("FNMA"), Freddie Mac
("FHLMC"), the Government National Mortgage Association ("GNMA"), and certain
private investors. The fees are based on a contractual percentage of the
outstanding principal balance or a fixed amount per loan and are recorded as
income when received. The amortization of mortgage servicing rights is netted
against servicing fee income.
(o) Interest Rate Swap Agreements
The Bank is a party to various interest rate swap agreements as a means of
managing its interest rate exposure relative to the Bank's FHLB advances.
Amounts receivable or payable under these derivative financial instruments are
recognized as adjustments to interest expense of the hedged liability (FHLB
advances). Gains and losses on early termination of these agreements are
included in the carrying amount of the related liability and amortized over the
remaining term of the liability.
(p) Income Taxes
For federal income tax purposes, Parent Holdings and FN Holdings are
members of the Mafco Holdings Inc. ("Mafco," the indirect parent of FN
Holdings) affiliated group, and accordingly, their federal taxable income or
loss will be included in the consolidated federal income tax return filed by
Mafco. Parent Holdings may also be included in certain state and local income
tax returns of Mafco or its subsidiaries. FN Holdings' tax sharing agreement
with Mafco provides that income taxes will be based on the separate results of
FN Holdings. The agreement generally provides that FN Holdings will pay to
Mafco amounts equal to the taxes that FN Holdings would be required to pay if
it were to file a return separately from the affiliated group. Furthermore, the
agreement provides that FN Holdings shall be entitled to take into account any
net operating loss carryovers in determining its tax liability. The agreement
also provides that Mafco will pay FN Holdings amounts equal to tax refunds FN
Holdings would be entitled to if it had always filed a separate company tax
return. Parent Holdings has not entered into any tax sharing agreements.
Income taxes are accounted for under the asset and liability method.
Deferred tax assets and liabilities are recognized for the future tax
consequences attributable to differences between the financial statement
carrying amounts of existing assets and liabilities and their respective tax
bases and operating loss and tax credit carryforwards. Deferred tax assets and
liabilities are measured using enacted tax rates expected to apply to taxable
income in the years in which those temporary differences are expected to be
recovered or settled. The effect on deferred tax assets and liabilities of a
change in tax rates is recognized in income in the period that includes the
enactment date.
(q) Extraordinary Gain or Loss from Extinguishment of Debt
During 1996, California Federal repurchased $44 million aggregate
principal amount of the $50 million in 11.20% Senior Notes (as defined herein)
assumed in the SFFed Acquisition resulting in an extraordinary loss of
approximately $1.6 million, net of income taxes, on the early extinguishment of
debt. During 1995, California Federal prepaid $250 million in FHLB advances
resulting in an extraordinary gain of approximately $2.0 million, net of income
taxes, on the early extinguishment of such borrowings.
(r) Management's Use of Estimates
The preparation of the consolidated financial statements in conformity
with generally accepted accounting principles requires management to make
estimates and assumptions that affect (i) the
19
<PAGE>
FIRST NATIONWIDE (PARENT) HOLDINGS INC. AND SUBSIDIARIES
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS (CONTINUED)
reported amounts of assets and liabilities, (ii) disclosure of contingent
assets and liabilities at the date of the consolidated financial statements and
(iii) the reported amounts of revenues and expenses during the reporting
period. Actual results could differ from those estimates.
(s) Reclassification
Certain amounts within the consolidated financial statements have been
reclassified to conform to the current year presentation.
(t) Newly Issued Accounting Pronouncements
On June 28, 1996, the FASB issued Statement of Financial Accounting
Standards No. 125, "Accounting for Transfers and Servicing of Financial Assets
and Extinguishments of Liabilities" ("SFAS No. 125"). SFAS No. 125 provides
accounting and reporting standards for transfers and servicing of financial
assets and extinguishments of liabilities based on consistent application of a
financial-components approach that focuses on control. Under that approach,
after a transfer of financial assets, an entity recognizes the financial and
servicing assets it controls and the liabilities it has incurred, derecognizes
financial assets when control has been surrendered, and derecognizes
liabilities when extinguished. This statement provides consistent standards for
distinguishing transfers of financial assets that are sales from transfers that
are secured borrowings.
In December 1996, the FASB issued Statement of Financial Accounting
Standards No. 127, "Deferral of the Effective Date of Certain Provisions of
FASB Statement No. 125" ("SFAS No. 127"). SFAS No. 127 defers for one year the
effective date (i) of paragraph 15 of SFAS No. 125 and (ii) of paragraphs 9-12
and 237(b) of SFAS No. 125 for repurchase agreement, dollar-roll, securities
lending and similar transactions. SFAS No. 127 provides additional guidance on
the types of transactions for which the effective date of SFAS No. 125 has been
deferred. It also requires that if it is not possible to determine whether a
transaction occurring during calendar-year 1997 is part of a repurchase
agreement, dollar-roll, securities lending, or similar transaction, then
paragraphs 9-12 of SFAS No. 125 should be applied to that transfer. The Company
adopted SFAS No. 125, as amended by SFAS No. 127, on January 1, 1997. Such
adoption did not have a material impact on the Company's consolidated financial
statements.
In June 1997, the FASB issued Statement of Financial Accounting Standards
No. 130, "Reporting Comprehensive Income" ("SFAS No. 130"). SFAS No. 130
establishes standards for reporting and display of comprehensive income and its
components (revenues, expenses, gains and losses) in a full set of general
purpose financial statements. SFAS No. 130 requires that all items that are
required to be recognized under accounting standards as components of
comprehensive income be reported in a financial statement that is displayed
with the same prominence as other financial statements. It does not require a
specific format for that financial statement but requires that an enterprise
display an amount representing total comprehensive income for the period in
that financial statement. This statement is effective for fiscal years
beginning after December 15, 1997. Reclassification of financial statements for
earlier periods provided for comparative purposes is required. This statement
has no impact on the financial condition or results of operations of the
Company, but does impact the Company's disclosure requirements. The Company
adopted this statement effective October 1, 1997.
In June 1997, the FASB issued Statement of Financial Accounting Standards
No. 131, "Disclosures About Segments of an Enterprise and Related Information"
("SFAS No. 131"). SFAS No. 131 establishes standards for the way that public
business enterprises report information about operating segments in annual
financial statements and requires that those enterprises report selected
information about operating segments in interim financial reports issued to
shareholders. SFAS No. 131 also establishes standards for related disclosures
about products and services, geographic areas, and major customers. This
statement supersedes Statement of Financial Accounting Standards No. 14,
"Financial Reporting for Segments of a Business Enterprise," but retains the
requirement to report information about major customers. It amends Statement of
Financial Accounting Standards No. 94, "Consolidation of All
20
<PAGE>
FIRST NATIONWIDE (PARENT) HOLDINGS INC. AND SUBSIDIARIES
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS (CONTINUED)
Majority-Owned Subsidiaries," to remove the special disclosure requirements for
previously unconsolidated subsidiaries. This statement is effective for fiscal
years beginning after December 15, 1997. In the initial year of application,
comparative informative for earlier years is to be restated. This statement
need not be applied to interim financial statements in the initial year of
application, but comparative information for interim periods in the initial
year of application is to be reported in financial statements for interim
periods in the second year of application. This statement has no impact on the
financial condition or results of operations of the Company, but will require
changes in the Company's disclosure.
5. SUPPLEMENTAL DISCLOSURE OF CASH FLOW INFORMATION (IN THOUSANDS)
Cash paid for interest for the years ended December 31, 1997, 1996 and
1995 was $1,459,676, $841,192, and $702,254, respectively.
During the year ended December 31, 1997, noncash activity consisted of
transfers from loans receivable and loans held for sale to foreclosed real
estate of $179.6 million, $19.4 million of loans made to facilitate sales of
real estate owned, and a contribution of capital through the redemption of
Additional FN Holdings Preferred Stock of $1.9 million. In addition, $50.8
million was transferred from loans held for sale to mortgage-backed securities
classified as trading securities upon the securitization of certain of the
Bank's qualifying single-family loans.
During the year ended December 31, 1996, noncash activity consisted of
transfers from loans receivable and loans held for sale to foreclosed real
estate of $109.8 million, $13.0 million of loans made to facilitate sales of
real estate owned, the reclassification of certain consumer loans from loans
held for sale (at lower of cost or market) to loans receivable totalling $27.7
million, a $46.8 million dividend paid in the form of a loan receivable from an
affiliate and the issuance of additional FN Holdings preferred stock through
preferred stock dividends to minority stockholders of $.8 million.
During the year ended December 31, 1995, the Financial Accounting
Standards Board issued a Special Report, "A Guide to Implementation of
Statement 115 on Accounting for Certain Investments in Debt and Equity
Securities" (the "Special Report"). The Special Report provided all entities an
opportunity to reassess their ability and intent to hold securities to maturity
and allowed a one time reclassification of securities from held-to-maturity to
available-for-sale without "tainting" the remaining held-to-maturity
securities. On December 29, 1995, the Company reclassified $1.5 billion and
$231.8 million in carrying value of mortgage-backed securities and U.S.
government and agency securities, respectively, from the respective
held-to-maturity categories to securities available for sale. In addition,
other noncash activity included $326.0 million of consumer loans reclassified
from loans receivable to loans held for sale, transfers from loans receivable
to foreclosed real estate of $79.6 million, and $376.3 million transferred from
loans receivable to mortgage-backed securities held to maturity representing
the securitization of certain of the Bank's qualifying single-family loans.
21
<PAGE>
FIRST NATIONWIDE (PARENT) HOLDINGS INC. AND SUBSIDIARIES
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS (CONTINUED)
6. SECURITIES AVAILABLE FOR SALE
At December 31, 1997 and 1996, securities available for sale and the
related unrealized gain or loss consisted of the following (in thousands):
<TABLE>
<CAPTION>
DECEMBER 31, 1997
----------------------------------------------------------------------
NET
AMORTIZED UNREALIZED UNREALIZED UNREALIZED CARRYING
COST GAINS LOSSES GAIN VALUE
----------- ------------ ------------ ------------ -----------
<S> <C> <C> <C> <C> <C>
Marketable equity securities ............. $ -- $ -- $ -- $ -- $ --
U.S. government and agency
obligations ............................ 812,716 957 (588) 369 813,085
-------- ---- ------- ----- --------
Total .................................. $812,716 $957 $ (588) 369 $813,085
======== ==== ======= ===== ========
Minority interest--Hunter's Glen ......... (65)
Estimated tax effect ..................... (47)
-----
Net unrealized holding gain in
stockholder's equity ................... $ 257
=====
</TABLE>
<TABLE>
<CAPTION>
DECEMBER 31, 1996
----------------------------------------------------------------------
NET
AMORTIZED UNREALIZED UNREALIZED UNREALIZED CARRYING
COST GAINS LOSSES GAIN VALUE
----------- ------------ ------------ ------------ -----------
<S> <C> <C> <C> <C> <C>
Marketable equity securities ............. $ 27,034 $34,954 $ -- $ 34,954 $ 61,988
U.S. government and agency
obligations ............................ 480,317 936 (1,222) (286) 480,031
-------- ------- --------- -------- --------
Total .................................. $507,351 $35,890 $ (1,222) 34,668 $542,019
======== ======= ========= ========
Minority interest--Hunter's Glen ......... (6,240)
Estimated tax effect ..................... (3,466)
--------
Net unrealized holding gain in
stockholder's equity ................... $ 24,962
========
</TABLE>
The following represents a summary of the amortized cost, carrying value
and weighted average yield of securities available for sale with related
maturities (dollars in thousands):
<TABLE>
<CAPTION>
DECEMBER 31, 1997
-------------------------------------
ESTIMATED WEIGHTED
AMORTIZED FAIR AVERAGE
COST VALUE YIELD
----------- ----------- ---------
<S> <C> <C> <C>
Marketable equity securities ..................... $ -- $ -- --%
U.S. government and agency obligations:
Maturing within 1 year ........................... 107,771 107,680 5.92
Maturing after 1 year but within 5 years ......... 704,945 705,405 6.52
Maturing after 5 years through 10 years .......... -- -- --
-------- -------- ----
Total .......................................... $812,716 $813,085 6.44%
======== ======== ====
</TABLE>
At December 31, 1997, U.S. government and agency obligations available for
sale of $78.2 million were pledged as collateral for various obligations.
22
<PAGE>
FIRST NATIONWIDE (PARENT) HOLDINGS INC. AND SUBSIDIARIES
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS (CONTINUED)
Marketable equity securities available for sale at December 31, 1996
represented approximately 5.93% of the outstanding stock of Affiliated Computer
Services ("ACS"), representing 2.24% of the voting power with a cost basis of
$27 million. The ACS stock represents the only marketable equity security
classified as available for sale at December 31, 1996. Pursuant to the terms of
a settlement agreement dated June 17, 1991 between the Bank, ACS, and the
Federal Deposit Insurance Corporation ("FDIC"), the FDIC was entitled to share
in a defined portion of the proceeds from the sale of the stock, which, at
December 31, 1995, approximated $34.5 million, and which was recorded in other
liabilities. On June 28, 1996, the Bank sold 2,000,000 shares of its investment
in common stock of ACS for gross proceeds totalling $92.3 million from which it
satisfied its full obligation to the FDIC. A pre-tax gain of $40.4 million
resulted from this transaction and was recorded as a gain on sale of assets in
the 1996 consolidated statement of income. The Bank's remaining shares of ACS
stock were sold in October 1997, resulting in a pre-tax gain of approximately
$25.0 million.
7. SECURITIES HELD TO MATURITY
At December 31, 1997 and 1996 securities held to maturity consist of the
following (in thousands):
<TABLE>
<CAPTION>
DECEMBER 31, 1997
-------------------------------------------------------
AMORTIZED UNREALIZED UNREALIZED ESTIMATED
COST GAINS LOSSES FAIR VALUE
----------- ------------ ------------ -----------
<S> <C> <C> <C> <C>
Municipal securities ......... $ 170 $-- $-- $ 170
Commercial paper ............. 58,129 -- -- 58,129
------- --- --- -------
Total ...................... $58,299 $-- $-- $58,299
======= === === =======
</TABLE>
<TABLE>
<CAPTION>
DECEMBER 31, 1996
-------------------------------------------------------
AMORTIZED UNREALIZED UNREALIZED ESTIMATED
COST GAINS LOSSES FAIR VALUE
----------- ------------ ------------ -----------
<S> <C> <C> <C> <C>
Municipal securities ........................... $ 190 $-- $-- $ 190
U.S. government and agency obligations ......... 3,800 15 -- 3,815
Commercial paper ............................... 282 -- -- 282
------ --- --- ------
Total ........................................ $4,272 $15 $-- $4,287
====== === === ======
</TABLE>
The weighted average stated interest rates on securities held to maturity
were 5.32% and 6.85% at December 31, 1997 and 1996, respectively.
The following represents a summary of the carrying values (amortized
cost), estimated fair values, and weighted average yield of securities held to
maturity with related maturities (dollars in thousands):
<TABLE>
<CAPTION>
DECEMBER 31, 1997
-------------------------------------
ESTIMATED WEIGHTED
AMORTIZED FAIR AVERAGE
COST VALUE YIELD
----------- ----------- ---------
<S> <C> <C> <C>
Municipal securities:
Maturing within 1 year ........................... $ -- $ -- --%
Maturing after 1 year but within 5 years ......... -- -- --
Maturing after 10 years .......................... 170 170 8.25
Commercial paper:
Maturing within 1 year ........................... 58,129 58,129 5.31
------- ------- ----
Total ........................................... $58,299 $58,299 5.32%
======= ======= ====
</TABLE>
23
<PAGE>
FIRST NATIONWIDE (PARENT) HOLDINGS INC. AND SUBSIDIARIES
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS (CONTINUED)
8. MORTGAGE-BACKED SECURITIES AVAILABLE FOR SALE
At December 31, 1997 and 1996, mortgage-backed securities available for
sale and the related unrealized gain or loss consisted of the following (in
thousands):
<TABLE>
<CAPTION>
DECEMBER 31, 1997
--------------------------------------------------------------------------
NET
AMORTIZED UNREALIZED UNREALIZED UNREALIZED CARRYING
COST GAINS LOSSES GAIN VALUE
------------- ------------ ------------ ------------ -------------
<S> <C> <C> <C> <C> <C>
GNMA ........................... $ 249,023 $ 2,710 $ -- $ 2,710 $ 251,733
FNMA ........................... 2,408,173 17,519 (5,923) 11,596 2,419,769
FHLMC .......................... 1,197,867 20,097 (548) 19,549 1,217,416
Other MBS ...................... 574,625 5,371 (111) 5,260 579,885
Collateralized mortgage
obligations .................. 606,965 2,698 (1,868) 830 607,795
---------- ------- --------- -------- ----------
Total ....................... $5,036,653 $48,395 $ (8,450) 39,945 $5,076,598
========== ======= ========= ==========
Minority interest--Hunter's
Glen ......................... (6,968)
Estimated tax effect ........... (5,105)
--------
Net unrealized holding gain in
stockholder's equity ......... $ 27,872
========
</TABLE>
<TABLE>
<CAPTION>
DECEMBER 31, 1996
--------------------------------------------------------------------------
NET
AMORTIZED UNREALIZED UNREALIZED UNREALIZED CARRYING
COST GAINS LOSSES GAIN VALUE
------------- ------------ ------------ ------------ -------------
<S> <C> <C> <C> <C> <C>
GNMA ........................... $ 67,130 $ 652 $ (95) $ 557 $ 67,687
FNMA ........................... 523,894 5,113 (5,042) 71 523,965
FHLMC .......................... 626,267 17,115 (310) 16,805 643,072
Collateralized mortgage
obligations .................. 364,675 497 (1,244) (747) 363,928
---------- ------- --------- -------- ----------
Total ....................... $1,581,966 $23,377 $ (6,691) 16,686 $1,598,652
========== ======= ========= ==========
Minority interest--Hunter's
Glen ......................... (3,004)
Estimated tax effect ........... (1,669)
--------
Net unrealized holding gain in
stockholder's equity ......... $ 12,013
========
</TABLE>
The following represents a summary of the amortized cost, carrying value
and weighted average yield of mortgage-backed securities available for sale
(dollars in thousands):
<TABLE>
<CAPTION>
DECEMBER 31, 1997
-----------------------------------------
ESTIMATED WEIGHTED
AMORTIZED FAIR AVERAGE
COST VALUE YIELD
------------- ------------- ---------
<S> <C> <C> <C>
GNMA ........................................ $ 249,023 $ 251,733 7.09%
FNMA ........................................ 2,408,173 2,419,769 6.99
FHLMC ....................................... 1,197,867 1,217,416 7.49
Other MBS ................................... 574,625 579,885 6.93
Collateralized mortgage obligations ......... 606,965 607,795 6.80
---------- ---------- ----
Total ..................................... $5,036,653 $5,076,598 7.08%
========== ========== ====
</TABLE>
24
<PAGE>
FIRST NATIONWIDE (PARENT) HOLDINGS INC. AND SUBSIDIARIES
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS (CONTINUED)
The weighted average stated interest rates on mortgage-backed securities
available for sale were 7.16% and 7.27% at December 31, 1997 and 1996,
respectively. At December 31, 1997 and 1996, mortgage-backed securities
available for sale included securities totalling $1.4 billion and $53.0
million, respectively, which resulted from the securitization of certain
qualifying mortgage loans from the Bank's, Old California Federal's and San
Francisco Federal's loan portfolios.
At December 31, 1997 and 1996, mortgage-backed securities available for
sale included $4.6 billion and $1.1 billion respectively, of variable-rate
securities.
At December 31, 1997, mortgage-backed securities available for sale of
$4.1 billion were pledged as collateral for various obligations as further
discussed in notes 19, 20 and 31. Further, at December 31, 1997,
mortgage-backed securities available for sale with a carrying value of $28.8
million were pledged to FNMA associated with the sales of certain securitized
multi-family loans.
9. MORTGAGE-BACKED SECURITIES HELD TO MATURITY
At December 31, 1997 and 1996, mortgage-backed securities held to maturity
consist of the following (in thousands):
<TABLE>
<CAPTION>
DECEMBER 31, 1997
-----------------------------------------------------------
AMORTIZED UNREALIZED UNREALIZED ESTIMATED
COST GAINS LOSSES FAIR VALUE
------------- ------------ ------------ -------------
<S> <C> <C> <C> <C>
FHLMC .................................... $ 317,766 $15,364 $-- $ 333,130
FNMA ..................................... 1,017,835 20,048 -- 1,037,883
Other mortgage-backed securities ......... 2,276 -- -- 2,276
---------- ------- --- ----------
Total .................................. $1,337,877 $35,412 $-- $1,373,289
========== ======= === ==========
</TABLE>
<TABLE>
<CAPTION>
DECEMBER 31, 1996
-----------------------------------------------------------
AMORTIZED UNREALIZED UNREALIZED ESTIMATED
COST GAINS LOSSES FAIR VALUE
------------- ------------ ------------ -------------
<S> <C> <C> <C> <C>
FHLMC .................................... $ 405,488 $14,811 $ -- $ 420,299
FNMA ..................................... 1,214,002 17,444 (70) 1,231,376
Other mortgage-backed securities ......... 2,172 -- -- 2,172
---------- ------- ------ ----------
Total .................................. $1,621,662 $32,255 $ (70) $1,653,847
========== ======= ====== ==========
</TABLE>
The following represents a summary of the amortized cost, carrying value
and weighted average yield of mortgage-backed securities held to maturity
(dollars in thousands):
<TABLE>
<CAPTION>
DECEMBER 31, 1997
-----------------------------------------
ESTIMATED WEIGHTED
AMORTIZED FAIR AVERAGE
COST VALUE YIELD
------------- ------------- ---------
<S> <C> <C> <C>
FHLMC .................................... $ 317,766 $ 333,130 8.17%
FNMA ..................................... 1,017,835 1,037,883 7.03
Other mortgage-backed securities ......... 2,276 2,276 8.27
---------- ---------- ----
Total .................................. $1,337,877 $1,373,289 7.30%
========== ========== ====
</TABLE>
25
<PAGE>
FIRST NATIONWIDE (PARENT) HOLDINGS INC. AND SUBSIDIARIES
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS (CONTINUED)
The weighted average stated interest rates on mortgage-backed securities
held to maturity were 7.33% and 7.06% at December 31, 1997 and 1996,
respectively. At December 31, 1997 and 1996, mortgage-backed securities held to
maturity included variable rate securities totalling $1.3 billion and $1.6
billion, respectively, which resulted from the securitization with FNMA and
FHLMC of certain qualifying mortgage loans from the Bank's, Old California
Federal's and San Francisco Federal's loan portfolios with full recourse to the
Bank.
At December 31, 1997, mortgage-backed securities held to maturity of $1.3
billion were pledged as collateral for various obligations as further discussed
in notes 19, 20 and 31.
10. LOANS RECEIVABLE, NET
At December 31, 1997 and 1996 loans receivable, net, included the
following (in thousands):
<TABLE>
<CAPTION>
1997 1996
-------------- ---------------
<S> <C> <C>
Real estate loans:
1-4 unit residential ...................... $14,071,258 $ 6,117,974
5+ unit residential ....................... 3,035,195 2,163,992
Commercial ................................ 2,145,634 1,977,732
Construction .............................. 3,737 11,242
Land ...................................... 4,766 11,074
----------- -----------
19,260,590 10,282,014
----------- -----------
Undisbursed loan funds .................... (2,714) (4,669)
----------- -----------
Total real estate loans .................. 19,257,876 10,277,345
----------- -----------
Equity-line loans ........................... 354,966 243,011
Other consumer loans ........................ 320,599 55,016
Commercial loans ............................ 8,370 29,651
----------- -----------
Total consumer and other loans ........... 683,935 327,678
----------- -----------
Total loans receivable ................... 19,941,811 10,605,023
Deferred fees and unearned premiums ......... 47,219 4,740
Allowance for loan losses ................... (439,233) (246,556)
Purchase accounting discounts, net .......... (125,387) (150,624)
----------- -----------
Total loans receivable, net .............. $19,424,410 $10,212,583
=========== ===========
</TABLE>
The Bank's lending activities are principally conducted in California, New
York, Texas and Florida.
At December 31, 1997, $11.2 billion in residential loans were pledged as
collateral for FHLB advances as further discussed in note 20.
As a result of the FN and the Cal Fed Acquisitions, the Bank assumed
obligations for certain loans sold with recourse. The outstanding balances of
loans sold with recourse at December 31, 1997 totalled $2.8 billion. No loans
were sold with recourse during the years ended December 31, 1997, 1996 and
1995. The Bank evaluates the credit risk of loans sold with recourse and, if
necessary, records a liability (other liabilities) for estimated losses related
to these potential obligations. At December 31, 1997, such liability totalled
$52.4 million.
26
<PAGE>
FIRST NATIONWIDE (PARENT) HOLDINGS INC. AND SUBSIDIARIES
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS (CONTINUED)
The following table indicates the carrying value of loans which have been
placed on nonaccrual status as of the dates indicated (in thousands):
<TABLE>
<CAPTION>
AT DECEMBER 31,
-------------------------
1997 1996
----------- -----------
<S> <C> <C>
Nonaccrual loans:
Real estate loans:
1-4 unit residential ............. $164,923 $146,283
5+ unit residential .............. 12,128 12,713
Commercial and other ............. 6,240 9,406
Construction ..................... 1,560 788
-------- --------
Total real estate .............. 184,851 169,190
Non-real estate ................... 7,344 3,032
-------- --------
Total nonaccrual loans ......... $192,195 $172,222
======== ========
</TABLE>
The following table indicates the carrying value of loans classified as
troubled debt restructuring, as of December 31, 1997 and 1996 (in thousands):
<TABLE>
<CAPTION>
AT DECEMBER 31,
---------------------
1997 1996
--------- ---------
<S> <C> <C>
1-4 unit residential ..................... $ 2,471 $ 3,113
5+ unit residential ...................... 6,718 55,642
Commercial and other real estate ......... 26,296 28,754
------- -------
Total restructured loans ............... $35,485 $87,509
======= =======
</TABLE>
At December 31, 1997, the Company's loan portfolio totalling $19.9 billion
is concentrated in California. The financial condition of the Company is
subject to general economic conditions such as the volatility of interest rates
and real estate market conditions and, in particular, to conditions in the
California residential real estate market. Any downturn in the economy
generally, and in California in particular, could reduce real estate values. An
increase in the general level of interest rates may adversely affect the
ability of certain borrowers to pay the interest on and principal of their
obligations. Accordingly, in the event interest rates rise or real estate
market values decline, particularly in California, the Company and the Bank may
find it difficult to maintain its asset quality and may require additional
allowances for loss above the amounts currently estimated by management.
For nonaccrual loans and loans classified as troubled debt restructurings,
the following table summarizes the interest income recognized ("Recognized")
and total interest income that would have been recognized had the borrowers
performed under the original terms of the loans ("Contractual") for the years
ended December 31, 1997 and 1996 (in thousands).
