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SECURITIES AND EXCHANGE COMMISSION
Washington, D.C. 20549
FORM 8-K
Current Report
Pursuant to Section 13 or 15(d) of
the Securities Exchange Act of 1934
September 26, 1997
(Date of earliest event reported)
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GOLDEN STATE BANCORP INC.
(Exact name of registrant as specified in its charter)
333-28037
(Commission File Number)
Delaware 95-4642135
(State or other jurisdiction (I.R.S. Employer
of incorporation) Identification Number)
414 North Central Avenue, Glendale, California 91203
(Address of principal executive office) (Zip Code)
Registrant's telephone number, including area code
(818) 500-2000
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<PAGE>
Item 5. Other Events
Golden State Bancorp Inc.("Golden State") has no significant assets or
business other than its ownership of Glendale Federal Bank, Federal
Savings Bank (the "Bank"). On September 26, 1997, the Bank filed with
the Office of Thrift Supervision its June 30, 1997 Annual Report on
Form 10-K. Golden State, the holding company of the Bank, did not
file an Annual Report on Form 10-K with the Securities Exchange
Commission for the year ended June 30, 1997 because the holding
company formation transaction was completed on July 24, 1997, after
the end of the Bank's fiscal year.
Item 7. Financial Statements, Pro-Forma Financial Information and Exhibits
(c) Exhibits
99A. September 30, 1997 Consent of Independent Auditors
99B. June 30, 1997 Glendale Federal Bank Annual Report on
Form 10-K (with Exhibits)
<PAGE>
SIGNATURES
Pursuant to the requirements of the Securities Exchange Act of 1934, the
registrant has duly caused this report to be signed on its behalf by the
undersigned thereunto duly authorized.
Golden State Bancorp Inc.
--------------------------------
(Registrant)
Date: September 30, 1997 By: /s/ John E. Haynes
----------------------- ---------------------------------
John E. Haynes
Chief Financial Officer
<PAGE>
Exhibit 99.A
[LETTERHEAD OF KPMG PEAT MARWICK LLP]
CONSENT OF INDEPENDENT AUDITORS
The Board of Directors
Golden State Bancorp Inc.:
We consent to the incorporation by reference in the registration statement (No.
333-28037) on Form S-3 of Golden State Bancorp Inc. and the registration
statement (No. 333-31713) on Form S-8 of Golden State Bancorp Inc. of our report
dated July 23, 1997, except for Note 24 of notes to the consolidated financial
statements of Glendale Federal Bank, Federal Savings Bank and subsidiaries as of
June 30, 1997 and 1996, and the related consolidated statements of operations,
changes in stockholders' equity and cash flows for each of the years in the
three year period ended June 30, 1997, which report appears in the Form 8-K of
Golden State Bancorp Inc. dated September 30, 1997.
/s/ KPMG Peat Marwick LLP
Los Angeles, California
September 30, 1997
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OFFICE OF THRIFT SUPERVISION
WASHINGTON, D.C. 20552
FORM 10-K
(MARK ONE)
[X] ANNUAL REPORT PURSUANT TO SECTION 13 OR 15(d) OF THE
SECURITIES EXCHANGE ACT OF 1934 (NO FEE REQUIRED)
FOR THE FISCAL YEAR ENDED JUNE 30, 1997
OR
[ ] TRANSITION REPORT PURSUANT TO SECTION 13 OR 15(d) OF THE
SECURITIES EXCHANGE ACT OF 1934 (NO FEE REQUIRED)
FOR THE TRANSITION PERIOD FROM:______ TO ______
DOCKET NO. 3088
----------------
GLENDALE FEDERAL BANK,
FEDERAL SAVINGS BANK
(EXACT NAME OF REGISTRANT AS SPECIFIED IN ITS CHARTER)
UNITED STATES OF AMERICA 95-0775407
(STATE OR OTHER JURISDICTION OF (I.R.S. EMPLOYER
INCORPORATION OR ORGANIZATION) IDENTIFICATION NO.)
414 NORTH CENTRAL AVENUE, 91203
GLENDALE, CALIFORNIA (ZIP CODE)
(ADDRESS OF PRINCIPAL EXECUTIVE
OFFICE)
REGISTRANT'S TELEPHONE NUMBER, INCLUDING AREA CODE: (818) 500-2000
SECURITIES REGISTERED PURSUANT TO SECTION 12(b) OF THE ACT:
<TABLE>
<CAPTION>
NAME OF EACH EXCHANGE
TITLE OF CLASS ON WHICH REGISTERED
-------------- ---------------------
<S> <C>
Common Stock, $1 par value New York Stock Exchange
Pacific Stock Exchange
Noncumulative Preferred Stock, New York Stock Exchange
Series E, $1 par value
</TABLE>
----------------
SECURITIES REGISTERED PURSUANT TO SECTION 12(g) OF THE ACT:
Warrants to Purchase Common Stock
Indicate by check mark whether the registrant (1) has filed all reports
required to be filed by Section 13 or 15(d) of the Securities Exchange Act of
1934 during the preceding 12 months (or for such shorter period that the
registrant was required to file such reports), and (2) has been subject to
such filing requirements for the past 90 days. Yes X No
--- ---
Indicate by check mark if disclosure of delinquent filers pursuant to Item
405 of Regulation S-K is not contained herein, and will not be contained, to
the best of the registrant's knowledge, in definitive proxy or information
statements incorporated by reference in Part III of this Form 10-K or any
amendment to this Form 10-K. [_]
Aggregate market value of the voting stock held by nonaffiliates of the
registrant as of July 24, 1997: $1,445,029,424.
Number of shares of Common Stock outstanding as of July 24, 1997: 50,363,923
shares
----------------
DOCUMENTS INCORPORATED BY REFERENCE: Portions of the definitive
Proxy Statement for the Annual Meeting of Shareholders of Golden State Bancorp
Inc., the Registrant's newly formed holding company, to be held on October 28,
1997 are incorporated by reference into Part III hereof.
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<PAGE>
GLENDALE FEDERAL BANK
1997 FORM 10-K ANNUAL REPORT
TABLE OF CONTENTS
<TABLE>
<CAPTION>
PAGE
----
<C> <S> <C>
PART I
Item 1. Business....................................................... 1
General........................................................ 1
Operating Strategies........................................... 2
Loans Receivable............................................... 9
Real Estate Acquired in Settlement of Loans.................... 21
Mortgage-Backed Securities..................................... 21
Liquidity and Investments...................................... 24
Mortgage Loan Servicing Activities............................. 26
Deposits....................................................... 29
Borrowings..................................................... 31
Asset and Liability Management and Market Risk................. 32
Interest Rate Margin........................................... 36
Subsidiaries................................................... 37
Competition.................................................... 37
Employees...................................................... 37
Regulation..................................................... 38
Taxation....................................................... 44
Item 2. Properties..................................................... 44
Item 3. Legal Proceedings.............................................. 45
Item 4. Submission of Matters to a Vote of Security Holders............ 47
Item 4a. Executive Officers............................................. 48
PART II
Item 5. Market for Registrant's Common Equity and Related Stockholder
Matters........................................................ 51
Item 6. Selected Financial Data........................................ 52
Item 7. Management's Discussion and Analysis of Financial Condition and
Results of Operations......................................... 54
Overview....................................................... 54
Balance Sheet Analysis......................................... 56
Liquidity and Asset and Liability Management................... 64
Results of Operations.......................................... 67
Item 8. Financial Statements and Supplementary Data.................... 76
Item 9. Changes in and Disagreements with Accountants on Accounting and
Financial Disclosure.......................................... 76
PART III
Item 10. Directors and Executive Officers of the Registrant............. 76
Item 11. Executive Compensation......................................... 76
Item 12. Security Ownership of Certain Beneficial Owners and Management. 76
Item 13. Certain Relationships and Related Transactions................. 76
PART IV
Item 14. Exhibits, Financial Statement Schedules and Reports on
Form 8-K....................................................... 77
Index to Financial Statements.................................. 80
</TABLE>
<PAGE>
PART I
ITEM 1. BUSINESS
GENERAL
Glendale Federal Bank, Federal Savings Bank ("Glendale Federal" or the
"Bank") is one of the largest savings institutions in the United States, with
total consolidated assets at June 30, 1997 of $16.2 billion. 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 subsidiaries, also provides general insurance and securities brokerage
services. Glendale Federal is headquartered in Glendale, California and
operates 171 banking offices and 25 loan offices statewide.
Glendale Federal Bank's goal is to be a full-service relationship-based
community bank meeting the growing business and consumer funding needs of the
local California communities served by the Bank without sacrificing its
philosophy that places a premium on customer service. To achieve this goal,
Glendale Federal began offering business banking lending and deposit products
in fiscal 1996 and has since continued to expand its business banking customer
base and the variety of business banking products it offers. In addition to
internal growth, Glendale Federal acquired TransWorld Bancorp ("TransWorld")
and OneCentral Bank ("OneCentral"), both of which were California licensed
commercial banks, during fiscal 1997, thereby adding business banking accounts
and relationships and adding nine banking offices to Glendale Federal's retail
network. See Note 4 of the Notes to Consolidated Financial Statements for
additional discussion of these acquisitions. The Bank has been successful in
attracting retail checking account customers, and in increasing its consumer
lending balances, as well as actively developing relationships with small- to
medium-sized business customers. Glendale Federal has also made considerable
progress in expanding its franchise through the extension of its retail
delivery network into non-traditional outlets.
Ultimately, the Bank intends to become a broad-based provider of financial
services better able to compete in the financial services environment with
lines of business equally divided among residential real estate lending,
business banking and consumer banking. Management believes that this will
provide shareholders with a better return on their investment than the
traditional savings and loan model. See "Operating Strategies", "Real Estate
Lending" and "Deposits" below for additional discussion.
The Bank derives its income primarily from the interest it receives on real
estate, business and consumer loans and, to a lesser extent, from interest on
investment securities, fees received in connection with loans, loan servicing,
and deposit services, as well as other services. Its major expenses are the
interest it pays on deposits and on borrowings and general operating expenses.
The Bank's operations, like those of other depository institutions, are
significantly influenced by general economic conditions, by the strength of
the real estate market, by the monetary, fiscal and regulatory policies of the
federal government and by the policies of financial institution regulatory
authorities. See Note 1 of the Notes to Consolidated Financial Statements for
a discussion of risks and uncertainties.
On July 23, 1997, shareholders of the Bank approved the formation of a new
holding company for the Bank. The formation of the holding company, named
Golden State Bancorp Inc. ("Golden State"), became effective on July 24, 1997
and Glendale Federal became a wholly-owned subsidiary of Golden State on that
date. In the transaction, shares of Bank common stock were exchanged on a one-
for-one basis for shares of Golden State common stock, and Bank shareholders
became the shareholders of Golden State. Golden State was capitalized with a
dividend of $14.9 million from Glendale Federal. Such dividend will be used
for general working capital purposes and for payment of dividends on Golden
State's preferred stock. The holding company structure is intended to provide
the Bank with the financial and operating flexibility to maximize stockholder
value.
1
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On August 18, 1997, Golden State entered into an agreement to acquire CENFED
Financial Corporation and its subsidiary, CenFed Bank ("CENFED"). CENFED is a
savings bank whose strategic direction is similar to that of Glendale Federal.
The agreement is subject to regulatory and other approvals and is expected to
close in the first calendar quarter of 1998. The terms of the transaction
provide for a tax-free exchange of 1.2 shares of Golden State common stock for
each outstanding share of CENFED's common stock. The acquisition will be
accounted for as a pooling-of-interests. At June 30, 1997, CENFED operated 18
branches and had $2.3 billion in assets, including $1.5 billion in gross loans
receivable, and $1.5 billion in deposits, over 79% of which were in
certificate of deposit accounts. The acquisition will provide Glendale Federal
entry into several markets in which it does not currently operate. With
CENFED's servicing portfolio of Small Business Administration ("SBA") loans,
Glendale Federal, upon completion of the acquisition, will become the fourth
largest servicer of SBA loans in the State of California.
OPERATING STRATEGIES
The Bank's principal business strategy is to transform itself from a
traditional savings and loan institution into a broad-based community bank
offering deposit, cash management and credit products and services to
individuals and small- to medium-sized businesses. This intended
transformation reflects management's assessment of the competitive financial
services environment and the significant narrowing of the spread between the
yield on single-family residential mortgages and the cost of term deposits
that have been the primary asset and liability products offered by savings
institutions. Competition from the federally-sponsored secondary mortgage
market agencies, mortgage bankers and commercial banks has driven the returns
available from the housing finance business to levels that require lower cost
funding sources than the certificate of deposit accounts that have
traditionally been the principal source of funds for savings institutions.
The Bank's mix of products and services includes three principal lines of
business: business banking, consumer banking and real estate lending. Business
banking was initiated in fiscal 1996 with a focus on attracting banking
relationships with small businesses having annual sales of $5 million or less.
In fiscal 1997, the Bank expanded its business banking program by targeting
middle-market commercial customers with between $10 million and $75 million in
annual sales and with credit needs of up to $15 million. The Bank also
acquired a portfolio of agricultural loans, established an agribusiness
lending program in central California, and began a statewide SBA guaranteed
lending program.
The Bank's focus in consumer banking has been principally on its new
"Infinity" account, a combined checking and savings account introduced in
fiscal 1996 which allows customers greater flexibility in managing their
finances. The Bank also offers unsecured lines of credit and home equity lines
of credit that are accessible through the customer's Infinity account. Real
estate lending is principally focused on traditional single-family residential
loans. Each of the Bank's lines of business is discussed separately below.
The community bank concept is expected to reduce the Bank's reliance on
mortgage lending and provide the Bank with a broader, more interest rate-
sensitive asset base and a lower costing, transaction account-focused deposit
base. This broader mix of assets and liabilities is intended to increase the
Bank's net interest margin and to build a fee income stream that will enhance
the Bank's future earnings. Implementation of the Bank's principal business
strategy has also resulted in an increase in general and administrative
expenses due to the increased cost of servicing transaction accounts, the
growth of the Bank's customer base, business lines and retail network, and the
increased cost of marketing necessary to build Glendale Federal's name
recognition among consumers. These expenses may increase in future periods as
the Bank further expands its business lines and franchise network, and
continues to maintain a high level of marketing activity. The targeted
2
<PAGE>
benefits of this transformation, namely increased net interest margin and
higher fee income, may lag the increase in expenditures depending upon the
timing of the investment in new business lines, network expansion and
marketing, and the increase in revenues that is intended to result from this
investment.
In fiscal 1997, the Bank began to expand its franchise through acquisitions,
the opening of new bank offices and the extension of its retail offices into
non-traditional outlets. In November 1996, Glendale Federal and Kinko's Inc.
entered into an agreement allowing the Bank to open banking offices inside 20
selected Kinko's stores in California. These in-store offices will provide a
full array of business and consumer products and services, including automated
teller machines ("ATMs"), as well as securities brokerage and insurance
services in some locations. Since Kinko's is a principal provider of 24-hour
printing and copying services to individuals and small and home-based business
owners, this affiliation not only provides the Bank access to these potential
new customers but also offers greater convenience to the Bank's existing
customers. The Bank has also entered into an arrangement with a supermarket
chain in Southern California to open two in-store branches.
This network expansion added 17 new locations for Glendale Federal in fiscal
1997. The TransWorld acquisition in May 1997 added nine branches to Glendale
Federal's branch network; the Kinko's and supermarket chain relationships
added five new locations; and the Bank opened three new stand-alone bank
offices in fiscal 1997.
Glendale Federal plans to open 36 new locations during fiscal 1998,
including both traditional banking offices and facilities located in Kinko's
and supermarket stores. Glendale Federal also intends to greatly expand its
ATM network in fiscal 1998, and has entered into an agreement with a major
theater chain to install 50 to 75 ATMs across the state. The Bank will
continue to pursue non-traditional outlets to provide convenient ATMs, account
opening services and expanded banking hours, and also to function as miniature
versions of its full-service bank offices.
In fiscal 1997, the Bank continued the growth of its mortgage servicing
business. During the fourth quarter of fiscal 1997, the Bank purchased
servicing rights relating to $11.5 billion of predominantly fixed-rate
mortgage loans. This transaction is Glendale Federal's largest purchase of
servicing to date. The Bank's servicing portfolio, consisting of loans owned
by the Bank and others, increased during fiscal 1997 by 70% from $22.0 billion
to $37.4 billion.
The Bank's focus on its new business lines during fiscal 1997 resulted in
significant growth of its business and consumer loan portfolios as well as its
transaction-based accounts. At June 30, 1997, the Bank's commercial and
consumer loan portfolios increased to $160.1 million and $120.7 million,
respectively, from $10.4 million and $73.2 million, respectively, at June 30,
1996. Excluding the TransWorld, OneCentral and agricultural loan acquisitions,
the loans in the commercial and consumer loan portfolios increased $35.6
million and $30.9 million, respectively. Checking accounts increased by $419
million, or 54%, to $1.2 billion during fiscal 1997. Excluding the TransWorld
and OneCentral acquisitions, checking account balances increased $245.6
million, or 32%. See Item 7. "Management's Discussion and Analysis of
Financial Condition and Results of Operations" for additional information on
loan and deposit activities in these portfolios.
In fiscal 1998, Glendale Federal intends to continue to diversify its loan
origination mix from real estate to business and consumer lending. While the
primary goals for the Bank's business banking operations continue to be
expanding current relationships by cross-selling other financial products, and
aggressively seeking out new customers, the Bank also intends to enhance
current product offerings through the introduction of an uninsured investment
product offered through a third-party alliance. In fiscal 1998, the Bank will
further enhance the Infinity account through the introduction of a two-way
sweep capability between a customer's checking account and an uninsured money
market fund account, and through the introduction of new mutual fund products
that the customer can access through the Infinity account.