<TABLE>
<CAPTION>
DECEMBER 31, 1997 DECEMBER 31, 1996
---------------------------- ---------------------------
RECOGNIZED CONTRACTUAL RECOGNIZED CONTRACTUAL
------------ ------------- ------------ ------------
<S> <C> <C> <C> <C>
Restructured loans ......... $ 3,532 $ 3,583 $12,977 $13,430
Nonaccrual loans ........... 6,779 15,880 4,860 13,752
------- ------- ------- -------
$10,311 $19,463 $17,837 $27,182
======= ======= ======= =======
</TABLE>
At December 31, 1997 and 1996, the Bank and its wholly-owned subsidiary,
FGB Realty Advisors, Inc., managed principally non-performing loan and asset
portfolios totalling $1.2 million and $1.0 billion,
27
<PAGE>
FIRST NATIONWIDE (PARENT) HOLDINGS INC. AND SUBSIDIARIES
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS (CONTINUED)
respectively, for investors. During 1997, substantially all the asset
management and disposition contracts held by FGB Realty Advisors, Inc. have
expired, and operations of the subsidiary have substantially ceased. Revenues
related to such activities are included in management fees in the accompanying
statements of income.
Activity in the allowance for loan losses for the years ended December 31,
1997, 1996 and 1995 is summarized as follows (in thousands):
<TABLE>
<CAPTION>
1997 1996 1995
----------- ----------- -----------
<S> <C> <C> <C>
Balance--beginning of year .......... $ 246,556 $ 210,484 $ 202,780
Purchases, net ...................... 164,378 38,486 --
Provision for loan losses ........... 79,800 39,600 37,000
Charge-offs ......................... (56,124) (44,785) (32,344)
Recoveries .......................... 4,623 2,771 3,048
--------- --------- ---------
Balance--end of year ................ $ 439,233 $ 246,556 $ 210,484
========= ========= =========
</TABLE>
FN Holdings loaned approximately $46.8 million to an affiliate on March 1,
1996. Such loan bore interest at the rate of 10.5% over the prevailing yield to
maturity of the five-year United States treasury note, and was an unsecured
subordinated obligation of the borrower guaranteed by certain other affiliates
of FN Holdings, which obligation to FN Holdings was evidenced by a promissory
note (the "Promissory Note"). Management believes that the terms and conditions
of such loan were at least as favorable to FN Holdings as might have been
obtained in a similar transaction with an unaffiliated party. On May 15, 1996,
FN Holdings distributed the Promissory Note to Parent Holdings as a partial
redemption of and dividends on class C common stock. Parent Holdings
distributed the Promissory Note in the form of a dividend to an affiliate.
During 1996 FN Holdings loaned approximately $19 million to an affiliate.
Such loan accrued interest at the rate of 14%, and was an unsecured
subordinated obligation of the borrower, which obligation to FN Holdings was
evidenced by a promissory note. Management believes that the terms and
conditions of such loan were at least as favorable to FN Holdings as might have
been obtained in a similar transaction with an unaffiliated party. On January
3, 1997, such loan, together with the accrued interest thereon, was repaid.
11. IMPAIRED LOANS
At December 31, 1997 and 1996, the carrying value of loans that are
considered to be impaired totalled $110.1 million and $102.1 million
respectively (of which $18.6 million and $22.6 million, respectively, were on
nonaccrual status). The average recorded investment in impaired loans during
the years ended December 31, 1997, 1996 and 1995 was approximately $112.9
million, $103.7 million and $125.5 million, respectively. For the years ended
December 31, 1997, 1996 and 1995, the Company recognized interest income on
those impaired loans of $10.5 million, $10.7 million and $12.9 million,
respectively, which included $.6 million, $.3 million and $.2 million,
respectively, of interest income recognized using the cash basis method of
income recognition.
Generally, specific allowances for loan losses relative to impaired
multi-family and commercial real estate loans, which comprised the majority of
impaired loans, have not been established. Generally, the carrying value of
such loans, net of purchase accounting adjustments, does not exceed the loans'
related collateral values less estimated selling costs. There have been no
significant multi-family or commercial real estate loans originated since
October 1, 1994.
28
<PAGE>
FIRST NATIONWIDE (PARENT) HOLDINGS INC. AND SUBSIDIARIES
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS (CONTINUED)
12. PUT AGREEMENT
In connection with the FN Acquisition, the Bank assumed generally the same
rights under an agreement ("Put Agreement") Old FNB had with Granite Management
and Disposition, Inc. ("Granite"), an indirect subsidiary of Ford Motor,
whereby Old FNB had the option to sell ("put") to Granite, on a quarterly
basis, up to approximately $500 million of certain assets, primarily
non-performing commercial real estate loans and residential mortgage loans with
an original principal balance greater than $250,000. The Put Agreement expired
on November 30, 1996. The aggregate purchase price of assets "put" to Granite
equals $500 million, including assets "put" to Granite by Old FNB through
October 3, 1994. Granite purchased these assets for an amount equal to the
assets' outstanding principal balance, accrued interest and certain other
expenses.
13. RECEIVABLES FROM THE FSLIC/RF--COVERED ASSETS
As part of First Gibraltar's 1988 acquisition of the five Closed
Associations, it entered into an assistance agreement (the "Assistance
Agreement") with the FSLIC. Assets subject to the Assistance Agreement were
known as "Covered Assets." The Assistance Agreement generally provided for
guaranteed yield amounts to be paid on the book value of the Covered Assets,
and paid the Bank for 90% of the losses incurred upon disposition of the
Covered Assets ("Capital Loss Coverage").
In June 1995, the FDIC, as manager of the FSLIC Resolution Fund
("FSLIC/RF"), as successor to the FSLIC, exercised its rights under the
Assistance Agreement to purchase substantially all of the remaining Covered
Assets as of June 1, 1995 at the fair market value of such assets and further
purchased additional assets from the remaining Covered Asset portfolio in
September 1995 (the "FDIC Purchase"). Any losses sustained by the Bank as a
result of the FDIC Purchase were reimbursed under the Capital Loss Coverage
provision of the Assistance Agreement. Proceeds from this transaction were
reinvested in the normal course of business.
On August 19, 1996, the Bank and the FSLIC/RF executed an agreement which
resulted in the termination of the Assistance Agreement. As a result of the
agreement, the FSLIC/RF paid the Bank the remaining Covered Asset balance of
$39 million and, among other things, assumed the responsibility for the
disposition of several litigation matters involving Covered Assets which had
been retained by the Bank following the FDIC Purchase. In connection with the
agreement, a pre-tax gain of $25.6 million was recorded.
14. INVESTMENT IN FHLB
The Company's investment in FHLB stock is carried at cost. The FHLB
provides a central credit facility for member institutions. As a member of the
FHLB system, the Bank is required to own capital stock in the FHLB in an amount
equal to the greater of (i) 1% of the aggregate outstanding principal amount of
its residential mortgage loans, home purchase contracts and similar obligations
at the beginning of each calendar year, (ii) .3% of total assets, or (iii) 5%
of its advances (borrowings) from the FHLB of San Francisco. The Bank was in
compliance with this requirement at December 31, 1997 and 1996. At December 31,
1997, the Bank's investment in FHLB stock was pledged as collateral for FHLB
advances as further discussed in note 20.
15. OFFICE PREMISES AND EQUIPMENT, NET
Office premises and equipment, net, at December 31, 1997 and 1996 is
summarized as follows (dollars in thousands):
29
<PAGE>
FIRST NATIONWIDE (PARENT) HOLDINGS INC. AND SUBSIDIARIES
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS (CONTINUED)
<TABLE>
<CAPTION>
ESTIMATED
DEPRECIABLE LIVES AT
1997 1996 DECEMBER 31, 1997
------------ ------------ ---------------------
<S> <C> <C> <C>
Land ....................................... $ 29,942 $ 19,084 --
Buildings and leasehold improvements ....... 74,141 40,103 25
Furniture and equipment .................... 85,519 50,559 6
Construction in progress ................... 5,253 10,601 --
--------- ---------
194,855 120,347
--------- ---------
Accumulated depreciation and amortization .. (35,506) (20,183)
--------- ---------
Total office premises and equipment, net .. $ 159,349 $ 100,164
========= =========
</TABLE>
Depreciation and amortization expense related to office premises and
equipment for the years ended December 31, 1997, 1996 and 1995 totalled $16.8
million, $10.9 million and $8.9 million, respectively.
California Federal rents certain office premises and equipment under
long-term, noncancelable operating leases expiring at various dates through
2029. Rental expense under such operating leases, included in occupancy and
equipment expense, for the years ended December 31, 1997, 1996 and 1995
totalled $29.6 million, $19.3 million and $22.6 million, respectively. Rental
income from subleasing agreements for the years ended December 31, 1997, 1996
and 1995 totalled $2.0 million, $1.6 million and $2.2 million, respectively. At
December 31, 1997, the projected minimum rental commitments, net of sublease
agreements, under terms of the leases were as follows (in thousands):
<TABLE>
<CAPTION>
CASH EFFECT ON
YEAR ENDED COMMITMENT NET INCOME
- - ----------------------- ------------ -----------
<S> <C> <C>
1998 ............... $ 31,218 $20,973
1999 ............... 31,085 18,602
2000 ............... 30,264 15,970
2001 ............... 27,914 10,492
2002 ............... 24,471 6,714
Thereafter ......... 116,193 24,480
-------- -------
Total ............. $261,145 $97,231
======== =======
</TABLE>
The effect of lease commitments on net income is different from the cash
commitment primarily as a result of lease commitments assumed in acquisitions
with related purchase accounting adjustments.
16. ACCRUED INTEREST RECEIVABLE
Accrued interest receivable at December 31, 1997 and 1996 is summarized as
follows (in thousands):
<TABLE>
<CAPTION>
1997 1996
---------- -----------
<S> <C> <C>
Cash and cash equivalents and securities .......... $ 10,832 $ 8,399
Mortgage-backed securities ........................ 43,700 24,110
Loans receivable and loans held for sale .......... 133,671 73,525
-------- --------
Total accrued interest receivable ................ $188,203 $106,034
======== ========
</TABLE>
17. MORTGAGE SERVICING RIGHTS
The following is a summary of activity for mortgage servicing rights
("MSRs") and the hedge against the change in value of the mortgage servicing
rights ("MSR Hedge") for the years ended December 31, 1997, 1996 and 1995 (in
thousands):
30
<PAGE>
FIRST NATIONWIDE (PARENT) HOLDINGS INC. AND SUBSIDIARIES
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS (CONTINUED)
<TABLE>
<CAPTION>
MSR
MSR HEDGE TOTAL
-------------- ----------- --------------
<S> <C> <C> <C>
Balance at December 31, 1994 ................................... $ 86,840 $ -- $ 86,840
Additions from Maryland Acquisition ........................... 76,369 -- 76,369
Additions from Lomas 1995 Purchase ............................ 93,362 -- 93,362
Additions--other .............................................. 18,676 -- 18,676
Amortization .................................................. (33,892) -- (33,892)
---------- -------- ----------
Balance at December 31, 1995 ................................... 241,355 -- 241,355
Additions from Lomas 1996 Purchase ............................ 105,029 -- 105,029
Additions from SFFed Acquisition .............................. 16,000 -- 16,000
Additions from Home Federal Acquisition ....................... 3,060 -- 3,060
Originated servicing .......................................... 81,028 -- 81,028
Additions--other .............................................. 64,421 -- 64,421
Premiums paid for interest rate floor contracts ............... -- 3,509 3,509
Payments received under interest rate floor contracts ......... -- (13) (13)
Net paid under principal-only swap agreements ................. -- 284 284
Amortization .................................................. (90,706) (275) (90,981)
---------- -------- ----------
Balance at December 31, 1996 ................................... 420,187 3,505 423,692
Additions from Cal Fed Acquisition ............................ 44,497 -- 44,497
Additions from Weyerhaeuser Purchase .......................... 41,949 -- 41,949
Originated servicing .......................................... 120,465 -- 120,465
Additions--other .............................................. 27,939 -- 27,939
Sales--Servicing Sale ......................................... (16,792) -- (16,792)
Sales--other .................................................. (4) -- (4)
Premiums paid for interest rate floor contracts ............... -- 7,088 7,088
Payments received under interest rate floor contracts ......... -- (471) (471)
Net received under principal-only swap agreements ............. -- (1,378) (1,378)
Amortization .................................................. (106,972) (3,310) (110,282)
----------- -------- -----------
Balance at December 31, 1997 ................................... $ 531,269 $ 5,434 $ 536,703
=========== ======== ===========
</TABLE>
At December 31, 1997, 1996 and 1995, the outstanding balances of 1-4 unit
residential loan participations, whole loans and mortgage pass-through
securities serviced for other investors by FNMC totalled $46.6 billion, $43.1
billion and $28.6 billion, respectively. In addition, FNMC had $6.2 billion,
$5.7 billion and $3.0 billion of master servicing at December 31, 1997, 1996
and 1995, respectively.
The estimated fair value of the MSRs was $647 million and $529 million at
December 31, 1997 and 1996, respectively. The estimated market value of
interest rate floor contracts and swaps designated as hedges against MSRs at
December 31, 1997 was $18.0 million and $13.5 million, respectively. At
December 31, 1997 and 1996, no allowance for impairment of the MSRs was
necessary.
A decline in long-term interest rates generally results in an acceleration
of mortgage loan prepayments. Higher than anticipated levels of prepayments
generally cause the accelerated amortization of MSRs and generally will result
in a reduction of the market value of MSRs and in the Company's servicing fee
income. To reduce the sensitivity of its earnings to interest rate and market
value fluctuations, the Company hedged the change in value of its servicing
rights based on changes in interest rates.
At December 31, 1997, the Company, through FNMC, was a party to several
interest rate floor contracts maturing from October 2001 through June 2002. The
Company paid counterparties a premium
31
<PAGE>
FIRST NATIONWIDE (PARENT) HOLDINGS INC. AND SUBSIDIARIES
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS (CONTINUED)
in exchange for cash payments in the event that the 10-year Constant Maturity
Treasury rate falls below the strike prices. At December 31, 1997, the notional
amount of the interest rate floors was $970 million and the strike prices were
between 5.0% and 6.5%. In addition, the Company, through FNMC, entered into
principal-only swap agreements with a notional amount of $99 million.
At December 31, 1997 and 1996, servicing advances and other receivables
related to 1-4 unit residential loan servicing, net of valuation allowances of
$43.2 million and $12.7 million in 1997 and 1996, respectively, (included in
other assets) consisted of the following (in thousands):
<TABLE>
<CAPTION>
1997 1996
----------- -----------
<S> <C> <C>
Servicing advances ....................... $160,266 $152,465
Checks in process of collection .......... 157 55,601
Other .................................... 6,555 23,704
-------- --------
$166,978 $231,770
======== ========
</TABLE>
18. DEPOSITS
A summary of deposits carrying values at December 31, 1997 and 1996
follows (in thousands):
<TABLE>
<CAPTION>
1997 1996
------------- -------------
<S> <C> <C>
Passbook accounts ........................ $ 2,161,967 $ 840,685
Demand deposits:
Interest-bearing ....................... 1,149,294 509,788
Noninterest-bearing .................... 1,179,344 729,648
Money market deposit accounts ............ 1,269,540 881,285
Term accounts ............................ 10,389,507 5,502,902
----------- ----------
16,149,652 8,464,308
----------- ----------
Accrued interest payable ................. 51,538 31,901
Purchase accounting adjustments .......... 1,415 5,674
----------- ----------
Total deposits ........................ $16,202,605 $8,501,883
=========== ==========
</TABLE>
The aggregate amount of jumbo certificates of deposit (term deposits) with
a minimum denomination of $100,000 was approximately $2 billion and $868
million at December 31, 1997 and 1996, respectively. Brokered certificates of
deposit totalling $363 million and $470 million were included in deposits at
December 31, 1997 and 1996, respectively. Total deposits at December 31, 1997
and 1996 include escrow balances for loans serviced for others of $702 million
and $550 million, respectively.
32
<PAGE>
FIRST NATIONWIDE (PARENT) HOLDINGS INC. AND SUBSIDIARIES
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS (CONTINUED)
A summary of interest expense by deposit category for the years ended
December 31, 1997, 1996 and 1995 follows (in thousands):
<TABLE>
<CAPTION>
1997 1996 1995
---------- ---------- ----------
<S> <C> <C> <C>
Passbook accounts ......................... $ 68,408 $ 31,418 $ 14,668
Interest-bearing demand deposits .......... 12,331 5,398 6,953
Money market deposit accounts ............. 50,152 32,073 50,847
Term accounts ............................. 616,094 350,285 374,891
-------- -------- --------
$746,985 $419,174 $447,359
======== ======== ========
</TABLE>
At December 31, 1997, term accounts had scheduled maturities as follows
(in thousands):
<TABLE>
<S> <C>
1998 ............... $ 7,794,543
1999 ............... 2,065,788
2000 ............... 219,650
2001 ............... 131,782
2002 ............... 166,384
Thereafter ......... 11,360
-----------
$10,389,507
===========
</TABLE>
19. SECURITIES SOLD UNDER AGREEMENTS TO REPURCHASE
A summary of information regarding securities sold under agreements to
repurchase as of December 31, 1997 and 1996 follows (dollars in thousands):
<TABLE>
<CAPTION>
DECEMBER 31, 1997
--------------------------------------------------------
UNDERLYING COLLATERAL REPURCHASE LIABILITY
----------------------------- ------------------------
RECORDED MARKET INTEREST
VALUE(i) VALUE AMOUNT RATE
-------------- ------------ ------------ ---------
<S> <C> <C> <C> <C>
Maturing within 30 days ................ $ -- $ -- $ -- --%
Maturing 30 days to 90 days ............ 1,848,385 1,859,169 1,774,950 5.75
Maturing 90 days to 1 year ............. 62,909 63,532 53,920 6.59
Maturing over 1 year ................... -- -- -- --
---------- ---------- ----------
Total (ii) ............................ 1,911,294 1,922,701 1,828,870
Purchase accounting adjustment ......... (424) -- 99
Accrued interest payable ............... -- -- 13,473
---------- ---------- ----------
$1,910,870 $1,922,701 $1,842,442
========== ========== ==========
</TABLE>
33
<PAGE>
FIRST NATIONWIDE (PARENT) HOLDINGS INC. AND SUBSIDIARIES
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS (CONTINUED)
<TABLE>
<CAPTION>
DECEMBER 31, 1996
---------------------------------------------------------
UNDERLYING COLLATERAL REPURCHASE LIABILITY
----------------------------- -------------------------
RECORDED MARKET INTEREST
VALUE (i) VALUE AMOUNT RATE
------------- ------------- ------------- ---------
<S> <C> <C> <C> <C>
Maturing within 30 days ................ $ 626,260 $ 633,615 $ 609,949 5.61%
Maturing 30 days to 90 days ............ 573,904 585,767 550,409 5.48
Maturing 90 days to 1 year ............. 342,531 345,599 350,000 6.97
Maturing over 1 year ................... 67,845 68,203 53,920 6.59
---------- ---------- ----------
Total (ii) ............................ 1,610,540 1,633,184 1,564,278
Purchase accounting adjustment ......... 2,578 -- 755
Accrued interest payable ............... -- -- 18,354
---------- ---------- ----------
$1,613,118 $1,633,184 $1,583,387
========== ========== ==========
</TABLE>
- - ----------
(i) Recorded value includes accrued interest at December 31, 1997 and
1996. In addition, the recorded values at December 31, 1997 and 1996
include adjustments for the unrealized gain or loss on
mortgage-backed securities available for sale.
(ii) Total mortgage-backed securities collateral at December 31, 1997 and
1996 includes $.6 billion and $1.1 billion, respectively, in
outstanding balances of loans securitized with full recourse to the
Bank. The market value of such collateral was $.6 billion and $1.1
billion at December 31, 1997 and 1996, respectively.
At December 31, 1997 and 1996, these agreements had weighted average
stated interest rates of 5.78% and 5.90%, respectively. The underlying
securities were delivered to, and are being held under the control of, third
party securities dealers. These dealers may have loaned the securities to other
parties in the normal course of their operations, but all agreements require
the dealers to resell to California Federal the identical securities at the
maturities of the agreements. The average daily balance of securities sold
under agreements to repurchase was $2.5 billion and $2.1 billion during 1997
and 1996, respectively, and the maximum amount outstanding at any month-end
during these periods was $3.1 billion and $2.7 billion, respectively.
At December 31, 1997, securities sold under agreements to repurchase were
collateralized with $1.9 billion of mortgage-backed securities.
34
<PAGE>
FIRST NATIONWIDE (PARENT) HOLDINGS INC. AND SUBSIDIARIES
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS (CONTINUED)
20. BORROWINGS
Borrowings at December 31, 1997 and 1996 are summarized as follows
(dollars in thousands):
<TABLE>
<CAPTION>
1997 1996
--------------------------- --------------------------
CARRYING AVERAGE CARRYING AVERAGE
VALUE RATE VALUE RATE
--------------- --------- ------------- ----------
<S> <C> <C> <C> <C>
Fixed-rate borrowings from FHLB .................... $ 5,447,168 5.88% $3,564,953 5.93%
Variable-rate borrowings from FHLB ................. 4,074,182 5.95 854,486 5.67
12 1/2% Senior notes ............................... 455,000 12.50 455,000 12.50
10% Subordinated debentures due 2006 ............... 92,100 10.00 92,100 10.00
11.20% Senior notes ................................ 6,000 11.20 6,000 11.20
12 1/4% Senior notes ............................... 200,000 12.25 200,000 12.25
9 1/8% Senior subordinated notes ................... 140,000 9.13 140,000 9.13
10 5/8% Senior subordinated notes .................. 575,000 10.63 -- --
10.668% Subordinated notes ......................... 50,000 10.67 -- --
6 1/2% Convertible subordinated debentures ......... 2,633 6.50 -- --
10% Subordinated debentures due 2003 ............... 4,299 10.00 -- --
Federal funds purchased ............................ 130,000 6.50 25,000 7.50
Other borrowings ................................... 570 8.89 885 8.54
----------- ----- ---------- -----
Total borrowings .................................. 11,176,952 6.64 5,338,424 6.85
Discount on 12 1/2% Senior notes ................... (3,907) -- (4,651) --
Accrued interest payable ........................... 58,682 -- 32,797 --
Purchase accounting adjustments, net ............... 803 -- (1,676) --
----------- ----- ---------- -----
$11,232,530 6.60% $5,364,894 6.85%
=========== ===== ========== =====
</TABLE>
Maturities and weighted average stated interest rates of borrowings at
December 31, 1997, not including accrued interest payable or purchase
accounting adjustments, are as follows (dollars in thousands):
<TABLE>
<CAPTION>
WEIGHTED
BALANCES MATURING AVERAGE RATES
----------------------------- -----------------------
MATURITIES DURING THE YEARS
ENDING DECEMBER 31 FHLB OTHER FHLB OTHER
- - ----------------------------- ------------- ------------- ---------- ----------
<S> <C> <C> <C> <C>
1998 ....................... $5,263,042 $ 180,148 5.88% 7.66%
1999 ....................... 3,090,430 64 5.94 8.90
2000 ....................... 1,150,000 33 5.93 9.50
2001 ....................... 10,833 202,633 6.50 12.18
2002 ....................... 5,000 8 6.94 7.00
Thereafter ................. 2,045 1,272,716 7.83 11.09
---------- ---------- ---- -----
Total .................... $9,521,350 $1,655,602 5.91% 10.85%
========== ========== ==== =====
</TABLE>
35
<PAGE>
FIRST NATIONWIDE (PARENT) HOLDINGS INC. AND SUBSIDIARIES
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS (CONTINUED)
Interest expense on borrowings for the years ended December 31, 1997, 1996
and 1995 is summarized as follows (in thousands):
<TABLE>
<CAPTION>
1997 1996 1995
----------- ----------- -----------
<S> <C> <C> <C>
FHLB advances ....................................... $ 443,966 $ 221,017 $ 139,051
Interest rate swap agreements ....................... (10,743) (11,532) (15,177)
12 1/2% Senior notes ................................ 57,613 40,494 --
10% Subordinated debentures due 2006 ................ 9,210 9,210 9,210
11.20% Senior notes ................................. 672 3,641 --
12 1/4% Senior notes ................................ 24,500 24,504 24,500
9 1/8% Senior subordinated notes .................... 12,775 11,739 --
10 5/8% Senior subordinated notes ................... 60,648 -- --
10.668% Subordinated notes .......................... 5,291 -- --
6 1/2% Convertible subordinated debentures .......... 172 -- --
10% Subordinated debentures due 2003 ................ 418 -- --
Federal funds purchased ............................. 5,300 3,529 2,268
Other borrowings .................................... 434 199 1,403
Purchase accounting adjustments ..................... 629 6,039 21,244
--------- --------- ---------
Total .............................................. $ 610,885 $ 308,840 $ 182,499
========= ========= =========
</TABLE>
The following is a summary of the carrying value of assets pledged as
collateral for FHLB advances at December 31, 1997 (in thousands):
<TABLE>
<S> <C>
Real estate loans (primarily residential) ......... $11,183,138
Mortgage-backed securities ........................ 3,544,108
FHLB stock ........................................ 468,191
-----------
Total .......................................... $15,195,437
===========
</TABLE>
12 1/2% Senior Notes Due 2003
On April 17, 1996, Parent Holdings issued $455 million of its 12 1/2%
Senior Notes ("12 1/2% Senior Notes"). The notes will mature on April 15, 2003,
with interest payable semiannually on April 15 and October 15 of each year.
Deferred issuance costs associated with the issuance of the 12 1/2% Senior
Notes totalling $18.1 million were recorded in other assets and are being
amortized using the interest method over the term of the 12 1/2% Senior Notes.
The 12 1/2% Senior Notes were issued with a $5.2 million discount that is
included in the carrying value of the liability and is being accreted using the
interest method over the term of the 12 1/2% Senior Notes.
The 12 1/2% Senior Notes are redeemable at the option of the Company, in
whole or in part at the following redemption prices: (i) on or after April 15,
2000, at 106.25% of the principal amount thereof, plus accrued interest and
unpaid interest to the date of redemption, (ii) on or after April 15, 2001, at
103.125% of the principal amount thereof, plus accrued interest and unpaid
interest to the date of redemption, and (iii) thereafter, at 100% of the
principal amount thereof, plus accrued interest and unpaid interest to the date
of redemption. In addition, at any time prior to April 15, 2000, the 12 1/2%
Senior Notes may be redeemed at the option of the Company, in whole but not in
part, at a redemption price of 100% of the principal amount thereof, plus
accrued and unpaid interest, if any, to the date of redemption, plus the
applicable premium.
The 12 1/2% Senior Notes are senior unsecured obligations of the Company
and rank pari passu in right of payment with all future senior debt of the
Company, if any is issued, and senior to all future subordinated debt of the
Company, if any is issued.
36
<PAGE>
FIRST NATIONWIDE (PARENT) HOLDINGS INC. AND SUBSIDIARIES
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS (CONTINUED)
Parent Holdings is a holding company, and therefore, the 12 1/2% Senior
Notes are subordinated to (i) all existing and future liabilities, including
deposits, indebtedness and trade payables of its subsidiaries, including FN
Holdings and the Bank, and (ii) all preferred stock issued by its subsidiaries,
including the Bank Preferred Stock (as defined herein) and the FN Holdings
Preferred Stock. The 12 1/2% Senior Notes are also subordinated to the
obligations of FN Holdings under the tax-sharing agreement between and among
the Bank, FN Holdings and Mafco Holdings.
The terms and conditions of the indenture and the FN Holdings indentures
impose restrictions that affect, among other things, the ability of the Company
or FN Holdings, as the case may be, to incur debt, pay dividends or make
distributions, engage in a business other than holding the common stock of FN
Holdings, in the case of the Company, or of California Federal Bank and similar
banking institutions, in the case of FN Holdings, make acquisitions, create
liens, sell assets and make certain investments.
12 1/4% Senior Notes Due 2001
In connection with the FN Acquisition, FN Holdings issued $200 million
principal amount of 12 1/4% Senior Notes ("12 1/4% Senior Notes"), including
$5.5 million principal amount of 12 1/4% Senior Notes to certain directors and
officers of the Bank. The notes will mature on May 15, 2001 with interest
payable semiannually on May 15 and November 15. Deferred issuance costs
associated with the 12 1/4% Senior Notes' issuance totalling $9.9 million were
recorded in other assets and are being amortized over the term of the 12 1/4%
Senior Notes.
The notes are redeemable at the option of FN Holdings, in whole or in
part, during the 12-month period beginning May 15, 1999, at a redemption price
of 106.125% plus accrued interest to the date of redemption, and thereafter at
100% plus accrued interest. The notes are subordinated to all existing and
future liabilities, including deposits and other borrowings of the Bank, and to
the 11 1/2% Preferred Stock (as defined herein).
The terms and conditions of the 12 1/4% Senior Notes indenture impose
restrictions that affect, among other things, the ability of FN Holdings to
incur debt, pay dividends, make acquisitions, create liens, sell assets and
make certain investments.
9 1/8% Senior Subordinated Notes Due 2003
On January 31, 1996, FN Holdings issued $140 million principal amount of
the 9 1/8% Senior Subordinated Notes. The 9 1/8% Senior Subordinated Notes will
mature on January 15, 2003 with interest payable semiannually on January 15 and
July 15. Deferred issuance costs associated with the issuance of the 9 1/8%
Senior Subordinated Notes totalling $7.0 million were recorded in other assets
and are being amortized over the term of the 9 1/8% Senior Subordinated Notes.
The 9 1/8% Senior Subordinated Notes are redeemable at the option of FN
Holdings, in whole or in part, during the 12-month period beginning January 1,
2001, at a redemption price of 104.5625% of the principal amount thereof, plus
accrued interest and unpaid interest to the date of redemption, and thereafter
at 100% of the principal amount thereof, plus accrued and unpaid interest.
The 9 1/8% Senior Subordinated Notes are unsecured senior subordinated
obligations of FN Holdings and are subordinated in right of payment to all
existing and future senior indebtedness of FN Holdings and future to all
subordinated debt, if any is issued. The 9 1/8% Senior Subordinated Notes are
subordinated to all existing and future liabilities, including deposits,
indebtedness and trade payables of FN Holdings' subsidiaries, including the
Bank, and to preferred stock issued by the Bank.
The terms and conditions of the 9 1/8% Senior Subordinated Notes indenture
impose restrictions that affect, among other things, the ability of FN Holdings
to incur debt, pay dividends or make distributions, engage in a business other
than holding the common stock of the Bank and similar banking institutions,
make acquisitions, create liens, sell assets and make certain investments.
37
<PAGE>
FIRST NATIONWIDE (PARENT) HOLDINGS INC. AND SUBSIDIARIES
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS (CONTINUED)
10 5/8% Senior Subordinated Notes Due 2003
In connection with the Cal Fed Acquisition, FN Holdings acquired the net
proceeds from the issuance of FN Escrow's 10 5/8% Notes and assumed FN Escrow's
obligations under the 10 5/8% Notes and indenture. Deferred issuance costs
associated with the 10 5/8% Notes of $19 million were included in FN Escrow's
other assets and are being amortized over the term of the 10 5/8% Notes.
The 10 5/8% Notes are redeemable at the option of FN Holdings, in whole or
in part, during the 12-month period beginning January 1, 2001, at a redemption
price of 105.313% plus accrued and unpaid interest to the date of redemption,
during the 12-month period beginning January 1, 2002 at a redemption price of
102.656% plus accrued and unpaid interest to the date of redemption, and
thereafter at 100% plus accrued and unpaid interest to the date of redemption.
The 10 5/8% Notes are subordinate in right of payment to all existing and
future subordinated debt, if any is issued, of FN Holdings. The 10 5/8% Notes
are subordinated to all existing and future liabilities, including deposits,
indebtedness and trade payables, of the subsidiaries of FN Holdings, including
California Federal and all preferred stock issued by the Bank, including the
Bank Preferred Stock.
The terms and conditions of the 10 5/8% Notes indenture impose
restrictions that affect, among other things, the ability of FN Holdings to
incur debt, pay dividends, make acquisitions, create liens, sell assets and
make certain investments.
10% Subordinated Debentures Due 2006
As part of the FN Acquisition, California Federal assumed subordinated
debentures, which bear interest at 10% per annum and mature on October 1, 2006
(the "10% Subordinated Debentures Due 2006"). At December 31, 1997 the
aggregate principal amount of the 10% Subordinated Debentures Due 2006
outstanding was $92.1 million.
Events of Default under the indenture governing the 10% Subordinated
Debentures Due 2006 (the "Old FNB Indenture") include, among other things: (i)
a default in the payment of interest when due and such default continues for 30
days, (ii) a default in the payment of any principal when due, (iii) the
failure to comply with covenants in the Old FNB Indenture, provided that the
trustee or holders of at least 25% in principal amount of the outstanding 10%
Subordinated Debentures Due 2006 notify the Bank of the default and the Bank
does not cure the default within 60 days after receipt of such notice, (iv)
certain events of bankruptcy, insolvency or reorganization of the Bank, (v) the
FSLIC/RF (or a comparable entity) is appointed to act as conservator,
liquidator, receiver or other legal custodian for the Bank and (vi) a default
under other indebtedness of the Bank in excess of $10 million resulting in such
indebtedness becoming due and payable, and such default or acceleration has not
been rescinded or annulled within 60 days after the date on which written
notice of such failure has been given by the trustee to the Bank or by holders
of at least 25% in principal amount of the outstanding 10% Subordinated
Debentures Due 2006 to the Bank and the trustee.
11.20% Senior Notes Due 2004
As part of the SFFed Acquisition, California Federal assumed $50 million
of SFFed 11.20% Senior Notes due September 1, 2004 (the "11.20% Senior Notes").
In connection with the assumption of the 11.20% Senior Notes, the Bank and all
of the holders of the 11.20% Senior Notes entered into an agreement amending
certain provisions of the note purchase pursuant to which the 11.20% Senior
Notes were sold (as amended, the "Note Purchase Agreement"). On September 12,
1996, the Bank repurchased $44.0 million aggregate principal amount of the
11.20% Senior Notes at a price of approximately 116.45% of the principal
amount, plus the accrued interest thereon. The Bank recorded an extraordinary
loss, net of tax, of $1.6 million in connection with such repurchase. At
December 31, 1997, the aggregate principal amount of the 11.20% Senior Notes
outstanding was $6.0 million.
38
<PAGE>
FIRST NATIONWIDE (PARENT) HOLDINGS INC. AND SUBSIDIARIES
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS (CONTINUED)
Events of Default under the Note Purchase Agreement include, among other
things: (i) failure to make any payment of principal when due; (ii) any failure
to make any payment of interest when due and such payment is not made within 15
days after the date such payment was due; (iii) failure to comply with certain
covenants in the Note Purchase Agreement, provided that such failure continues
for more than 60 days; (iv) failure to deliver to holders a notice of default,
notice of event of default, or notice of claimed default as provided in the
Note Purchase Agreement; (v) failure to comply with any provision of the Note
Purchase Agreement, provided that such failure continues for more than 60 days
after notice is delivered to the Bank; (vi) a default under other indebtedness
provided that the aggregate amount of all obligations in respect of such
indebtedness exceeds $15 million; (vii) one or more final, non-appealable
judgments outstanding against the Bank or its subsidiaries for the payment of
money aggregating in excess of $15 million, any one of which has been
outstanding for 45 days and shall not have been discharged in full or stayed;
(viii) any warranty, representation or other statement contained in the Note
Purchase Agreement by the Bank or any of its subsidiaries being false or
misleading in any material respect when made; or (ix) certain events of
bankruptcy, insolvency or reorganization of the Bank or its subsidiaries.
As a result of the Cal Fed Acquisition, the Bank is obligated with respect
to the following outstanding securities of Old California Federal:
10.668% Subordinated Notes Due 1998
California Federal assumed $50 million of 10.668% unsecured senior
subordinated notes which matures on December 22, 1998 (the "10.668%
Subordinated Notes"). At December 31, 1997, the aggregate principal amount of
10.668% Subordinated Notes outstanding was $50 million.
Events of Default under the note agreement governing the 10.668%
Subordinated Notes include, among other things: (i) failure to make any payment
of principal when due; (ii) any failure to make any payment of interest when
due and such payment is not made within ten business days after the date such
payment was due; (iii) failure to comply with certain covenants in the note
agreement provided that such failure continues for more than 60 days after
notice is delivered to the Bank; (iv) the default or any event which, with the
giving of notice or the lapse of time or both, would constitute a default under
any indebtedness of the Bank and cause such indebtedness with an aggregate
principal amount exceeding $15 million to accelerate; and (v) certain events of
bankruptcy, insolvency or reorganization of the Bank.
6 1/2% Convertible Subordinated Debentures Due 2001
In 1986, Cal Fed Inc., Old California Federal's former parent company,
issued $125 million of 6.5% convertible subordinated debentures due February
20, 2001 (the "6 1/2% Convertible Subordinated Debentures"). As a result of a
corporate restructuring in December 1992, Cal Fed Inc. was merged with and into
XCF Acceptance Corporation ("XCF"), a subsidiary of Old California Federal. The
6 1/2% Convertible Subordinated Debentures are redeemable at the option of the
holders on February 20, 2000, at 123% of their principal amount. At December
31, 1997, $2.6 million of the 6 1/2% Convertible Subordinated Debentures were
outstanding. Due to the purchase of all of the Cal Fed stock by FN Holdings in
the Cal Fed Acquisition on January 3, 1997, the common stock conversion feature
has been eliminated.
Events of Default under the indenture governing the 6 1/2% Convertible
Subordinated Debentures include, among other things: (i) any failure to make
any payment of interest when due and such payment is not made within 30 days
after the date such payment was due; (ii) failure to make any payment of
principal when due; (iii) default in the performance, or breach, of any
covenant or warranty in the indenture, provided that such default or breach
continues for more than 60 days after notice is delivered to the Bank; or (iv)
certain events of bankruptcy, insolvency or reorganization of the Bank or its
subsidiaries.
39
<PAGE>
FIRST NATIONWIDE (PARENT) HOLDINGS INC. AND SUBSIDIARIES
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS (CONTINUED)
10% Subordinated Debentures Due 2003
On December 16, 1992, Old California Federal issued $13.6 million of 10.0%
unsecured subordinated debentures due 2003 (the "10% Subordinated Debentures").
During 1996 and 1995, Old California Federal repurchased $0.6 million and $8.7
million, respectively, of the 10% Subordinated Debentures, leaving $4.3 million
outstanding at December 31, 1997.
Events of Default under the indenture governing the 10% Subordinated
Debentures include, among other things: (i) failure to make any payment of
principal when due; (ii) any failure to make any payment of interest when due
and such payment is not made within 30 days after the date such payment was
due; (iii) failure to comply with certain covenants in the indenture; (iv)
failure to comply with certain covenants in the indenture provided that such
failure continues for more than 60 days after notice is delivered to the Bank;
(v) certain events of bankruptcy, insolvency or reorganization of the Bank; or
(vi) the default or any event which, with the giving of notice or lapse of time
or both, would constitute a default under any indebtedness of the Bank and
cause such indebtedness with an aggregate principal amount exceeding $15
million to accelerate.
21. INTEREST RATE SWAP AGREEMENTS
In connection with the FN Acquisition and the Cal Fed Acquisition, the
Bank acquired the rights and assumed the obligations under certain interest
rate swap agreements. Interest rate swap agreements outstanding and their
weighted average rates at December 31, 1997 and 1996 are as follows (dollars in
thousands):
<TABLE>
<CAPTION>
WEIGHTED
NOTIONAL AVERAGE RATE ESTIMATED
PRINCIPAL ---------------------- MATURITY VARIABLE
MATURITY DATE AMOUNT PAY RECEIVE IN YEARS RATE INDEX
- - --------------------- ----------- ---------- --------- ---------- --------------
<S> <C> <C> <C> <C> <C>
1997:
April 1998 ......... $400,000 5.76% 8.38% .26 3 month LIBOR
1996:
April 1998 ......... $400,000 5.64% 8.38% 1.26 3 month LIBOR
</TABLE>
The Bank uses interest rate swap agreements to hedge against interest rate
risk inherent in its FHLB advances. Under the agreements, the Bank receives or
makes payments based on the differential between fixed-rate and variable-rate
interest amounts on the notional amount of the agreement. The notional amounts
of these derivatives do not represent amounts exchanged by the parties and
thus, are not a measure of the Bank's exposure through its use of derivatives.
The Bank pays the variable-rate and receives the fixed-rate under these
agreements. The variable interest rates presented in the tables above are based
on LIBOR. The current LIBOR rates have been assumed implicitly, in the
aforementioned weighted average receive rate, to remain constant throughout the
term of the respective swaps. Any changes in LIBOR interest rates would affect
the variable-rate information disclosed above.
The Bank is exposed to credit-related losses in the event of
nonperformance by the counterparties to these agreements but does not expect
any counterparties to fail their obligations. The Bank deals only with national
investment banking firms and the FHLB of San Francisco.
22. SEGMENT REPORTING
The Company's operations include two primary business segments: mortgage
lending and retail banking. The Company's principal business consists of
operating retail deposit branches and originating and/or purchasing residential
real estate loans. The Company's mortgage lending activities are conducted
through FNMC and include the origination and purchase of residential mortgage
loans for sale to various investors, as well as the servicing of loans for
others.
40
<PAGE>
FIRST NATIONWIDE (PARENT) HOLDINGS INC. AND SUBSIDIARIES
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS (CONTINUED)
Selected financial information by business segment for the three years
ended December 31, 1997, 1996 and 1995 is presented in the following summary
(in thousands):
<TABLE>
<CAPTION>
MORTGAGE RETAIL CONSOLIDATED
LENDING BANKING TOTAL
------------- ------------- -------------
<S> <C> <C> <C>
1997
- - ----
Total revenue (1) ......................................... $ 288,360 $ 2,317,096 $ 2,467,184
Income before income taxes, extraordinary item and minority
interest ................................................ (27,782) 266,180 238,398
Office premises and equipment, net ........................ 26,576 132,773 159,349
Identifiable assets (2) ................................... 3,072,219 31,155,325 31,362,156
1996
- - ----
Total revenue (3) ......................................... $ 212,325 $ 1,751,852 $ 1,887,177
Income before income taxes, extraordinary item and minority
interest ................................................ 5,836 501,711 507,547
Office premises and equipment, net ........................ 23,410 76,754 100,164
Identifiable assets (4) ................................... 1,634,258 16,264,912 16,635,073
1995
- - ----
Total revenue (5) ......................................... $ 100,930 $ 1,166,180 $ 1,226,818
Income before income taxes, extraordinary item and minority
interest ................................................ (7,898) 130,348 122,450
Office premises and equipment, net ........................ 17,376 76,133 93,509
Identifiable assets (6) ................................... 1,383,451 14,425,200 14,666,781
</TABLE>
- - ----------
(1) Excludes the elimination of $14.2 million in intercompany servicing fees
and $124.1 million in interest income on intercompany loans.
(2) Excludes the elimination of $20.2 million in deposits maintained with the
Bank and $2.8 billion in intercompany borrowings.
(3) Excludes the elimination of $6.9 million in intercompany servicing fees
and $70.1 million in interest income on intercompany loans.
(4) Excludes the elimination of $23.3 million in deposits maintained with the
Bank and $1.2 billion in intercompany borrowings.
(5) Excludes the elimination of $10.6 million in intercompany servicing fees
and $29.7 million in interest income on intercompany loans.
(6) Excludes the elimination of $13.7 million in deposits maintained with the
Bank and $1.1 billion in intercompany borrowings.
The Company typically reviews the results of operations for the mortgage
banking segment based on that segment's contribution as opposed to its income
before income taxes, extraordinary item and minority interest. The main
difference between the two measures of profitability are that contribution for
the mortgage lending segment includes custodial earnings that are reported in
the retail banking segment when computing net income and that intercompany
interest expense is computed using an internal cost of funds rate instead of a
market rate. The mortgage lending segment's contribution for the years ended
December 31, 1997, 1996 and 1995 was $35.9 million, $54.9 million and $24.5
million, respectively.
41
<PAGE>
FIRST NATIONWIDE (PARENT) HOLDINGS INC. AND SUBSIDIARIES
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS (CONTINUED)
23. COMPREHENSIVE INCOME
The tax effect associated with unrealized gain on securities for the years
ended December 31, 1997, 1996 and 1995 is summarized as follows (dollars in
thousands):
<TABLE>
<CAPTION>
BEFORE-TAX TAX (EXPENSE) NET-OF-TAX
AMOUNT BENEFIT AMOUNT
-------------- --------------- --------------
<S> <C> <C> <C>
1997
- - ----
Unrealized gains on securities:
Unrealized holding gains arising during the period ................. $ 10,004 $ (1,278) $ 8,726
Less: reclassification adjustments for gains in net income ......... (20,146) 2,574 (17,572)
---------- --------- ----------
Other comprehensive income ......................................... $ (10,142) $ 1,296 $ (8,846)
========== ========= ==========
1996
- - ----
Unrealized gains on securities:
Unrealized holding gains arising during the period ................. $ 16,200 $ (1,620) $ 14,580
Less: reclassification adjustments for gains in net income ......... (31,572) 3,157 (28,415)
---------- --------- ----------
Other comprehensive income ......................................... $ (15,372) $ 1,537 $ (13,835)
========== ========= ==========
1995
- - ----
Unrealized gains on securities:
Unrealized holding gains arising during the period ................. $ 47,983 $ (4,798) $ 43,185
Less: reclassification adjustments for gains in net income ......... (1,305) 130 (1,175)
---------- --------- ----------
Other comprehensive income ......................................... $ 46,678 $ (4,668) $ 42,010
========== ========= ==========
</TABLE>
Unrealized gains on securities is the only component of other
comprehensive income and accumulated other comprehensive income for the years
ended December 31, 1997, 1996 and 1995.
24. MINORITY INTEREST AND STOCKHOLDER'S EQUITY
(a) 11 1/2% Preferred Stock
In connection with the FN Acquisition, California Federal issued 3,007,300
shares of its 11 1/2% noncumulative perpetual preferred stock ("11 1/2%
Preferred Stock") with a par value of $.01 per share, having a liquidation
preference of $300.7 million. This stock has a stated liquidation value of $100
per share. Costs related to the 11 1/2% Preferred Stock issuance were deducted
from additional paid-in capital. At or after September 1, 1999, the 11 1/2%
Preferred Stock is redeemable at the option of the Bank, in whole or in part,
at $105.75 per share prior to September 1, 2000, and at prices which will
decrease annually thereafter to the stated liquidation value of $100 per share
on or after September 1, 2004, plus declared but unpaid dividends. Dividends
are payable quarterly at an annual rate of 11.50% per share when declared by
the Bank's Board of Directors. Dividends paid on the 11 1/2% Preferred Stock
for each year during 1997 and 1996 totalled $34.6 million.
(b) 10 5/8% Preferred Stock
In connection with the Cal Fed Acquisition, California Federal assumed Cal
Fed's 10 5/8% preferred stock with liquidation value of $172.5 million (the "10
5/8% Preferred Stock" and, together with the 11 1/2% Preferred Stock, "Bank
Preferred Stock"). The 10 5/8% Preferred Stock resulted in a $172.5 million
increase in the Bank's stockholders' equity. Cash dividends on the 10 5/8%
Preferred Stock are noncumulative and are payable at an annual rate of 10 5/8%
per share if, when, and as declared by the Board of Directors of the Bank. The
10 5/8% Preferred Stock is generally not redeemable prior to April 1, 1999. The
42
<PAGE>
FIRST NATIONWIDE (PARENT) HOLDINGS INC. AND SUBSIDIARIES
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS (CONTINUED)
10 5/8% Preferred Stock is redeemable at the option of the Bank, in whole or in
part, at $105.313 per share on or after April 1, 1999 and prior to April 1,
2000, and at prices decreasing annually thereafter to the liquidation
preference of $100.00 per share on or after April 1, 2003, plus declared but
unpaid dividends. In addition, in the event of a change of control, the 10 5/8%
Preferred Stock is redeemable at the option of the Bank or its successor on or
after April 1, 1996 and prior to April 1, 1999 in whole, but not in part, at
$114.50 per share. Dividends paid on the 10 5/8% Preferred Stock during 1997
were $18.3 million.
(c) REIT Preferred Stock
On January 31, 1997, Preferred Capital Corp. issued 20,000,000 shares of
the REIT Preferred Stock for $500 million. The REIT Preferred Stock has a
stated liquidation value of $25 per share, plus declared and unpaid dividends,
if any. The annual cash dividends on the 20,000,000 shares of REIT Preferred
Stock, assuming such dividends are declared by the Board of Directors of
Preferred Capital Corp., are expected to approximate $45.6 million per year. As
long as Preferred Capital Corp. qualifies as a REIT, distributions on the REIT
Preferred Stock will be a dividends-paid deduction by Preferred Capital Corp.
for tax purposes. Dividends paid on the REIT Preferred Stock during 1997 were
$36.6 million, net of the income tax benefit.
(d) Hunter's Glen
Minority interest--Hunter's Glen represents that portion of stockholders'
equity of FN Holdings attributable to its class B common stock, which is owned
by a limited partnership controlled by the Bank's Chairman of the Board and
Chief Executive Officer.
(e) FN Holdings Preferred Stock
On September 19, 1996, FN Holdings issued 10,000 shares of preferred stock
("FN Holdings Preferred Stock") with a liquidation value of $150 million to a
corporation owned by the Chairman of the Board of the Bank, ("Special Purpose
Corp."). Cash dividends on the FN Holdings Preferred Stock are cumulative and
are payable: (i) in cash at an annual rate of the cost of funds to an affiliate
of FN Holdings under such affiliate's bank credit facility (the "Cost of Funds
Rate") and (ii) in newly issued shares of another series of cumulative
perpetual preferred stock of FN Holdings ("Additional FN Holdings Preferred
Stock") at an annual rate of 2% of the stated liquidation value of the FN
Holdings Preferred Stock, if, when, and as declared by the Board of Directors
of FN Holdings. Dividends on the Additional FN Holdings Preferred Stock are
cumulative and accrue and are payable in shares of Additional FN Holdings
Preferred Stock at an annual rate equal to the Cost of Funds Rate plus 2% of
the stated liquidation value of the Additional FN Holdings Preferred Stock if,
when and as declared by the Board of Directors of FN Holdings. Additional FN
Holdings Preferred Stock will have substantially the same relative rights,
terms and preferences as the FN Holdings Preferred Stock except as set forth
above with respect to the payment of dividends. Dividends on the FN Holdings
Preferred Stock are payable quarterly each year, commencing January 1, 1997,
out of funds legally available therefor. In addition, the payment of dividends
by FN Holdings is subject to certain federal laws applicable to savings and
loan holding companies. The FN Holdings Preferred Stock ranks prior to the
common stock of FN Holdings and to all other classes and series of equity
securities subsequently issued.
The FN Holdings Preferred Stock and the Additional FN Holdings Preferred
Stock are redeemable so long as Special Purpose Corp. is the sole holder
thereof, at any time, and, if Special Purpose Corp. is not the sole holder
thereof, at any time after the fifth anniversary of the issuance of the FN
Holdings Preferred Stock, in each case, upon prior written notice, at the
option of FN Holdings, in whole or in part, at a redemption price equal to the
stated liquidation value of $15,000 per share plus any accrued and unpaid
dividends. Upon the redemption of the FN Holdings Preferred Stock by FN
Holdings, all outstanding shares of the Additional FN Holdings Preferred Stock
will be contributed to the capital of FN Holdings, without any payment
therefor, and such shares will be retired and canceled.
43
<PAGE>
FIRST NATIONWIDE (PARENT) HOLDINGS INC. AND SUBSIDIARIES
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS (CONTINUED)
(f) Common Stock
In connection with the FN Acquisition and the offering of the 12 1/4%
Senior Notes, First Gibraltar Holdings incorporated Parent Holdings and FN
Holdings to hold 100% of the common stock of First Nationwide. First Gibraltar
Holdings contributed all of its shares of capital stock of the Bank to Parent
Holdings, which contributed such shares to FN Holdings in exchange for 1,000
shares of common stock of FN Holdings.
In 1994, FN Holdings amended its certificate of incorporation to create
800 shares of class A common stock having one vote per share, 200 shares of
class B common stock having .75 votes per share, and 230.3 shares of nonvoting
class C common stock. Parent Holdings exchanged its 1,000 shares of common
stock of FN Holdings for 800 shares of class A common stock.
Pursuant to the terms of an exchange agreement between FN Holdings, the
Bank's Chairman and Parent Holdings (the "Exchange Agreement"), and in
connection with the consummation of the FN Acquisition, FN Holdings issued 100%
of its class C common stock to Parent Holdings for approximately $210.3
million, and the Bank's Chairman acquired 100% of the class B common stock of
FN Holdings in exchange for his 6.25% of the class A common stock of First
Gibraltar Holdings.
As a result of the consummation of the transactions contemplated by the
Exchange Agreement, the Bank's Chairman owns 100% of the class B common stock
of FN Holdings, representing 20% of its voting common stock (representing
approximately 15% of the voting power of its common stock), and Parent Holdings
owns (i) 100% of the class A common stock of FN Holdings, representing 80% of
its voting common stock (representing approximately 85% of the voting power of
its common stock) and (ii) 100% of the class C common stock of FN Holdings. The
class C common stock was redeemed out of distributions from the Bank for $230.3
million plus accrued interest during 1995 and 1996. On December 29, 1995, the
Bank's Chairman transferred his shares of class B common stock to a limited
partnership, Hunter's Glen/Ford Ltd. ("Hunter's Glen"), over which he maintains
control.
There were no dividends or distributions on common stock in 1997.
Dividends and distributions on the Company's common stock during 1996 and 1995
totalled $636,504 and $89,986, respectively.