3
<PAGE>
BUSINESS BANKING
In fiscal 1996, the Bank introduced a line of community business banking
products and services. This program focuses on small businesses, primarily
professionals, wholesalers, distributors and light manufacturers, with annual
sales of up to $5 million, located in the markets served by the Bank's retail
banking offices. The Bank's community business banking product line includes
business checking account programs, account analysis, payroll services,
electronic banking and merchant draft servicing. To meet the credit needs of
its business customers, the Bank offers revolving lines of credit and term
loans (primarily secured) with maturities of up to five years and with prime-
based adjustable interest rates. The maximum loan offered by the community
business banking group is $1 million. Since its introduction two years ago,
Glendale Federal's community business banking division has made significant
progress in expanding its product lines and customer base, attracting greater
loan commitments and increasing fee income. At June 30, 1997, line of credit
commitments and deposit relationships under the community business banking
product line totaled $80.7 million and $386.5 million, respectively.
In fiscal 1997, the Bank, through its commercial markets group, introduced a
line of middle-market banking products and services to build larger deposit
relationships. This middle-market business banking program focuses primarily
on businesses with annual sales between $10 million to $75 million, but also
accommodates businesses with annual sales of up to $150 million. With the
acquisitions of TransWorld and OneCentral during the second half of fiscal
1997, the Bank's commercial markets group has taken on management for those
banks' approximately 180 largest relationships, representing $80 million in
loans outstanding and $93 million in deposits. The Bank offers its commercial
markets group clients business checking accounts, various cash management
services, standby and commercial letters of credit, revolving lines of credit
and term loans with a maximum limit of $15 million. Specific loan terms are
determined based upon the financial strength of the borrower, the amount of
credit granted, and the type and quality of collateral available. At June 30,
1997, line of credit commitments and deposit relationships under the
commercial markets group totaled $56.7 million and $122.9 million,
respectively.
In contrast to the asset-based commercial lending previously engaged in by
the Bank's subsidiaries, Glendale Federal intends that the commercial loans
originated through its new business banking programs will be cash flow and
credit based, with collateral being taken for the purpose of providing
additional security for repayment. In this respect, this activity more closely
resembles traditional community business banking rather than the commercial
finance company activities formerly conducted by the Bank's subsidiaries.
In December 1996, the Bank launched an agribusiness lending program serving
central California and specializing in crop production loans for crops such as
cotton, grapes, nuts and stone fruits, and dairy operations, together with
loans for other agricultural businesses, such as processors and packers.
California is home to eight of the ten largest agricultural counties in the
nation. The Bank hired experienced personnel to staff the new agricultural
lending facilities and to underwrite its products, and purchased $35.6 million
of agricultural loans and $50.0 million of agricultural loan commitments in
order to assist in the growth and development of this lending program. At June
30, 1997, line of credit commitments and deposit relationships under the
agribusiness lending program totaled $70.9 million and $12.3 million,
respectively.
In the fourth quarter of fiscal 1997, the Bank added SBA lending to its
business banking segment to complement the SBA program acquired in the
TransWorld transaction. The SBA is a federal government agency created to
assist small businesses by providing guarantees of loans made to eligible
small businesses. Glendale Federal will focus on the long-term needs of small
businesses and will provide long-term, variable and fixed-rate financing to
expanding small businesses.
4
<PAGE>
In August 1997, Glendale Federal was granted statewide preferred lender
status by the SBA. This designation allows the Bank to approve SBA-guaranteed
loan applications without prior review from the SBA, thereby speeding up the
decision-making process for small business loan applications. The preferred
lender, the highest lender status awarded by the SBA, enjoys priority funding
and service from the SBA. Loans approved through the preferred lender program
carry a maximum SBA guarantee of 75 percent. The rapid turnaround time on
approvals and the longer repayment terms on SBA loans are expected to attract
more small business clients for the Bank.
The Bank's business banking loan products primarily have adjustable interest
rates that are indexed to the Prime Rate, as published in the Wall Street
Journal.
CONSUMER BANKING
Glendale Federal's principal consumer banking goal is to increase the number
and balance of low-cost demand deposit accounts as well as the number and
balance of higher-yielding consumer lending products. A principal focus of
Glendale Federal's consumer banking program is to increase the Bank's checking
account relationships, especially the Infinity account, which is the Bank's
multi-relationship deposit account, rather than the higher-rate time deposits
that have been the traditional source of deposit funding for thrift
institutions. The Infinity account allows customers to manage their finances,
including checking, money market, savings, and certificate of deposit
accounts, borrowings and investments, through the use of a series of linked
asset and loan accounts with both automatic "sweep" and discretionary transfer
features, all of which are reflected on a single statement. The customer has
the ability to transfer funds to and from checking or money market accounts or
to transfer funds to and from a GLENFED Brokerage account for investment in
stocks, bonds or mutual funds.
The Infinity account is expected to continue to increase the Bank's demand
deposit and money market accounts, which carry a lower interest cost to the
Bank than the certificate of deposit account. In early fiscal 1998, the Bank
introduced a new component of the Infinity account--the Uninsured Money Market
Fund Accounts (the "UMMFA"). The UMMFA is a liquid and convenient account that
provides the Infinity customer easy access to money market mutual funds
managed by an unrelated third party. When a customer's Infinity checking
account balance exceeds the "ceiling", which has a minimum setting of $2,000,
the surplus will automatically sweep over on the same day to the UMMFA. When
the Infinity checking balance drops below the "floor", which has a minimum
setting of $1,000, funds automatically sweep over on the same day from the
UMMFA to return the checking account balance to the "floor". This two-way
sweep feature not only provides the customer overdraft protection but also
promotes regular savings and a steady investing schedule.
On the lending side, the Infinity account is expected to encourage the use
of secured and unsecured lines of credit that carry higher yields than single-
family loans. These line of credit products include a home equity line of
credit, a line of credit secured by a savings deposit, and an unsecured line
of credit and are primarily adjustable-rate products indexed to the Prime
Rate, as published in the Wall Street Journal.
REAL ESTATE LENDING
The Bank's real estate lending activity is focused on the purchase or
origination of loans secured by single-family residential real estate. Income
property lending (loans secured by multi-family residential and non-
residential properties) and construction lending activities were discontinued
in 1991, with income property lending currently being restricted to refinance
existing loans or to finance the disposition of real estate acquired in
settlement of loans ("REO") and with construction lending being restricted to
fulfill commitments under outstanding loans.
5
<PAGE>
The largest portion of the Bank's real estate loans are made to homeowners
on the security of single-family residences for the purpose of enabling them
to purchase or refinance such property. Most of the Bank's single-family
residential permanent loan contracts provide for amortization of principal
over 30 years. These loans, however, have remained outstanding for much
shorter periods because the original loans have been refinanced or the
borrowers have repaid the loans in full upon sale of the properties securing
the loans, or the underlying collateral has been acquired in settlement of the
loan.
The Bank originates and purchases for its own portfolio, depending upon
certain yield and other guidelines, adjustable-rate mortgage loans ("ARMs")
(loans bearing interest rates that change periodically based on changes in a
reference index), loans with rates that are fixed for up to five years and
then convert to adjustable rates for the remainder of the loan term, and
fixed-rate loans.
The ARM programs offered by the Bank provide for interest rates that adjust
either monthly, semi-annually or annually, beginning three, six or twelve
months from the inception of the loan, based primarily on changes in the
average weekly yield on specified maturities of U.S. Treasury securities or on
changes in the monthly weighted average cost of funds for savings institutions
in the Eleventh District of the Federal Home Loan Bank System ("COFI").
Adjustments to the required monthly payment of principal and interest on such
loans occur either monthly, semi-annually or annually, depending on the loan
program selected by the borrower. The Bank has placed greater emphasis on the
origination of loans whose rates are tied to U.S. Treasury securities since
this index is more sensitive to changes in market rates.
The Bank also offers several programs that provide for interest rates that
are fixed for up to five years and then convert to adjustable rates tied to
the same Treasury indices as certain of the Bank's other ARM products. In
August 1996, the Bank introduced a new ARM product whose terms allow for
negative amortization and provide for an index tied to one-month London
Interbank Offered Rates ("LIBOR"), which adjusts monthly, and monthly payments
which adjust annually. This product was introduced because of its favorable
repricing characteristics and because it represents a product which management
believes will be competitive with other lenders' offerings. See "Loans
Receivable" below for a summary of the Bank's loan originations by note type.
While ARMs have the advantage of reducing an institution's sensitivity to
interest rate fluctuations, they present certain risks not associated with
traditional fixed-rate mortgages. These include: (i) the risk that the
borrower, having qualified for the loan based upon interest rates prevailing
at the time of origination, may be unable to make the higher payments required
under the ARM when increases in the applicable index rates increase the rate
payable on the loan; and (ii) the risk that "negative amortization" of
principal (that is, accretion of a portion of monthly interest accruals to the
principal amount of the loan) may occur in those ARMs which provide for limits
in the monthly payment increase and do not correspondingly limit the rate
increase. The Bank attempts to mitigate these risks by the use of underwriting
standards that include analyzing the financial impact to the borrower
resulting from payment adjustments, and which require borrowers to qualify at
the greater of the initial interest rate plus the first annual adjustment or
at a predetermined interest rate based on loan-to-value ("LTV").
Loans with an LTV in excess of 80% require private mortgage insurance,
except that loans meeting certain criteria may be made, at the option of the
loan applicant, without mortgage insurance, but at higher fees, interest rates
and margins to reflect the increased credit risk assumed by the Bank. This
option is available only on loans with a maximum loan amount of $300,000 and
an LTV ratio of no more than 90%, where the purpose of the loan is to
purchase, or to refinance an existing Glendale Federal loan secured by a one-
unit, single-family residence. This alternative is only available on loans
that do not have negative amortization features.
6
<PAGE>
The Bank discontinued significant originations of loans with negative
amortization features in fiscal 1991 and does not separately monitor the
historical loss experience on such loans. Negative amortization is not
considered by the Bank to be a sufficiently significant credit risk
characteristic to require specific identification for historical loss
monitoring purposes. Most of the loans with negative amortization features
remaining in the Bank's portfolio are income property loans that are
individually monitored to assess loss potential. Because negatively amortizing
income property loans of this type are no longer being originated by the Bank,
the balances on such loans are declining on both an absolute and relative
basis.
As of June 30, 1997 and 1996, the balances of loans owned by the Bank that
were subject to negative amortization totaled approximately $3.2 billion and
$3.5 billion, respectively, including cumulative negative amortization at such
dates of approximately $0.9 million and $1.4 million, respectively.
Approximately 76% of such loans are secured by multi-family or non-residential
real estate.
The Bank offers a loan program called California Partners to low- and
moderate-income and minority borrowers. This program provides more favorable
pricing and flexible underwriting standards, including reduced down payment
and reduced income documentation requirements. These criteria are designed to
enable eligible borrowers who might not be able to satisfy conventional
underwriting standards to qualify for a home loan. Approximately $92.3 million
of such loans were approved in fiscal 1997.
Loan Purchase Activity
The Bank purchases single-family residential real estate loans in the
secondary mortgage market to supplement its retail single-family loan
originations. See Item 7. "Management's Discussion and Analysis of Financial
Condition and Results of Operations--Balance Sheet Analysis--Loans Receivable"
for a three-year summary of secondary market loan purchases by note type. The
servicing rights for these loans are typically retained by the seller. The
servicer collects the mortgage payments, passes through the interest and
principal due the Bank under the Bank's loan purchase agreement, and retains a
servicing fee typically ranging between 0.25% and 0.50% on the unpaid
principal balances of the loans. The Bank determines the timing and amount of
its whole loan purchases based on available liquidity, current asset yields
and the Bank's interest rate risk management policy. The Bank's investment and
underwriting policies governing purchased loans are the same as its policies
for originating single-family residential loans. Loans are purchased by the
Bank only after the Bank's loan underwriting and appraisal staff perform a
review of a representative sample of loans in the pool to be purchased.
To reduce the Bank's loss exposure, Glendale Federal has implemented
procedures designed to monitor and analyze the Bank's portfolio of mortgage
loans serviced by other institutions (the "LSBO Portfolio") and to ensure the
servicer's compliance with its servicing agreement with the Bank. A majority
of the loans in this portfolio were originated during the last four years. At
June 30, 1997, 98.4% of the LSBO Portfolio was secured by single-family
residential real estate.
7
<PAGE>
The following tables set forth the composition of the Bank's LSBO Portfolio
by note type and by state as of the dates indicated (dollars in thousands):
<TABLE>
<CAPTION>
JUNE 30
--------------------------------------------
1997 1996 1995 1994
---------- ---------- ---------- --------
<S> <C> <C> <C> <C>
Adjustable-rate.................. $2,245,683 $2,075,212 $ 392,078 $151,555
Fixed-rate....................... 2,082,616 1,068,635 1,358,107 486,685
---------- ---------- ---------- --------
$4,328,299 $3,143,847 $1,750,185 $638,240
========== ========== ========== ========
Weighted average rate on port-
folio at end of period........ 7.61% 7.37% 7.74% 7.07%
========== ========== ========== ========
<CAPTION>
JUNE 30
--------------------------------------------
1997 1996 1995 1994
---------- ---------- ---------- --------
<S> <C> <C> <C> <C>
California....................... $1,932,794 $1,442,451 $ 581,305 $243,417
New York......................... 244,111 233,659 116,303 35,138
Virginia......................... 201,829 97,393 81,814 24,222
Florida.......................... 190,412 123,122 112,798 83,062
New Jersey....................... 169,456 137,311 98,215 34,493
Other(1)......................... 1,589,697 1,109,911 759,750 217,908
---------- ---------- ---------- --------
$4,328,299 $3,143,847 $1,750,185 $638,240
========== ========== ========== ========
</TABLE>
- - --------
(1) The state with the largest balance in the "Other" category was Maryland
with $156,964 at June 30, 1997; Illinois with $101,094 at June 30, 1996;
Maryland with $76,294 at June 30, 1995; and Massachusetts with $29,510 at
June 30, 1994.
8
<PAGE>
LOANS RECEIVABLE
LOAN PORTFOLIO COMPOSITION
The following table summarizes the composition of Glendale Federal's loan
portfolio, including loans held for sale, by property type as of the dates
indicated (dollars in thousands):
<TABLE>
<CAPTION>
JUNE 30
---------------------------------------------------------------
1997 1996 1995 1994 1993
----------- ----------- ----------- ----------- -----------
<S> <C> <C> <C> <C> <C>
Real estate loans:
Existing structures:
1-4 units............. $ 8,785,539 $ 7,535,048 $ 6,292,589 $ 5,481,781 $ 5,931,276
5-36 units............ 1,472,654 1,559,097 1,666,032 1,895,203 2,131,565
37 or more units...... 345,052 400,415 478,803 556,440 678,308
Non-residential....... 1,196,703 1,338,975 1,593,839 1,749,988 1,977,828
Construction:
1-4 units............. 7,726 16,794 2,113 35,602 23,834
5-36 units............ 4,895 5,445 7,624 25,574 55,771
37 or more units...... -- -- -- 7,748 24,891
Non-residential....... 531 -- 500 8,870 12,512
Land................... 9,779 18,250 36,251 40,888 90,553
Home equity and
improvement........... 28,563 28,470 30,468 74,966 100,015
----------- ----------- ----------- ----------- -----------
Total real estate
loans.............. 11,851,442 10,902,494 10,108,219 9,877,060 11,026,553
----------- ----------- ----------- ----------- -----------
Non-real estate loans:
Equity................. 45,709 10,079 12,750 17,858 26,957
Unsecured.............. 39,712 21,788 17,600 27,360 40,804
Deposit account........ 15,702 17,113 17,571 20,383 27,071
Auto and recreational
vehicle............... 13,838 17,588 24,739 37,855 64,424
Mobile home............ 5,724 6,590 7,943 3,593 5,103
----------- ----------- ----------- ----------- -----------
Subtotal consumer
loans.............. 120,685 73,158 80,603 107,049 164,359
Commercial loans....... 160,061 10,391 22,844 47,212 84,910
----------- ----------- ----------- ----------- -----------
Total non-real
estate loans....... 280,746 83,549 103,447 154,261 249,269
----------- ----------- ----------- ----------- -----------
Total gross loans
receivable............. 12,132,188 10,986,043 10,211,666 10,031,321 11,275,822
Unearned discounts (net
of premiums)........... (38,824) (34,772) (70,038) (50,407) (12,175)
Undisbursed loan funds.. (1,807) (12,160) (4,653) (22,215) (27,724)
Deferred loan fees...... (22,705) (24,446) (28,536) (42,205) (51,102)
Allowance for loan loss-
es..................... (163,759) (186,756) (209,142) (320,714) (334,782)
----------- ----------- ----------- ----------- -----------
Loans receivable, net... $11,905,093 $10,727,909 $ 9,899,297 $ 9,595,780 $10,850,039
=========== =========== =========== =========== ===========
Weighted average yield
on loan portfolio at end
of year................ 7.73% 7.74% 7.91% 6.87% 7.08%
=========== =========== =========== =========== ===========
</TABLE>
9
<PAGE>
The following table sets forth the activity in the Bank's loan portfolio for
the periods indicated (dollars in thousands):
<TABLE>
<CAPTION>
YEARS ENDED JUNE 30
--------------------------------------------------------------
1997 1996 1995 1994 1993
----------- ----------- ---------- ----------- -----------
<S> <C> <C> <C> <C> <C>
Loans, beginning bal-
ance................... $10,727,909 $ 9,899,297 $9,595,780 $10,850,039 $12,741,028
Loans originated(1)..... 731,307 713,857 805,897 1,747,519 1,565,584
Loans purchased......... 2,430,461 2,107,509 1,549,955 521,357 111,423
TransWorld loans
acquired(2)............ 135,766 -- -- -- --
OneCentral loans
acquired(2)............ 37,992 -- -- -- --
Union Federal loans
acquired(2)............ -- -- 398,635 -- --
(Increase) decrease in
allowance for loan
losses................. 22,997 22,386 111,572 14,068 (53,353)
Accretion of net un-
earned discount(3)..... (575) 12,618 8,394 6,464 4,007
Principal repayments.... (1,894,953) (1,430,312) (892,977) (1,252,503) (1,781,121)
Loans sold.............. (78,809) (275,428) (156,494) (348,838) (388,568)
University Savings loans
sold................... -- -- (815,406) -- --
Principal reductions due
to foreclosures........ (156,820) (186,157) (294,822) (328,022) (387,808)
Loans exchanged for
mortgage-backed
securities............. (42,222) (145,826) (268,436) (1,470,844) (882,908)
(Increase) decrease in
loans in process....... 10,353 (7,507) 11,073 5,509 21,065
Other changes........... (18,313) 17,472 (153,874) (148,969) (99,310)
----------- ----------- ---------- ----------- -----------
Net increase (decrease)
in loans............... 1,177,184 828,612 303,517 (1,254,259) (1,890,989)
----------- ----------- ---------- ----------- -----------
Loans, ending balance... $11,905,093 $10,727,909 $9,899,297 $ 9,595,780 $10,850,039
=========== =========== ========== =========== ===========
Weighted average yield
on loans originated
during the year........ 7.94% 7.90% 8.08% 6.17% 6.93%
=========== =========== ========== =========== ===========
Weighted average yield
on loans purchased dur-
ing the year........... 7.83% 6.78% 8.68% 8.69% 8.41%
=========== =========== ========== =========== ===========
</TABLE>
- - --------
(1) Net of refinanced portion of the Bank's loans, which amounted to, in the
years ended June 30: 1997--$86,566; 1996--$153,449; 1995--$61,553; 1994--
$390,370; and 1993--$329,263.
(2) For information regarding the TransWorld, OneCentral and Union Federal
transactions, see Note 4 of the Notes to Consolidated Financial
Statements. The weighted average yields of these loans were 10.26%, 9.60%
and 7.94%, respectively.
(3) Includes accretion of discount and amortization of premium on acquired
loans.
10
<PAGE>
The following table summarizes Glendale Federal's term loan originations,
including the refinanced portion of the Bank's loans, for the periods
indicated (in thousands):
<TABLE>
<CAPTION>
YEARS ENDED JUNE 30
------------------------------------------------
1997 1996 1995 1994 1993
-------- -------- -------- ---------- ----------
<S> <C> <C> <C> <C> <C>
Fixed.......................... $323,824 $371,611 $152,921 $ 655,341 $ 749,680
Convertible/fixed.............. 188,324 243,436 270,693 690,759 --
ARM............................ 224,978 164,817 296,380 636,912 1,008,730
Call-date...................... 27,763 43,595 109,322 69,778 40,243
Construction/tract............. 6,780 21,957 19,337 66,279 70,074
-------- -------- -------- ---------- ----------
Total real estate............ 771,669 845,416 848,653 2,119,069 1,868,727
Consumer....................... 16,100 20,504 18,797 18,820 24,420
Commercial..................... 30,104 1,386 -- -- 1,700
-------- -------- -------- ---------- ----------
$817,873 $867,306 $867,450 $2,137,889 $1,894,847
======== ======== ======== ========== ==========
</TABLE>
As of June 30, 1997, approximately $3.1 billion of fixed-rate loans and $8.8
billion of adjustable-rate loans were contractually due after one year. The
following table summarizes the remaining contractual maturities of the Bank's
gross loan portfolio as of June 30, 1997 (in thousands):
<TABLE>
<CAPTION>
REAL ESTATE CONSUMER COMMERCIAL
LOANS LOANS LOANS TOTAL
----------- -------- ---------- -----------
<S> <C> <C> <C> <C>
Due in year 1....................... $ 132,979 $ 49,210 $ 92,203 $ 274,392
Due in year 2....................... 130,515 5,077 7,959 143,551
Due in year 3....................... 133,115 4,119 8,195 145,429
Due after year 3 through year 5..... 218,585 44,627 27,186 290,398
Due after year 5 through year 10.... 665,024 15,318 20,857 701,199
Due after year 10 through year 15... 243,375 1,983 824 246,182
Due after year 15................... 10,327,849 351 2,837 10,331,037
----------- -------- -------- -----------
$11,851,442 $120,685 $160,061 $12,132,188
=========== ======== ======== ===========
</TABLE>
Actual repayments may differ from contractual maturities as borrowers
generally have the right to prepay loans.
As of June 30, 1997, the Bank's construction loans totaled $13.2 million and
all were contractually due within one year.
DELINQUENCIES
When a borrower fails to make a required payment on a loan and does not
promptly cure the delinquency, the loan is classified as delinquent. In this
event, the normal procedure followed by the Bank is to contact the borrower at
regular intervals in an effort to bring the loan to a current status. If a
delinquency is not cured, foreclosure proceedings are typically instituted by
the Bank by the ninetieth day of delinquency.
During fiscal 1997, the Bank's delinquencies, expressed both in dollars and
as a percent of gross loans receivable, declined in all categories of loans,
except for consumer, non-residential real estate and commercial lending. The
overall improvement in payment performance of the Bank's portfolio reflects
continuing economic recovery in California which is the Bank's primary lending
area. The dollar increase in consumer delinquencies reflects growth in the
Bank's consumer lending activities. However, delinquencies as a percent of
consumer loans receivable declined by 58 basis points. Increases in the Bank's
non-residential and other commercial loan delinquencies reflect the Bank's
acquisitions of OneCentral and TransWorld, which had seasoned loan portfolios
concentrated in these lines. Management believes these increases are not
reflective of adverse portfolio quality trends. However, if economic growth
slows in the Bank's primary lending markets, the declining delinquency trends
experienced over the past five years may be adversely impacted.
11
<PAGE>
The following table presents the principal amount and percentage of the
Bank's loan delinquencies, in each case by property type, as of the dates
indicated (dollars in thousands):
<TABLE>
<CAPTION>
% OF TYPE OF
% OF TYPE OF % OF TYPE OF GROSS LOANS % OF TYPE OF % OF TYPE OF
JUNE 30, GROSS LOANS JUNE 30, GROSS LOANS JUNE 30, RECEIVABLE JUNE 30, GROSS LOANS JUNE 30, GROSS LOANS
1997 RECEIVABLE 1996 RECEIVABLE 1995 1994 RECEIVABLE 1993 RECEIVABLE
-------- ------------ -------- ------------ -------- ------------ -------- ------------ -------- ------------
<S> <C> <C> <C> <C> <C> <C> <C> <C> <C> <C>
Single-family 1-4
units:
31-60 Days...... $ 46,172 0.52% $ 57,047 0.75% $ 57,979 0.92% $ 44,181 0.79% $ 66,279 1.09%
61-90 Days...... 17,030 0.19 18,416 0.24 26,460 0.42 21,919 0.39 28,054 0.47
Over 90 Days.... 82,989 0.95 119,978 1.59 110,761 1.75 127,556 2.28 169,776 2.80
-------- ---- -------- ---- -------- ---- -------- ----- -------- -----
146,191 1.66 195,441 2.58 195,200 3.09 193,656 3.46 264,109 4.36
-------- ---- -------- ---- -------- ---- -------- ----- -------- -----
Multi-family 5-36
units:
31-60 Days...... 8,944 0.61 9,528 0.61 19,249 1.15 59,663 3.11 50,198 2.29
61-90 Days...... 3,021 0.20 7,601 0.49 11,433 0.68 26,841 1.40 15,377 0.71
Over 90 Days.... 17,713 1.20 25,595 1.63 32,804 1.96 96,920 5.04 91,928 4.20
-------- ---- -------- ---- -------- ---- -------- ----- -------- -----
29,678 2.01 42,724 2.73 63,486 3.79 183,424 9.55 157,503 7.20
-------- ---- -------- ---- -------- ---- -------- ----- -------- -----
Multi-family 37
or more units:
31-60 Days...... 1,312 0.38 2,126 0.53 4,079 0.85 14,434 2.56 29,166 4.15
61-90 Days...... -- -- -- -- 3,202 0.67 8,682 1.54 29,822 4.24
Over 90 Days.... -- -- 14,461 3.61 13,371 2.79 66,254 11.74 62,175 8.84
-------- ---- -------- ---- -------- ---- -------- ----- -------- -----
1,312 0.38 16,587 4.14 20,652 4.31 89,370 15.84 121,163 17.23
-------- ---- -------- ---- -------- ---- -------- ----- -------- -----
Non-residential:
31-60 Days...... 11,240 0.93 3,169 0.23 19,789 1.21 31,637 1.76 59,580 2.86
61-90 Days...... 3,079 0.26 2,762 0.20 6,409 0.39 25,767 1.43 10,393 0.50
Over 90 Days.... 14,149 1.17 17,907 1.33 39,588 2.43 152,415 8.47 192,645 9.26
-------- ---- -------- ---- -------- ---- -------- ----- -------- -----
28,468 2.36 23,838 1.76 65,786 4.03 209,819 11.66 262,618 12.62
-------- ---- -------- ---- -------- ---- -------- ----- -------- -----
Commercial:
31-60 Days...... 3,235 2.02 38 0.37 -- -- 952 2.02 1,324 1.56
61-90 Days...... 1,935 1.21 -- -- 90 0.39 -- -- -- --
Over 90 Days.... 726 0.45 -- -- -- -- 5,025 10.64 5,857 6.90
-------- ---- -------- ---- -------- ---- -------- ----- -------- -----
5,896 3.68 38 0.37 90 0.39 5,977 12.66 7,181 8.46
-------- ---- -------- ---- -------- ---- -------- ----- -------- -----
Consumer:
31-60 Days...... 1,560 1.29 1,081 1.48 2,206 2.74 3,504 3.27 5,172 3.15
61-90 Days...... 624 0.52 612 0.84 941 1.17 1,040 0.97 2,245 1.37
Over 90 Days.... 1,562 1.29 1,001 1.36 906 1.12 1,711 1.60 4,477 2.72
-------- ---- -------- ---- -------- ---- -------- ----- -------- -----
3,746 3.10 2,694 3.68 4,053 5.03 6,255 5.84 11,894 7.24
-------- ---- -------- ---- -------- ---- -------- ----- -------- -----
Total:
31-60 Days...... 72,463 0.60 72,989 0.66 103,302 1.01 154,371 1.54 211,719 1.88
61-90 Days...... 25,689 0.21 29,391 0.27 48,535 0.48 84,249 0.84 85,891 0.76
Over 90 Days.... 117,139 0.96 178,942 1.63 197,430 1.93 449,881 4.48 526,858 4.67
-------- ---- -------- ---- -------- ---- -------- ----- -------- -----
$215,291 1.77% $281,322 2.56% $349,267 3.42% $688,501 6.86% $824,468 7.31%
======== ==== ======== ==== ======== ==== ======== ===== ======== =====
</TABLE>
12
<PAGE>
NON-ACCRUAL LOANS
All loans delinquent for more than 90 days are placed on non-accrual status.
Loans delinquent 90 days or less are placed on non-accrual status if the
borrower is deemed by management to be unable to continue performance. As of
June 30, 1997 and 1996, loans 90 days or less delinquent totaling $23.2
million and $13.5 million, respectively, had been placed on non-accrual
status. Placement of loans on non-accrual status does not necessarily mean
that the outstanding loan principal will not be collected but rather that
timely collection of principal and interest is in question. When a loan is
placed on non-accrual status, interest accrued but not received is reversed.
A non-accrual loan may be restored to accrual status when principal and
interest payments are brought current or when brought to 90 days or less
delinquent and continuing payment of principal and interest is expected. The
amount of interest income which would have been recorded in fiscal 1997, 1996
and 1995 had the Bank's non-accrual loans been current in accordance with
their original terms was $12.4 million, $16.3 million and $19.1 million,
respectively. The amount of interest income on these loans that was included
in net earnings in fiscal 1997, 1996 and 1995 was $5.3 million, $5.8 million
and $5.5 million, respectively. See Item 7. "Management's Discussion and
Analysis of Financial Condition and Results of Operations--Balance Sheet
Analysis--Non-Performing Assets and Restructured Loans" for further discussion
of non-accrual loans. See Note 8 of the Notes to Consolidated Financial
Statements for information on the geographical location of non-accrual loans
at June 30, 1997 and 1996.
The following table shows the Bank's non-accrual loans by property type as
of the dates indicated (in thousands):
<TABLE>
<CAPTION>
JUNE 30
--------------------------------------------
1997 1996 1995 1994 1993
-------- -------- -------- -------- --------
<S> <C> <C> <C> <C> <C>
Single-family 1-4 units............ $ 82,989 $119,978 $111,881 $130,554 $177,294
Multi-family:
5-36 units....................... 21,087 33,123 50,487 112,400 126,501
37 or more units................. 3,121 14,461 21,255 84,937 95,618
Non-residential.................... 30,672 23,860 59,430 172,897 227,874
-------- -------- -------- -------- --------
Total real estate................ 137,869 191,422 243,053 500,788 627,287
Commercial......................... 859 22 283 6,044 18,028
Consumer........................... 1,567 1,001 906 1,711 4,477
-------- -------- -------- -------- --------
$140,295 $192,445 $244,242 $508,543 $649,792
======== ======== ======== ======== ========
</TABLE>
RESTRUCTURED LOANS
The Bank has agreed to modifications in the form of interest rate and other
concessions on certain existing single-family, multi-family residential and
non-residential loans under terms not generally available in order to maximize
the recovery of its loans that are not performing under their original terms.
As of June 30, 1997, the Bank's largest restructured loan was secured by a 368
unit apartment complex located in Southern California and had a balance
outstanding of $16.1 million, which represented 52% of all restructured loans.
Interest income with respect to these restructured loans would have been $2.9
million, $0.9 million and $3.3 million in fiscal 1997, 1996 and 1995,
respectively, under their original terms. Actual interest income recognized by
the Bank with respect to these restructured loans was $2.4 million, $0.7
million and $2.6 million in fiscal 1997, 1996 and 1995, respectively.
Restructured loans are placed on non-accrual status if they become more than
90 days delinquent or the borrower otherwise fails, or is not expected, to
perform in accordance with the restructure agreement. See Note 1 of the Notes
to Consolidated Financial Statements for additional discussion of the Bank's
accounting policy with respect to restructured loans.
13
<PAGE>
The following table shows the Bank's restructured loans by property type as
of the dates indicated (in thousands):
<TABLE>
<CAPTION>
JUNE 30
---------------------------------------
1997 1996 1995 1994 1993
-------- ------ ------- ------- -------
<S> <C> <C> <C> <C> <C>
Single-family 1-4 units................. $ 2,168 $3,222 $ 4,601 $ -- $ --
Multi-family:
5-36 units............................ 3,676 2,197 10,717 5,338 12,451
37 or more units...................... 18,331 2,251 7,462 14,456 25,053
Non-residential......................... 6,889 1,524 15,762 14,424 45,873
-------- ------ ------- ------- -------
$ 31,064 $9,194 $38,542 $34,218 $83,377
======== ====== ======= ======= =======
</TABLE>
POTENTIAL PROBLEM ASSETS
Impaired Loans
Impaired secured loans are carried on the Bank's accounting records at the
fair value of the collateral securing the loan less estimated selling costs.
Impaired unsecured loans are recorded at the present value of the expected
future cash flows from the loans, discounted at the loan's effective interest
rate, or at the loan's observable market price. Impaired loans exclude large
groups of smaller balance homogeneous loans that are collectively evaluated
for impairment. For the Bank, loans collectively reviewed for impairment
include single-family loans with unpaid balances of less than $500,000,
substantially all consumer loans, business banking loans with principal
balances less than $100,000, and performing multi-family and non-residential
real estate loans ("income property loans") having principal balances of less
than $1 million, excluding loans which have entered the workout process.
The Bank considers a loan to be impaired when, based upon current
information and events, the Bank believes it is probable that it will be
unable to collect all amounts due according to the contractual terms of the
loan agreement on a timely basis. The Bank's impaired loans include non-
accrual income property loans, non-accrual single-family loans or borrowing
relationships with unpaid balances greater than $500,000, troubled debt
restructurings, and certain performing loans that evidence weaknesses. While a
loan is on non-accrual status, interest is recognized only as cash is received
and only if no portion of the loan's balance is classified "Doubtful."
Impaired loans may be left on accrual status during the period the Bank is
pursuing repayment of the loan. Such loans are placed on non-accrual status at
the point either: (1) they become 90 days delinquent; or (2) the Bank
determines the borrower is incapable of, or has ceased efforts toward, making
required payments on the loan. The Bank carries these impaired loans on its
books at the fair value of the collateral properties securing the loans less
selling costs.
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 impaired
loans' collateral properties are also included in the provision for loan
losses. 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.
At June 30, 1997 and 1996, the recorded investment in loans identified by
the Bank as impaired totaled $142.8 million and $158.8 million, respectively,
and the total specific allowance for loan losses related to such loans was
$14.0 million and $26.5 million, respectively. See Note 8 of the Notes to
Consolidated Financial Statements for additional information regarding
impaired loans.
14
<PAGE>
Classification of Assets
Savings institutions are required under applicable law and regulations to
review their assets on a regular basis and to classify them as "satisfactory",
"special mention", "substandard", "doubtful" or "loss". An asset which
possesses no apparent weakness or deficiency is designated "satisfactory". An
asset which possesses weaknesses or deficiencies deserving close attention is
designated as "special mention". An asset, or a portion thereof, is generally
classified as "substandard" if it possesses a well-defined weakness which
could jeopardize the timely liquidation of the asset or realization of the
collateral at the asset's book value. Thus, these assets are characterized by
the possibility that the institution will sustain some loss if the
deficiencies are not corrected. An asset, or portion thereof, is classified as
"doubtful" if a probable loss of principal and/or interest exists but the
amount of the loss, if any, is subject to the outcome of future events which
are undeterminable at the time of classification. If an asset, or portion
thereof, is classified as "loss", the Bank either establishes a specific
valuation allowance equal to the amount classified as loss or charges off such
amount. The Regional Director of the Office of Thrift Supervision ("OTS") has
the authority to approve, disapprove or modify any asset classification or any
amount established as an allowance pursuant to such classification. The Bank
monitors the level of assets within each of the asset classification
categories and utilizes this information along with its review of the
underlying collateral and other factors in determining the appropriate level
of loss allowances it maintains from period to period. See "Credit Loss
Experience" below for further information.