(g) Payment of Dividends
The terms of the 12 1/2% Senior Notes indenture generally will permit the
Company to make distributions of up to 65% of the consolidated net income of
the Company if, after giving effect to such distribution, (i) the Bank is "well
capitalized" under applicable OTS regulations and (ii) the Consolidated Common
Shareholders' Equity (as defined therein) of the Bank is at least equal to the
Minimum Common Equity Amount (as defined therein). The terms of the 9 1/8%
Senior Subordinated Notes indenture and the 12 1/4% Senior Notes indenture
apply similar restrictions except FN Holdings can make distributions of up to
75% of the consolidated net income of FN Holdings. The Federal thrift laws and
regulations of the Office of Thrift Supervision (the "OTS") limit the Bank's
ability to pay dividends on its preferred or common stock. The Bank generally
may not pay dividends without the consent of the OTS if, after the payment of
the dividends, it would not be deemed "adequately capitalized" under the prompt
corrective action standards of the Federal Deposit Insurance Corporation
Improvement Act of 1991.
As of December 31, 1997, the Bank could pay dividends of $502.4 million
without the consent of the OTS and it could pay dividends of $153.8 million and
still be "well capitalized." As of December 31, 1997, FN Holdings and the
Company could pay dividends of $254.0 million and $168.2 million, respectively,
without violating the most restrictive terms of their respective indentures.
25. REGULATORY CAPITAL OF THE BANK
The Bank is subject to various regulatory capital requirements
administered by the Federal banking agencies. Failure to meet minimum capital
requirements can initiate certain mandatory--and possibly
44
<PAGE>
FIRST NATIONWIDE (PARENT) HOLDINGS INC. AND SUBSIDIARIES
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS (CONTINUED)
additional discretionary--actions by regulators that, if undertaken, could have
a direct material effect on the Company's and the Bank's consolidated financial
statements. Under capital adequacy guidelines and the regulatory framework for
prompt corrective action, the Bank must meet specific capital guidelines that
involve quantitative measures of the Bank's assets, liabilities, and certain
off-balance-sheet items as calculated under regulatory accounting practices.
The Bank's capital amounts and classification are also subject to qualitative
judgments by the regulators about components, risk weightings, and other
factors.
Quantitative measures established by regulation to insure capital adequacy
require the Bank to maintain minimum amounts and ratios (set forth in the table
below) of tangible and leverage capital to adjusted total assets, and of Tier 1
and total risk-based capital to risk-weighted assets. Management believes, as
of December 31, 1997, that the Bank meets all capital adequacy requirements to
which it is subject.
As of December 31, 1997 and 1996, the most recent notification from the
OTS categorized the Bank as well capitalized under the regulatory framework for
prompt corrective action. To be categorized as well capitalized, the Bank must
maintain minimum leverage, Tier 1 risk-based and total risk-based ratios as set
forth in the table. There are no conditions or events since the most recent
notification that management believes have changed the institution's category.
The Bank's actual capital amounts and ratios as of December 31, 1997 and
1996 are also presented in the table (dollars in thousands):
<TABLE>
<CAPTION>
ACTUAL FOR CAPITAL ADEQUACY TO BE WELL CAPITALIZED
--------------------------- -------------------------- --------------------------
AS A % AS A % AS A %
1997 AMOUNT OF ASSETS AMOUNT OF ASSETS AMOUNT OF ASSETS
- - -------------------------------------- ------------- ----------- ------------ ----------- ------------- ----------
<S> <C> <C> <C> <C> <C> <C>
Stockholders' equity of the
Bank per financial statements $2,260,044
Minority interest in Preferred
Capital Corp. ....................... 500,000
Net unrealized holding gains ......... (35,162)
----------
2,724,882
----------
Adjustments for tangible and
leverage capital:
Goodwill litigation asset ............ (100,000)
Intangible assets .................... (675,927)
Non-allowable minority
interest in Preferred Capital
Corp. ............................... (71,099)
Non-qualifying MSRs .................. (53,670)
Non-includable subsidiaries .......... (53,582)
Excess deferred tax asset ............ (55,000)
----------
Total tangible capital ............... $1,715,604 5.65% $ 455,457 1.50% N/A N/A
========== ==========
Total leverage capital ............... $1,715,604 5.65% $ 910,915 3.00% $1,518,191 5.00%
========== ========== ===========
Tier 1 risk-based capital ............ $1,715,604 10.14% N/A N/A $1,015,036 6.00%
========== ===========
Adjustments for risk-based
capital:
Qualifying subordinated debt
debentures .......................... 93,847
General loan loss allowance .......... 214,217
Assets required to be
deducted ............................ (5,648)
----------
Total risk-based capital ............. $2,018,020 11.93% $1,353,382 8.00% $1,691,727 10.00%
========== ========== ===========
</TABLE>
45
<PAGE>
FIRST NATIONWIDE (PARENT) HOLDINGS INC. AND SUBSIDIARIES
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS (CONTINUED)
<TABLE>
<CAPTION>
ACTUAL FOR CAPITAL ADEQUACY TO BE WELL CAPITALIZED
--------------------------- ------------------------- --------------------------
AS A AS A AS A
1996 AMOUNT % OF ASSETS AMOUNT % OF ASSETS AMOUNT % OF ASSETS
- - ----------------------------------- ------------- ------------- ----------- ------------- ------------- ------------
<S> <C> <C> <C> <C> <C> <C>
Stockholders' equity of the
Bank per financial statements $1,463,862
Net unrealized holding gains ...... (46,219)
----------
1,417,643
Adjustments for tangible and
leverage capital:
Intangible assets ................ (140,564)
Non-qualifying MSRs .............. (42,369)
Non-includable subsidiaries ...... (6,001)
Excess deferred tax asset ........ (68,000)
----------
Total tangible capital ............ $1,160,709 7.17% $242,828 1.50% N/A N/A
========== ========
Total leverage capital ............ $1,160,709 7.17% $485,655 3.00% $ 809,426 5.00%
========== ======== ==========
Tier 1 risk-based capital ......... $1,160,709 11.50% N/A N/A $ 605,843 6.00%
========== ==========
Adjustments for risk-based
capital:
Qualifying subordinated debt
debentures ..................... 89,907
General loan loss allowance ...... 127,708
Assets required to be
deducted ....................... (2,882)
----------
Total risk-based capital .......... $1,375,442 13.62% $807,791 8.00% $1,009,738 10.00%
========== ========= ==========
</TABLE>
26. OTHER NONINTEREST INCOME AND EXPENSE
Other noninterest income and expense amounts are summarized as follows for
the years ended December 31, 1997, 1996 and 1995 (in thousands):
<TABLE>
<CAPTION>
1997 1996 1995
----------- --------- ---------
<S> <C> <C> <C>
Other noninterest income:
Disbursement float ............................ $ 8,169 $ 5,369 $ 2,622
Other ......................................... 14,827 12,820 8,759
-------- ------- -------
$ 22,996 $18,189 $11,381
======== ======= =======
Other noninterest expense:
Telephone ..................................... $ 15,932 $11,727 $ 7,652
Insurance and surety bonds .................... 5,642 3,811 4,005
Postage ....................................... 8,070 7,141 6,856
Printing, copying and office supplies ......... 9,230 6,549 6,096
Employee travel ............................... 8,745 6,112 5,244
Clerical and other losses ..................... 11,410 2,636 4,345
Other ......................................... 54,853 42,135 27,131
-------- ------- -------
$113,882 $80,111 $61,329
======== ======= =======
</TABLE>
46
<PAGE>
FIRST NATIONWIDE (PARENT) HOLDINGS INC. AND SUBSIDIARIES
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS (CONTINUED)
27. INCOME TAXES
Total income tax expense (benefit) for the years ended December 31, 1997,
1996 and 1995 was allocated as follows (in thousands):
<TABLE>
<CAPTION>
1997 1996 1995
---------- -------------- --------------
<S> <C> <C> <C>
Income before income taxes, extraordinary item and
minority interest ............................... $41,315 $ (75,807) $ (57,185)
Extraordinary item ............................... -- (176) 221
Net unrealized holding (loss) gain on securities
available for sale .............................. 17 (1,921) 7,055
------- ---------- ----------
$41,332 $ (77,904) $ (49,909)
======= ========== ==========
</TABLE>
Income tax expense (benefit) attributable to income before income taxes,
extraordinary item and minority interest for the years ended December 31, 1997,
1996 and 1995 consisted of (in thousands):
<TABLE>
<CAPTION>
1997 1996 1995
--------- ------------- --------------
<S> <C> <C> <C>
Federal
Current .......... $ 4,687 $ 10,900 $ 285
Deferred ......... -- (125,000) (69,000)
------- ---------- ----------
4,687 (114,100) (68,715)
------- ---------- ----------
State and local
Current .......... 36,628 38,293 11,530
Deferred ......... -- -- --
------- ---------- ----------
36,628 38,293 11,530
------- ---------- ----------
$41,315 $ (75,807) $ (57,185)
======= ========== ==========
</TABLE>
47
<PAGE>
FIRST NATIONWIDE (PARENT) HOLDINGS INC. AND SUBSIDIARIES
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS (CONTINUED)
The consolidated income tax expense (benefit) for the years ended December
31, 1997, 1996 and 1995 differs from the amounts computed by applying the
statutory federal corporate tax rate of 35% for 1997, 1996 and 1995 to income
before income taxes, extraordinary item and minority interest (in thousands):
<TABLE>
<CAPTION>
1997 1996 1995
--------------- ------------- -------------
<S> <C> <C> <C>
Computed "expected" income tax expense ..................... $ 83,439 $ 177,642 $ 42,858
Increase (decrease) in taxes resulting from:
State income taxes, net of federal income tax
benefit ................................................. 23,808 24,890 7,495
Tax exempt income ......................................... (5) (584) (2,636)
Amortization of excess cost over fair value of net
assets acquired ......................................... 16,959 33 --
Adjustment to prior year's tax expense .................... -- 595 (1,675)
Unrealized holding (loss) gain on securities
available for sale recognized for tax purposes .......... (12,234) (3,703) 15,937
REIT preferred dividend ................................... (14,682) -- --
Other ..................................................... 2,762 1,214 (1,747)
Adjustment to deferred tax asset fully offset by
valuation allowance:
Temporary differences from acquisitions ................. (115,633) 6,196 --
Adjustment to deferred tax asset ........................ (17,130) 2,821 7,644
Change in the beginning-of-the-year balance of the
valuation allowance for deferred tax assets
allocated to income tax expense ......................... 74,031 (284,911) (125,061)
----------- ---------- ----------
$ 41,315 $ (75,807) $ (57,185)
=========== ========== ==========
</TABLE>
The significant components of deferred income tax (benefit) expense
attributable to income before income taxes, extraordinary item and minority
interest for the years ended December 31, 1997, 1996 and 1995 are as follows
(in thousands):
<TABLE>
<CAPTION>
1997 1996 1995
------------- --------------- -------------
<S> <C> <C> <C>
Deferred tax expense (exclusive of the effects of
other components listed below) ............................. $ 58,732 $ 150,894 $ 56,061
Adjustments to deferred tax asset fully offset by
valuation allowance ........................................ (132,763) 9,017 --
Increase (decrease) in beginning-of-the-year balance
of the valuation allowance for deferred tax assets ......... 74,031 (284,911) (125,061)
---------- ----------- ----------
$ -- $ (125,000) $ (69,000)
========== =========== ==========
</TABLE>
48
<PAGE>
FIRST NATIONWIDE (PARENT) HOLDINGS INC. AND SUBSIDIARIES
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS (CONTINUED)
The tax effects of temporary differences that give rise to significant
portions of the deferred tax assets and deferred tax liabilities at December
31, 1997 and 1996 are presented below (in thousands):
<TABLE>
<CAPTION>
1997 1996
------------- -------------
<S> <C> <C>
Deferred tax assets:
Net operating loss carryforwards .......................... $ 750,193 $ 737,815
Foreclosed real estate .................................... 6 312
Loans receivable .......................................... 60,835 4,774
Securities ................................................ -- 95
Miscellaneous accruals .................................... 31,520 11,851
Accrued liabilities ....................................... 86,617 30,017
Deferred interest ......................................... 5,369 6,440
State taxes ............................................... 38,704 15,429
Other intangible assets ................................... 39,848 35,476
Alternative minimum tax credit and investment tax credit
carryforwards ........................................... 14,911 13,324
Other ..................................................... 5,732 3,165
---------- ----------
Total gross deferred tax assets ......................... 1,033,735 858,698
Less valuation allowance ................................ (600,161) (526,130)
---------- ----------
Net deferred tax assets ................................. 433,574 332,568
---------- ----------
Deferred tax liabilities:
Change in accounting method ............................... 30,000 23,362
Securities ................................................ 8,166 --
Other intangible assets ................................... 73,872 48,280
Purchase accounting adjustments ........................... 18,137 29,881
FHLB stock ................................................ 52,337 12,688
Unrealized gains on securities available for sale ......... 5,152 1,640
Goodwill litigation ....................................... 58,450
Other ..................................................... 65,279 24,357
---------- ----------
Net deferred tax liabilities ............................ 311,393 140,208
---------- ----------
Net deferred tax assets and liabilities ................. $ 122,181 $ 192,360
========== ==========
</TABLE>
The net change in the total valuation allowance for the year ended
December 31, 1997 was an increase of $74.0 million which is attributable to
income before income taxes and minority interest.
Based on a historical earnings trend since the consummation of the FN
Acquisition and future earnings expectations, management changed its judgment
about the realizability of the Company's net deferred tax assets and recognized
a deferred tax benefit (i.e., reduced valuation allowance) of $125.0 million in
the second quarter of 1996 and $69.0 million in the fourth quarter of 1995.
Management believes that the realization of the resulting deferred tax asset is
more likely than not, based upon the expectation that the Company will generate
the necessary amount of taxable income in future periods.
At December 31, 1997, if the Company had filed a consolidated federal
income tax return on behalf of itself (as common parent), and its subsidiaries
for each year since the formation of the Company, it would have had regular and
alternative minimum tax net operating losses for federal income tax purposes of
approximately $2.1 billion and $878 million, respectively, which expire in 2004
through 2010.
If for any reason the Company was to deconsolidate from the Mafco Group
(see note 33, "Subsequent Event"), only the amount of the net operating loss
carryovers of the Company not already
49
<PAGE>
FIRST NATIONWIDE (PARENT) HOLDINGS INC. AND SUBSIDIARIES
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS (CONTINUED)
utilized by the Mafco Group would be available to offset the taxable income
subsequent to the date of deconsolidation. If the Company had deconsolidated as
of December 31, 1997, the Company would have had approximately $970 million of
regular net operating loss carryforwards. It cannot be predicted to what extent
the Mafco Group will utilize the net operating losses of the Company in the
future or the amount, if any, of net operating loss carryforwards that the
Company may have upon deconsolidation. Additionally, the net operating loss
carryovers are subject to review and potential disallowance, in whole or in
part, by the Internal Revenue Service.
On August 20, 1996, the Small Business Job Protection Act of 1996 (the
"Act") was enacted into law generally effective for tax years beginning after
1995. One provision of the Act repealed the Section 593 reserve method of
accounting for bad debts by thrift institutions which are treated as large
banks. Another provision of the Act requires the Company to take into income
the balance of its post-1987 bad debt reserves over a six year period beginning
in 1996 subject to a two-year deferral if certain residential loan tests are
satisfied. As of December 31, 1995, the Company had approximately $279 million
of post-1987 bad debt reserves that are subject to recapture. The Company has
fully provided for the tax related to this recapture.
In accordance with SFAS No. 109 "Accounting for Income Taxes," a deferred
tax liability has not been recognized for the base year reserves of the
Company. The base year reserves are generally the balance of the tax bad debt
reserve as of December 31, 1987 reduced proportionately for reductions in the
Company's loan portfolio since that date. At December 31, 1997, the amount of
those reserves was approximately $152 million. The amount of the unrecognized
deferred tax liability at December 31, 1997 was approximately $53 million.
Pursuant to the Act, circumstances that may require an accrual of this
unrecorded tax liability are a failure to meet the definition of a "bank" for
federal income tax purposes, dividend payments in excess of tax earnings and
profits, and other distributions, dissolution, liquidation or redemption of
stock, excluding preferred stock meeting certain conditions.
28. EMPLOYEE BENEFIT PLANS
Post-retirement Benefits Plan
The Bank provides certain post-retirement medical benefits to certain
eligible employees and their dependents through age 65. In general, early
retirement is age 55 with 10 years of service. Retirees participating in the
plans generally pay Consolidated Omnibus Budget Reduction Act premiums for the
period of time they participate.
The estimated cost for post-retirement health care benefits has been
accrued on an actuarial net present value basis.
The following table sets forth the plans' combined liabilities included in
the Bank's consolidated balance sheet at December 31, 1997 and 1996 (in
thousands):
<TABLE>
<CAPTION>
1997 1996
--------- ---------
<S> <C> <C>
Accumulated post-retirement benefit obligation:
Retirees ........................................... $2,228 $2,212
Eligible active plan participants .................. 554 471
Ineligible active plan participants ................ 1,343 733
------ ------
Accumulated post-retirement benefit obligation (other
liabilities) ...................................... $4,125 $3,416
====== ======
</TABLE>
The projected benefit obligation at December 31, 1997 and 1996 was
determined using a discount rate of 7.5%. At December 31, 1997, an increase of
1% in the health care cost trend rate would cause the accumulated
post-retirement benefit obligation to increase by $.4 million, and the service
and interest costs to increase by less than $.1 million.
50
<PAGE>
FIRST NATIONWIDE (PARENT) HOLDINGS INC. AND SUBSIDIARIES
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS (CONTINUED)
Net periodic post-retirement benefits cost for the years ended December
31, 1997 and 1996 included the following components (in thousands):
<TABLE>
<CAPTION>
1997 1996
------ -------
<S> <C> <C>
Service cost--benefits attributable to service during the current
period ................................................................. $364 $301
Interest cost on accumulated post-retirement benefit obligation ......... 498 231
Amortization of loss .................................................... -- 19
---- ----
Periodic post-retirement benefit cost ................................... $862 $551
==== ====
</TABLE>
The initial health care cost trend rate for medical benefits in 1997 was
9%, the average trend rate was 7.25% and the ultimate trend rate was 5.5%,
which will be reached in eight years. Similar trend rates were utilized for the
1996 valuation.
In connection with the SFFed Acquisition, the Bank assumed SFFed's defined
benefit pension plan which covered substantially all employees of San Francisco
Federal. The SFFed benefit plan was frozen effective September 30, 1995 and no
additional benefits accrued after such time.
The following table sets forth the funded status and amounts recognized in
the Bank's consolidated balance sheet for its defined benefit pension plan (in
thousands):
<TABLE>
<CAPTION>
1997 1996
---------- ----------
<S> <C> <C>
Actuarial present value of benefit obligations:
Accumulated benefit obligations, including vested benefits of
$40,995 in 1997 and $21,720 in 1996......................... $40,995 $21,720
======= =======
Projected benefit obligations ............................... $40,995 $21,720
Plan assets at fair value ................................... 42,292 23,085
------- -------
Excess (deficiency) of plan assets over projected benefit
obligations ................................................ 1,297 1,365
Unrecognized net gain (loss) ................................ 5,506 5,414
------- -------
Accrued (prepaid) pension liability ......................... $ 4,209 $ 4,049
======= =======
</TABLE>
Net periodic expense for 1997, 1996 and 1995 included the following
components (in thousands):
<TABLE>
<CAPTION>
1997 1996 1995
------------- ----------- -----
<S> <C> <C> <C>
Service cost benefit earned during the period ........... $ -- $ -- $--
Interest cost on projected benefit obligations .......... 2,796 2,143 --
Expected return on plan assets .......................... (3,306) (2,349) --
Net amortization and deferral ........................... (91) 1,278 --
Curtailment gain ........................................ (404) -- --
--------- -------- ---
Total net periodic pension expense ...................... $ (1,005) $ 1,072 $--
========= ======== ===
</TABLE>
Assumptions used in computing the funded status were:
<PAGE>
<TABLE>
<CAPTION>
1997 1996 1995
---------- ---------- -----
<S> <C> <C> <C>
Discount rate ........................................... 7.75% 8.50% --%
Rate of increase in future compensation levels .......... -- -- --
Long-term rate of return on assets ...................... 9.00% 8.50% --
</TABLE>
In the Cal Fed Acquisition, the Bank assumed sponsorship of the Old
California Federal defined benefit plan which was frozen effective May 31, 1993
and at which time, all accrued benefits became 100% vested. Effective April 30,
1997, the SFFed benefit plan was merged with and into the Old California
Federal benefit plan. The fair value of assets transferred was $23.6 million.
51
<PAGE>
FIRST NATIONWIDE (PARENT) HOLDINGS INC. AND SUBSIDIARIES
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS (CONTINUED)
Investment Plan
The Bank offers a defined contribution plan which is available to
substantially all employees with at least one year of employment. Employee
contributions are voluntary. The plan provides for deferral of up to 12% of
qualifying compensation of plan participants. The Bank's matching contribution
was a maximum of 100% of up to the first 3% of employee deferrals. The annual
discretionary employer profit sharing contribution is a maximum of 3% of
eligible compensation. It can be declared at any level in the range from 0% to
3%. Employees vest immediately in their own deferrals and any employer profit
sharing contributions and vest in employer matching contributions based on
completed years of service. The Bank's contributions to such plan totalled $3.8
million, $2.3 million, and $2.8 million for the years ended December 31, 1997,
1996 and 1995, respectively.
During 1996, defined contribution plans assumed in the SFFed and Home
Federal Acquisitions were merged with and into Old FNB's defined contribution
plan. The fair value of assets transferred was $14.4 million.
In the Cal Fed Acquisition, contributions made to Old California Federal's
defined contribution plan became 100% vested at the date of acquisition.
Effective December 31, 1997, the Old California Federal contribution plan was
merged with and into the Bank's plan. The fair value of assets transferred was
$33.6 million.
29. INCENTIVE PLAN
Effective October 1, 1995, FN Holdings entered into a management incentive
plan ("Incentive Plan") with certain executive officers of the Bank
("Participants"). Awards under the Incentive Plan will be made in the form of
performance units. Each performance unit entitles Incentive Plan Participants
to receive cash and/or stock options ("Bonuses") based upon the Participants'
vested interest in a bonus pool. Generally, the Incentive Plan provides for the
payment of Bonuses, on a quarterly basis, to the Participants upon the
occurrence of certain events. Bonuses vest at 20% per year beginning October 1,
1995 and are subject to a cap of $50 million.
Bonuses are recorded by a charge to compensation and employee benefits and
an increase to other liabilities. During 1997 and 1996, accruals relative to
the Incentive Plan totalled $12.4 million and $35.6 million, respectively.
30. SPECIAL SAIF ASSESSMENT
On September 30, 1996, the Economic Growth and Regulatory Paperwork
Reduction Act ("Act") of 1996 was enacted. The Act included a special
assessment ("Special SAIF Assessment") related to the recapitalization of the
SAIF, which was levied based on a rate of 65.7 cents per $100 of SAIF-insured
domestic deposits held as of March 31, 1995. As a result of the Act, the
Company recorded a pre-tax charge of $60.1 million on September 30, 1996. The
1997 SAIF deposit premiums declined to 6.42 cents per $100 of SAIF-insured
deposits per year from the prior rate of 23 cents.
31. COMMITMENTS AND CONTINGENCIES
In the ordinary course of business the Company has commitments and
contingent liabilities that are not reflected in the accompanying consolidated
financial statements. The Company, through FNMC, enters into financial
instruments with off-balance sheet risk through the origination and sale of
mortgage loans and the management of the related loss exposure caused by
fluctuations in interest rates. These financial instruments include commitments
to extend credit and purchase loans (mortgage loan pipeline) and mandatory and
optional forward commitments to sell loans.
52
<PAGE>
FIRST NATIONWIDE (PARENT) HOLDINGS INC. AND SUBSIDIARIES
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS (CONTINUED)
The following is a summary of the Company's pipeline of loans in process
and mandatory forward commitments to sell loans at December 31, 1997 (in
thousands):
Commitments to originate and purchase loans ......... $1,718,729
Mandatory commitments to sell loans ................. 1,368,123
The Company's pipeline of loans in process include loan applications in
various stages of processing. Until all required documentation is provided and
underwritten, there is no credit risk to the Company. There is no interest rate
risk until a rate commitment is extended by the Company to a borrower. Some of
these commitments will ultimately be denied by the Company or declined by the
borrower and therefore, the commitment amounts do not necessarily represent
future cash requirements.
Loans in process for which rates were committed to the borrower totalled
approximately $691.7 million at December 31, 1997. On a daily basis, the
Company determines what percentage of the portfolio of loans in process for
which rate commitments have been extended to a borrower to hedge. Both the
anticipated percentage of the pipeline that is expected to fund and the
inherent risk position of the portfolio are considered in making this
determination.
Mandatory and optional delivery forward commitments to sell loans are used
by the Company to hedge its interest rate exposure from the time a loan has a
committed rate to the time the loan is sold. These instruments involve varying
degrees of credit and interest rate risk. Credit risk on these instruments is
controlled through credit approvals, limits and monitoring procedures. To the
extent that counterparties are not able to fulfill forward commitments, the
Company is at risk for any fluctuations in the market value of the mortgage
loans and locked pipeline.
Realized gains and losses on mandatory and optional-delivery forward
commitments are recognized in the period settlement occurs. Unrealized gain and
losses on mandatory and optional-delivery forward commitments are included in
the lower of cost or market valuation adjustment to mortgage loans held for
sale.
On September 28, 1994, the Company entered into an agreement with FNMA
pursuant to which FNMA provided credit enhancements for certain bond-financed
real estate projects originated by Old FNB. The agreement requires that the
Company pledge to FNMA collateral in the form of certain eligible securities
which are held by a third party trustee. The collateral requirement varies
based on the balance of the bonds outstanding, losses incurred (if any), as
well as other factors. At December 31, 1997 and 1996, the Company had pledged
as collateral certain securities available for sale with a carrying value of
$78.2 million and $91.6 million.
At December 31, 1997 and 1996, mortgage-backed securities available for
sale with a carrying value of $28.8 million and $33.4 million, respectively,
were pledged to FNMA associated with the sales of certain securitized
multi-family loans.
At December 31, 1997, mortgage-backed securities available for sale and
mortgage-backed securities held to maturity of $4.1 billion and $1.3 billion,
respectively, were pledged as collateral for various obligations as discussed
in notes 8, 9, 19 and 20. At December 31, 1996, mortgage-backed securities
available for sale and mortgage-backed securities held to maturity of $936.2
million and $1.4 billion, respectively, were pledged as collateral for various
obligations.
At December 31, 1997, $11.2 billion in residential loans were pledged as
collateral for FHLB advances.
At December 31, 1997 and 1996, loans receivable included approximately
$7.5 billion and $2.3 billion, respectively, of loans that had the potential to
experience negative amortization.