SIGNIFICANT LOAN RELATIONSHIPS
Most of the Bank's gross loan portfolio consists of loans with individual
balances of less than $1 million. At June 30, 1997 the Bank's largest borrower
had two loans outstanding totaling $30.6 million, both of which are performing
and are secured by an office building in Northern California. Both loans were
paid off in July 1997. The second largest borrower at that date had three
loans outstanding totaling $20.9 million, all of which are performing and are
secured by multi-family residential properties. The third largest borrower at
that date had eight performing loans secured by multi-family residential and
non-residential properties with outstanding balances totaling $16.5 million.
The fourth largest borrower at that date was an investor in multi-family
housing projects in Southern California with 16 loans outstanding totaling
$16.5 million, of which four restructured loans totaling $3.4 million were
non-performing. The fifth largest borrower at that date had one non-performing
loan secured by a shopping center in Southern California with a balance
outstanding of $16.2 million. The Bank had borrowing relationships exceeding
$10 million with each of five other borrowers at June 30, 1997, all of which
loans are performing.
The Bank's single-family residential and consumer loans are relatively
homogeneous and typically no single loan is individually significant in terms
of size or risk of loss. The Bank reviews most of its single-family
residential and consumer portfolios by analyzing the performance and the
composition of these portfolios as a whole. The Bank's monitoring process for
non-homogeneous multi-family residential and non-residential loans encompasses
a periodic review of the individual loans. The Bank reviews--annually if rated
"satisfactory" or quarterly if rated "special mention", "substandard",
"doubtful", or "loss"--any loan with an unpaid principal balance of more than
$1 million, and any relationship with a single borrower whose aggregate loan
balances exceed $3 million. The reviews are based on information available and
generally include analysis of operating statements, occupancy levels, debt
coverage, the condition and the appraised value of the collateral, the
borrower's financial strength and other factors. The Bank periodically reviews
all individual commercial loans with a balance of $100,000 or more. Loans that
are rated "satisfactory" are reviewed at least annually, and those that are
rated "special mention", "substandard", "doubtful" or "loss" are reviewed
quarterly. The Bank maintains special departments with responsibility for
resolving problem loans and liquidating collateral or selling foreclosed real
estate.
15
<PAGE>
CREDIT LOSS EXPERIENCE
Credit losses are inherent in the business of lending. The allowance for
loan losses is established to provide for such losses and is based on
management's assessment of trends in the homogeneous portfolio as well as the
results of management's periodic review of the individual loans in the non-
homogeneous portfolio. Specific valuation allowances are established for
impaired loans at the difference between the loan amount and the fair value of
the collateral less estimated selling costs. The general allowance for loan
losses is based upon a number of factors, including asset classification,
historical loss experience, loan portfolio composition, industry experience,
prevailing and forecasted economic and market conditions and management's
judgment. Since the factors on which the general allowance is based are
subject to change from time to time as a result of changes in relevant
conditions and management's knowledge thereof, no assurance can be given that
additional provisions for loss will not be required in future periods as a
result of changes in economic and market conditions, management's assessments
thereof or other factors. The OTS, as part of its examination process, reviews
the Bank's allowances for estimated losses and may require the Bank to make
additions to such allowances based on their judgments of the information
available to them at the time of their examination.
16
<PAGE>
A summary of activity in the allowance for loan losses during the periods
indicated is set forth below (dollars in thousands):
<TABLE>
<CAPTION>
YEARS ENDED JUNE 30
---------------------------------------------------
1997 1996 1995 1994 1993
-------- -------- --------- --------- ---------
<S> <C> <C> <C> <C> <C>
Balance at beginning of
period.................. $186,756 $209,142 $ 320,714 $ 334,782 $ 281,429
Provision for loan
losses.................. 25,204 40,350 66,150 139,726 251,261
-------- -------- --------- --------- ---------
211,960 249,492 386,864 474,508 532,690
-------- -------- --------- --------- ---------
Charge-offs:
Single-family 1-4
units................. (25,773) (33,617) (37,194) (43,248) (44,467)
Multi-family:
5-36 units........... (10,756) (13,175) (54,314) (39,743) (24,555)
37 or more units..... (5,860) (7,923) (33,932) (28,149) (22,047)
Non-residential........ (12,996) (14,490) (73,602) (43,675) (86,761)
-------- -------- --------- --------- ---------
Total real estate.. (55,385) (69,205) (199,042) (154,815) (177,830)
Commercial............. (68) (974) (2,340) (6,353) (25,415)
Consumer............... (3,043) (2,842) (4,595) (6,904) (21,062)
-------- -------- --------- --------- ---------
Total charge-offs.. (58,496) (73,021) (205,977) (168,072) (224,307)
-------- -------- --------- --------- ---------
Recoveries:
Single-family 1-4
units................. 167 149 334 1,013 2,744
Multi-family:
5-36 units........... 8 288 -- 440 93
37 or more units..... 248 231 800 878 1,785
Non-residential........ 1,159 2,929 9,572 2,339 3,251
-------- -------- --------- --------- ---------
Total real estate.. 1,582 3,597 10,706 4,670 7,873
Commercial............. 3,575 5,590 4,748 6,873 14,034
Consumer............... 1,062 1,098 1,840 2,735 4,492
-------- -------- --------- --------- ---------
Total recoveries... 6,219 10,285 17,294 14,278 26,399
-------- -------- --------- --------- ---------
Net charge-offs.... (52,277) (62,736) (188,683) (153,794) (197,908)
-------- -------- --------- --------- ---------
Additions due to acquisi-
tions(1):
Single-family 1-4
units................. -- -- 2,535 -- --
Non-residential........ 219 -- 14,815 -- --
Commercial............. 3,857 -- -- -- --
-------- -------- --------- --------- ---------
Total additions.... 4,076 -- 17,350 -- --
-------- -------- --------- --------- ---------
Deletions due to sale of
subsidiary(2):
Single-family 1-4
units................. -- -- (2,389) -- --
Multi-family:
5-36 units........... -- -- (1,282) -- --
37 or more units..... -- -- (401) -- --
Non-residential........ -- -- (2,127) -- --
Consumer............... -- -- (190) -- --
-------- -------- --------- --------- ---------
Total deletions.... -- -- (6,389) -- --
-------- -------- --------- --------- ---------
Balance at end of period. $163,759 $186,756 $ 209,142 $ 320,714 $ 334,782
======== ======== ========= ========= =========
</TABLE>
- - --------
<TABLE>
<S> <C>
</TABLE>
(1) Represents the allowance for loan losses recorded in connection with the
acquisitions of TransWorld and OneCentral in fiscal 1997, and with the
acceptance of loans receivable as part of the consideration for assuming
the deposit liabilities of Union Federal in fiscal 1995. For additional
information, see Note 4 of the Notes to Consolidated Financial Statements.
(2) Represents the reduction of the allowance for loan losses due to the sale
of University Savings.
17
<PAGE>
The following table indicates the ratio of the Bank's charge-offs (net of
recoveries) to average gross loans by category for the periods indicated
(dollars in thousands):
<TABLE>
<CAPTION>
YEARS ENDED JUNE 30
----------------------------------------------------------------------
1997 1996 1995 1994 1993
----------- ----------- ----------- ----------- -----------
<S> <C> <C> <C> <C> <C>
Single-family 1-4 units:
Average gross loans... $ 8,201,070 $ 6,952,741 $ 5,958,760 $ 5,823,737 $ 6,592,896
Net charge-offs....... 25,606 33,468 36,860 42,235 41,723
Net charge-offs/
average gross loans.. 0.31% 0.48% 0.62% 0.73% 0.63%
Multi-family 5-36 units:
Average gross loans... 1,521,046 1,619,099 1,797,216 2,054,056 2,260,268
Net charge-offs....... 10,748 12,887 54,314 39,303 24,462
Net charge-offs/
average gross loans.. 0.71% 0.80% 3.02% 1.91% 1.08%
Multi-family 37 or more
units:
Average gross loans... 372,734 439,609 521,496 633,694 761,827
Net charge-offs....... 5,612 7,692 33,132 27,271 20,262
Net charge-offs/
average gross loans.. 1.51% 1.75% 6.35% 4.30% 2.66%
Non-residential:
Average gross loans... 1,282,119 1,493,908 1,715,168 1,940,320 2,178,844
Net charge-offs....... 11,837 11,561 64,030 41,336 83,510
Net charge-offs/
average gross loans.. 0.92% 0.77% 3.73% 2.13% 3.83%
Commercial:
Average gross loans... 85,226 16,618 35,028 66,061 151,138
Net charge-offs
(recoveries)......... (3,507) (4,616) (2,408) (520) 11,381
Net charge-offs
(recoveries)/
average gross loans.. (4.11)%(1) (27.78)% (6.87)% (0.79)% 7.53%
Consumer:
Average gross loans... 96,922 76,880 93,826 135,704 268,641
Net charge-offs....... 1,981 1,744 2,755 4,169 16,570
Net charge-offs/
average gross loans.. 2.04% 2.27% 2.94% 3.07% 6.17%
Total:
Average gross loans... $11,559,117 $10,598,855 $10,121,494 $10,653,572 $12,213,614
Net charge-offs....... 52,277 62,736 188,683 153,794 197,908
Net charge-offs/
average gross loans.. 0.45% 0.59% 1.86% 1.44% 1.62%
</TABLE>
- - --------
(1) Excluding the business banking loans from the average gross loan balances,
this ratio would have been (68.4%).
See Item 7. "Management's Discussion and Analysis of Financial Condition and
Results of Operations--Balance Sheet Analysis--Allowance for Loan Losses" for
a discussion regarding charge-offs and the impact on such charge-offs
resulting from certain sales of non-performing and underperforming loans
during fiscal 1996.
18
<PAGE>
The following tables set forth the allocation of Glendale Federal's
allowance for loan losses by property type as of the dates indicated (dollars
in thousands):
<TABLE>
<CAPTION>
JUNE 30, 1997 JUNE 30, 1996
------------------------------------------ ------------------------------------------
PERCENT PERCENT
PERCENT OF GROSS OF PERCENT OF GROSS OF
LOANS TO LOAN ALLOWANCE LOANS TO LOAN ALLOWANCE
TOTAL PORTFOLIO TO LOAN TOTAL PORTFOLIO TO LOAN
LOANS BALANCE ALLOWANCE BALANCE LOANS BALANCE ALLOWANCE BALANCE
---------- ----------- --------- --------- ---------- ----------- --------- ---------
<S> <C> <C> <C> <C> <C> <C> <C> <C>
Single-family
1-4 units.............. 72.71% $ 8,821,828 $ 52,579 0.60% 69.00% $ 7,580,312 $ 56,833 0.75%
Multi-family:
5-36 units............. 12.18 1,477,549 43,852 2.97 14.24 1,564,542 48,628 3.11
37 or more units....... 2.84 345,052 16,496 4.78 3.65 400,415 26,062 6.51
Non-residential......... 9.95 1,207,013 35,280 2.92 12.35 1,357,225 47,260 3.48
Commercial.............. 1.32 160,061 7,552 4.72 0.09 10,391 4,699 45.22
Consumer................ 1.00 120,685 8,000 6.63 0.67 73,158 3,274 4.48
------ ----------- -------- ------ ----------- --------
100.00% $12,132,188 $163,759 1.35% 100.00% $10,986,043 $186,756 1.70%
====== =========== ======== ====== =========== ========
<CAPTION>
JUNE 30, 1995 JUNE 30, 1994
------------------------------------------ ------------------------------------------
PERCENT PERCENT
PERCENT OF GROSS OF PERCENT OF GROSS OF
LOANS TO LOAN ALLOWANCE LOANS TO LOAN ALLOWANCE
TOTAL PORTFOLIO TO LOAN TOTAL PORTFOLIO TO LOAN
LOANS BALANCE ALLOWANCE BALANCE LOANS BALANCE ALLOWANCE BALANCE
---------- ----------- --------- --------- ---------- ----------- --------- ---------
<S> <C> <C> <C> <C> <C> <C> <C> <C>
Single-family
1-4 units.............. 61.94% $ 6,325,170 $ 44,483 0.70% 55.75% $ 5,592,349 $ 44,667 0.80%
Multi-family:
5-36 units............. 16.39 1,673,656 41,736 2.49 19.15 1,920,777 65,878 3.43
37 or more units....... 4.69 478,803 31,569 6.59 5.62 564,188 61,867 10.97
Non-residential......... 15.97 1,630,590 83,086 5.10 17.94 1,799,746 137,775 7.66
Commercial.............. 0.22 22,844 4,176 18.28 0.47 47,212 6,052 12.82
Consumer................ 0.79 80,603 4,092 5.08 1.07 107,049 4,475 4.18
------ ----------- -------- ------ ----------- --------
100.00% $10,211,666 $209,142 2.05% 100.00% $10,031,321 $320,714 3.20%
====== =========== ======== ====== =========== ========
</TABLE>
<TABLE>
<CAPTION>
JUNE 30, 1993
------------------------------------------
PERCENT
PERCENT OF GROSS OF
LOANS TO LOAN ALLOWANCE
TOTAL PORTFOLIO TO LOAN
LOANS BALANCE ALLOWANCE BALANCE
---------- ----------- --------- ---------
<S> <C> <C> <C> <C>
Single-family 1-4 units.............. 53.70% $ 6,055,125 $ 51,653 0.85%
Multi-family:
5-36 units.......................... 19.40 2,187,336 54,107 2.47
37 or more units.................... 6.24 703,199 36,320 5.16
Non-residential...................... 18.45 2,080,893 173,913 8.36
Commercial........................... 0.75 84,910 12,884 15.17
Consumer............................. 1.46 164,359 5,905 3.59
------ ----------- --------
100.00% $11,275,822 $334,782 2.97%
====== =========== ========
</TABLE>
The allocation of the allowance to each category is not necessarily
indicative of future losses and does not restrict the use of the allowance to
absorb losses in any other category.
The Bank's allowance for loan losses, expressed both in dollars and as a
percent of loans receivable, decreased during fiscal 1997, reflecting
continuing improvements in portfolio performance and classified asset levels
as well as a 10% increase in the size of the gross loan portfolio from
$11.0 billion at June 30, 1996 to $12.1 billion at June 30, 1997. The
increases in allowance allocations to consumer and commercial lending reflect
growth in the respective loan portfolios and the Bank's limited experience to
date in managing the credit performance of these new lines of business.
19
<PAGE>
The following tables compare the Bank's gross loan portfolio balances,
allowance for loan losses, non-accrual loans and non-performing assets
("NPAs") by property type as of the dates indicated (dollars in thousands):
<TABLE>
<CAPTION>
PERCENT OF
GROSS PERCENT OF NPAS TO PERCENT
LOAN NON- ALLOWANCE TO GROSS LOAN OF
PORTFOLIO ACCRUAL NON-ACCRUAL PORTFOLIO ALLOWANCE
JUNE 30, 1997 BALANCE ALLOWANCE LOANS LOANS NPAS(1) BALANCE TO NPAS
- - ------------- ----------- --------- -------- ------------ -------- ---------- ---------
<S> <C> <C> <C> <C> <C> <C> <C>
Single-family 1-4 units. $ 8,821,828 $ 52,579 $ 82,989 63.36% $117,105 1.33% 44.90%
Multi-family:
5-36 units............. 1,477,549 43,852 21,087 207.96 29,501 2.00 148.65
37 or more units....... 345,052 16,496 3,121 528.55 5,054 1.46 326.39
Non-residential......... 1,207,013 35,280 30,672 115.02 50,841 4.21 69.39
Commercial.............. 160,061 7,552 859 879.16 859 0.54 879.16
Consumer................ 120,685 8,000 1,567 510.53 1,598 1.32 500.63
----------- -------- -------- --------
$12,132,188 $163,759 $140,295 116.72% $204,958 1.69% 79.90%
=========== ======== ======== ========
<CAPTION>
PERCENT OF
GROSS PERCENT OF NPAS TO PERCENT
LOAN NON- ALLOWANCE TO GROSS LOAN OF
PORTFOLIO ACCRUAL NON-ACCRUAL PORTFOLIO ALLOWANCE
JUNE 30, 1996 BALANCE ALLOWANCE LOANS LOANS NPAS(1) BALANCE TO NPAS
- - ------------- ----------- --------- -------- ------------ -------- ---------- ---------
<S> <C> <C> <C> <C> <C> <C> <C>
Single-family 1-4 units. $ 7,580,312 $ 56,833 $119,978 47.37% $159,671 2.11% 35.59%
Multi-family:
5-36 units............. 1,564,542 48,628 33,123 146.81 44,791 2.86 108.57
37 or more units....... 400,415 26,062 14,461 180.22 19,288 4.82 135.12
Non-residential......... 1,357,225 47,260 23,860 198.07 49,753 3.67 94.99
Commercial.............. 10,391 4,699 22 N/A 22 0.21 N/A
Consumer................ 73,158 3,274 1,001 327.07 1,124 1.54 291.28
----------- -------- -------- --------
$10,986,043 $186,756 $192,445 97.04% $274,649 2.50% 68.00%
=========== ======== ======== ========
</TABLE>
- - --------
(1) Comprised of non-accrual loans and REO and other repossessed assets.
See Item 7. "Management's Discussion and Analysis of Financial Condition and
Results of Operations--Allowance for Loan Losses" for discussion of the
allowance for loan losses at June 30, 1997.
20
<PAGE>
REAL ESTATE ACQUIRED IN SETTLEMENT OF LOANS
The procedures for foreclosure of the Bank's loans are governed by the laws
of the states in which the loan collateral is located. In California, the Bank
normally utilizes the non-judicial foreclosure sale procedures available under
applicable state law. In Florida, where the Bank formerly had offices and
where properties secured $896 million of its mortgage loans at June 30, 1997,
judicial foreclosure is normally required. The borrowers' rights of redemption
under the laws of the respective states are also different. In California, the
right to cure the default and reinstate the loan terminates five days before
the scheduled trustee sale under a deed of trust. In Florida, the borrower
generally may cure the default under a mortgage at any time during foreclosure
proceedings and until the certificate of title is issued, usually 10 days
after the sale, by making all delinquent payments and paying all charges,
including legal fees. Florida law permits a mortgage lender to seek a
deficiency judgment against a defaulted borrower when the proceeds of the
foreclosure sale are not sufficient to satisfy the loan balance. Such
judgments are ordinarily not permitted or are impractical in California. In
most foreclosure sales, the Bank acquires title to the property. REO is
recorded and carried at the lower of the recorded investment in the loan or
fair value of the asset received less selling costs. The fair value of the
asset received is based on the current appraised value less estimated selling
costs. See Note 9 of the Notes to Consolidated Financial Statements for
information on the geographical location of REO as of June 30, 1997 and 1996.
The following table shows the Bank's REO and other repossessed assets, net
of specific valuation allowances, and gross of the general valuation
allowance, by property type as of the dates indicated (in thousands):
<TABLE>
<CAPTION>
JUNE 30
------------------------------------------
1997 1996 1995 1994 1993
------- ------- -------- -------- --------
<S> <C> <C> <C> <C> <C>
Single-family 1-4 units.............. $34,116 $39,693 $ 37,316 $ 43,231 $ 53,853
Multi-family:
5-36 units......................... 8,414 11,668 18,131 27,180 23,803
37 or more units................... 1,933 4,827 5,716 2,792 18,423
Non-residential...................... 20,169 25,893 50,024 79,089 108,565
------- ------- -------- -------- --------
Total real estate................ 64,632 82,081 111,187 152,292 204,644
Other repossessed assets............. 31 123 93 127 414
------- ------- -------- -------- --------
$64,663 $82,204 $111,280 $152,419 $205,058
======= ======= ======== ======== ========
</TABLE>
See Item 7. "Management's Discussion and Analysis of Financial Condition and
Results of Operations--Balance Sheet Analysis--Non-Performing Assets and
Restructured Loans" and Note 9 of the Notes to Consolidated Financial
Statements for additional discussion regarding REO activity for fiscal 1997.
MORTGAGE-BACKED SECURITIES
The Bank purchases mortgage-backed securities from time to time to meet
balance sheet size objectives, to use such securities for collateral purposes
and, when necessary, to augment loan originations and whole loan purchases and
to replace loan portfolio and mortgage-backed securities run-off. The Bank's
primary choice for such purposes had been mortgage pass-through securities
issued by private parties and backed by pools of adjustable-rate, single-
family mortgage loans. During fiscal 1997, however, the Bank only purchased
mortgage-backed securities issued by federal agencies for its available for
sale portfolio totalling $504.0 million, of which $444.6 million were
Government National Mortgage Association ("GNMA") securities. The Bank's
portfolio of gross mortgage-backed securities at June 30, 1997 and 1996
included $744.7 million and $386.9 million of GNMA securities, respectively.
21
<PAGE>
The Bank acquires mortgage pass-through securities that are issued or
guaranteed by certain agencies including the GNMA, the Federal National
Mortgage Association ("FNMA") and the Federal Home Loan Mortgage Corporation
("FHLMC"). These securities are backed by pools of single-family mortgage
loans and are obtained either through cash purchase or through securitization
of the Bank's single-family mortgage loans. The Bank has used these securities
to collateralize borrowings, to secure public agency deposits, to reduce the
Bank's credit risk exposure through the agency guarantees of the securities
and to reduce its regulatory capital requirements. The gross amount of these
agency related securities totaled $1.5 billion and $1.2 billion at June 30,
1997 and 1996, respectively.
The following tables summarize the composition of Glendale Federal's held to
maturity and available for sale mortgage-backed securities portfolios by
security type as of the dates indicated (dollars in thousands):
<TABLE>
<CAPTION>
JUNE 30
----------------------------------------------------------
1997 1996 1995 1994 1993
---------- ---------- ---------- ---------- ----------
<S> <C> <C> <C> <C> <C>
Held to maturity:
FHLMC................. $ 266,272 $ 298,090 $ 329,081 $ 100,879 $ 432,646
GNMA.................. 230,410 273,690 325,025 356,898 187,294
FNMA.................. 422,701 489,919 579,486 665,634 259,093
---------- ---------- ---------- ---------- ----------
Subtotal............ 919,383 1,061,699 1,233,592 1,123,411 879,033
Pass-through
securities........... 212,595 256,781 1,499,337 1,867,312 1,143,934
CMOs.................. -- -- 1,878,117 2,037,867 1,885,899
Subordinated
securities........... 21,926 25,855 31,909 36,720 49,265
CMO residuals......... -- 277 4,760 7,043 16,050
---------- ---------- ---------- ---------- ----------
Total gross......... 1,153,904 1,344,612 4,647,715 5,072,353 3,974,181
Unamortized premiums.. 11,557 14,664 77,369 98,154 71,168
Deferred loan origina-
tion fees............ (2,636) (3,041) (3,677) (3,321) (3,321)
---------- ---------- ---------- ---------- ----------
Total, at amortized
cost............... 1,162,825 1,356,235 4,721,407 5,167,186 4,042,028
---------- ---------- ---------- ---------- ----------
Available for sale:
FHLMC................. 44,859 142 161 109,135 275
GNMA.................. 514,321 113,181 1,840 60,115 2,439
FNMA.................. 14,133 28 32 36 53
---------- ---------- ---------- ---------- ----------
Subtotal............ 573,313 113,351 2,033 169,286 2,767
Pass-through
securities........... 496,784 704,586 -- 33,301 --
CMOs.................. 24,831 58,357 -- -- --
CMO residuals......... 100 -- -- -- --
---------- ---------- ---------- ---------- ----------
Total gross......... 1,095,028 876,294 2,033 202,587 2,767
Unrealized gain
(loss)............... (2,320) (16,076) 53 (4,765) --
Unamortized premiums
(discounts).......... 24,001 24,337 (36) (1,176) (51)
Deferred loan origina-
tion fees............ -- -- -- (53) --
---------- ---------- ---------- ---------- ----------
Total, at fair
value.............. 1,116,709 884,555 2,050 196,593 2,716
---------- ---------- ---------- ---------- ----------
Total mortgage-backed
securities, net........ $2,279,534 $2,240,790 $4,723,457 $5,363,779 $4,044,744
========== ========== ========== ========== ==========
Weighted average yield
on mortgage-backed se-
curities portfolio at
end of period.......... 6.78% 6.26% 6.30% 5.28% 5.88%
========== ========== ========== ========== ==========
</TABLE>
See Note 7 of the Notes to Consolidated Financial Statements for information
on individual issuers with outstanding amounts exceeding ten percent of
stockholders' equity at June 30, 1997.
22
<PAGE>
The following table sets forth the activity in the Bank's mortgage-backed
securities portfolio for the periods indicated (in thousands):
<TABLE>
<CAPTION>
YEARS ENDED JUNE 30
-------------------------------------------------------------
1997 1996 1995 1994 1993
---------- ----------- ---------- ----------- -----------
<S> <C> <C> <C> <C> <C>
Mortgage-backed securi-
ties, beginning balance $2,240,790 $ 4,723,457 $5,363,779 $ 4,044,744 $ 2,604,700
Mortgage-backed
securities purchased... 498,066 115,595 958 3,524,460 3,002,959
Loans exchanged for
mortgage-backed
securities............. 42,222 145,826 268,436 1,470,844 882,908
Mortgage-backed
securities acquired(1). 5,909 -- 23,963 -- --
Mortgage-backed securi-
ties sold(2)........... (42,222) (1,838,289) (12,099) (1,223,167) (1,762,649)
Principal repayments.... (475,949) (851,974) (711,881) (2,474,146) (750,032)
Amortization of unearned
premium................ (10,486) (20,810) (19,786) (58,316) (25,658)
Other changes........... 21,204 (33,015) (3,214) 79,360 92,516
University Savings mort-
gage-backed securities
sold(1)................ -- -- (186,699) -- --
---------- ----------- ---------- ----------- -----------
Net increase (decrease)
in mortgage-backed
securities............. 38,744 (2,482,667) (640,322) 1,319,035 1,440,044
---------- ----------- ---------- ----------- -----------
Mortgage-backed securi-
ties, ending balance... $2,279,534 $ 2,240,790 $4,723,457 $ 5,363,779 $ 4,044,744
========== =========== ========== =========== ===========
</TABLE>
- - --------
(1) Represents mortgage-backed securities acquired from TransWorld and
OneCentral in fiscal 1997, and from Union Federal in fiscal 1995. For
information regarding the TransWorld, OneCentral, Union Federal and
University Savings transactions, see Note 4 of the Notes to Consolidated
Financial Statements.
(2) Includes loans originated by the Bank and converted to mortgage-backed
securities.
23
<PAGE>
The following table summarizes the contractual maturities of the Bank's
gross mortgage-backed securities portfolio as of June 30, 1997 (dollars in
thousands):
<TABLE>
<CAPTION>
DUE AFTER YEAR 1 DUE AFTER YEAR 5
DUE IN YEAR 1 THROUGH YEAR 5 THROUGH YEAR 10 DUE AFTER YEAR 10 TOTAL
------------- ---------------- ---------------- ----------------- ----------
<S> <C> <C> <C> <C> <C>
Held to maturity:
FHLMC................. $ -- $ -- $ -- $ 266,272 $ 266,272
GNMA.................. -- -- -- 230,410 230,410
FNMA.................. -- 7,234 -- 415,467 422,701
----- ------- ------ ---------- ----------
Subtotal............ -- 7,234 -- 912,149 919,383
Pass-through securi-
ties................. -- -- -- 212,595 212,595
Subordinated securi-
ties................. -- -- -- 21,926 21,926
----- ------- ------ ---------- ----------
Total............... $ -- $ 7,234 $ -- $1,146,670 $1,153,904
===== ======= ====== ========== ==========
Weighted average cou-
pon rate............. -- 6.50% -- 7.14% 7.13%
===== ======= ====== ========== ==========
Available for sale:
FHLMC................. $ 936 $ 2,681 $ 11 $ 41,231 $ 44,859
GNMA.................. -- -- 146 514,175 514,321
FNMA.................. -- 1,286 -- 12,847 14,133
----- ------- ------ ---------- ----------
Subtotal............ 936 3,967 157 568,253 573,313
Pass-through securi-
ties................. -- -- -- 496,784 496,784
CMOs.................. -- -- 8,644 16,187 24,831
CMO residuals......... -- -- -- 100 100
----- ------- ------ ---------- ----------
Total............... $ 936 $ 3,967 $8,801 $1,081,324 $1,095,028
===== ======= ====== ========== ==========
Weighted average cou-
pon rate............. 6.48% 7.10% 7.02% 7.53% 7.52%
===== ======= ====== ========== ==========
Total gross mortgage-
backed securities...... $ 936 $11,201 $8,801 $2,227,994 $2,248,932
===== ======= ====== ========== ==========
Weighted average coupon
rate on total gross
mortgage-backed securi-
ties portfolio at end
of period.............. 6.48% 6.71% 7.02% 7.32% 7.32%
===== ======= ====== ========== ==========
</TABLE>
LIQUIDITY AND INVESTMENTS
The Bank is required by federal regulations to maintain a specified minimum
amount of liquid assets which may be invested in specified types of securities
and is also permitted to make certain other securities investments. The
balance of securities investments maintained by the Bank in excess of
regulatory requirements reflects management's objective of maintaining
liquidity at a level necessary to meet operating requirements, taking into
account anticipated cash flows and available sources of credit, to afford
future flexibility to meet withdrawal requests and loan commitments or to make
other investments. See Item 7. "Management's Discussion and Analysis of
Financial Condition and Results of Operations", for discussion of the Bank's
current investing strategies.
The OTS currently requires savings institutions to maintain eligible liquid
assets as defined by federal regulations in an amount equal to or greater than
5% of average deposits and borrowings. This liquidity requirement may be
changed from time to time by the OTS Director to any amount within the range
of 4% to 10% and the OTS Director has the authority to prescribe different
liquidity requirements for different classes of savings institutions, which
classes may be determined in accordance with
24
<PAGE>
criteria selected by the OTS Director. See "Regulation" below. The Bank's
qualified regulatory liquidity percentage of 5.75% and 5.41% for the months of
June 1997 and 1996, respectively, exceeded the regulatory requirement
applicable during each of those months.
The following table summarizes Glendale Federal's cash and short-term,
highly liquid securities by type at the dates indicated (in thousands):
<TABLE>
<CAPTION>
JUNE 30
----------------------------------------------
1997 1996 1995 1994 1993
-------- -------- -------- -------- ----------
<S> <C> <C> <C> <C> <C>
Federal funds sold.............. $ -- $ 33,000 $ 16,000 $ 45,961 $ 267,767
Securities purchased under
resale agreements.............. 482,000 375,000 280,000 270,000 575,000
Whole loans purchased under re-
sale agreements................ 150,000 25,000 -- -- --
-------- -------- -------- -------- ----------
632,000 433,000 296,000 315,961 842,767
Cash and amounts due from banks. 221,557 153,608 139,697 164,576 217,689
-------- -------- -------- -------- ----------
$853,557 $586,608 $435,697 $480,537 $1,060,456
======== ======== ======== ======== ==========
The following table summarizes the carrying amount of Glendale Federal's
other investments (excluding Federal Home Loan Bank ("FHLB") stock) at the
dates indicated (in thousands):
<CAPTION>
JUNE 30
----------------------------------------------
1997 1996 1995 1994 1993
-------- -------- -------- -------- ----------
<S> <C> <C> <C> <C> <C>
Certificates of deposit......... $ 4,005 $ 10,786 $ 10,059 $ 13,716 $ 24,779
U.S. Government and Federal
agency obligations............. 25,690 8,086 17,354 148,056 402,440
Equity securities............... 2,104 5 5 52 --
Commercial paper................ -- -- 14,908 1,564 1,741
FHLB Deposits................... -- -- -- 1,668 92,486
Mortgage-backed collateralized
notes -- -- -- 605 1,308
Other........................... -- -- -- 379 971
-------- -------- -------- -------- ----------
$ 31,799 $ 18,877 $ 42,326 $166,040 $ 523,725
======== ======== ======== ======== ==========
</TABLE>
Shown below are the carrying amounts and weighted average rates of other
investments (excluding FHLB stock) at June 30, 1997, with related remaining
terms to maturity (dollars in thousands):
<TABLE>
<CAPTION>
WEIGHTED
CARRYING AVERAGE
AMOUNT RATE
-------- --------
<S> <C> <C>
Certificates of deposit maturing within 1 year................ $ 4,005 5.37%
U.S. Government and Federal agency obligations:
Maturing within 1 year...................................... 14,813 5.58
Maturing in 1-5 years....................................... 4,974 5.50
Maturing in 5-10 years...................................... 5,903 6.08
Equity securities............................................. 2,104 --
------- ----
$31,799 5.33%
======= ====
</TABLE>
25
<PAGE>
MORTGAGE LOAN SERVICING ACTIVITIES
The Bank services mortgage loans for other loan investors in exchange for
servicing fees. Mortgage loan servicing activities include: collecting
payments from borrowers; forwarding the payments to the loans' investors along
with an accounting of the allocation of the payments, the loans' payment
status, and custodial funds held by the Bank; holding impounded borrower funds
for the payment of taxes and insurance; collecting, and if necessary,
foreclosing on delinquent borrowers; and advancing corporate funds when
impounded funds on hand are inadequate to pay property taxes and insurance, or
as otherwise needed to protect the investors' interest in the loans.
The Bank enters into agreements to service loans for others primarily
through the purchase of servicing rights from other servicers, and to a lesser
extent, through the sale of loans it has originated while retaining the right
to service the loans. Prior to fiscal 1995, the primary source of servicing
rights for the Bank was from the sale of loans with servicing rights retained.
Of the Bank's $29.6 billion of mortgage loan servicing, approximately $24.7
billion were obtained through the purchase of servicing agreements and $4.9
billion were obtained through the sale of loans with servicing rights
retained.
The Bank receives fees from loan investors, generally expressed as a percent
of the unpaid balance of the loans serviced, along with any late charges or
other fees collected from the borrowers. Servicing fees are collected from the
borrowers' payments, or in the event of default by the borrower, from the
investor's proceeds from foreclosure of the real estate. During the period the
borrower is not making payments, the Bank receives no fees and may be required
to advance corporate funds to meet contractual principal and interest pass-
through requirements for certain investors, maintain current property taxes
and insurance, to move the loan through the foreclosure process, and to
secure, prepare and market foreclosed real estate. The Bank generally recovers
advanced funds from borrowers of reinstated and performing loans, and from
investors of foreclosed loans. At June 30, 1997 and 1996, 3.50% and 2.83% of
the Bank's loans serviced for others were delinquent 30 days or more.