The Bank is the plaintiff in a claim against the United States in the
lawsuit, California Federal Bank v. United States (the "Cal Fed Litigation"),
which it assumed in the Cal Fed Acquisition. In connection
53
<PAGE>
FIRST NATIONWIDE (PARENT) HOLDINGS INC. AND SUBSIDIARIES
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS (CONTINUED)
with this lawsuit, the Company recorded as an asset the estimated after-tax
cash recovery from the Cal Fed Litigation that will inure to the Company, net
of amounts payable to holders of certain publicly-traded rights in any such
recovery (the "Goodwill Litigation Asset"). In connection with the Cal Fed
Acquisition, the Goodwill Litigation Asset was recorded at its estimated fair
value of $100 million, net of estimated tax liabilities, as of January 3, 1997,
and is included in the Company's consolidated balance sheet as of December 31,
1997.
In addition, the Company is involved in various claims and lawsuits
arising in the ordinary course of business. Management is of the opinion that
the effect, if any, of these claims and lawsuits is not material to the
Company.
32. FAIR VALUE OF FINANCIAL INSTRUMENTS
The following table presents the carrying amounts and fair values of the
Company's financial instruments at December 31, 1997 and 1996 (in thousands):
<TABLE>
<CAPTION>
1997 1996
------------------------------ ----------------------------
CARRYING FAIR CARRYING FAIR
VALUE VALUE VALUE VALUE
-------------- --------------- -------------- -------------
<S> <C> <C> <C> <C>
Financial Assets:
Cash and cash equivalents ........................ $ 412,311 $ 412,311 $ 269,869 $ 269,869
Securities available for sale .................... 813,085 813,085 542,019 542,019
Securities held to maturity ...................... 58,299 58,299 4,272 4,287
Mortgage-backed securities available for sale..... 5,076,598 5,076,598 1,598,652 1,598,652
Mortgage-backed securities held to maturity ...... 1,337,877 1,373,289 1,621,662 1,653,847
Loans held for sale .............................. 1,483,466 1,493,867 825,316 825,316
Loans receivable, net ............................ 19,424,410 19,786,805 10,212,583 10,428,934
Investment in FHLB ............................... 468,191 468,191 220,962 220,962
Accrued interest receivable ...................... 188,203 188,203 106,034 106,034
Mortgage servicing rights ........................ 536,703 673,975 423,692 531,726
Financial Liabilities:
Deposits ......................................... 16,202,605 16,224,399 8,501,883 8,514,099
Securities sold under agreements to
repurchase ..................................... 1,842,442 1,842,737 1,583,387 1,585,964
Borrowings:
Gross ............................................ 11,232,931 11,427,457 5,370,285 5,453,811
Interest rate swap agreements (1) ................ (401) (2,954) (5,391) (13,763)
----------- ----------- ----------- -----------
Total borrowings .............................. $11,232,530 $11,424,503 $ 5,364,894 $ 5,440,048
=========== =========== =========== ===========
Off-balance sheet net unrealized
gains (losses):
Commitments to originate loans ................... $ 1,652 $ (503)
Forward commitments to sell loans ................ (7,099) 1,022
Principal-only swap agreements ................... 13,520 112
</TABLE>
- - ----------
(1) Designated as a hedge against FHLB advances.
The carrying amounts in the table are included in the accompanying
consolidated balance sheet under the indicated captions, except for off-balance
sheet net unrealized gains (losses).
The following summary presents a description of the methodologies and
assumptions used to estimate the fair value of the Company's financial
instruments. Much of the information used to determine
54
<PAGE>
FIRST NATIONWIDE (PARENT) HOLDINGS INC. AND SUBSIDIARIES
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS (CONTINUED)
fair value is highly subjective. When applicable, readily available market
information has been utilized. However, for a significant portion of the
Company's financial instruments, active markets do not exist. Therefore,
considerable judgment was required in estimating fair value for certain items.
The subjective factors include, among other things, the estimated timing and
amount of cash flows, risk characteristics, and interest rates, all of which
are subject to changes.
Cash and cash equivalents: Cash and cash equivalents are valued at their
carrying amounts included in the consolidated statement of financial condition,
which are reasonable estimates of fair value due to the relatively short period
to maturity of the instruments.
Securities and mortgage-backed securities: Securities and mortgage-backed
securities are valued at quoted market prices where available. If quoted market
prices are not available, fair values are based on quoted market prices of
comparable instruments.
Loans held for sale: Loans held for sale are valued based on quoted market
prices for mortgage-backed securities backed by similar loans.
Loans receivable, net: Fair values are estimated for loans in groups with
similar financial and risk characteristics. Loans are segregated by type
including residential, multi-family and commercial. Each loan type is further
segmented into fixed and variable interest rate terms and by performing and
non-performing categories in order to estimate fair values.
For performing residential mortgage loans, fair value is estimated by
discounting contractual cash flows adjusted for prepayment estimates using
discount rates based on secondary market sources. The fair value of performing
commercial and multi-family loans is calculated by discounting scheduled
principal and interest cash flows through the estimated maturity using
estimated market discount rates that reflect the credit and interest rate risk
inherent in the respective loan type.
Fair value for non-performing loans is based on discounting estimated cash
flows using a rate commensurate with the risk associated with the estimated
cash flows, or underlying collateral values, where appropriate.
Investment in FHLB: Since no secondary market exists for FHLB stock and
the stock is bought and sold at par by FHLB, fair value of these financial
instruments approximates the carrying value.
Accrued interest: The carrying amounts of accrued interest approximate
their fair values.
Mortgage servicing rights: The fair value of mortgage servicing rights is
based on market prices for comparable mortgage servicing contracts, when
available, or alternatively a valuation model that calculates the present value
of future net servicing income. In using the valuation model, the Company
incorporates assumptions that market participants would use in estimating
future net servicing income, which include estimates of the cost of servicing,
the discount rate, mortgage escrow earnings rate, an inflation rate, ancillary
income, prepayment speeds and default rates and losses.
Deposits: The fair values of demand deposits, passbook accounts, money
market accounts, and other deposits immediately withdrawable, by definition,
approximate carrying values for the respective financial instruments. For fixed
maturity deposits, the fair value was estimated by discounting expected cash
flows by the current offering rates of deposits with similar terms and
maturities.
Securities sold under agreements to repurchase: The fair value of
securities sold under agreements to repurchase is estimated using a discounted
cash flow analysis based on interest rates currently offered on such repurchase
agreements with similar maturities.
Borrowings: The fair value of borrowings, other than FHLB advances, is
estimated using discounted cash flow analyses based on current incremental
rates for similar borrowing arrangements. The fair values of FHLB advances are
estimated using a discounted cash flow analysis based on interest rates
55
<PAGE>
FIRST NATIONWIDE (PARENT) HOLDINGS INC. AND SUBSIDIARIES
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS (CONTINUED)
currently offered on advances with similar maturities. Fair values of the
Company's interest rate swap agreements, which effectively hedge certain of the
Company's FHLB advances, are based on the net present value of the estimated
interest due to the Company as compared to the estimated interest due to the
counterparties of the agreements.
Off-balance sheet financial instruments: Fair values of the Company's
commitments to originate loans is estimated using the fees currently charged to
enter into similar agreements, taking into account the remaining terms of the
agreements and the present creditworthiness of the counterparties. For
fixed-rate commitments, fair value also considers the difference between
current levels of interest rates and the committed rates. Fair values of
forward commitments to sell loans are determined using current estimated
replacement costs. Fair values of the Company's floors are based on quoted
market prices for comparable floors. To calculate the value of the
principal-only swaps, dealer bids are obtained on the underlying principal-only
swaps. The change in the market price of a principal-only swap from the date of
inception to the termination date is applied to the remaining principal-only
swap.
56
<PAGE>
FIRST NATIONWIDE (PARENT) HOLDINGS INC. AND SUBSIDIARIES
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS (CONTINUED)
33. SELECTED QUARTERLY FINANCIAL DATA (UNAUDITED)
The following table presents selected quarterly financial data for the
years ended December 31, 1997 and 1996 (in thousands) (unaudited):
<TABLE>
<CAPTION>
QUARTER ENDED
----------------------------------------------------------
DECEMBER 31, SEPTEMBER 30, JUNE 30, MARCH 31, TOTAL
1997 1997 1997 1997 1997
-------------- --------------- ------------- ------------- ---------------
<S> <C> <C> <C> <C> <C>
Total interest income ....................... $ 530,809 $ 531,303 $ 527,837 $ 512,751 $ 2,102,700
Total interest expense ...................... (383,286) (380,268) (375,468) (359,395) (1,498,417)
---------- ---------- ---------- ---------- ------------
Net interest income ......................... 147,523 151,035 152,369 153,356 604,283
Provision for loan losses ................... (19,950) (19,950) (19,950) (19,950) (79,800)
---------- ---------- ---------- ---------- ------------
Net interest income after provision for loan
losses ..................................... 127,573 131,085 132,419 133,406 524,483
Total noninterest income .................... 108,351 94,846 82,448 78,839 364,484
Total noninterest expense ................... (170,443) (154,758) (171,644) (153,724) (650,569)
---------- ---------- ---------- ---------- ------------
Income before income taxes,extraordinary item
and minority interest ...................... 65,481 71,173 43,223 58,521 238,398
Income taxes ................................ (9,888) (12,208) (9,025) (10,194) (41,315)
---------- ---------- ---------- ---------- ------------
Income before extraordinary item and minority
interest ................................... 55,593 58,965 34,198 48,327 197,083
Extraordinary item .......................... -- -- -- -- --
---------- ---------- ---------- ---------- ------------
Income before minority interest ............. 55,593 58,965 34,198 48,327 197,083
Minority interest ........................... (33,701) (35,250) (31,061) (31,839) (131,851)
---------- ---------- ---------- ---------- ------------
Net income available to common
stockholder ............................. $ 21,892 $ 23,715 $ 3,137 $ 16,488 $ 65,232
========== ========== ========== ========== ============
</TABLE>
<TABLE>
<CAPTION>
QUARTER ENDED
----------------------------------------------------------
DECEMBER 31, SEPTEMBER 30, JUNE 30, MARCH 31, TOTAL
1996 1996 1996 1996 1996
-------------- --------------- ------------- ------------- -------------
<S> <C> <C> <C> <C> <C>
Total interest income ....................... $ 299,386 $ 308,137 $ 318,100 $ 308,176 $1,233,799
Total interest expense ...................... (208,515) (219,453) (220,205) (200,121) (848,294)
---------- ---------- ---------- ---------- ----------
Net interest income ......................... 90,871 88,684 97,895 108,055 385,505
Provision for loan losses ................... (9,900) (9,900) (9,900) (9,900) (39,600)
---------- ---------- ---------- ---------- ----------
Net interest income after provision for loan
losses ..................................... 80,971 78,784 87,995 98,155 345,905
Total noninterest income .................... 57,917 75,870 154,652 364,939 653,378
Total noninterest expense ................... (112,090) (157,443) (103,982) (118,221) (491,736)
---------- ---------- ---------- ---------- ----------
Income before income taxes,extraordinary item
and minority interest ...................... 26,798 (2,789) 138,665 344,873 507,547
Income taxes ................................ (5,641) (527) 110,978 (29,003) 75,807
---------- ---------- ---------- ---------- ----------
Income before extraordinary item and minority
interest ................................... 21,157 (3,316) 249,643 315,870 583,354
Extraordinary item .......................... -- (1,586) -- -- (1,586)
---------- ---------- ---------- ---------- ----------
Income before minority interest ............. 21,157 (4,902) 249,643 315,870 581,768
Minority interest ........................... (17,656) (8,802) (58,610) (76,123) (161,191)
---------- ---------- ---------- ---------- ----------
Net income available to common
stockholder ............................. $ 3,501 $ (13,704) $ 191,033 $ 239,747 $ 420,577
========== ========== ========== ========== ==========
</TABLE>
57
<PAGE>
FIRST NATIONWIDE (PARENT) HOLDINGS INC. AND SUBSIDIARIES
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS (CONTINUED)
34. CONDENSED PARENT COMPANY FINANCIAL INFORMATION
The following represents condensed balance sheets of the Company (parent
company only) at December 31, 1997 and 1996 (in thousands):
<TABLE>
<CAPTION>
1997 1996
----------- -----------
<S> <C> <C>
Assets:
Investment in FN Holdings ............................................... $843,507 $919,217
Other assets and deferred charges ....................................... 15,077 19,582
-------- --------
Total assets .......................................................... $858,584 $938,799
======== ========
Liabilities, Minority Interest and Stockholder's Equity:
Senior notes ............................................................ $455,000 $455,000
Discount on senior notes ................................................ (3,907) (4,651)
Accrued interest payable ................................................ 11,843 11,849
Other liabilities ....................................................... 484 514
-------- --------
Total liabilities ..................................................... 463,420 462,712
Minority interest--FN Holdings preferred stock ........................... 25,680 150,792
Minority interest--Hunter's Glen ......................................... 163,568 153,684
Total stockholder's equity ............................................... 205,916 171,611
-------- --------
Total liabilities, minority interest and stockholder's equity ......... $858,584 $938,799
======== ========
</TABLE>
The following represents parent company only condensed statements of
income for the years ended December 31, 1997, 1996 and 1995 (in thousands):
<TABLE>
<CAPTION>
1997 1996 1995
----------- ------------ ----------
<S> <C> <C> <C>
Dividends received from FN Holdings ........................ $ 56,876 $ 57,902 $ 29,185
-------- -------- --------
56,876 57,902 29,185
-------- -------- --------
Interest expense ........................................... 57,613 40,494 --
Noninterest expense ........................................ 1,850 1,167 --
-------- -------- --------
59,463 41,661 --
-------- -------- --------
Income before equity in undistributed net income of FN
Holdings .................................................. (2,587) 16,241 29,185
Equity in undistributed net income of FN Holdings .......... 104,493 519,621 117,833
-------- -------- --------
Income before income taxes and minority interest ........... 101,906 535,862 147,018
Income tax benefit ......................................... (5,833) (2,676) --
-------- -------- --------
Income before minority interest ............................ 107,739 538,538 147,018
Minority interest--Hunter's Glen ........................... 29,716 113,146 24,554
Minority interest--FN Holdings preferred stock
dividends ................................................. 12,791 4,815 --
-------- -------- --------
Net income ................................................ $ 65,232 $420,577 $122,464
======== ======== ========
</TABLE>
58
<PAGE>
FIRST NATIONWIDE (PARENT) HOLDINGS INC. AND SUBSIDIARIES
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS (CONTINUED)
The following represents parent company only statements of cash flows for
the years ended December 31, 1997, 1996 and 1995 (in thousands):
<TABLE>
<CAPTION>
1997 1996 1995
--------------- ------------- -------------
<S> <C> <C> <C>
Cash flows from operating activities:
Net income ..................................................... $ 65,232 $ 420,577 $ 122,464
Adjustments to reconcile net income to net cash provided
by operating activities:
Amortization of discount on senior notes ...................... 744 523 --
Amortization of deferred issuance costs ....................... 1,825 1,167 --
Decrease (increase) other assets and deferred charges ......... 876 (2,332) --
Increase (decrease) in other liabilities ...................... 1,775 (2,163) --
(Decrease) increase in accrued interest payable ............... (6) 11,849 --
Minority interest--FN Holdings preferred stock ................ 12,791 4,815 --
Minority interest--Hunter's Glen .............................. 29,716 113,146 24,554
Equity in undistributed net income of FN
Holdings .................................................... (104,493) (519,621) (117,833)
----------- ---------- ----------
Net cash provided by operating activities ................... 8,460 27,961 29,185
----------- ---------- ----------
Cash flows provided by investing activities:
Redemption of FN Holdings' class C common stock ............... -- 124,670 60,801
----------- ---------- ----------
Net cash provided by investing activities ................... -- 124,670 60,801
----------- ---------- ----------
Cash flows used in financing activities:
Proceeds from issuance of senior notes ........................ -- 434,083 --
Capital contribution .......................................... 49 1,819 --
Capital distribution .......................................... -- (434,083) --
Dividends ..................................................... (8,509) (154,450) (89,986)
----------- ---------- ----------
Net cash used in financing activities ....................... (8,460) (152,631) (89,986)
----------- ---------- ----------
Net change in cash and cash equivalents ..................... -- -- --
Cash and cash equivalents at beginning of year .............. -- -- --
----------- ---------- ----------
Cash and cash equivalents at end of year .................... $ -- $ -- $ --
=========== ========== ==========
</TABLE>
Noncash investing and financing activities:
During 1996, Parent Holdings received a $46.8 million loan receivable from
FN Holdings in exchange for the redemption of and dividends on FN Holdings'
class C common stock in amounts totalling $44.8 million and $2 million,
respectively. Parent Holdings distributed such loan receivable in the form of a
dividend to an affiliate.
35. SUBSEQUENT EVENTS (UNAUDITED)
SAC Acquisition
On February 4, 1998, Auto One completed the GSAC Acquisition in a
transaction accounted for under the purchase method of accounting. GSAC engaged
in sub-prime automobile financing activities and provided loan processing,
funding and loan servicing primarily in the states of Texas, Louisiana and
Georgia. The purchase price paid was $22.5 million and the issuance of 250
shares of Auto One's common stock. The estimated fair value of assets acquired
was approximately $102.9 million consisting of approximately 7,400 loans.
59
<PAGE>
FIRST NATIONWIDE (PARENT) HOLDINGS INC. AND SUBSIDIARIES
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS (CONTINUED)
Golden State Merger
On February 4, 1998, Parent Holdings, and Hunter's Glen entered into a
definitive merger agreement ("Golden State Merger Agreement") with Golden State
Bancorp Inc. ("Golden State"), the publicly traded parent company of Glendale
Federal Bank, Federal Savings Bank ("Glendale Federal"), pursuant to which
Parent Holdings, Hunter's Glen and Golden State agreed to a tax-free exchange
of shares in a merger transaction (the "Golden State Merger"). Following the
Golden State Merger, the combined parent company, Golden State, will have 135
to 145 million common shares outstanding and will continue to be a publicly
traded company. As part of the Golden State Merger Agreement, Glendale Federal
will be merged with and into California Federal.
The terms of the Golden State Merger Agreement provide for Golden State
shareholders to retain ownership of approximately 55% to 58% of the merged
entity, based on the average trading price of Golden State shares during a
period preceding the close of the transaction, as determined after distribution
of Golden State's share of certain litigation interests. The remaining
ownership of the merged entity will be retained by the principal shareholders
of California Federal, Gerald J. Ford, chairman and chief executive officer of
the Bank, and MacAndrews & Forbes Holdings Inc. As part of the Golden State
Merger Agreement, the owners of Parent Holdings will receive, after a final
resolution of the Cal Fed Litigation, additional Golden State stock.
The Golden State Merger will be accounted for as a purchase. Golden
State's assets, liabilities and other items will be adjusted to their estimated
fair value at the closing date of the merger.
As a result of the Golden State Merger, Parent Holdings and its
subsidiaries will deconsolidate from the Mafco Group. Therefore, the amount of
net operating loss carryovers available to offset the taxable income of Parent
Holdings and its subsidiaries will be reduced. See note 27.
As of December 31, 1997, Glendale Federal had total assets of
approximately $16.0 billion and deposits of $9.5 billion, and operated 181
branches and 26 loan offices in California. During 1997, Golden State entered
into agreements to acquire RedFed Bancorp Inc. ("RedFed") and its federal
savings bank subsidiary, Redlands Federal Bank, in a tax-free stock-for-stock
merger, and CENFED Financial Corporation ("CENFED") and its federal savings
bank subsidiary, CenFed Bank, in a tax-free exchange of shares. At December 31,
1997, RedFed and CENFED had total assets of approximately $1.0 billion and $2.2
billion, respectively, and deposits of $.8 billion and $1.2 billion,
respectively. On a pro forma basis at December 31, 1997, Golden State would
have consolidated assets of $19.2 billion and deposits of $11.9 billion.
Further, on a pro forma basis, the merged entities (including RedFed and CENFED
would have consolidated assets of $51.9 billion and deposits of $28.1 billion
at December 31, 1997.
The Golden State Merger is subject to regulatory and stockholder approval
and is expected to close during the third quarter of 1998.
60
<PAGE>
EXHIBIT 99.1(a)(ii)
<PAGE>
EXHIBIT 99.1(a)(ii)
FIRST NATIONWIDE (PARENT) HOLDINGS INC. AND SUBSIDIARIES
CONSOLIDATED BALANCE SHEETS
JUNE 30, 1998 AND DECEMBER 31, 1997
(UNAUDITED)
(DOLLARS IN THOUSANDS, EXCEPT PER SHARE DATA)
<TABLE>
<CAPTION>
JUNE 30, DECEMBER 31,
1998 1997
-------------- -------------
<S> <C> <C>
ASSETS
Cash and amounts due from banks .......................................... $ 345,921 $ 350,214
Interest-bearing deposits in other banks ................................. 2,081 36,164
Short-term investment securities ......................................... 35,404 25,933
----------- -----------
Cash and cash equivalents ............................................. 383,406 412,311
Securities available for sale, at fair value ............................. 783,029 813,085
Securities held to maturity .............................................. 58,557 58,299
Mortgage-backed securities available for sale, at fair value ............. 8,037,170 5,076,598
Mortgage-backed securities held to maturity .............................. 1,143,112 1,337,877
Loans held for sale, net ................................................. 1,725,497 1,483,466
Loans receivable, net .................................................... 18,626,425 19,424,410
Investment in Federal Home Loan Bank ("FHLB") System ..................... 540,127 468,191
Office premises and equipment, net ....................................... 179,278 159,349
Foreclosed real estate, net .............................................. 64,892 76,997
Accrued interest receivable .............................................. 207,422 188,203
Intangible assets (net of accumulated amortization of $83,523 in 1998
and $60,294 in 1997)..................................................... 656,177 675,927
Mortgage servicing rights ................................................ 669,056 536,703
Other assets ............................................................. 975,877 650,740
----------- -----------
Total assets .......................................................... $34,050,025 $31,362,156
=========== ===========
LIABILITIES, MINORITY INTEREST AND STOCKHOLDER'S EQUITY
Deposits ................................................................. $16,044,288 $16,202,605
Securities sold under agreements to repurchase ........................... 2,861,604 1,842,442
Borrowings ............................................................... 12,739,591 11,232,530
Other liabilities ........................................................ 729,599 702,959
----------- -----------
Total liabilities ..................................................... 32,375,082 29,980,536
----------- -----------
Commitments and contingencies ............................................ -- --
Minority interest ........................................................ 1,213,967 1,175,704
Stockholder's equity:
Common stock, $1.00 par value, 1,000 shares authorized, issued and
outstanding ........................................................... 1 1
Additional paid-in capital .............................................. -- --
Net unrealized holding gain on securities available for sale ............ 22,481 28,129
Retained earnings (substantially restricted) ............................ 438,494 177,786
----------- -----------
Total stockholder's equity ............................................ 460,976 205,916
----------- -----------
Total liabilities, minority interest and stockholder's equity ......... $34,050,025 $31,362,156
=========== ===========
</TABLE>
See accompanying notes to unaudited consolidated financial
statements.
<PAGE>
FIRST NATIONWIDE (PARENT) HOLDINGS INC. AND SUBSIDIARIES
CONSOLIDATED STATEMENTS OF INCOME
SIX MONTHS ENDED JUNE 30, 1998 AND 1997
(UNAUDITED) (IN THOUSANDS)
<TABLE>
<CAPTION>
1998 1997
------------- -------------
<S> <C> <C>
Interest income:
Loans receivable ..................................................... $ 761,340 $ 779,663
Mortgage-backed securities available for sale ........................ 178,529 134,432
Mortgage-backed securities held to maturity .......................... 47,433 58,869
Loans held for sale .................................................. 58,230 37,627
Securities available for sale ........................................ 28,286 25,278
Securities held to maturity .......................................... 1,572 929
Interest-bearing deposits in other banks ............................. 1,571 3,790
---------- ----------
Total interest income .............................................. 1,076,961 1,040,588
---------- ----------
Interest expense:
Deposits ............................................................. 355,202 374,787
Securities sold under agreements to repurchase ....................... 57,049 72,786
Borrowings ........................................................... 369,151 287,290
---------- ----------
Total interest expense ............................................. 781,402 734,863
---------- ----------
Net interest income ................................................ 295,559 305,725
Provision for loan losses ............................................. 20,000 39,900
---------- ----------
Net interest income after provision for loan losses ................ 275,559 265,825
---------- ----------
Noninterest income:
Loan servicing fees, net ............................................. 71,363 74,979
Customer banking fees and service charges ............................ 51,197 46,752
Gain on sale of loans, net ........................................... 36,124 11,358
(Loss) gain on sale of branches ...................................... (86) 1,069
Loss on sale of assets, net .......................................... (181) (214)
Dividends on FHLB stock .............................................. 14,562 11,975
Other income ......................................................... 11,755 15,368
---------- ----------
Total noninterest income ........................................... 184,734 161,287
---------- ----------
Noninterest expense:
Compensation and employee benefits ................................... 127,620 127,502
Occupancy and equipment .............................................. 41,406 40,844
Savings Association Insurance Fund deposit insurance premium ......... 5,054 5,450
Loan expense ......................................................... 23,500 33,966
Marketing ............................................................ 9,914 7,684
Professional fees .................................................... 19,609 22,198
Data processing ...................................................... 6,897 6,182
Foreclosed real estate operations, net ............................... (5,138) (857)
Amortization of intangible assets .................................... 23,229 24,595
Other ................................................................ 50,626 57,804
---------- ----------
Total noninterest expense .......................................... 302,717 325,368
---------- ----------
Income before income taxes and minority interest ...................... 157,576 101,744
Income tax (benefit) expense .......................................... (223,818) 19,218
---------- ----------
Income before minority interest ....................................... 381,394 82,526
Minority interest ..................................................... 118,660 62,900
---------- ----------
Net income ......................................................... $ 262,734 $ 19,626
========== ==========
</TABLE>
See accompanying notes to unaudited consolidated financial statements.
2
<PAGE>
FIRST NATIONWIDE (PARENT) HOLDINGS INC. AND SUBSIDIARIES
CONSOLIDATED STATEMENTS OF COMPREHENSIVE INCOME
SIX MONTHS ENDED JUNE 30, 1998 AND 1997
(UNAUDITED) (IN THOUSANDS)
<TABLE>
<CAPTION>
1998 1997
----------- -------------
<S> <C> <C>
Net income ................................................................ $262,734 $19,626
Other comprehensive income, net of tax:
Unrealized holding (loss) gain on securities available for sale:
Unrealized holding (loss) gain arising during the period ............... (5,196) 5,444
Less: reclassification adjustment for gains included in net (loss) gain (452) (3)
-------- ---------
Other comprehensive (loss) income ........................................ (5,648) 5,441
-------- --------
Comprehensive income ...................................................... $257,086 $25,067
======== ========
</TABLE>
See accompanying notes to unaudited consolidated financial statements.