The following table summarizes activity in the Bank's portfolio of loans
serviced for others for the periods indicated (in millions):
<TABLE>
<CAPTION>
YEARS ENDED JUNE 30
-------------------------
1997 1996 1995
------- ------- -------
<S> <C> <C> <C>
Beginning portfolio of loans serviced for
others......................................... $14,168 $11,678 $10,085
Add: Servicing purchased........................ 17,184 3,696 2,803
Servicing retained on loans sold............. 92 -- --
Less: Amortization, prepayments and foreclosures (1,846) (1,206) (1,210)
------- ------- -------
Ending portfolio of loans serviced for others... $29,598 $14,168 $11,678
======= ======= =======
</TABLE>
The Bank's consolidated statement of financial condition includes "Mortgage
servicing assets" ("MSA"), which reflect the amortized cost of servicing
rights acquired by the Bank, either through purchase or retention of the
servicing rights relating to loans sold. As more fully discussed in Note 1 of
the Notes to Consolidated Financial Statements, the Bank adopted Statement of
Financial Accounting Standards No. 125, "Accounting for Transfers and
Servicing of Financial Assets and Extinguishment of Liabilities" ("SFAS 125").
SFAS 125 requires the recognition of a servicing asset or liability for loans
sold where the Bank retains the servicing rights. The amount recognized is an
allocation of the carrying value of the loan sold based on the relative fair
value of the loan to the servicing rights retained. SFAS 125 also requires
recognition of a valuation allowance for impairment in the fair value of the
MSA.
26
<PAGE>
The following table summarizes activity in the Bank's MSA and related
valuation allowance for the periods indicated (in thousands):
<TABLE>
<CAPTION>
YEARS ENDED JUNE 30
----------------------------
1997 1996 1995
-------- -------- --------
<S> <C> <C> <C>
MORTGAGE SERVICING ASSETS ACTIVITY:
Beginning balance.............................. $127,399 $ 99,122 $ 68,719
Purchases...................................... 187,343 50,836 51,537
Originated servicing rights.................... 1,119 -- --
Amortization................................... (27,342) (22,559) (19,131)
Decrease due to sale of University Savings..... -- -- (2,003)
-------- -------- --------
Ending balance................................. $288,519 $127,399 $ 99,122
======== ======== ========
VALUATION ALLOWANCE ACTIVITY:
Beginning balance.............................. $ --
Additions charged to loan servicing income..... (4,047)
--------
Ending balance................................. $ (4,047)
========
</TABLE>
The fair value of the Bank's servicing portfolio is determined 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 mortgages; during periods of increasing interest
rates, the market anticipates that homeowners will be less inclined to
refinance their existing mortgages. The slower prepayments anticipated by
rising interest rates results in a longer estimated period of net servicing
income for the existing servicing portfolio, and therefore increases its
value. Conversely, the faster prepayments anticipated by declining interest
rates results in a shorter estimated period of net servicing income and
therefore decreases the value of the Bank's servicing portfolio.
The following table summarizes the Bank's mortgage loan servicing portfolio
by interest rate at June 30, 1997:
<TABLE>
<CAPTION>
PRINCIPAL WEIGHTED AVERAGE WEIGHTED AVERAGE
INTEREST NUMBER OF BALANCE SERVICE FEE REMAINING TERM
RATE LOANS (IN THOUSANDS) (IN BASIS POINTS) (MONTHS)
-------- --------- -------------- ----------------- ----------------
<S> <C> <C> <C> <C>
Less than 6.5%..... 4,956 $ 595,334 33.0 298
6.50-6.99.......... 19,114 2,741,059 25.6 256
7.00-7.49.......... 54,034 8,205,535 29.2 313
7.50-7.99.......... 65,050 10,000,845 26.1 318
8.00-8.49.......... 38,995 4,529,434 37.3 298
8.50-8.99.......... 35,993 2,501,835 52.3 358
9.00-9.49.......... 8,442 426,979 54.0 242
9.50-9.99.......... 7,236 304,509 57.7 349
10.00 & over....... 6,809 292,101 71.4 345
------- -----------
Total............ 240,629 $29,597,631 32.1 310
======= ===========
</TABLE>
27
<PAGE>
The following table sets forth the geographic distribution of the Bank's
mortgage loan servicing portfolio at June 30, 1997 (dollars in thousands):
<TABLE>
<CAPTION>
% OF TOTAL
NUMBER OF PRINCIPAL PRINCIPAL
STATE LOANS BALANCE BALANCE
----- --------- ----------- ----------
<S> <C> <C> <C>
California.................................. 135,989 $19,813,201 67%
Florida..................................... 47,729 2,690,049 9
New York.................................... 3,801 745,914 3
Texas....................................... 3,783 653,129 2
New Jersey.................................. 7,227 647,374 2
Maryland.................................... 2,800 506,713 2
Colorado.................................... 4,068 442,572 1
Virginia.................................... 2,315 423,098 1
Washington.................................. 2,439 306,675 1
Others(1)................................... 30,478 3,368,906 12
------- ----------- ---
Total................................... 240,629 $29,597,631 100%
======= =========== ===
</TABLE>
- - --------
(1) No other state represents more than 1% of the Bank's mortgage servicing
portfolio measured by unpaid principal balance.
28
<PAGE>
DEPOSITS
The Bank's deposits are obtained primarily in California, where its branch
offices are located. The Bank attracts checking and other daily access type
accounts as well as short-term and long-term certificate accounts from the
general public by providing a wide assortment of accounts and rates. The
Bank's customer deposit accounts include savings, checking and money market
accounts, certificates of deposit with fixed terms ranging from three months
to five years, and negotiated rate $95,000 and over "jumbo" certificates with
maturities ranging from 14 days to five years. Included among these savings
programs are individual retirement accounts and Keogh retirement accounts.
Jumbo certificates are obtained from a diverse customer base which includes
state and local governments, private individuals, corporations and non-profit
organizations.
The following table sets forth information regarding the amounts of deposits
in the various types of deposit programs offered by the Bank as of the dates
indicated (dollars in thousands):
<TABLE>
<CAPTION>
JUNE 30
------------------------------------------------------------
1997 1996 1995 1994 1993
---------- ---------- ---------- ----------- -----------
<S> <C> <C> <C> <C> <C>
Daily access:
Checking.............. $1,198,011 $ 778,980 $ 661,853 $ 850,112 $ 816,536
Savings............... 452,225 492,777 551,905 1,236,446 1,422,005
Money-market.......... 2,119,553 1,719,319 1,272,012 1,038,944 796,666
---------- ---------- ---------- ----------- -----------
Total daily access.. 3,769,789 2,991,076 2,485,770 3,125,502 3,035,207
---------- ---------- ---------- ----------- -----------
Certificates with origi-
nal maturities of:
6 months and under.... 803,849 955,203 870,733 1,426,838 1,336,028
Over 6 months to 18
months............... 2,951,465 2,797,297 2,758,070 3,428,317 4,362,533
Over 18 months to 30
months............... 1,096,788 961,912 1,345,524 1,288,984 1,183,939
Over 30 months........ 552,342 770,786 737,891 1,088,872 1,059,738
Jumbo certificates.... 182,676 247,702 536,892 561,293 638,084
---------- ---------- ---------- ----------- -----------
Total certificates.. 5,587,120 5,732,900 6,249,110 7,794,304 8,580,322
---------- ---------- ---------- ----------- -----------
$9,356,909 $8,723,976 $8,734,880 $10,919,806 $11,615,529
========== ========== ========== =========== ===========
Weighted average inter-
est rate on deposits at
end of year............ 4.37% 4.62% 5.13% 3.94% 4.34%
========== ========== ========== =========== ===========
</TABLE>
29
<PAGE>
The following table sets forth information relating to the Bank's deposit
flows during the periods indicated (in thousands):
<TABLE>
<CAPTION>
YEARS ENDED JUNE 30
-------------------------------------------------------------
1997 1996 1995 1994 1993
---------- ---------- ----------- ----------- -----------
<S> <C> <C> <C> <C> <C>
Total deposits at begin-
ning of year........... $8,723,976 $8,734,880 $10,919,806 $11,615,529 $13,720,874
Interest credited....... 402,863 432,992 398,861 423,132 539,541
Net deposits increase
(decrease)............. (175,087) (443,896) 608,417 (1,118,855) (2,644,886)
Purchase of OneCentral
Bank deposits.......... 68,809 -- -- -- --
Purchase of TransWorld
Bank deposits.......... 336,348 -- -- -- --
Sale of Florida
franchise.............. -- -- (3,281,049) -- --
Sale of University
Savings................ -- -- (918,126) -- --
Purchase of Independence
One deposits........... -- 194,146 -- --
Purchase of Union Fed-
eral deposits.......... -- -- 812,825 -- --
---------- ---------- ----------- ----------- -----------
Total net increase (de-
crease) in deposits.... 632,933 (10,904) (2,184,926) (695,723) (2,105,345)
---------- ---------- ----------- ----------- -----------
Total deposits at end of
year................... $9,356,909 $8,723,976 $ 8,734,880 $10,919,806 $11,615,529
========== ========== =========== =========== ===========
</TABLE>
The following table sets forth information regarding the remaining
contractual maturities of deposits as of June 30, 1997 (dollars in thousands):
<TABLE>
<CAPTION>
WEIGHTED
AVERAGE TOTAL 3 MONTHS 4-6 7-12 13-24 25-36 OVER 36
RATE BALANCE OR LESS(1) MONTHS MONTHS MONTHS MONTHS MONTHS
-------- ---------- ---------- -------- ---------- ---------- ------- -------
<S> <C> <C> <C> <C> <C> <C> <C> <C>
Checking................ 0.37% $1,198,011 $1,198,011 $ -- $ -- $ -- $ -- $ --
Savings................. 2.15 452,225 452,225 -- -- -- -- --
Money-market............ 4.25 2,119,553 2,119,553 -- -- -- -- --
Certificates:
5.00% and lower........ 4.83 1,046,824 620,532 242,790 105,063 65,683 2,833 9,923
5.01%-6.00%............ 5.56 4,277,651 1,064,001 598,673 1,484,743 1,048,448 22,985 58,801
6.01%-7.00%............ 6.24 227,948 17,498 6,985 30,785 122,878 47,816 1,986
7.01%-8.00%............ 7.24 32,839 178 377 7,342 4,213 20,542 187
8.01%-9.00%............ 8.27 1,595 -- 411 319 865 -- --
9.01%-10.00%........... 9.45 263 -- -- 130 133 -- --
---------- ---------- -------- ---------- ---------- ------- -------
Total certificates.... 5.46 5,587,120 1,702,209 849,236 1,628,382 1,242,220 94,176 70,897
---------- ---------- -------- ---------- ---------- ------- -------
4.37% $9,356,909 $5,471,998 $849,236 $1,628,382 $1,242,220 $94,176 $70,897
========== ========== ======== ========== ========== ======= =======
</TABLE>
- - --------
(1) Includes deposits with no stated maturity.
For additional information with respect to deposits, see "Operating
Strategies" above and Item 7. "Management's Discussion and Analysis of
Financial Condition and Results of Operations--Balance Sheet Analysis--
Deposits" and Notes 4 and 13 of the Notes to Consolidated Financial
Statements.
30
<PAGE>
BORROWINGS
The following table summarizes Glendale Federal's consolidated borrowings by
type at the dates indicated (dollars in thousands):
<TABLE>
<CAPTION>
JUNE 30
----------------------------------------------------------
1997 1996 1995 1994 1993
---------- ---------- ---------- ---------- ----------
<S> <C> <C> <C> <C> <C>
Securities sold under
agreements to repur-
chase.................. $ 768,682 $ 758,050 $2,695,176 $2,306,274 $3,064,995
Borrowings from FHLB.... 4,788,000 3,838,000 3,495,000 2,443,428 2,192,272
Subordinated debentures. 10,506 10,506 14,227 14,280 63,363
Notes payable........... 276 93 1,177 1,440 98
Collateralized notes.... -- -- 13,479 81,170 78,510
---------- ---------- ---------- ---------- ----------
$5,567,464 $4,606,649 $6,219,059 $4,846,592 $5,399,238
========== ========== ========== ========== ==========
Weighted average inter-
est rate on
borrowings at end of
period................. 5.72% 5.87% 6.18% 4.65% 4.11%
========== ========== ========== ========== ==========
</TABLE>
The Bank sells securities under "reverse repurchase agreements" with
securities dealers and the FHLB. Reverse repurchase agreements consist of
sales of securities with a commitment by the Bank to repurchase such
securities for a predetermined price at a future date, typically ranging from
one to 120 days after the date of initial sale. The proceeds are used to
provide investment funds. Reverse repurchase transactions are treated as
borrowings, with the repurchase obligations being reflected as a liability
under the caption "Securities sold under agreements to repurchase" in the
Consolidated Statements of Financial Condition, and the related interest
expense being included in "Interest expense: Short-term borrowings" in the
Consolidated Statements of Operations. The securities and loans
collateralizing the reverse repurchase agreements are included in the
respective line items in the Consolidated Statements of Financial Condition.
The FHLB System functions in a reserve credit capacity for savings
institutions and certain other home financing institutions. As a member, the
Bank is required to own capital stock in the Federal Home Loan Bank of San
Francisco and is authorized to apply for advances from the FHLB on the
security of such stock and certain of its home mortgage loans and other
assets. Such borrowings may be made pursuant to several different credit
programs offered from time to time by the FHLB. Each credit program has its
own interest rate and range of maturities, and the FHLB prescribes the
acceptable uses to which the advances pursuant to each program may be put as
well as limitations on the size of the advances. Depending upon the credit
program used, FHLB advances bear interest at fixed rates or at adjustable
rates tied to various indices. When the Bank utilizes adjustable-rate
programs, it generally obtains advances tied to LIBOR.
The FHLB offers a full range of maturities up to ten years at generally
competitive rates. A prepayment penalty is normally imposed for early
repayment of FHLB advances. The Bank had a line of credit with the FHLB
totaling $5.7 billion at June 30, 1997. The Bank had borrowings outstanding
from the FHLB at June 30, 1997 and 1996 of $4.8 billion and $3.8 billion,
respectively. All advances from the FHLB are collateralized with mortgage
loans, mortgage-backed securities and FHLB stock. The Bank is also a member of
the Federal Reserve System and may borrow from the Federal Reserve Bank of San
Francisco. Savings institutions are required to exhaust their FHLB borrowing
capacity before borrowing from the Federal Reserve Bank. See Item 7.
"Management's Discussion and Analysis of Financial Condition and Results of
Operations--Liquidity and Asset and Liability Management" for further
information on the Bank's liquidity.
All of the subordinated debentures outstanding at June 30, 1997 were
redeemed on September 16, 1997 at a redemption price equal to 100% of the
principal amount together with accrued and unpaid interest from March 15, 1997
to the redemption date.
31
<PAGE>
In the past, the Bank has utilized other sources of funds to supplement
retail deposits. These sources included the issuance by the Bank of
subordinated debentures, collateralized notes, subordinated capital notes,
commercial paper, medium-term notes and other short-term debt and the use by
the Bank's subsidiaries of commercial paper, lines of credit with banks and
other notes payable.
ASSET AND LIABILITY MANAGEMENT AND MARKET RISK
Glendale Federal's earnings depend primarily on its net interest income,
which is the difference between the amounts it receives from interest earned
on its loans and securities investments (its "interest-earning assets") and
the amounts it pays in interest on its deposit accounts and borrowings (its
"interest-bearing liabilities"). Net interest income is affected by (i) the
difference (the "interest rate spread" as applied to a specified date and the
"yield-cost spread" as applied to a specified period) between rates of
interest earned on its interest-earning assets and rates paid on its interest-
bearing liabilities and (ii) the relative amounts of its interest-earning
assets and interest-bearing liabilities. See "Interest Rate Margin" below for
information concerning the interest rate spread for the past three fiscal
years. See Item 7. "Management's Discussion and Analysis of Financial
Condition and Results of Operations--Results of Operations--Net Interest
Income" for information concerning the yield-cost spread and a discussion of
net interest income for the past three fiscal years.
Market risk is the risk of loss from adverse changes in market prices and
rates. The Bank's market risk arises primarily from interest rate risk
inherent in its lending and deposit taking activities. To that end, management
actively monitors and manages its interest rate risk exposure.
The Bank's primary objective in managing interest rate risk is to minimize
the adverse impact of changes in interest rates on the Bank's net interest
income and capital, while adjusting the Bank's asset-liability structure to
obtain the maximum yield-cost spread on that structure. The Bank relies
primarily on its asset-liability structure to control interest rate risk.
However, a sudden and substantial increase in interest rates may adversely
impact the Bank's earnings to the extent that the interest rates borne by
assets and liabilities do not change at the same speed, to the same extent, or
on the same basis.
32
<PAGE>
The Bank actively monitors the impact of changes in interest rates on its
net interest income. One measure of the Bank's exposure to differential
changes in interest rates between assets and liabilities is shown in the
following table, which sets forth the maturity and rate sensitivity of
Glendale Federal's interest-earning assets and interest-bearing liabilities as
of June 30, 1997. "GAP", as reflected in the table, represents the estimated
difference between the amount of interest-earning assets and interest-bearing
liabilities repricing during future periods as adjusted for interest rate
swaps and based on certain assumptions, including those stated in the notes to
the table. The interest rate sensitivity of the Bank's assets and liabilities
illustrated in the following table would vary substantially if different
assumptions were used or if actual experience differs from the assumptions
used. See Item 7. "Management's Discussion and Analysis of Financial Condition
and Results of Operations--Liquidity and Asset and Liability Management--Asset
and Liability Management" for further discussion.