3
<PAGE>
FIRST NATIONWIDE (PARENT) HOLDINGS INC. AND SUBSIDIARIES
CONSOLIDATED STATEMENT OF STOCKHOLDER'S EQUITY
SIX MONTHS ENDED JUNE 30, 1998
(UNAUDITED) (IN THOUSANDS)
<TABLE>
<CAPTION>
NET UNREALIZED
ADDITIONAL HOLDING GAINS ON TOTAL
COMMON PAID-IN SECURITIES RETAINED STOCKHOLDER'S
STOCK CAPITAL AVAILABLE FOR SALE EARNINGS EQUITY
-------- ------------ -------------------- ------------ --------------
<S> <C> <C> <C> <C> <C>
Balance at December 31, 1997 .............. $ 1 $ -- $ 28,129 $177,786 $205,916
Net income ................................ -- -- -- 262,734 262,734
Capital contribution ...................... -- 28 -- -- 28
Redemption of Additional FN
Holdings Preferred Stock ................. -- -- -- 630 630
Dividends to parent ....................... -- (28) -- (2,656) (2,684)
Change in net unrealized holding gains
on securities available for sale ......... -- -- (5,648) -- (5,648)
--- ----- -------- -------- --------
Balance at June 30, 1998 .................. $ 1 $ -- $ 22,481 $438,494 $460,976
=== ===== ======== ======== ========
</TABLE>
See accompanying notes to unaudited consolidated financial statements.
4
<PAGE>
FIRST NATIONWIDE (PARENT) HOLDINGS INC. AND SUBSIDIARIES
CONSOLIDATED STATEMENTS OF CASH FLOWS
SIX MONTHS ENDED JUNE 30, 1998 AND 1997
(UNAUDITED) (IN THOUSANDS)
<TABLE>
<CAPTION>
1998 1997
--------------- ---------------
<S> <C> <C>
Cash flows from operating activities:
Net income .............................................................. $ 262,734 $ 19,626
Adjustments to reconcile net income to net cash (used in) provided by
operating activities:
Amortization of intangible assets ...................................... 23,229 24,595
Accretion of purchase accounting premiums and discounts, net ........... (3,675) (9,882)
Accretion of discount on borrowings .................................... 372 372
Amortization of mortgage servicing rights .............................. 57,074 51,070
Provision for loan losses .............................................. 20,000 39,900
Loss on sales of assets, net ........................................... 181 214
Loss (gain) on sale of branches ........................................ 86 (1,069)
Gain on sales of foreclosed real estate, net ........................... (8,403) (7,191)
Loss on sale of loans, net ............................................. 65,491 51,816
Depreciation and amortization of office premises and equipment ......... 11,225 7,603
Amortization of deferred debt issuance costs ........................... 4,351 3,379
FHLB stock dividends ................................................... (14,562) (11,975)
Capitalization of originated mortgage servicing rights and excess
servicing fees receivable ............................................. (101,615) (63,174)
Purchases and originations of loans held for sale ...................... (4,847,904) (3,024,959)
Proceeds from the sale of loans held for sale .......................... 4,537,939 2,962,052
(Increase) decrease in other assets .................................... (335,037) 107,353
Increase in accrued interest receivable ................................ (18,649) (15,004)
Increase (decrease) in other liabilities ............................... 31,358 (733)
Minority interest ...................................................... 118,660 59,048
------------ ------------
Net cash (used in) provided by operating activities .................... (197,145) 193,041
------------ ------------
</TABLE>
See accompanying notes to unaudited consolidated financial statements.
5
<PAGE>
FIRST NATIONWIDE (PARENT) HOLDINGS INC. AND SUBSIDIARIES
CONSOLIDATED STATEMENTS OF CASH FLOWS
SIX MONTHS ENDED JUNE 30, 1998 AND 1997
(UNAUDITED) (IN THOUSANDS) (CONTINUED)
<TABLE>
<CAPTION>
1998 1997
--------------- --------------
<S> <C> <C>
Cash flows from investing activities:
Acquisitions:
Cal Fed Acquisition .................................................... $ -- $ (161,196)
GSAC Acquisition ....................................................... (13,577) --
Mortgage loan servicing rights and operations .......................... -- (7,728)
Purchases of securities available for sale ............................... (513,957) (607,845)
Proceeds from maturities of securities available for sale ................ 549,442 204,888
Purchases of securities held to maturity ................................. (615) (58,149)
Proceeds from maturities of securities held to maturity .................. 357 4,374
Purchases of mortgage-backed securities available for sale ............... (4,083,863) (1,743,072)
Principal payments on mortgage-backed securities available for sale ...... 1,107,314 345,823
Proceeds from sales of mortgage-backed securities available for sale ..... 3,253 22,184
Principal payments on mortgage-backed securities held to maturity ........ 194,445 136,207
Net decrease in loans receivable ......................................... 728,600 652,385
Purchases of FHLB stock, net ............................................. (71,936) --
Purchases of office premises and equipment ............................... (37,221) (24,264)
Proceeds from disposal of office premises and equipment .................. 5,840 1,828
Proceeds from sales of foreclosed real estate ............................ 76,424 67,216
Purchases of mortgage servicing rights ................................... (63,628) (21,230)
------------- ------------
Net cash flows used in investing activities ......................... (2,119,122) (1,188,579)
------------- ------------
Cash flows from financing activities:
Branch Sales ............................................................. -- (21,683)
Net decrease in deposits ................................................. (157,876) (810,276)
Proceeds from additional borrowings ...................................... 11,829,493 9,147,953
Principal payments on borrowings ......................................... (10,321,926) (8,598,582)
Net increase in securities sold under agreements to repurchase ........... 1,019,260 500,856
Proceeds from FN Escrow Merger ........................................... -- 605,347
Issuance of REIT Preferred Stock, net .................................... -- 485,959
Dividends to Parent ...................................................... (2,628) --
Redemption of FN Holdings/FN Escrow Preferred Stock ...................... -- (17,250)
Redemption of FN Holdings Preferred Stock ................................ (25,000) (62,500)
Dividends paid to minority stockholders, net of taxes .................... (53,933) (61,668)
Issuance costs of FN Holdings Preferred Stock ............................ -- (440)
Capital contribution ..................................................... -- 39
Capital distribution to parent ........................................... (28) --
------------- ------------
Net cash flows provided by financing activities ..................... 2,287,362 1,167,755
------------- ------------
Net change in cash and cash equivalents ................................... (28,905) 172,217
Cash and cash equivalents at beginning of period .......................... 412,311 269,869
------------- ------------
Cash and cash equivalents at end of period ................................ $ 383,406 $ 442,086
============= ============
</TABLE>
See accompanying notes to unaudited consolidated financial statements.
6
<PAGE>
FIRST NATIONWIDE (PARENT) HOLDINGS INC. AND SUBSIDIARIES
NOTES TO UNAUDITED CONSOLIDATED FINANCIAL STATEMENTS
(1) BASIS OF PRESENTATION
The accompanying consolidated financial statements were prepared in
accordance with generally accepted accounting principles for interim financial
information and with the instructions for meeting the requirements of
Regulation S-X, Article 10 and therefore do not include all disclosures
necessary for complete financial statements. In the opinion of management, all
adjustments have been made that are necessary for a fair presentation of the
financial position and results of operations and cash flows as of and for the
periods presented. All such adjustments are of a normal recurring nature. The
results of operations for the six months ended June 30, 1998 are not
necessarily indicative of the results that may be expected for the entire
fiscal year or any other interim period. Certain amounts for the six month
period in the prior year have been reclassified to conform with the current
period's presentation.
The accompanying consolidated financial statements include the accounts of
First Nationwide (Parent) Holdings Inc. ("Parent Holdings" or the "Company"),
which owns directly 80% of the voting stock of First Nationwide Holdings Inc.
("FN Holdings"), which owns all of the common stock of California Federal Bank,
A Federal Savings Bank and its subsidiaries. On January 3, 1997, First
Nationwide Bank, A Federal Savings Bank merged with and into California Federal
Bank, A Federal Savings Bank (the "Cal Fed Acquisition"). Unless the context
otherwise indicates, (i) "Old California Federal" refers to California Federal
Bank, A Federal Savings Bank prior to the consummation of the Cal Fed
Acquisition and (ii) "California Federal" or "Bank" refers to California
Federal Bank, A Federal Savings Bank, as the surviving entity after the
consummation of the Cal Fed Acquisition, and to First Nationwide and its
predecessors for periods prior to the Cal Fed Acquisition. All significant
intercompany balances and transactions have been eliminated in consolidation.
These financial statements should be read in conjunction with the consolidated
financial statements included in the Company's Annual Report on Form 10-K for
the year ended December 31, 1997. All terms used but not defined elsewhere
herein have meanings ascribed to them in the Company's Annual Report on Form
10-K.
Minority interest represents amounts attributable to (i) the Bank
Preferred Stock, (ii) the preferred stock of FN Holdings, (iii) the preferred
stock ("REIT Preferred Stock") of California Federal Preferred Capital
Corporation, a wholly owned subsidiary of the Bank, (iv) that portion of
stockholder's equity of Auto One Acceptance Corporation, a subsidiary of the
Bank ("Auto One"), attributable to 20% of its common stock, and (v) the results
of operations and equity of FN Holdings attributable to its class B common
stock, which is owned by Hunter's Glen/Ford Ltd. ("Hunter's Glen").
Earnings per share data is not presented due to the limited ownership of
the Company. Parent Holdings is a holding company whose only significant asset
is its indirect ownership of 80% of the common stock of the Bank, and therefore
all activities for the consolidated entity are carried out by the Bank and its
operating subsidiaries.
(2) ACQUISITIONS AND DIVESTITURES
On February 4, 1998, Auto One acquired 100% of the partnership interests
in Gulf States Acceptance Company, a Delaware limited partnership ("GSAC") and
its general partner, Gulf States Financial Services, Inc., a Texas corporation.
GSAC was liquidated and its assets and liabilities were transferred to Auto One
(the "GSAC Acquisition"). The aggregate consideration paid in connection with
the GSAC Acquisition was approximately $13.6 million plus a 20% interest in the
common stock of Auto One.
On February 4, 1998, Parent Holdings and Hunter's Glen entered into a
definitive merger agreement ("Golden State Merger Agreement") with Golden State
Bancorp Inc. ("Golden State"), the publicly traded parent company of Glendale
Federal Bank, Federal Savings Bank ("Glendale Federal"), pursuant to which,
Parent Holdings, Hunter's Glen and Golden State agreed to a tax-free exchange
of shares in a merger transaction (the "Golden State Merger"), to be accounted
for under the purchase method of accounting. In connection with the execution
of the Golden State Merger Agreement, Golden State,
7
<PAGE>
FIRST NATIONWIDE (PARENT) HOLDINGS INC. AND SUBSIDIARIES
NOTES TO UNAUDITED CONSOLIDATED FINANCIAL STATEMENTS (CONTINUED)
Glendale Federal, the Bank, Stephen J. Trafton, Chairman of the Board,
President and Chief Executive Officer of Golden State and Richard A. Fink, Vice
Chairman of Golden State, entered into a Litigation Management Agreement
("Litigation Management Agreement") pursuant to which, among other things,
Messrs. Trafton and Fink will oversee and manage the California Federal
Litigation (hereinafter defined) and continue to oversee and manage similar
litigation being prosecuted by Glendale Federal, following the consummation of
the Golden State Merger. Following the Golden State Merger, the combined parent
company, Golden State, will have approximately 135 to 145 million common shares
outstanding and will continue to be a publicly traded company. As part of the
Golden State Merger Agreement, Glendale Federal will be merged with and into
the Bank. At March 31, 1998, Glendale Federal had total assets of approximately
$15.9 billion and deposits of $9.7 billion and operated 181 branches and 26
loan offices in California. The Golden State Merger is subject to regulatory
and stockholder approval and is expected to close during the third quarter of
1998.
On March 29, 1998, the Company signed a definitive agreement to sell its
Florida bank franchise (consisting of 24 branches with deposits of $1.5
billion) to Union Planters Bank of Florida, a wholly owned subsidiary of Union
Planters Corp. (the "Florida Branch Sale"). The Company expects to record a
pre-tax gain of approximately $110 million in connection with the Florida
Branch Sale, representing a deposit premium of approximately 7.5%. On June 2,
1998, the Company received regulatory approval for this transaction, which is
expected to close during the third quarter of 1998.
(3) CASH, CASH EQUIVALENTS, AND STATEMENT OF CASH FLOWS
The Company uses the indirect method to present cash flows from operating
activities. Cash paid for interest for the six months ended June 30, 1998 and
1997 was $775.7 million and $706.1 million, respectively.
During the six months ended June 30, 1998, noncash activity consisted of
transfers of $62.4 million from loans receivable to foreclosed real estate,
$5.5 million of loans made to facilitate sales of real estate owned and
transfers of $3.2 million from loans held for sale (at lower of cost or market)
to mortgage-backed securities classified as trading securities upon the
securitization of certain of the Bank's single-family loans. Noncash activity
also includes the retirement of preferred stock of $.8 million, the issuance of
additional preferred stock through preferred stock dividends of $.1 million and
dividends to parent of $2.7 million.
During the six months ended June 30, 1997, noncash activity consisted of
transfers of $86.8 million from loans receivable and $1.2 million from loans
held for sale (at lower of cost or market) to foreclosed real estate, $21.6
million of loans made to facilitate sales of real estate owned, the issuance of
additional preferred stock through preferred stock dividends of $1.4 million
and the forgiveness of a $19 million loan from an affiliate of FN Holdings in
exchange for the redemption of the FN Holdings/FN Escrow Preferred Stock.
(4) MINORITY INTEREST
In connection with the GSAC Acquisition, Auto One issued 250 shares of its
common stock, par value $1.00 per share, representing a 20% interest in Auto
One. The carrying value of Auto One's common stockholders' equity attributable
to the minority stockholders at June 30, 1998 is ($.2) million.
(5) NEWLY ISSUED ACCOUNTING PRONOUNCEMENTS
In June 1997, the FASB issued Statement of Financial Accounting Standards
No. 131, "Disclosures About Segments of an Enterprise and Related Information"
("SFAS No. 131"). SFAS No. 131 establishes standards for the way that public
business enterprises report information about operating segments in annual
financial statements and requires that those enterprises report selected
information about
8
<PAGE>
FIRST NATIONWIDE (PARENT) HOLDINGS INC. AND SUBSIDIARIES
NOTES TO UNAUDITED CONSOLIDATED FINANCIAL STATEMENTS (CONTINUED)
operating segments in interim financial reports issued to shareholders. SFAS
No. 131 also establishes standards for related disclosures about products and
services, geographic areas, and major customers. This statement supersedes FASB
Statement No. 14, Financial Reporting for Segments of a Business Enterprise,
but retains the requirement to report information about major customers. It
amends FASB Statement No. 94, Consolidation of All Majority-Owned Subsidiaries,
to remove the special disclosure requirements for previously unconsolidated
subsidiaries. This statement is effective for fiscal years beginning after
December 15, 1997. In the initial year of application, comparative information
for earlier years is to be restated. This statement need not be applied to
interim financial statements in the initial year of application, but
comparative information for interim periods in the initial year of application
is to be reported in financial statements for interim periods in the second
year of application. This statement has no impact on the financial condition or
results of operations of the Company, but will require changes in the Company's
disclosure requirements.
In February 1998, the FASB issued Statement of Financial Accounting
Standards No. 132, "Employers' Disclosures about Pensions and Other
Postretirement Benefits" ("SFAS No. 132"), an amendment of FASB Statements No.
87, No. 88 and No. 106. SFAS No. 132 revises employers' disclosures about
pension and other postretirement benefit plans. It does not change the
measurement or recognition of those plans. It standardizes the disclosure
requirements for pensions and other postretirement benefits to the extent
practicable, requires additional information on changes in the benefit
obligations and fair values of plan assets that will facilitate financial
analysis, and eliminates certain disclosures that are no longer useful as they
were when FASB Statements No. 87, Employers' Accounting for Pensions, No. 88,
Employers' Accounting for Settlements and Curtailments of Defined Benefit
Pension Plans and for Termination Benefits, and No. 106, Employers' Accounting
for Postretirement Benefits Other Than Pensions, were issued. SFAS No. 132 is
effective for fiscal years beginning after December 15, 1997 and requires
restatement of disclosures for earlier periods provided for comparative
purposes, if available. It is not expected that the Company will experience any
material revision in its disclosures when SFAS No. 132 is adopted.
In June 1998, the FASB issued Statement of Financial Accounting Standards
No. 133, "Accounting for Derivative Instruments and Hedging Activities" ("SFAS
No. 133"). SFAS No. 133 establishes standards for derivative instruments and
for hedging activities, and requires that an entity recognize all derivatives
as either assets or liabilities in the balance sheet and measure those
instruments at fair value. Under SFAS No. 133, an entity that elects to apply
hedge accounting is required to establish at the inception of the hedge the
method it will use for assessing the effectiveness of the hedging derivative
and the measurement approach for determining the ineffective aspect of the
hedge. SFAS No. 133 applies to all entities and amends FASB Statement No. 107,
Disclosures About Fair Values of Financial Instruments, to include in Statement
107 the disclosure provisions about concentrations of credit risk from
Statement 105. SFAS No. 133 supersedes FASB Statements No. 80, Accounting for
Futures Contracts, No. 105, Disclosure of Information about Financial
Instruments with Off-Balance Sheet Risk and Financial Instruments with
Concentrations of Credit Risk, and No. 119, Disclosure about Derivative
Financial Instruments and Fair Value of Financial Instruments. SFAS No. 133
also nullifies or modifies the consensuses reached in a number of issues
addressed by the Emerging Issues Task Force. SFAS No. 133 is effective for all
fiscal quarters of fiscal years beginning after June 15, 1999. Initial
application of this statement should be as of the beginning of an entity's
fiscal quarter; on that date, hedging relationships must be designated anew and
documented pursuant to the provisions of this statement. Earlier application of
all of the provisions of SFAS No. 133 is encouraged, but is permitted only as
of the beginning of any fiscal quarter that begins after issuance of this
statement. SFAS No. 133 should not be applied retroactively to financial
statements of prior periods. Management has not yet completed its analysis of
SFAS No. 133 and is unable to determine the effect, if any, implementation may
have on the Company's consolidated financial statements.
9
<PAGE>
FIRST NATIONWIDE (PARENT) HOLDINGS INC. AND SUBSIDIARIES
NOTES TO UNAUDITED CONSOLIDATED FINANCIAL STATEMENTS (CONTINUED)
(6) SUBSEQUENT EVENT
On August 6, 1998, GS Escrow Corp. ("GS Escrow") issued $2 billion in debt
securities ("GS Escrow Notes"). The GS Escrow Notes were issued to fund a
series of refinancing transactions described below. Upon consummation of the
Golden State Merger and the refinancing transactions, GS Escrow will be merged
(the "GS Escrow Merger") with and into Golden State Holdings Inc. ("GS
Holdings"), which is currently named New First Nationwide Holdings Inc. ("New
FN Holdings") and is a newly formed subsidiary of FN Holdings. Upon
consummation of the Golden State Merger and the GS Escrow Merger, the GS Escrow
Notes will be obligations of New FN Holdings. GS Holdings was formed to acquire
all of the assets of FN Holdings (including all of the common stock of the
Bank) as part of the Golden State Merger.
Prior to the consummation of the Golden State Merger, (i) FN Holdings (or
an affiliate other than GS Escrow) is expected to commence cash tender offers
and consent solicitations (collectively, the "Debt Tender Offers") for each of
its three outstanding series of long-term notes (the "FN Holdings Notes") which
together have a total aggregate principal balance of $915 million; and (ii) FN
Holdings (or an affiliate other than GS Escrow Corp.) is expected to commence
cash tender offers (the "Bank Preferred Stock Tender Offers") for each of the
Bank's two outstanding series of preferred stock which together have a total
aggregate liquidation preference of $473.2 million.
The Debt Tender Offers and Bank Preferred Stock Tender Offers are expected
to close subsequent to the closing of the Golden State Merger.
After the closing of the Golden State Merger and concurrently with the
closings of the Debt Tender Offers, Golden State Financial Corporation (an
entity that will own 100% of the common stock of GS Holdings following the
consummation of the Golden State Merger), as the successor obligor, is expected
to give a 30-day notice of redemption for all of the outstanding $455 million
aggregate principal amount of 12 1/2% Senior Notes Due 2003 of Parent Holdings
(the "Parent Holdings Notes"), and to irrevocably deposit in trust money or
government obligations in an amount sufficient to pay the redemption price
therefor, together with any accrued and unpaid interest to the date of
redemption, for the purpose of defeasing the Parent Holdings Notes (the "Parent
Holdings Defeasance").
The Debt Tender Offers, the Bank Preferred Stock Tender Offers and the
Parent Holdings Defeasance will be financed with the net proceeds from the
offering of the GS Escrow Notes and, to the extent required, a cash dividend
from the Bank.
There can be no assurance that all of the outstanding FN Holdings Notes
will be tendered to and purchased by FN Holdings in the Debt Tender Offers. Any
FN Holdings 12 1/4% Senior Notes that remain outstanding after the consummation
of the Debt Tender Offers will rank pari passu with the GS Escrow Notes and any
FN Holdings 9c% Senior Subordinated Notes or FN Holdings 10e% Senior
Subordinated Notes that remain outstanding after the consummation of the Debt
Tender Offers will be subordinated in right of payment to the GS Escrow Notes.
It is not expected that all of the Bank Preferred Stock will be purchased
in the Bank Preferred Stock Tender Offers. FN Holdings expects to purchase any
outstanding Bank Preferred Stock not acquired in the Bank Preferred Stock
Tender Offers once it becomes redeemable (April 1, 1999 in the case of the
10 5/8% Preferred Stock and September 1, 1999 in the case of the 11 1/2%
Preferred Stock).
10
<PAGE>
INDEX TO FINANCIAL STATEMENTS
<TABLE>
<CAPTION>
PAGE
-----
<S> <C>
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>
<PAGE>
GOLDEN STATE FINANCIAL CORPORATION
INDEPENDENT AUDITORS' REPORT
The Board of Directors
Golden State Financial Corporation
We have audited the accompanying consolidated statements of financial
condition of Golden State Financial Corporation and subsidiaries (the Company)
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 Company's management. Our
responsibility is to express an opinion on these consolidated financial
statements based on our audits.
We conducted our audits in accordance with generally accepted auditing
standards. Those standards require that we plan and perform the audit to obtain
reasonable assurance about whether the financial statements are free of
material misstatement. An audit includes examining, on a test basis, evidence
supporting the amounts and disclosures in the financial statements. An audit
also includes assessing the accounting principles used and significant
estimates made by management, as well as evaluating the overall financial
statement presentation. We believe that our audits provide a reasonable basis
for our opinion.
In our opinion, the consolidated financial statements referred to above
present fairly, in all material respects, the financial position of Golden
State Financial Corporation 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
<PAGE>
GOLDEN STATE FINANCIAL CORPORATION AND SUBSIDIARIES
CONSOLIDATED STATEMENTS OF FINANCIAL CONDITION
(DOLLARS IN THOUSANDS EXCEPT SHARE DATA)
<TABLE>
<CAPTION>
JUNE 30,
-------------------------------
1998 1997
--------------- ---------------
<S> <C> <C>
ASSETS
Cash and amounts due from banks .............................................. $ 311,278 $ 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
----------- -----------
$18,116,696 $16,218,259
=========== ===========
LIABILITIES AND STOCKHOLDER'S EQUITY
LIABILITIES:
Deposits ..................................................................... $10,699,588 $ 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 ............................................................. 63,936 10,782
Other liabilities and accrued expenses ....................................... 279,281 221,540
Income taxes payable ......................................................... 44,971 60,272
----------- -----------
Total liabilities ......................................................... 16,876,785 15,206,185
----------- -----------
STOCKHOLDER'S EQUITY:
Preferred stock, Series A, $1.00 par value per share and $25.00 liquidation
preference per share (1,000 shares authorized in 1998; 5,000,000 shares
authorized in 1997; 4,621,982 shares issued and outstanding at June 30,
1997) ....................................................................... -- 4,622
Common stock, $1.00 par value per share (1,000 shares authorized in 1998;
1,000 shares issued and outstanding in 1998; 100,000,000 shares
authorized in 1997; 50,348,509 shares issued and outstanding at June 30,
1997) ....................................................................... -- 50,349
Additional paid-in capital ................................................... 1,088,082 793,111
Net unrealized holding gain (loss) on debt and equity securities available
for sale .................................................................... (1,612) (1,154)
Retained earnings--substantially restricted .................................. 153,441 165,146
----------- -----------
Total stockholder's equity .................................................. 1,239,911 1,012,074
----------- -----------
$18,116,696 $16,218,259
=========== ===========
</TABLE>
See accompanying Notes to Consolidated Financial Statements
F-2
<PAGE>
GOLDEN STATE FINANCIAL CORPORATION AND SUBSIDIARIES
CONSOLIDATED STATEMENTS OF OPERATIONS
(IN THOUSANDS)
<TABLE>
<CAPTION>
YEARS ENDED JUNE 30,
-----------------------------------------
1998 1997 1996
------------- ------------- -------------
<S> <C> <C> <C>
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 .............................................. 271,894 270,148 204,297
---------- ---------- ----------
Total interest expense ...................................... 717,785 693,972 746,970
---------- ---------- ----------
Net interest income ......................................... 440,160 378,984 333,065
Provision for loan losses ...................................... (1,727) 25,204 40,350
---------- ---------- ----------
Net interest income after provision for loan losses ......... 441,887 353,780 292,715
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 ...................................... 1,645 62 (707)
---------- ---------- ----------
Total other income .......................................... 104,888 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 ..................... 26,838 26,686 21,209
---------- ---------- ----------
Total general and administrative expenses ................... 293,670 263,224 246,935
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 ........................................ 325,030 355,889 263,679
---------- ---------- ----------
Earnings before income tax provision ........................... 221,745 86,554 63,394
Income tax provision ........................................... 92,926 36,131 21,342
---------- ---------- ----------
Net earnings ................................................ $ 128,819 $ 50,423 $ 42,052
========== ========== ==========
</TABLE>
See accompanying Notes to Consolidated Financial Statements
F-3
<PAGE>
GOLDEN STATE FINANCIAL CORPORATION 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 gain on
debt and equity securities
available for sale ............... -- -- -- --
Stock options exercised ........... -- -- 15,376 15
5-year warrants exercised ......... -- -- 38 --
Acquisition of CENFED ............. (4,621,982) (4,622) (50,362,923) (50,363)
Dividends paid to parent .......... -- -- -- --
Net earnings ...................... -- -- -- --
---------- --------- ----------- ----------
Balance, June 30, 1998 ............ -- -- 1,000 $ 1
========== ========= =========== ==========
</TABLE>
<PAGE>
(RESTUBBED TABLE CONTINUED FROM ABOVE)
<TABLE>
<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 gain on
debt and equity securities
available for sale ............... -- (458) -- 1,546
Stock options exercised ........... 28,883 -- -- 28,898
5-year warrants exercised ......... -- -- --
Acquisition of CENFED ............. 266,088 -- -- 209,098
Dividends paid to parent .......... -- -- (140,524) (140,524)
Net earnings ...................... -- -- 128,819 128,819
---------- --------- ----------- ----------
Balance, June 30, 1998 ............ $1,088,082 $ (1,612) $ 153,441 $1,239,911
========== ========= =========== ==========
</TABLE>
- - ----------
* substantially restricted
See accompanying Notes to Consolidated Financial Statements
F-4
<PAGE>
GOLDEN STATE FINANCIAL CORPORATION 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 ........................................................ $ 128,819 $ 50,423 $ 42,052
Adjustments to reconcile net earnings to net cash provided by
operating activities:
Amortization of discounts and accretion of premiums, net ........... 7,167 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 ........................... 122,302 177,937 (27,698)
Other items ........................................................ (2,669) 630 (24,286)
------------ ------------ ------------
Total adjustments .................................................. 101,454 292,548 104,664
------------ ------------ ------------
Net cash provided by operating activities ........................... 230,273 342,971 146,716
============ ============ ============
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>
GOLDEN STATE FINANCIAL CORPORATION 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 ........................... $ (61,020) $ 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)
Proceeds from other borrowings ................................ 45,000 -- --
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 ........................ (140,524) -- --
------------ ------------ ------------
Net cash (used in) provided by financing activities ........... (320,247) 1,178,893 (1,639,222)
------------ ------------ ------------
Net (decrease) increase in cash and cash equivalents .......... (370,279) 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 ...................... $ 483,278 $ 853,557 $ 586,608
============ ============ ============
</TABLE>
See accompanying Notes to Consolidated Financial Statements
F-6
<PAGE>
GOLDEN STATE FINANCIAL CORPORATION 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 Golden State
Financial Corporation and its subsidiaries ("Golden State Financial" or the
"Company"). All significant intercompany balances and transactions have been
eliminated in consolidation, including 200,686 common shares of Glendale
Federal Bank, Federal Savings Bank ("Glendale Federal" or the "Bank") 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.