<TABLE>
<CAPTION>
MATURITY/RATE SENSITIVITY
-------------------------------------
TOTAL % OF WITHIN OVER 6 TO 12 1-5 OVER 5
BALANCE TOTAL 6 MONTHS MONTHS YEARS YEARS
------- ----- -------- ------------ ------- ------
(DOLLARS IN MILLIONS)
<S> <C> <C> <C> <C> <C> <C>
Interest-earning As-
sets(1):
Loans receivable:
Single-family 1-4
units(2)(3)........... $ 8,822 56.8% $3,831 $2,030 $ 2,400 $561
Multi-family and non-
residential(2)(3)..... 3,027 19.5 2,693 111 138 85
Consumer and commer-
cial(3)............... 281 1.8 206 41 32 2
Mortgage-backed securi-
ties(2)(3).............. 2,249 14.5 1,488 316 351 94
Investment securi-
ties(4)................. 664 4.3 664 -- -- --
Other assets(5).......... 481 3.1 260 -- -- 221
------- ----- ------ ------ ------- ----
Total interest-earn-
ing assets.......... 15,524 100.0% $9,142 $2,498 $ 2,921 $963
===== ------ ------ ------- ----
Non-interest-earning as-
sets..................... 694
-------
Total assets.............. $16,218
=======
Interest-bearing Liabili-
ties:
Deposits:
Checking(6)............ $ 1,198 8.0% $ 107 $ 97 $ 522 $472
Savings(6)............. 452 3.0 33 30 176 213
Money-market(6)........ 2,120 14.2 372 307 1,133 308
Certificates(4)........ 5,587 37.5 2,549 1,630 1,407 1
Borrowings:
FHLB(4)................ 4,788 32.1 3,388 -- 1,400 --
Other(4)............... 779 5.2 769 -- 10 --
------- ----- ------ ------ ------- ----
Total interest-bearing li-
abilities................ 14,924 100.0% $7,218 $2,064 $ 4,648 $994
===== ------ ------ ------- ----
Non-interest-bearing lia-
bilities................. 282
-------
Total liabilities......... 15,206
Stockholders' equity...... 1,012
-------
Total liabilities and
stockholders' equity..... $16,218
=======
Maturity GAP.............. 1,924 434 (1,727) (31)
Impact of interest rate
swaps(7)................. -- -- -- --
------ ------ ------- ----
Adjusted GAP.............. $1,924 $ 434 $(1,727) (31)
Cumulative GAP............ $1,924 $2,358 $ 631 $600
As % of total assets...... 11.9% 14.5% 3.9% 3.7%
June 30, 1996 Cumulative
GAP...................... $3,421 $3,048 $ 194 $646
As % of total assets...... 23.7% 21.1% 1.3% 4.5%
</TABLE>
- - --------
(1) Asset balances are net of loans in process.
(2) ARM loans are predominantly included in the "within 6 months" and "over 6
to 12 months" categories, as they are subject to an interest adjustment
every month, six months or twelve months, depending upon terms of the
applicable note.
(3) Maturity/rate sensitivity is based upon contractual maturity, projected
repayments and prepayments of principal. The prepayment experience
reflected herein is based on the Bank's historical experience. The Bank's
average Constant Prepayment Rate ("CPR") is 16.7% and 18.2% on its fixed-
rate and adjustable-rate portfolios, respectively. The actual maturity and
rate sensitivity of these assets could vary substantially if future
prepayments differ from the Bank's historical experience.
(4) Based on the contractual maturity of the instrument.
(5) Includes cash and demand deposits and FHLB stock, the latter earning a
rate of return that varies quarterly.
(6) In accordance with standard industry practice and the Bank's own
historical experience, decay factors, used to estimate deposit runoff, of
41.8% (CPR) per year have been applied to these deposits.
(7) No interest rate swaps were outstanding as of June 30, 1997.
33
<PAGE>
Another measure, required to be performed by OTS-regulated institutions, is
the test specified by OTS Thrift Bulletin No. 13, "Interest Rate Risk
Exposure: Guidelines on Director and Officer Responsibilities". Under this
regulation, institutions are required to establish limits on the sensitivity
of their net interest income and net portfolio value to changes in interest
rates. Such changes in interest rates are defined as instantaneous and
sustained movements in interest rates in 100 basis point increments. Following
are the estimated impacts of a parallel shift in interest rates at June 30,
1997, calculated in a manner consistent with the requirements of Thrift
Bulletin No. 13:
<TABLE>
<CAPTION>
PERCENTAGE CHANGE IN
--------------------------
CHANGE IN INTEREST RATES NET INTEREST NET PORTFOLIO
(IN BASIS POINTS) INCOME(1) VALUE(2)
------------------------ ------------ -------------
<S> <C> <C>
+200......................................... -3% -22%
+100......................................... -1% -9%
-100......................................... 2% 9%
-200......................................... 3% 17%
</TABLE>
- - --------
(1) The percentage change in this column represents Net Interest Income for 12
months in a stable interest rate environment versus the Net Interest
Income in the various rate scenarios.
(2) The percentage change in this column represents Net Portfolio Value of the
Bank in a stable interest rate environment versus the Net Portfolio Value
in the various rate scenarios. The OTS defines Net Portfolio Value as the
present value of expected net cash flows from existing assets minus the
present value of expected net cash flows from existing liabilities plus
the present value of expected net cash inflows from existing off-balance
sheet contracts.
34
<PAGE>
The following table shows the Bank's financial instruments that are
sensitive to changes in interest rates, categorized by expected maturity, and
the instruments' fair values at June 30, 1997. Market risk sensitive
instruments are generally defined as on and off balance sheet derivatives and
other financial instruments.
<TABLE>
<CAPTION>
EXPECTED MATURITY DATE AT JUNE 30, 1997(1)
-----------------------------------------------------------------
THERE- TOTAL FAIR
1998 1999 2000 2001 2002 AFTER BALANCE VALUE
----------------------- ------ ------ ------ ------- -------
(DOLLARS IN MILLIONS)
<S> <C> <C> <C> <C> <C> <C> <C> <C>
INTEREST-SENSITIVE ASSETS:
Loans receivable:
Single-family 1-4 units. $ 1,663 $1,598 $1,252 $ 901 $ 635 $2,773 $ 8,822 $ 8,821
Average interest rate.. 8.13% 8.20% 8.30% 8.40% 8.58% 10.10% 8.85%
Multi-family and non-
residential............ 410 303 254 223 195 1,642 3,027 2,795
Average interest rate.. 8.08% 7.88% 7.79% 7.75% 7.68% 7.48% 7.66%
Consumer and commercial. 33 31 120 4 62 31 281 266
Average interest rate.. 10.70% 10.73% 10.00% 17.84% 11.47% 12.55% 10.88%
Mortgage-backed
securities.............. 417 323 261 205 161 882 2,249 2,284
Average interest rate.. 8.16% 8.28% 8.31% 8.31% 8.30% 8.08% 8.19%
Investment securities.... 664 -- -- -- -- -- 664 679
Average interest rate.. 5.63% -- -- -- -- -- 5.63%
Mortgage servicing
assets.................. 44 38 33 27 23 119 284 353
------- ------ ------ ------ ------ ------ ------- -------
Total interest-sensitive
assets.................. $ 3,231 $2,293 $1,920 $1,360 $1,076 $5,447 $15,327 $15,198
======= ====== ====== ====== ====== ====== ======= =======
INTEREST-SENSITIVE LIABILITIES:
Deposits:
Checking................ $ 204 $ 169 $ 140 $ 116 $ 97 $ 472 $ 1,198 $ 1,198
Average interest rate.. .37% .37% .37% .37% .37% .37% .37%
Savings................. 63 54 47 40 35 213 452 452
Average interest rate.. 2.15% 2.15% 2.15% 2.15% 2.15% 2.15% 2.15%
Money-market............ 678 462 314 213 145 308 2,120 2,120
Average interest rate.. 4.26% 4.26% 4.26% 4.26% 4.26% 4.26% 4.26%
Certificates............ 4,184 1,336 66 1 -- -- 5,587 5,589
Average interest rate.. 5.35% 5.81% 5.44% 5.96% -- -- 5.46%
Borrowings:
FHLB.................... 3,388 500 -- 900 -- -- 4,788 4,766
Average interest rate.. 5.72% 5.64% -- 5.77% -- -- 5.72%
Other................... 779 -- -- -- -- -- 779 777
Average interest rate.. 5.69% -- -- -- -- -- 5.69%
------- ------ ------ ------ ------ ------ ------- -------
Total interest-sensitive
liabilities............. $ 9,296 $2,521 $ 567 $1,270 $ 277 $ 993 $14,924 $14,902
======= ====== ====== ====== ====== ====== ======= =======
</TABLE>
- - --------
(1) Expected maturities are contractual maturities adjusted for prepayments of
principal. The Bank uses certain assumptions to estimate fair values and
expected maturities. For assets, expected maturities are based upon
contractual maturity, projected repayments and prepayments of principal.
The prepayment experience reflected herein is based on the Bank's
historical experience. The Bank's average Constant Prepayment Rate ("CPR")
is 16.7% and 18.2% on its fixed-rate and adjustable-rate portfolios,
respectively, for interest-earning assets (excluding investment
securities, which do not have prepayment features). For deposit
liabilities, in accordance with standard industry practice and the Bank's
own historical experience, "decay factors", used to estimate deposit
runoff, of 41.8% (CPR) per year have been applied. The actual maturities
of these instruments could vary substantially if future prepayments differ
from the Bank's historical experience.
35
<PAGE>
The Bank continually evaluates interest rate risk management opportunities,
including the use of derivative financial instruments. Management believes
that hedging instruments currently available are not cost-effective, and
therefore, has focused its efforts on increasing the Bank's yield-cost spread
by attracting lower-costing retail deposits. In the past, the Bank has used
derivatives, primarily interest rate exchange agreements, as a component of
its interest rate risk management strategy. The purpose of the interest rate
exchange agreements was to reduce the effect of rising interest rates on
short-term deposits and FHLB advances, and the effect thereof on interest
expense. The Bank currently has no interest rate exchange agreements or other
off-balance sheet derivatives. The Bank had $734,000 in derivatives,
consisting of interest-only strips and CMO residuals, at June 30, 1997.
INTEREST RATE MARGIN
The following table provides information concerning the interest rate spread
at the end of each of the past three fiscal years:
<TABLE>
<CAPTION>
JUNE 30
-----------------
1997 1996 1995
---- ---- -----
<S> <C> <C> <C>
Weighted average rate:
Loans receivable, net..................................... 7.73% 7.74% 7.91%
Mortgage-backed securities, net........................... 6.78 6.26 6.30
Total loans and mortgage-backed securities.............. 7.58 7.49 7.40
Federal funds sold and assets purchased under resale
agreements............................................... 6.49 5.69 6.43
Other investments(1)...................................... 8.41 9.58 9.05
Total investments....................................... 7.10 6.99 7.58
Total loans, mortgage-backed securities and investments. 7.55 7.46 7.40
Weighted average rate:
Deposits--daily access.................................... 2.76 3.02 3.06
Deposits--certificates.................................... 5.46 5.46 5.95
Total deposits.......................................... 4.37 4.62 5.13
Securities sold under agreements to repurchase............ 5.66 5.50 6.15
Borrowings from FHLB...................................... 5.72 5.94 6.18
Other borrowings.......................................... 7.78 7.76 10.63
Total borrowings........................................ 5.72 5.87 6.18
Total deposits and borrowings........................... 4.87 5.05 5.57
Interest rate spread........................................ 2.68% 2.41% 1.83%
Adjusted interest rate spread(2)............................ 2.79% 2.59% 1.98%
</TABLE>
- - --------
(1) Includes certificates of deposit, other debt and equity securities, and
investment in capital stock of FHLB.
(2) Net interest income annualized at the rates in effect as of the reported
date divided by the balance of interest-earning assets as of such date.
See Item 7. "Management's Discussion and Analysis of Financial Condition and
Results of Operations--Results of Operations--Net Interest Income" for an
analysis of changes in interest income and interest expense and their effect
on the results of the Bank's operations.
36
<PAGE>
SUBSIDIARIES
The Bank conducts various business activities through its subsidiaries.
Applicable regulations provide that federally chartered institutions such as
the Bank may invest up to 2% of their assets in capital stock and secured and
unsecured loans to subsidiary service corporations and an additional 1% of
assets when the additional funds are used for community development and inner-
city purposes. An institution that meets its regulatory capital requirements
is also generally permitted to make conforming loans to service corporations
(and certain joint ventures of service corporations) in which the institution
owns or holds more than 10% of the capital stock in an aggregate amount of up
to 50% of its regulatory capital. At June 30, 1997 the Bank's permissible
investment limit was $833.4 million and the Bank's aggregate investment for
regulatory purposes related to this limitation was $213.3 million.
Subsidiaries of the Bank whose operations are on-going include GLENFED
Brokerage Service ("GBS") and GLENFED Insurance Services, Inc. ("GIS"). GBS
markets investments such as mutual funds and annuity products and provides
discount securities brokerage services. GBS recorded total revenues and pre-
tax earnings of $10.1 million and $5.1 million, respectively, for fiscal 1997
and had total assets of $14.5 million at June 30, 1997. GIS provides general
insurance agency services. GIS recorded total revenues and pre-tax earnings of
$5.4 million and $2.5 million, respectively, for fiscal 1997 and had total
assets of $10.6 million at June 30, 1997. While these subsidiaries conduct
their activities separately from those of the Bank, their principal sources of
customers are referrals from the Bank's retail branch offices. These
subsidiaries have contributed to the Bank's non-interest income and, as such,
continue to be a part of the Bank's core operations.
COMPETITION
Savings institutions such as the Bank face intense competition in attracting
retail deposits and in making real estate and other loans. The most direct
competition for deposits comes from commercial banks, other savings
institutions, credit unions, thrift and loan associations, short-term money
market securities, including, in particular, money-market funds, and from
other corporate and government securities. The principal basis of competition
for funds is the interest rate paid.
The principal methods used by the Bank to attract retail deposits include
interest rate competition, convenient office locations, advertising, automated
teller machines and customer service. Competition for retail deposits in
California is particularly strong from large commercial banks because they
provide a broader range of consumer services and have extensive branch
networks.
Competition in making loans comes principally from mortgage banking
companies, other savings institutions, commercial banks and insurance
companies. These institutions compete for loans primarily through the interest
rates and loan fees charged and the efficiency, convenience and quality of
services they provided to borrowers, home builders and real estate brokers.
Many of the nation's largest savings institutions, commercial banks and
mortgage banking companies operate in the same areas in which the Bank
competes and consequently the Bank has had to market and price its own
products aggressively.
EMPLOYEES
As of June 30, 1997, Glendale Federal had a total of 2,769 full-time
equivalent employees. None of its employees are represented by any collective
bargaining group. The Bank provides its full-time employees with a
comprehensive program of benefits, most of which are on a contributory basis,
including medical insurance, dental insurance, life insurance, accidental
death and dismemberment insurance, long-term disability coverage, a pension
plan and a 401(k) plan. Management considers the Bank's employee relations to
be satisfactory with a work force which maintains an overall commitment to the
mission and strategic goals of the Bank.
37
<PAGE>
REGULATION
GENERAL
As a federally chartered and insured savings bank (referred to generally in
applicable statutes as a "savings association"), Glendale Federal is subject
to examination and supervision by the OTS and, in a back-up capacity, the FDIC
and to federal statutes and regulations governing such matters as capital
standards, business combinations, establishment of branch offices, lending,
deposit taking and borrowing authority, permitted subsidiary investments and
activities and general investment authority. Glendale Federal is also subject
to various regulations of the Board of Governors of the Federal Reserve System
(the "Federal Reserve Board") concerning non-interest-bearing reserves
required to be maintained against customer deposits and certain consumer
protection laws and other regulations.
Golden State is subject to regulation and examination by the OTS under the
savings and loan holding company provisions of federal law.
The descriptions of the statutes and regulations that are applicable to
Glendale Federal and Golden State set forth herein do not purport to be
complete descriptions of such statutes and regulations and their effects. Such
descriptions also do not purport to identify every statute and regulation that
may apply to Glendale Federal or Golden State.
The enforcement authority of the OTS over savings institutions includes the
ability to impose penalties for and to seek correction of violations of laws
or regulations or unsafe or unsound practices by assessing civil money
penalties, issuing cease and desist or removal and prohibition orders against
an institution, its directors, officers or employees and other persons or
initiating injunctive actions. In general, such enforcement actions may be
initiated in response to violations of laws, regulations and cease and desist
orders or to address unsafe or unsound conditions or practices.
The FDIC may terminate the deposit insurance of any insured depository
institution if it determines, after a hearing, that the institution has
engaged or is engaging in unsafe or unsound practices, is in an unsafe or
unsound condition to continue operations or has violated any applicable law,
regulation or order, or any condition imposed in writing by the FDIC. It may
also suspend deposit insurance temporarily during the hearing process if the
institution has no tangible capital.
RESTRICTIONS ON DIVIDENDS AND OTHER CAPITAL DISTRIBUTIONS
OTS regulations impose limitations on "capital distributions" by savings
institutions, including cash dividends, payments to repurchase or otherwise
acquire an institution's shares, payments to shareholders in a "cash-out"
merger and other distributions charged against capital. 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. 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.
FEDERAL HOME LOAN BANK SYSTEM
The FHLB System provides a central credit facility for member institutions.
Glendale Federal is subject to certain regulations of the Federal Housing
Finance Board and is required to own capital stock in its regional FHLB, the
FHLB of San Francisco, in an amount at least equal to the greater of 1% of the
aggregate outstanding balance of its loans secured by home mortgages, home
purchase contracts and similar obligations at the end of each calendar year,
or 5% of its FHLB advances. As of
38
<PAGE>
June 30, 1997, Glendale Federal was in compliance with this requirement with
an investment in FHLB stock of $259.6 million. Institutions not satisfying
certain "qualified thrift lender" requirements are subject to limitations on
their ability to borrow from their FHLB.