On November 26, 1997, Golden State Financial was formed as a wholly-owned
subsidiary of Golden State Bancorp Inc. ("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. The
acquisition of Glendale Federal was accounted for in a manner similar to a
pooling-of-interest as required under Accounting Principles Board Opinion No.
16, "Business Combinations". Therefore, the historical information presented,
prior to November 26, 1997, is that of Glendale Federal.
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 Company 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 Company 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 Company'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 Company,
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 Company 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 Company 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. The
Company's lending activities are principally in California, with the largest
concentration of the Company's loan portfolio being secured by real estate
located in Southern California. The ability of the Company's borrowers to repay
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. In addition,
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.
F-7
<PAGE>
GOLDEN STATE FINANCIAL CORPORATION AND SUBSIDIARIES
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS (CONTINUED)
JUNE 30, 1998, 1997 AND 1996
The Company 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
Company's mainframe systems have been implemented with completion of all
mission critical repairs having been scheduled for November 1998. The Company
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
Company 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 Company 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 Company 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 Company's short-term highly liquid investments consist of federal
funds sold and assets purchased under agreements to resell. The Company 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
The Company's investment in debt securities consists principally of U.S.
Treasury securities, obligations of municipalities and mortgage-backed
securities purchased by the Company or created when the Company exchanges pools
of loans for mortgage-backed securities ("securitized loans"). The Company
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 Company 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 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 Company 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.
The Company 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 Company does not have the positive intent or ability
F-8
<PAGE>
GOLDEN STATE FINANCIAL CORPORATION AND SUBSIDIARIES
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS (CONTINUED)
JUNE 30, 1998, 1997 AND 1996
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.
The Company classifies securities it intends to sell presently as trading
securities. Such securities are generally comprised of securities created by
the Company 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 Company 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 Company 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 Company, 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 Company 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
The Company may designate certain of its loans receivable as being held
for sale. In determining the level of loans held for sale, the Company
considers whether such loans would be sold in response to liquidity needs,
asset/liability management requirements, regulatory capital needs and other
factors. The Company 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 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,
F-9
<PAGE>
GOLDEN STATE FINANCIAL CORPORATION AND SUBSIDIARIES
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS (CONTINUED)
JUNE 30, 1998, 1997 AND 1996
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
Company's principal market areas could adversely impact the Company'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 Company considers a loan to be impaired when, based upon current
information and events, it believes it is probable that the Company will be
unable to 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
Company 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 Company 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 Company 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 Company
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.
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
F-10
<PAGE>
GOLDEN STATE FINANCIAL CORPORATION AND SUBSIDIARIES
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS (CONTINUED)
JUNE 30, 1998, 1997 AND 1996
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
The Company 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 Company'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 Company sells loans and continues to service such loans
for the investor. During fiscal 1997, the Company 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
Company 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 Company evaluates the MSA for impairment or increased
obligation based on the MSA's fair value.
The Company 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 Company 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.
LOAN SERVICING AND MORTGAGE SERVICING RIGHTS
The Company 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.
F-11
<PAGE>
GOLDEN STATE FINANCIAL CORPORATION AND SUBSIDIARIES
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS (CONTINUED)
JUNE 30, 1998, 1997 AND 1996
The Company 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 Company for these rights is capitalized as
MSA. The Company 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 Company 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 Company 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 Company 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 Company 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 Company 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 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.
F-12
<PAGE>
GOLDEN STATE FINANCIAL CORPORATION AND SUBSIDIARIES
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS (CONTINUED)
JUNE 30, 1998, 1997 AND 1996
In fiscal 1997, the Company 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 Company 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, Golden State 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 Company
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, Golden
State completed its acquisition of RedFed Bancorp, parent company of Redlands
Federal Bank. Pursuant to this acquisition, the Company recorded goodwill of
$62.8 million.
In fiscal 1995, the Company 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
Company 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 Company 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 Company 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
The Company has in the past used various strategies to minimize interest
rate risk, including interest rate futures contracts and interest rate exchange
agreements ("swaps"). The Company'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 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 Company does not hold any derivative
financial instruments for trading purposes. As of June 30, 1998 and 1997, there
were no interest rate swaps outstanding.
F-13
<PAGE>
GOLDEN STATE FINANCIAL CORPORATION AND SUBSIDIARIES
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS (CONTINUED)
JUNE 30, 1998, 1997 AND 1996
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 Company's accounting policy during the quarter ending
September 30, 1999. As the Company presently does not use derivative financial
instruments in its hedging practices, changes to the Company's accounting
policies would have no effect on the Company's statements of financial position
or results of operations at June 30, 1998 for the year then-ended.
SECURITIES SOLD UNDER AGREEMENTS TO REPURCHASE
The Company 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 file a consolidated Federal income tax
return.
The Company 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 Company; accordingly, adoption of
SFAS 129 has no impact on the Company'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, 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.
F-14
<PAGE>
GOLDEN STATE FINANCIAL CORPORATION AND SUBSIDIARIES
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS (CONTINUED)
JUNE 30, 1998, 1997 AND 1996
SFAS 130 is effective for the Company's fiscal year beginning July 1,
1998. SFAS 130 requires the presentation of information already contained in
the Company's financial statements and therefore is not expected to have an
impact on the Company'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 Company'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 Company'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 Company had no derivative financial
instruments. Therefore, as of June 30, 1998, SFAS 133 would have no impact on
the Company's statement of financial condition or results of operations.
However, should the Company enter into derivative instrument transactions
during its fiscal year ended June 30, 1999, there will be an indeterminate
effect on the Company's financial condition and results of operations for the
fiscal quarter ending September 30, 1999.
F-15
<PAGE>
GOLDEN STATE FINANCIAL CORPORATION 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 .......................................................... $714,696 $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 in the acquisition of CenFed
Bank and Glendale Federal Bank .................................. 209,098 -- --
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 Financial Corporation net assets
acquired ........................................................ 123,805 -- --
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 Company 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 Company received income tax refunds
of $314,000, $8,383,000 and $6,630,000, respectively.
NOTE 3: ACQUISITIONS
On April 21, 1998, Golden State Financial acquired CENFED. Pursuant to the
terms of the transaction, the Company's parent, Golden State issued 7,390,557
shares of its common stock for a total
F-16
<PAGE>
GOLDEN STATE FINANCIAL CORPORATION AND SUBSIDIARIES
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS (CONTINUED)
JUNE 30, 1998, 1997 AND 1996
purchase price of $211.1 million. Under the purchase method of accounting, the
goodwill of $90.5 million recorded in this transaction will be amortized over
15 years using the straight-line method. At April 21, 1998, CENFED 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's
liabilities included $1.4 billion of deposits and $403 million of borrowings.
These amounts are unaudited. The merger of CenFed Bank with Glendale Federal
Bank was completed on May 8, 1998.
The following table summarizes the composition of loans acquired in the
CENFED 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 merger at April 21, 1998 (in thousands):
<TABLE>
<CAPTION>
PERCENT OF
AMOUNT TOTAL
------------- -----------
<S> <C> <C>
Checking ......................................... $ 110,832 7.9%
Savings .......................................... 55,847 4.0
Money Market ..................................... 170,402 12.2
---------- -----
Total daily access .............................. 337,081 24.1
---------- -----
Short-term certificates (1 year or less) ......... 458,496 32.7
Long-term certificates (over 1 year) ............. 513,066 36.6
Jumbo and brokered certificates .................. 92,410 6.6
---------- -----
Total certificates .............................. 1,063,972 75.9
---------- -----
$1,401,053 100.0%
========== =====
</TABLE>
The following unaudited pro forma financial information presents the
combined results of operations of Golden State Financial and CENFED, 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 Golden State Financial and CENFED
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 ..... $483,195 $436,539
Pro forma net earnings ............ $136,283 $ 59,087
</TABLE>
F-17
<PAGE>
GOLDEN STATE FINANCIAL CORPORATION AND SUBSIDIARIES
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS (CONTINUED)
JUNE 30, 1998, 1997 AND 1996
On May 16, 1997, the Company completed its acquisition of TransWorld
Bancorp ("TransWorld") and its principal subsidiary TransWorld Bank, which
added nine bank offices to the Company'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
Company 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 Company 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 Company 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>
GOLDEN STATE FINANCIAL CORPORATION 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 Company held only assets purchased under agreements to
resell identical assets. The assets underlying the agreements are held by a
third party trustee for the Company until the maturities of the agreements.
F-19
<PAGE>
GOLDEN STATE FINANCIAL CORPORATION 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 Company'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 Company sold $2.0 million of other debt securities
available for sale. No gain or loss was recorded on the sale.
During fiscal 1997, the Company 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>
GOLDEN STATE FINANCIAL CORPORATION AND SUBSIDIARIES
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS (CONTINUED)
JUNE 30, 1998, 1997 AND 1996
NOTE 6: MORTGAGE-BACKED SECURITIES
The following tables summarize the Company'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 FAIR
COST GAINS LOSSES 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 FAIR
COST GAINS LOSSES 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>
GOLDEN STATE FINANCIAL CORPORATION AND SUBSIDIARIES
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS (CONTINUED)
JUNE 30, 1998, 1997 AND 1996
The Company 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 Company 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 Company 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 Company 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 Company's decision to sell most of its CMO
portfolio was part of a strategic realignment of the Company'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 Company's $1.8 billion fixed-rate CMO
portfolio and $1.0 billion of its adjustable-rate pass-through securities
portfolio. The Company 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>
GOLDEN STATE FINANCIAL CORPORATION 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 Company 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 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.
F-23
<PAGE>
GOLDEN STATE FINANCIAL CORPORATION AND SUBSIDIARIES
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS (CONTINUED)
JUNE 30, 1998, 1997 AND 1996
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>
YEARS ENDED 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>
GOLDEN STATE FINANCIAL CORPORATION 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
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 Company has no commitments to
lend additional funds to borrowers whose loans were classified as
non-performing or troubled debt restructurings.
F-25
<PAGE>
GOLDEN STATE FINANCIAL CORPORATION AND SUBSIDIARIES
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS (CONTINUED)
JUNE 30, 1998, 1997 AND 1996
The following table further identifies the Company'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 Company'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 Company's
restructured loans were in California.
F-26
<PAGE>
GOLDEN STATE FINANCIAL CORPORATION AND SUBSIDIARIES
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS (CONTINUED)
JUNE 30, 1998, 1997 AND 1996
The following table summarizes the Company'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 .......... 1,242,863 107,037 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 Company'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>
GOLDEN STATE FINANCIAL CORPORATION AND SUBSIDIARIES
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS (CONTINUED)
JUNE 30, 1998, 1997 AND 1996
The Company'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
Company. 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 Company'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 Company sold certain loans with limited credit loss
recourse provisions. These provisions require the Company 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 Company entered into certain
transactions whereby its recourse obligations were reduced to reduce risk-based
capital requirements (the "recourse reduction transactions"). In each
transaction, the Company retained the risk of first loss up to a specified
level for which the Company maintains a liability for recourse obligations. The
remainder of the Company'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
Company and the full amount of the recourse obligations reverted back to the
Company 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 Company had recourse obligations for approximately $886.0 million of
loans sold with recourse at June 30, 1998 for which the Company is contingently
liable for up to $465.5 million in future losses. The Company'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>
GOLDEN STATE FINANCIAL CORPORATION 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,
------------------------------------------
1998 1997 1996
------------ ------------ ------------
<S> <C> <C> <C>
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>
GOLDEN STATE FINANCIAL CORPORATION AND SUBSIDIARIES
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS (CONTINUED)
JUNE 30, 1998, 1997 AND 1996
The following table identifies the Company'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 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 Company'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>
GOLDEN STATE FINANCIAL CORPORATION 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 Company'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
Company 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 Company 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 Company sold its former headquarters facility for
approximately $30 million. The Company 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 Company 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>
GOLDEN STATE FINANCIAL CORPORATION 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 Company 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>
GOLDEN STATE FINANCIAL CORPORATION 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% $ 1,814,192 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% $10,699,588 100.0% 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.
Accrued 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 .................. $ 4,670,640
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 ............................ $10,699,588
===========
</TABLE>
F-33
<PAGE>
GOLDEN STATE FINANCIAL CORPORATION 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 Company'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>
<PAGE>
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 Company 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.
F-34
<PAGE>
GOLDEN STATE FINANCIAL CORPORATION AND SUBSIDIARIES
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS (CONTINUED)
JUNE 30, 1998, 1997 AND 1996
Mortgage-backed securities sold under agreements to repurchase at June 30,
1998 were contractually due July 1998. These agreements require the Company to
repurchase identical securities to those which were 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, the Company had a line of credit with the Federal Home
Loan Bank of San Francisco enabling the Company to borrow up to 35% of the
amount of the total consolidated assets of Glendale Federal. Based on the
amount of these assets at June 30, 1998, the Company's credit limit with the
FHLB was approximately $6.3 billion. At June 30, 1997, the Company 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 Company 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>
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.
F-35
<PAGE>
GOLDEN STATE FINANCIAL CORPORATION AND SUBSIDIARIES
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS (CONTINUED)
JUNE 30, 1998, 1997 AND 1996
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>
Short-term borrowing with $10,000 due July 1998 and the
remaining $35,000 due the earlier of November 1998 or 15
days after the completion of the Cal Fed Merger, which is
expected to take place on September 11, 1998; bearing
interest at 75 basis points above the London Interbank
Offered Rate .................................................... $45,000 $ --
Senior debentures due December 2001, with interest at 11.17% ..... 18,866 --
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
------- -------
$63,936 $10,782
======= =======
</TABLE>
Short-term Borrowing
The short-term borrowing was obtained in June 1998 from a commercial bank
to purchase shares of Golden State's common stock in connection with its
acquisition of RedFed in July 1998. See Note 21: "Subsequent Events" for more
information on the Cal Fed Merger and the RedFed acquisition.
Senior Debentures
The senior debentures were assumed in the CENFED acquisition in April
1998. The balance at June 30, 1998, is comprised of $17,750,000 of principal
and $1,116,000 of purchase accounting premium. In July 1998, prior to maturity,
all of this debt was redeemed at a redemption price equal to 100% of the
principal amount, together with accrued and unpaid interest and a $2.8 million
premium over the Company's book value of such debentures.
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 Company incurred interest expense on other borrowings of $1.7 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.
F-36
<PAGE>
GOLDEN STATE FINANCIAL CORPORATION AND SUBSIDIARIES
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS (CONTINUED)
JUNE 30, 1998, 1997 AND 1996
NOTE 14: INCOME TAXES
Following is a summary of the Company's income tax expense (in thousands):
<TABLE>
<CAPTION>
YEARS ENDED JUNE 30,
-------------------------------------
1998 1997 1996
------------ ---------- ---------
<S> <C> <C> <C>
Current taxes:
Federal ..................... $ 77,835 $ 14,481 $ 2,210
State ....................... 22,776 11,286 --
-------- -------- -------
$100,611 $ 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 ......... $ 92,926 $ 36,131 $21,342
======== ======== =======
</TABLE>
The following is a summary of the income tax liability (in thousands):
<TABLE>
<CAPTION>
JUNE 30,
----------------------
1998 1997
--------- ----------
<S> <C> <C>
Current taxes ............... $ 7,861 $15,150
Deferred taxes .............. 37,110 45,122
------- -------
$44,971 $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>
F-37
<PAGE>
GOLDEN STATE FINANCIAL CORPORATION AND SUBSIDIARIES
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS (CONTINUED)
JUNE 30, 1998, 1997 AND 1996
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 Company'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 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 Company 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 Company, therefore, is required to use the
"specific charge-off" method on its 1996 and subsequent federal income tax
returns. The Company 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 Company 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 Company had approximately $72
million of applicable excess reserves. As of June 30, 1996, the Company had
fully provided for the tax related to this recapture. The base year reserves
will continue to be subject to recapture and the Company could be required to
recognize a tax liability if: (1) the Company fails to qualify as a "bank" for
federal income tax purposes; (2) certain distributions are made with respect to
the stock of the Company; (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 Company's operations or financial position.
F-38
<PAGE>
GOLDEN STATE FINANCIAL CORPORATION AND SUBSIDIARIES
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS (CONTINUED)
JUNE 30, 1998, 1997 AND 1996
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 Company. The base year reserves
are generally the balance of reserves as of December 31, 1987 reduced
proportionately for reductions in the Company'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 Glendale
Federal 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
Company'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.
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.
F-39
<PAGE>
GOLDEN STATE FINANCIAL CORPORATION AND SUBSIDIARIES
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS (CONTINUED)
JUNE 30, 1998, 1997 AND 1996
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.
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 ................................ $ 1,814,192 $ 1,814,192 $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
----------- ----------- ---------- ----------
$10,699,588 $10,702,176 $9,356,909 $9,358,499
=========== =========== ========== ==========
</TABLE>
F-40
<PAGE>
GOLDEN STATE FINANCIAL CORPORATION AND SUBSIDIARIES
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS (CONTINUED)
JUNE 30, 1998, 1997 AND 1996
Borrowings
The estimate of the fair value of the Company'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.
The following table represents the carrying amount and fair value of the
Company'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
Short-term borrowing ............................ 45,000 45,000 -- --
Senior debentures ............................... 18,866 20,531 -- --
Convertible subordinated debentures ............. -- -- 10,506 10,506
---------- ---------- ---------- ----------
Notes payable ................................... 70 70 276 276
---------- ---------- ---------- ----------
$5,852,945 $5,855,132 $5,567,464 $5,542,493
========== ========== ========== ==========
</TABLE>
Mortgage Servicing Assets
The carrying amount and fair value of the Company's MSA at June 30, 1998
were $243 million and $298 million, respectively. The carrying amount and fair
value of the Company's MSA at June 30, 1997 were $284 million and $353 million,
respectively.
The fair value of the Company'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 Company's servicing portfolio.
Other Financial Instruments
Financial instruments of the Company, 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 Company 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
F-41
<PAGE>
GOLDEN STATE FINANCIAL CORPORATION AND SUBSIDIARIES
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS (CONTINUED)
JUNE 30, 1998, 1997 AND 1996
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 Company
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 could result from
offering for sale at one time the Company'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 Company 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 Company
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.
F-42
<PAGE>
GOLDEN STATE FINANCIAL CORPORATION AND SUBSIDIARIES
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS (CONTINUED)
JUNE 30, 1998, 1997 AND 1996
As more fully discussed in Note 7: "Loans Receivable," in the past, the
Company sold loans and mortgage-backed securities with recourse for credit
losses. The Company 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.
The Company 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 Company 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 Company 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 Company normally gives the
applicant a commitment that the Company 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 Company evaluates each customer's creditworthiness on a case-by-case
basis. The amount of collateral obtained, if it is deemed necessary by the
Company 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
Company 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 Company 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 Company 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 Company 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 Company.
F-43
<PAGE>
GOLDEN STATE FINANCIAL CORPORATION AND SUBSIDIARIES
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS (CONTINUED)
JUNE 30, 1998, 1997 AND 1996
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 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
--------------- --------------- --------------- ---------------
JUNE 30, 1998
- - -----------------------------------------
<S> <C> <C> <C> <C>
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>
GOLDEN STATE FINANCIAL CORPORATION 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 COMPANY SECURITIES
The Series A Preferred Stock issued by the Bank and owned by Golden State
Bancorp Inc. 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 Golden State
Bancorp Inc., 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
F-45
<PAGE>
GOLDEN STATE FINANCIAL CORPORATION AND SUBSIDIARIES
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS (CONTINUED)
JUNE 30, 1998, 1997 AND 1996
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, the
Bank had 4,617,484 shares of Series A Preferred Stock issued and outstanding.
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 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 Company 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 Company uses, for financial reporting purposes, the projected unit
credit method and continues to base its funding policy on the individual entry
age normal method.
F-46
<PAGE>
GOLDEN STATE FINANCIAL CORPORATION AND SUBSIDIARIES
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS (CONTINUED)
JUNE 30, 1998, 1997 AND 1996
The following table sets forth the Plan's funded status as of March 31,
1998 and 1997 and amounts recognized in the Company'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
Company ........................................................... 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>
GOLDEN STATE FINANCIAL CORPORATION 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 Company 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 Company's partial matching
contributions vest over five years. The Company'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, 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, 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 Company 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
Golden State 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 Golden State.
In October 1994, Glendale Federal'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
Golden State in property or cash in an amount in excess of Golden State'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 Golden
State's shareholders with an exercise price equal to the closing price on the
New York Stock Exchange of Golden State's common stock on such date and vest on
the date of the next succeeding annual meeting.
F-48
<PAGE>
GOLDEN STATE FINANCIAL CORPORATION AND SUBSIDIARIES
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS (CONTINUED)
JUNE 30, 1998, 1997 AND 1996
The following is a summary of the transactions under Golden State's stock
option plan:
<TABLE>
<CAPTION>
WEIGHTED
NUMBER OF RANGE OF 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 Golden State'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>
F-49
<PAGE>
GOLDEN STATE FINANCIAL CORPORATION AND SUBSIDIARIES
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS (CONTINUED)
JUNE 30, 1998, 1997 AND 1996
Golden State and the Company applies APB Opinion 25 in accounting for its
stock-based compensation plan. Accordingly, no compensation expense has been
recognized for its stock options. Had Golden State and the Company determined
compensation cost based on the fair value at the grant dates of its stock
options consistent with SFAS 123, the Company'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 ......... $128,819 $50,423 $42,052
Pro forma ........... 121,885 45,223 39,634
</TABLE>
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. Under the purchase method of accounting, the
goodwill of $62.8 million recorded in this transaction 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.
In connection with its acquisition of RedFed, Golden State undertook a
stock repurchase program, pursuant to which Golden State purchased 5,222,200
shares of its common stock in the open market. At June 30, 1998, Golden State
had 4,688,400 shares of its common stock in treasury that had been repurchased
under this program at an aggregate cost of $158.1 million.
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.
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 Golden State
Financial's consolidated financial statements at their estimated fair value at
the closing date of the RedFed Merger. Golden State Financial's assets,
liabilities and other items will be adjusted to their estimated fair value at
the closing date of the Mergers and combined with the historical book values of
the assets and liabilities of Parent Holdings. Applicable income tax effects of
such adjustments are included as a component of the combined entity's deferred
tax asset or liability. The difference between the estimated fair value of the
assets, liabilities and other items, adjusted as discussed above, and the
purchase price, is recorded as goodwill.
The Unaudited Pro Forma Condensed Combined Financial Statements reflect
preliminary purchase accounting adjustments in compliance with generally
accepted accounting principles. Estimates relating to the fair value of certain
assets, liabilities, and other events requiring recognition have been made as
more fully described in the Notes to the Unaudited Pro Forma Condensed Combined
Financial Statements. Actual adjustments will be made on the basis of actual
assets, liabilities and other items as of the respective closing dates of the
Mergers and the RedFed Merger on the basis of appraisals and evaluations and,
therefore, actual fair value amounts are expected to differ from those
reflected in the Unaudited Pro Forma Condensed Combined Financial Statements.
The Unaudited Pro Forma Condensed Combined Statement of Financial
Condition assumes that each of the proposed mergers and the Refinancing were
consummated on June 30, 1998. However, for purposes of computing the purchase
price, the daily volume weighted average price of Golden State common stock and
the Litigation Tracking Warrants (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, Golden State Financial's consolidated statements of
operations have been recast to conform to the calendar year end used by Parent
Holdings.
The Unaudited Pro Forma Condensed Combined Financial Statements should be
read in conjunction with the consolidated historical financial statements and
the related notes thereto of Golden State Financial and Parent Holdings, which
are included 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 FINANCIAL CORPORATION
UNAUDITED PRO FORMA CONDENSED COMBINED
STATEMENT OF FINANCIAL CONDITION
AS OF JUNE 30, 1998
(IN THOUSANDS)
<TABLE>
<CAPTION>
PARENT GOLDEN STATE
HOLDINGS FINANCIAL
(HISTORICAL) (HISTORICAL) REDFED(1)
-------------- -------------- -------------
<S> <C> <C> <C>
ASSETS
Cash and amounts due
from banks ................... $ 345,921 $ 311,278 $ 71,197
Federal funds sold and
assets purchased under
resale agreements ............ -- 172,000 --
Other investments ............. 879,071 128,308 9,407
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 1,372
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 .................. 1,362,577 587,331 24,934
----------- ----------- ----------
$34,050,025 $18,116,696 $1,093,087
=========== =========== ==========
LIABILITIES, MINORITY
INTEREST AND
STOCKHOLDERS' EQUITY
Deposits ...................... $16,044,288 $10,699,588 $ 859,589
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 .............. 1,745,884 63,936 8,693
Other liabilities ............. 729,599 324,252 1,262
Minority interest ............. 1,213,967 -- --
Stockholders' equity .......... 460,976 1,239,911 153,464
----------- ----------- ----------
$34,050,025 $18,116,696 $1,093,087
=========== =========== ==========
</TABLE>
<PAGE>
(RESTUBBED TABLE CONTINUED FROM ABOVE)
<TABLE>
<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 ................... $ -- $ 728,396 $ (45,002) $ 683,394
Federal funds sold and
assets purchased under
resale agreements ............ -- 172,000 -- 172,000
Other investments ............. -- 1,016,786 -- 1,016,786
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 ................ -- 7,699 -- 7,699
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 2,159,288 (42,915) 2,154,956
28,625
9,958
----------- ----------- ------------- -----------
$ 314,333 $53,574,141 $ (49,334) $53,524,807
=========== =========== ============= ===========
LIABILITIES, MINORITY
INTEREST AND
STOCKHOLDERS' EQUITY
Deposits ...................... $ 2,588 $27,606,053 $ -- $27,606,053
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 1,819,506 (1,366,465) 2,446,960
2,000,000
(6,081)
Other liabilities ............. 563,578 1,618,691 (19,579) 1,612,340
13,228
Minority interest ............. (227,671) 986,296 (486,458) 499,838
Stockholders' equity .......... (26,349) 1,828,002 (183,979) 1,644,023
----------- ----------- ------------- -----------
$ 314,333 $53,574,141 $ (49,334) $53,524,807
=========== =========== ============= ===========
</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 FINANCIAL CORPORATION
UNAUDITED PRO FORMA CONDENSED COMBINED STATEMENT OF OPERATIONS
FOR THE SIX MONTHS ENDED JUNE 30, 1998
(IN THOUSANDS, EXCEPT PER SHARE DATA)
<TABLE>
<CAPTION>
PARENT GOLDEN STATE
HOLDINGS FINANCIAL CENFED
(HISTORICAL) (HISTORICAL) AND REDFED(1)
-------------- -------------- ---------------
<S> <C> <C> <C>
Interest income ................ $1,091,523 $581,626 $ 85,711
Interest expense ............... 781,402 354,291 49,855
---------- -------- --------
Net interest income ............ 310,121 227,335 35,856
Provision for loan losses ...... 20,000 (3,721) 804
---------- -------- --------
Net interest income after
provision for loan losses ..... 290,121 231,056 35,052
Other income:
Fee income ..................... 71,363 48,357 5,358
Gain on sale of loans, net ..... 36,124 796 --
Gain on sale of
mortgage-backed
securities, net ............... -- 4,430 725
Other income, net .............. 62,685 212 108
---------- -------- --------
Total other income ............ 170,172 53,795 6,191
Other expenses:
Compensation and
employee benefits ............. 127,620 70,449 19,568
Occupancy expense, net ......... 41,406 16,887 2,606
Regulatory insurance ........... 5,054 4,015 586
Advertising and promotion 9,914 10,434 385
Furniture, fixtures and
equipment ..................... -- 8,109 --
Other general and
administrative expenses ....... 100,632 40,269 7,626
---------- -------- --------
Total general and administrative
expenses ..................... 284,626 150,163 30,771
Restructuring charges .......... -- 4,452 4,244
Legal expense--goodwill
lawsuit ....................... -- 9,068 --
Operations of real estate held
for sale or investment ........ -- 46 --
Operations of real estate
acquired in settlement of
loans ......................... (5,138) (4,329) 2,396
Amortization of goodwill and
other intangible assets ....... 23,229 5,052 4,880
---------- -------- --------
Total other expenses .......... 302,717 164,452 42,291
Earnings before income tax
provision (benefit) ........... 157,576 120,399 (1,048)
Income tax provision (benefit).. (223,818) 49,008 178
---------- -------- --------
Earnings before minority
interest ...................... 381,394 71,391 (1,226)
Minority interest .............. 118,660 -- --
---------- -------- --------
Net earnings ................... $ 262,734 $ 71,391 $ (1,226)
========== ======== ========
</TABLE>
<PAGE>
(RESTUBBED TABLE CONTINUED FROM ABOVE)
<TABLE>
<CAPTION>
PRO FORMA REFINANCING
ADJUSTMENTS BEFORE ADJUSTMENTS PRO FORMA
(NOTE D) REFINANCING (NOTE G) COMBINED
----------------- ------------- ------------------ -----------------
<S> <C> <C> <C> <C>
Interest income ................ $ (5,129) $1,753,731 $ (1,238) $1,752,493
Interest expense ............... (1,616) 1,183,932 (78,030) 1,177,175
----------- ---------- ----------- ----------
70,455
818
----------- ---------- ----------- ----------
Net interest income ............ (3,513) 569,799 5,519 575,318
Provision for loan losses ...... -- 17,083 -- 17,083
----------- ---------- ----------- ----------
Net interest income after
provision for loan losses ..... (3,513) 552,716 5,519 558,235
Other income:
Fee income ..................... (4,068) 121,010 -- 121,010
Gain on sale of loans, net ..... -- 36,920 -- 36,920
Gain on sale of
mortgage-backed
securities, net ............... -- 5,155 -- 5,155
Other income, net .............. -- 63,005 -- 63,005
----------- ---------- ----------- ----------
Total other income ............ (4,068) 226,090 -- 226,090
Other expenses:
Compensation and
employee benefits ............. -- 217,637 -- 217,637
Occupancy expense, net ......... -- 60,899 -- 60,899
Regulatory insurance ........... -- 9,655 -- 9,655
Advertising and promotion -- 20,733 -- 20,733
Furniture, fixtures and
equipment ..................... -- 8,109 -- 8,109
Other general and
administrative expenses ....... -- 148,527 (4,336) 146,945
2,754
----------- ---------- ----------- ----------
Total general and
administrative expenses ...... -- 465,560 (1,582) 463,978
Restructuring charges .......... -- 8,696 -- 8,696
Legal expense--goodwill
lawsuit ....................... -- 9,068 -- 9,068
Operations of real estate
held for sale or investment ... -- 46 -- 46
Operations of real estate
acquired in settlement of
loans ......................... -- (7,071) -- (7,071)
Amortization of goodwill
and other intangible assets ... 2,063 35,224 -- 35,224
----------- ---------- ----------- ----------
Total other expenses .......... 2,063 511,523 (1,582) 509,941
Earnings before income tax
provision (benefit) ........... (9,644) 267,283 7,101 274,384
Income tax provision (benefit) . 46,572 (2) (128,060) 2,982 (4) (125,078)
----------- ---------- ----------- ----------
Earnings before minority
interest ...................... (56,216) 395,343 4,119 399,462
Minority interest .............. (79,134)(3) 39,526 (26,456)(5) 13,070
----------- ---------- ----------- ----------
Net earnings ................... $ 22,918 $ 355,817 $ 30,575(6) $ 386,392(7)
=========== ========== ============= ============
</TABLE>
See accompanying Notes to Unaudited Pro Forma Condensed Combined Financial
Statements.
3
<PAGE>
GOLDEN STATE FINANCIAL CORPORATION
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 Parent Holdings'
historical effective tax rate to 42%.
(3) Represents the exchange of Hunter's Glen minority interest in FNH for
Golden State Common Stock and reflects a 42% effective tax rate related
to the REIT Preferred Stock.
(4) Represents tax expense at 42% related to pro forma Refinancing
adjustments.
(5) Represents historical dividends paid related to the Cal Fed Preferred
Stock.
(6) Does not reflect the extraordinary loss that will be realized as a result
of the Refinancing. See Note 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 Parent Holdings'
deferred tax asset. If this $250 million tax benefit is not considered,
net earnings for the six months ended June 30, 1998 would be as follows
(in thousands):
Parent Holdings historical $ 12,734
Pro forma before Refinancing 105,817
Pro forma combined ........ 136,392
See accompanying Notes to Unaudited Pro Forma Condensed Combined Financial
Statements.
4
<PAGE>
GOLDEN STATE FINANCIAL CORPORATION
UNAUDITED PRO FORMA CONDENSED COMBINED STATEMENT OF OPERATIONS
FOR THE YEAR ENDED DECEMBER 31, 1997
(IN THOUSANDS, EXCEPT PER SHARE DATA)
<TABLE>
<CAPTION>
GOLDEN
PARENT STATE
HOLDINGS FINANCIAL CENFED
(HISTORICAL) (HISTORICAL) AND REDFED(1)
-------------- -------------- ---------------
<S> <C> <C> <C>
Interest income ................ $2,127,490 $1,121,021 $236,033
Interest expense ............... 1,498,417 711,807 147,953
Net interest income ........... 629,073 409,214 88,080
Provision for loan losses ...... 79,800 12,015 7,139
---------- ---------- --------
Net interest income after
provision for loan losses .... 549,273 397,199 80,941
Other income:
Fee income .................... 143,919 96,867 13,904
Gain (loss) on sale of loans,
net .......................... 24,721 (363) 16
Gain (loss) on sale of
mortgage-backed
securities, net .............. -- (226) 2,029
Other income, net ............. 171,054 1,217 1,249
---------- ---------- --------
Total other income ........... 339,694 97,495 17,198
Other expenses:
Compensation and
employee benefits ............ 256,448 124,693 29,450
Occupancy expense, net ........ 81,914 33,468 12,832
Regulatory insurance .......... 10,680 8,949 2,433
Advertising and promotion 20,186 22,708 2,146
Furniture, fixtures and
equipment .................... -- 13,649 --
Other general and
administrative expenses ...... 235,492 71,221 9,719
---------- ---------- --------
Total general and
administrative expenses...... 604,720 274,688 56,580
SAIF special assessment ....... -- (3,153) --
Legal expense--goodwill
lawsuit ...................... -- 28,517 --
Operations of real estate
held for sale or investment .. -- (387) --
Operations of real estate
acquired in settlement of
loans ........................ (3,304) 4,021 2,745
Acquisition and
restructuring charges ........ -- 2,487 397
Amortization of goodwill
and other intangible assets .. 49,153 7,056 9,733
---------- ---------- --------
Total other expenses ......... 650,569 313,229 69,455
Earnings before income tax
provision ..................... 238,398 181,465 28,684
Income tax provision ........... 41,315 76,851 10,063
---------- ---------- --------
Earnings before minority
interest ...................... 197,083 104,614 18,621
Minority interest .............. 131,851 -- --
---------- ---------- --------
Net earnings .................. $ 65,232 $ 104,614 $ 18,621
========== ========== ========
</TABLE>
<PAGE>
(RESTUBBED TABLE CONTINUED FROM ABOVE)
<TABLE>
<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) 2,354,946 (156,060) 2,341,432
140,910
1,636
----------- ---------- ----------- ----------
Net interest income ........... (7,025) 1,119,342 11,039 1,130,381
Provision for loan losses ...... -- 98,954 -- 98,954
----------- ---------- ----------- ----------
Net interest income after
provision for loan losses .... (7,025) 1,020,388 11,039 1,031,427
Other income:
Fee income .................... (8,136) 246,554 -- 246,554
Gain (loss) on sale of loans,
net .......................... -- 24,374 -- 24,374
Gain (loss) on sale of
mortgage-backed
securities, net .............. -- 1,803 -- 1,803
Other income, net ............. -- 173,520 -- 173,520
----------- ---------- ----------- ----------
Total other income ........... (8,136) 446,251 -- 446,251
Other expenses:
Compensation and
employee benefits ............ -- 410,591 -- 410,591
Occupancy expense, net ........ -- 128,214 -- 128,214
Regulatory insurance .......... -- 22,062 -- 22,062
Advertising and promotion -- 45,040 -- 45,040
Furniture, fixtures and
equipment .................... -- 13,649 -- 13,649
Other general and
administrative expenses ...... -- 316,432 (8,672) 313,267
5,507
----------- ---------- ----------- ----------
Total general and
administrative expenses -- 935,988 (3,165) 932,823
SAIF special assessment ....... -- (3,153) -- (3,153)
Legal expense--goodwill
lawsuit ...................... -- 28,517 -- 28,517
Operations of real estate
held for sale or investment .. -- (387) -- (387)
Operations of real estate
acquired in settlement of
loans ........................ -- 3,462 -- 3,462
Acquisition and
restructuring charges ........ -- 2,884 -- 2,884
Amortization of goodwill
and other intangible assets .. 4,125 70,067 -- 70,067
----------- ---------- ----------- ----------
Total other expenses ......... 4,125 1,037,378 (3,165) 1,034,213
Earnings before income tax
provision ..................... (19,286) 429,261 14,204 443,465
Income tax provision ........... 73,089 (2) 201,318 5,966 (4) 207,284
----------- ---------- ----------- ----------
Earnings before minority
interest ...................... (92,375) 227,943 8,238 236,181
Minority interest .............. (42,047)(3) 89,804 (52,912)(5) 36,892
----------- ---------- ----------- ----------
Net earnings .................. $ (50,328) $ 138,139 $ 61,150(6) $ 199,289
=========== ========== ============= ==========
</TABLE>
See accompanying Notes to Unaudited Pro Forma Condensed Combined Financial
Statements.
5
<PAGE>
GOLDEN STATE FINANCIAL CORPORATION
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 Parent Holdings'
historical effective tax rate to 42%.
(3) Represents the exchange of Hunter's Glen minority interest in FNH for
Golden State Common Stock and reflects a 42% effective tax rate related
to the REIT Preferred Stock.
(4) Represents tax expense at 42% related to pro forma refinancing
adjustments.
(5) Represents historical dividends paid related to the Cal Fed Preferred
Stock.
(6) Does not reflect the extraordinary loss that will be realized as a result
of the Refinancing. See Note G.
See accompanying Notes to Unaudited Pro Forma Condensed Combined Financial
Statements.
6
<PAGE>
GOLDEN STATE FINANCIAL CORPORATION
NOTES TO UNAUDITED PRO FORMA
CONDENSED COMBINED FINANCIAL STATEMENTS
AS OF JUNE 30, 1998 AND FOR THE SIX MONTH AND TWELVE MONTH PERIODS
ENDED JUNE 30, 1998 AND DECEMBER 31, 1997, RESPECTIVELY
NOTE A: BASIS OF PRESENTATION
The Unaudited Pro Forma Condensed Combined Statement of Financial
Condition combines the unaudited pro forma condensed combined statement of
financial condition of RedFed and the historical consolidated statements of
financial condition of Parent Holdings and Golden State Financial as of June
30, 1998, as if the Mergers, the RedFed Merger and the Refinancing were
consummated on June 30, 1998. The Unaudited Pro Forma Condensed Combined
Statement of Operations for the six months ended June 30, 1998 combines the
unaudited pro forma condensed combined statements of operations of CENFED and
RedFed and the historical unaudited consolidated statements of operations of
Parent Holdings and Golden State Financial for the six months ended June 30,
1998, as if the Mergers, the RedFed Merger, the CENFED Merger and the
Refinancing were consummated on January 1, 1997. The Unaudited Pro Forma
Condensed Combined Statement of Operations for the year ended December 31, 1997
combines the pro forma condensed combined statements of operations of CENFED
and RedFed and the historical statements of operations of Parent Holdings and
Golden State Financial as if the Mergers, the RedFed Merger, the CENFED Merger
and the Refinancing were consummated on January 1, 1997. Certain items in the
unaudited pro forma condensed combined financial statements related to Parent
Holdings have been reclassified to conform to the Golden State Financial
presentation.
The Mergers will be accounted for using the "purchase" method of
accounting. Golden State Financial is treated as the acquired corporation for
financial reporting purposes. Golden State Financial's assets, liabilities, and
other items will be adjusted to their estimated fair value at the closing date
of the Mergers and combined with the historical book values of the assets and
liabilities of Parent Holdings. Applicable income tax effects of such
adjustments are included as a component of the combined entity's deferred tax
asset/liability. The difference between the estimated fair value of the assets,
liabilities and other items, adjusted as discussed above, and the purchase
price, is recorded as goodwill.
For purposes of the Unaudited Pro Forma Condensed Combined Financial
Statements, estimates relating to the fair value of certain assets, liabilities
and other items have been made as of June 30, 1998. Actual adjustments will be
made on the basis of actual assets, liabilities and other items as of the date
of the respective mergers on the basis of appraisals and evaluations made as of
that time and, therefore, actual fair value amounts are expected to differ from
those reflected in the Unaudited Pro Forma Condensed Combined Financial
Statements.
It should be noted that management's expectations of cost savings and
other operating efficiencies are not reflected in the Unaudited Pro Forma
Condensed Combined Financial Statements. Further, it should be noted that net
interest income may increase or decrease from historical levels based upon
changes in the shape of the yield curve and current market conditions. The pro
forma financial data do not necessarily reflect the results of operations or
the financial position of Golden State Financial 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 Financial 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 FINANCIAL CORPORATION
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 FINANCIAL CORPORATION
NOTES TO UNAUDITED PRO FORMA
CONDENSED COMBINED FINANCIAL STATEMENTS--(CONTINUED)
AS OF JUNE 30, 1998 AND FOR THE SIX MONTH AND TWELVE MONTH PERIODS
ENDED JUNE 30, 1998 AND DECEMBER 31, 1997, RESPECTIVELY
NOTE D: PURCHASE ACCOUNTING ADJUSTMENTS
The estimated purchase accounting adjustments relating to the Mergers are
detailed below:
<TABLE>
<CAPTION>
INTEREST- MORTGAGE
EARNING SERVICING OTHER
ASSETS ASSETS GOODWILL ASSETS
-------------- ------------- ------------ ----------
(IN THOUSANDS)
<S> <C> <C> <C> <C>
Purchase price in excess of Golden
State's net stockholders' equity, giving
effect to the RedFed Merger ...................... $ -- $ -- $ 78,615 $ --
Fair value adjustments, net of taxes .............. 13,769 54,243 (36,677) --
Merger costs, net of taxes (Note E) ............... -- -- 84,867 41,433
Other integration costs, net of taxes
(Note E) ......................................... -- -- -- 31,065
Value of Golden State Financial's
retained participation in the Glendale
Goodwill Litigation after issuance of
the Litigation Tracking Warrants (Trade Mark)
(Note F) ......................................... -- -- (64,930) 111,948
Dividend of tax benefits to FGH as a
result of deconsolidation caused by
the Mergers ...................................... -- -- -- --
Conversion of minority interest
triggered by the Mergers ......................... -- -- -- --
---------- --------- --------- --------
$ 13,769 $ 54,243 $ 61,875 $184,446
========== ========= ========= ========
IMPACT ON PRE-TAX
EARNINGS FOR:
Six months ended June 30, 1998 .................... $ (5,129) $ (4,068) $ (2,063) $ --
Year ended December 31, 1997 ...................... $ (10,256) $ (8,136) $ (4,125) $ --
</TABLE>
(RESTUBBED TABLE CONTINUED FROM ABOVE)
<TABLE>
<CAPTION>
INTEREST-
BEARING OTHER MINORITY STOCKHOLDERS'
LIABILITIES LIABILITIES INTEREST EQUITY
------------- ------------- ------------- --------------
(IN THOUSANDS)
<S> <C> <C> <C> <C>
Purchase price in excess of Golden
State's net stockholders' equity, giving
effect to the RedFed Merger ...................... $ -- $ -- $ -- $ 78,615
Fair value adjustments, net of taxes .............. 4,775 26,560 -- --
Merger costs, net of taxes (Note E) ............... -- 126,300 -- --
Other integration costs, net of taxes
(Note E) ......................................... -- 73,700 -- (42,635)
Value of Golden State Financial's
retained participation in the Glendale
Goodwill Litigation after issuance of
the Litigation Tracking Warrants (Trade Mark)
(Note F) ......................................... -- 47,018 -- --
Dividend of tax benefits to FGH as a
result of deconsolidation caused by
the Mergers ...................................... -- 290,000 -- (290,000)
Conversion of minority interest
triggered by the Mergers ......................... -- -- (227,671) 227,671
------ -------- ---------- ----------
$4,775 $563,578 $ (227,671) $ (26,349)
====== ======== ========== ==========
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>
<PAGE>
<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
9
<PAGE>
GOLDEN STATE FINANCIAL CORPORATION
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
mortgage servicing assets is amortized in proportion to, and over the period
of, estimated net servicing income. Goodwill is amortized on the straight line
basis over fifteen years. Premiums relating to deposits and borrowings are
amortized to interest expense using an interest method over the weighted
average life of the related liability.
NOTE E: MERGER AND INTEGRATION COSTS
The table below reflects Golden State Financial's current estimate, for
purposes of pro forma presentation, of the aggregate merger and integration
costs, net of taxes, expected to be incurred in connection with the Mergers.
While a portion of these costs may be required to be recognized in the combined
entity's results of operations as incurred, the current estimate of these costs
has been reflected in the pro forma condensed combined statement of financial
condition to disclose the effect of these activities on Golden State
Financial's pro forma condensed combined financial position.
<TABLE>
<CAPTION>
RELATED
GROSS TAX NET
COSTS BENEFIT COSTS
---------- --------- ----------
(IN THOUSANDS)
<S> <C> <C> <C>
Merger costs:
Severance costs ............................................... $ 55,000 $23,183 $ 31,817
Contract termination costs .................................... 23,100 9,737 13,363
Investment banking, legal and other professional fees ......... 40,000 5,058 34,942
Benefit plan termination costs ................................ 5,000 2,107 2,893
Branch consolidation costs .................................... 3,200 1,348 1,852
-------- ------- --------
Subtotal--merger costs included in the allocation of the
purchase price ............................................. 126,300 41,433 84,867
-------- ------- --------
Other Integration costs:
Conversion costs .............................................. 27,900 11,760 16,140
Branch consolidation costs .................................... 9,600 4,046 5,554
Transition staffing expenses .................................. 17,000 7,166 9,834
Officer benefits .............................................. 10,000 4,215 5,785
Other costs ................................................... 9,200 3,878 5,322
-------- ------- --------
Subtotal--other integration costs reflected as an adjustment
to stockholders' equity .................................... 73,700 31,065 42,635
-------- ------- --------
Total merger and integration costs ............................. $200,000 $72,498 $127,502
======== ======= ========
</TABLE>
10
<PAGE>
GOLDEN STATE FINANCIAL CORPORATION
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 Financial's cost estimates are forward looking statements.
While the costs represent management's current estimate of merger and
integration costs that will be incurred, the ultimate level and timing of
recognition of such costs will be based on the final merger and integration
plan to be completed in the coming months; the types and amounts of actual
costs incurred could vary materially from these estimates if future
developments differ from the underlying assumptions used by management in
determining its current estimate of these costs.
NOTE F: LITIGATION TRACKING WARRANTS (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 (Trade Mark) , 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 Financial.............. 15%
------------
Estimated fair value of Glendale Goodwill Litigation owned by Golden
State Financial .................................................................... $ 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 FINANCIAL CORPORATION
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, Parent Holdings and FNH will make
offers to purchase or will redeem the following issues of debt and preferred
stock (dollars in thousands):
<TABLE>
<CAPTION>
IMPACT ON PRE-TAX EARNINGS
-----------------------------------
SIX MONTHS ENDED
AT JUNE 30, 1998 JUNE 30, 1998
---------------------------------- -----------------------------------
PRINCIPAL AMORTIZATION OF
OR LIQUIDATION DEFERRED INTEREST DEFERRED
PREFERENCE ISSUANCE COSTS EXPENSE/DIVIDEND ISSUANCE COSTS
---------------- ---------------- ------------------ ----------------
<S> <C> <C> <C> <C>
Parent Holdings 12 1/2% Senior Notes .... $ 455,000 $14,068 $28,438 $1,000
Remaining Original Issue Discount ....... (3,535) -- 408 --
FNH 12 1/4% Senior Notes ................ 200,000 9,704 12,250 1,482
FNH 9 1/8% Senior Subordinated
Notes .................................. 140,000 4,457 6,387 426
FNH 10 5/8% Senior Subordinated
Notes .................................. 575,000 14,686 30,547 1,428
---------- ------- ------- ------
Total Debt Reduction ................... $1,366,465 $42,915 $78,030 $4,336
========== ======= ======= ======
Cal Fed 11 1/2% Preferred Stock ......... 300,730 17,292
Cal Fed 10 5/8% Preferred Stock ......... 172,500 9,164
plus: Accrued and Unpaid Dividends...... 13,228 --
---------- -------
Total Preferred Stock Reduction
(Minority Interest) .................. $ 486,458 $26,456
========== =======
</TABLE>
<TABLE>
<CAPTION>
IMPACT ON PRE-TAX EARNINGS
-----------------------------
YEAR ENDED
DECEMBER 31, 1997
-----------------------------
INTEREST AMORTIZATION OF
EXPENSE/ DEFERRED
DIVIDEND ISSUANCE COSTS
---------- ----------------
<S> <C> <C>
Parent Holdings 12 1/2% Senior Notes ......................... $ 56,875 $2,000
Remaining Original Issue Discount ............................ 816 --
FNH 12 1/4% Senior Notes ..................................... 24,500 2,964
FNH 9 1/8% Senior Subordinated Notes ......................... 12,775 852
FNH 10 5/8% Senior Subordinated Notes ........................ 61,094 2,856
-------- ------
Total Debt Reduction ........................................ $156,060 $8,672
======== ======
Cal Fed 11 1/2% Preferred Stock .............................. 34,584
Cal Fed 10 5/8% Preferred Stock .............................. 18,328
plus: Accrued and Unpaid Dividends .......................... --
--------
Total Preferred Stock Reduction (Minority Interest) ......... $ 52,912
========
</TABLE>
12
<PAGE>
GOLDEN STATE FINANCIAL CORPORATION
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 and discount reflected above, net of taxes of
approximately $19,579, will be written off as part of the Refinancing. These
items and the premiums paid will be reflected as an "extraordinary item--early
extinguishment of debt" on the financial statements of Parent Holdings in an
amount totalling approximately $183,979 on an after-tax basis.
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>
<CAPTION>
<S> <C> <C>
Sale of New Notes ............................................ $ 1,993,919
FNH Debt Offers:
FNH 12 1/4% Senior Notes .................................... 200,000
FNH 9 1/8% Senior Subordinated Notes ........................ 140,000
FNH 10 5/8% Senior Subordinated Notes ....................... 575,000
Cal Fed Preferred Stock Offers:
Cal Fed 11 1/2% Preferred Stock ............................. 300,730
Cal Fed 10 5/8% Preferred Stock ............................. 172,500 (1,388,230)
-------
Parent Holdings Defeasance:
FNPH 12 1/2% Senior Notes ................................... (455,000)
Premiums, Fees and Other Expenses (net of taxes) ............. (195,691)
------------
Net Cash Payment to be made by Golden State Holdings (from Cal
Fed dividend) ............................................... $ (45,002)
============
</TABLE>
At an assumed rate of 5.5%, the net cash payment made of $45,002 would
reduce pre-tax earnings by approximately $1,238 and $2,475 for the six months
ended June 30, 1998 and the year ended
December 31, 1997, respectively.
The hedging transaction effected under the Rate Lock Agreements resulted
in a net loss of approximately $9,958, which will be deferred and amortized
over the life of the related Fixed Rate New Notes through interest expense.
This amortization will reduce pre-tax earnings by approximately $818 and $1,636
for the six months ended June 30, 1998 and the year ended December 31, 1997,
respectively.
There can be no assurance that all of the outstanding FNH Notes and Cal
Fed Preferred Stock will be purchased in connection with the Refinancing. The
pro forma financial results assume that 100% of the outstanding principal
amount of the FNH Notes and all of the Cal Fed Preferred Stock is purchased in
the Refinancing. If FNH does not purchase all of the outstanding Cal Fed 11
1/2% and 10 5/8% Preferred Stock, Golden State Holdings intends to cause Cal
Fed to redeem any remaining Cal Fed 10 5/8% Preferred
13
<PAGE>
GOLDEN STATE FINANCIAL CORPORATION
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
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% $30,575 $61,150
95% 80% 26,378 52,755
90% 75% 24,801 49,602
80% 65% 21,618 43,239
</TABLE>
14