LIQUIDITY
Current federal regulations require savings institutions to maintain an
average daily balance each month of liquid assets (as defined in the
applicable regulations) equal to not less than a specified percentage of the
average daily balance during the previous month of net withdrawable customer
accounts and borrowings payable on demand or in one year or less (the
"liquidity ratio"). The required liquidity ratio may be changed by the OTS
within the range of 4% to 10% of an institution's net withdrawable accounts
and short-term borrowings, depending upon economic conditions and the deposit
flows of member institutions. The OTS has proposed to reduce the required
liquidity ratio from the current requirement of 5% to the statutory minimum of
4%. Savings institutions must also maintain an average daily balance each
month of short-term liquid assets equal to at least 1% of the average daily
balance for the preceding calendar month of net withdrawable customer accounts
plus borrowings payable on demand or in one year or less. The liquidity and
short-term liquidity ratios of Glendale Federal for the month of June 1997
were 5.75% and 5.27%, respectively.
INSURANCE OF DEPOSIT ACCOUNTS
The FDIC administers two separate deposit insurance funds. The Savings
Association Insurance Fund (the "SAIF") insures the customer deposits of
institutions that were formerly insured by the Federal Savings and Loan
Insurance Corporation. The Bank Insurance Fund (the "BIF") insures the
customer deposits of commercial banks and certain other institutions. Glendale
Federal is a member of the SAIF.
FDIC insurance premiums are assessed pursuant to a risk-based system under
which institutions are classified on the basis of capital ratios, supervisory
evaluation by the institutions' primary federal regulatory agency and other
information deemed relevant by the FDIC. The deposit insurance premium
assessment rate for SAIF-insured institutions currently ranges from 0% to
0.27%. The FDIC is authorized to increase deposit insurance premiums if it
determines such increases are appropriate to maintain the reserves of either
the SAIF or the BIF or to fund the administration of the FDIC. In addition,
the FDIC is authorized to levy emergency special assessments on BIF and SAIF
members.
Pursuant to the Federal Deposit Insurance Corporation Improvement Act of
1991 ("FDICIA"), the FDIC implemented a risk-based federal deposit insurance
premium system under which savings institutions were previously assigned a
deposit insurance premium rate ranging from 0.23% to 0.31%.
During the third calendar quarter of 1996, federal legislation was enacted
which, among other things, recapitalized the SAIF through a one-time special
assessment for SAIF members, such as the Bank. The special assessment was at
an assessment rate of .657% on the Bank's assessment base as of March 31,
1995. The Bank recorded a one-time charge of $55.5 million for the special
assessment. The federal legislation also provided that, beginning January 1,
1997, the same risk-based insurance premium assessment schedule would apply to
both SAIF members and BIF members, SAIF members having previously been subject
to higher rates of insurance premium assessments than those applicable to BIF
member institutions. The recapitalization of the SAIF has reduced the Bank's
deposit insurance premium expense.
Additionally, the federal legislation enacted in the third quarter of 1996
provides for full pro rata sharing by all federally-insured institutions by
January 1, 2000, of the obligation, previously borne entirely by SAIF-insured
institutions, to pay the interest on the bonds (commonly referred to as the
"FICO Bonds") that were issued by a specially created federal corporation for
the purpose of funding
39
<PAGE>
the resolution of failed thrift institutions. Beginning on January 1, 1997
through January 1, 2000 (or January 1, 1999 if federal legislation is enacted
to merge the commercial bank and savings association charters for federal law
purposes), FICO premiums for the BIF- and SAIF-insured deposits are $0.013 and
$0.064 per $100 of deposits, respectively. The legislation provides for the
merger of the BIF and the SAIF on January 1, 1999, into a newly created
Deposit Insurance Fund, provided that the commercial bank and savings
association charters are combined by that date. If the charters have been
merged and the Deposit Insurance Fund created, pro rata FICO premium sharing
will begin on January 1, 1999. Congress has begun consideration of legislation
that would merge the commercial bank and savings association charters and
would, in connection therewith limit the permitted range of business
activities of savings association holding companies, while expanding the
lending powers of institutions that are currently categorized as savings
associations by categorizing them as commercial banks.
Under current law, and subject to certain limitations, a savings institution
may convert to a commercial bank charter if the resulting bank remains a
member of the SAIF. Federal laws and regulations relating to deposit insurance
now permit SAIF-insured savings institutions to merge with BIF-insured
commercial banks, with the resulting merged institution being subject to
proportionate assessments by the BIF and the SAIF. Upon payment of so-called
entrance and exit fees to the relevant FDIC insurance funds and compliance
with certain other requirements, transfers of deposit insurance from the SAIF
to the BIF will also be permitted on a whole institution basis at such time as
the SAIF attains a reserve to insured deposits ratio of 1.25% or under certain
other circumstances.
CAPITAL REQUIREMENTS
Federal Law and the capital regulations promulgated thereunder establish a
"leverage limit" (also commonly referred to as the "core capital ratio"), a
"tangible capital requirement" and a "risk-based capital requirement" for
savings institutions subject to OTS supervision.
The leverage limit currently requires a savings institution to maintain
"core capital" of not less than 3% of adjusted total assets. "Core capital"
generally includes common stockholders' equity (including retained earnings),
noncumulative perpetual preferred stock and any related surplus, and minority
interests in the equity accounts of fully consolidated subsidiaries.
Intangible assets (with certain exceptions for purchased and originated
mortgage servicing rights ("MSRs"), and certain other intangible assets must
generally be deducted from core capital. Under current regulations, up to 50%
of core capital may be comprised of MSRs, with MSRs being valued for this
purpose at the lowest of 90% of fair market value, 90% of original cost, or
amortized book value as determined under generally accepted accounting
principles. The OTS has proposed to remove the 50% of core capital limit on
inclusion of the amount of MSRs that may be taken into account in the
calculation of regulatory capital.
Under the tangible capital requirement a savings institution must maintain
"tangible capital" in an amount not less than 1.5% of adjusted total assets.
"Tangible capital" is defined as core capital less any intangible assets other
than readily marketable mortgage servicing rights which are included in core
capital, and investments in certain subsidiaries engaged in activities not
permissible for national banks.
Under the risk-based capital requirement, a savings institution must
maintain "total capital" (defined below) in an amount at least equal to 8% of
its risk-weighted assets. Each asset held by a savings institution is assigned
to one of four risk-weighting categories, based upon the degree of credit risk
associated with the type of asset involved and ranging from 0% for low-risk
assets such as U.S. Treasury securities and GNMA securities to 100% for
various types of loans and other assets deemed to be of higher risk. Single
family mortgage loans having loan-to-value ratios not exceeding 80% and
meeting certain additional criteria, as well as 5 to 36 unit multi-family
residential property loans meeting certain criteria, qualify for the 50% risk-
weighting. The book value of each asset is multiplied by the
40
<PAGE>
risk-weighting applicable to the asset category, and the sum of the products
of this calculation equals total risk-weighted assets. Off-balance sheet items
are also included in the calculation of total risk-weighted assets through a
formula intended to reflect the relative likelihood that a credit obligation
would result from the off-balance sheet item.
For purposes of the risk-based capital requirement, "total capital" means
core capital (as described above) plus "supplementary capital" (as defined
below), provided that the amount of supplementary capital may not exceed the
amount of core capital, less certain assets. Supplementary capital includes
(i) certain types of cumulative perpetual preferred stock and other perpetual
preferred stock, mandatory convertible subordinated debt and perpetual
subordinated debt, (ii) "maturing capital instruments" such as mandatory
redeemable preferred stock, intermediate-term preferred stock, commitment
notes and subordinated debt meeting certain criteria, and (iii) general
valuation loan and lease loss allowances, up to a maximum of 1.25% of risk-
weighted assets. Under the risk-based capital requirements, assets excluded
from total capital include equity investments (including certain direct
investments in real estate) and that portion of land loans and non-residential
construction loans in excess of an 80% loan-to-value ratio.
The Federal banking laws require each federal banking agency to monitor and
to revise its risk-based capital standards as appropriate to ensure that such
standards take adequate account of interest rate risk, concentration of credit
risk and the risks of nontraditional activities, and to ensure that such
standards reflect the actual performance and expected risk of loss of multi-
family mortgages.
In addition to the above regulatory capital requirements, the Federal
banking laws contain so-called "prompt corrective action" ("PCA") provisions
pursuant to which banks and savings institutions are to be classified into one
of five categories based primarily upon capital adequacy, ranging from "well
capitalized" to "critically undercapitalized," and which require, subject to
certain exceptions, the appropriate federal banking agency to take prompt
corrective action with respect to an institution which becomes
"undercapitalized" and to take additional actions if the institution becomes
"significantly undercapitalized" or "critically undercapitalized." These
provisions expand the powers and duties of the OTS and the FDIC and expressly
authorize, or in many cases direct, regulatory intervention prior to the time
at which regulatory capital becomes negative.
The OTS regulations implementing the PCA provisions define the five capital
categories. An institution is "well capitalized" if it has a total risk-based
capital ratio of 10% or greater, has a Tier 1 risk-based capital ratio (Tier 1
capital to total assets) of 6% or greater, has a core capital ratio of 5% or
greater and is not subject to any written capital order or directive to meet a
specific capital level or any capital measure. An institution is "adequately
capitalized" if it has a total risk-based capital ratio of 8% or greater, has
a Tier 1 risk-based capital ratio of 4% or greater and has a core capital
ratio of 4% or greater (3% for certain highly rated institutions).
Institutions with lower capital ratios are categorized as "undercapitalized",
"significantly undercapitalized" or "critically undercapitalized", with
increasingly severe mandatory regulatory consequences at the descending
capital levels, including mandatory appointment of a receiver or conservator
if an institution's tangible equity to total assets ratio is 2% or lower. The
OTS also has authority, after an opportunity for a hearing, to downgrade an
institution from "well capitalized" to "adequately capitalized", or to subject
an "adequately capitalized" or "undercapitalized" institution to the
supervisory actions applicable to the next lower category, for supervisory
concerns.
At June 30, 1997, the Bank's regulatory capital ratios were significantly
above the 5% core capital, 6% Tier 1 risk-based capital and 10% risk-based
capital levels required by federal regulators for "well-capitalized"
institutions. See Item 7. "Management's Discussion and Analysis of Financial
Condition and Results of Operations--Overview--Capital" and Note 18 of the
Notes to Consolidated Financial Statements for further information regarding
the Bank's regulatory capital ratios.
41
<PAGE>
LOANS TO ONE BORROWER
Savings institutions are generally subject to the loans-to-one borrower
limitations that are applicable to national banks. With certain limited
exceptions, the maximum amount that a savings institution may lend to one
borrower (including certain related entities of such borrower) is an amount
equal to 15% of the savings institution's unimpaired capital and unimpaired
capital surplus, plus an additional 10% for loans fully secured by readily
marketable collateral. Real estate is not included within the definition of
"readily marketable collateral" for this purpose. Pursuant to recent
regulatory amendments, the definition of the term "unimpaired capital and
unimpaired surplus" has been changed to refer now generally to an
institution's regulatory capital, and also to include in the basic 15% of
capital lending limit, that portion of an institution's general valuation
allowance that is not includable in regulatory capital as calculated for other
regulatory purposes. At June 30, 1997, the maximum amount which Glendale
Federal could have loaned to any one borrower (and related entities) was
$159.5 million. At that date, the largest balance of loans which Glendale
Federal had outstanding to any one borrower and related entities was $30.6
million. This loan was repaid in July 1997.
QUALIFIED THRIFT LENDER TEST
Under the qualified thrift lender ("QTL") test provisions of applicable
Federal law, a savings institution must maintain at least 65% of its portfolio
assets in qualified thrift investments on a specified monthly average basis.
In general, qualified thrift investments include loans, securities and other
investments that are related to housing, small business and credit card
lending, and, to a more limited extent, consumer lending and community service
purposes. Portfolio assets are defined as an institution's total assets less
goodwill and other intangible assets, the institution's business property and
a limited amount of the institution's liquid assets.
A savings institution's failure to remain a QTL may result in limitations on
new investments and activities, imposition of branching restrictions, loss of
FHLB borrowing privileges, and limitations on the payment of dividends. If a
savings institution that is a subsidiary of a savings and loan holding company
fails to regain QTL status within one year of its loss of such status, the
holding company must register as and will be deemed to be a bank holding
company subject to, among other things, the business activity restrictions of
the Bank Holding Company Act ("BHCA").
Glendale Federal's qualified thrift investments comprised 87.2% of its
portfolio assets as of June 30, 1997.
COMMUNITY REINVESTMENT ACT
The Community Reinvestment Act ("CRA") requires each savings institution, as
well as commercial banks and other lenders, to identify the communities served
by the institution's offices and to identify the types of credit the
institution is prepared to extend within such communities. The CRA also
requires the OTS to assess, as part of its examination of a savings
institution, the performance of the institution in meeting the credit needs of
its community and to take such assessments into consideration in reviewing
applications for mergers, acquisitions and other transactions. An
unsatisfactory CRA rating may be the basis for denying such an application. In
connection with the assessment of a savings institution's CRA performance, the
OTS will assign a rating of "outstanding", "satisfactory", "needs to improve"
or "substantial noncompliance". Based on the most recent OTS examination
conducted in March 1996, Glendale Federal's CRA performance was rated
"satisfactory".
REAL ESTATE LENDING STANDARDS
FDICIA requires the federal banking agencies to adopt uniform real estate
lending standards. In response to this requirement, the OTS and the other
federal banking agencies have jointly adopted
42
<PAGE>
uniform rules on real estate lending and related Interagency Guidelines for
Real Estate Lending Policies (the "Guidelines"). The uniform rules require
that institutions adopt and maintain comprehensive written policies for real
estate lending. The policies must reflect consideration of the Guidelines and
must address relevant lending procedures, such as loan to value limitations,
loan administration procedures, portfolio diversification standards and
documentation, approval and reporting requirements. Although the final rule
did not impose specific maximum loan to value ratios, the related Guidelines
state that such ratio limits established by individual institutions' boards of
directors should not exceed levels set forth in the Guidelines, which range
from a maximum of 65% for loans secured by raw land to 85% for improved
property. No limit is set for single family residence loans, but the
Guidelines state that such loans exceeding a 90% loan to value ratio should
have private mortgage insurance or some form of credit enhancement. The
Guidelines further permit a limited amount of loans that do not conform to
these criteria. The Bank has adopted limits in accordance with the Guidelines.
SAVINGS AND LOAN HOLDING COMPANY REGULATIONS
As a savings and loan holding company, Golden State is subject to certain
restrictions with respect to its activities and investments. Among other
things, Golden State is generally prohibited, either directly or indirectly,
from acquiring more than 5% of the voting shares of any savings association or
savings and loan holding company which is not a subsidiary.
Similarly, OTS approval must be obtained prior to any person acquiring
control of Golden State or the Bank. Control is conclusively presumed to exist
if, among other things, a person acquires more than 25% of any class of voting
stock of the institution or holding company or controls in any manner the
election of a majority of the directors of the insured institution or the
holding company. Control is also presumed to exist, but subject to rebuttal,
if, among other things, a person acquires more than 10% of any class of voting
stock (or 25% of any class of stock) and is subject to any of certain
specified "control factors," which include the percentage of the debt and
equity of the institution or holding company owned by the person, agreements
giving the person influence over a material aspect of the operations of the
institution or holding company and the number of seats on the board of
directors of the institution or holding company held by the person or
designees of the person.
Golden State is considered an "affiliate" of the Bank for regulatory
purposes. Savings associations are subject to the rules relating to
transactions with affiliates and loans to insiders generally applicable to
commercial banks that are members of the Federal Reserve System and certain
additional limitations. In addition, savings associations are generally
prohibited from extending credit to an affiliate, other than the association's
subsidiaries, unless the affiliate is engaged only in activities which the
Federal Reserve Board has determined to be permissible for bank holding
companies and which the OTS has not disapproved.
Savings and loan holding companies which control only one savings
association are exempt, if the association meets its QTL test, from
restrictions on the conduct of unrelated business activities that are
applicable to other savings and loan holding companies and that are similar to
the restrictions on the conduct of unrelated business activities applicable to
bank holding companies under the Bank Holding Company Act.
43
<PAGE>
TAXATION
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 claim annual tax
deductions for additions to such reserves. A qualifying savings institution
was permitted to make annual additions to such reserves under a method based
on the institution's loss experience. 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 percentage of taxable income method permitted the
institution to deduct a specified percentage of its taxable income before such
deduction, regardless of the institution's actual bad debt experience, subject
to certain limitations. Since 1988, Glendale Federal has claimed bad debt
deductions under the experience method because that method produced a greater
deduction than did the percentage of taxable income method.
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 and provided for recapture of a portion of the
reserves existing at the close of the last taxable year beginning before
January 1, 1996. See Note 15 of the Notes to Consolidated Financial Statements
for a discussion of the effect of this legislation on the Bank. For its tax
years beginning on or after January 1, 1996, the Bank is required to account
for its bad debts under the specific charge-off method. Under this method,
deductions may be claimed only as and to the extent that loans become wholly
or partially worthless.
In addition to the regular corporate income tax, corporations, including
qualifying savings institutions, are subject to an alternative minimum tax.
The 20% tax is computed on Alternative Minimum Taxable Income ("AMTI") and
applies if it exceeds the regular tax liability. AMTI is the regular taxable
income with certain adjustments. For taxable years beginning after 1989, AMTI
includes an adjustment for 75% of the excess of "adjusted current earnings"
over regular taxable income. Net operating loss carrybacks and carryforwards
are permitted to offset only 90% of AMTI.
The California franchise tax applicable to Glendale Federal and other
financial corporations is higher than the rate for general corporations. Prior
to 1995 the additional tax rate was computed for each year under a formula and
was "in lieu" of local personal property and business license taxes paid by
general corporations but not generally paid by banks and financial
corporations. For calendar 1994 the rate applicable to Glendale Federal was
11.47%. After 1994 the "in lieu" portion of the tax was set at 2% and the
Bank's rate for 1995 and 1996 was 11.3%. For 1997 and subsequent years the
rate is 10.84%. Under California law and regulations, financial corporations
are permitted to claim a bad debt deduction by using a reserve method, with
the reserve level being determined by past experience or current facts and
circumstances. California franchise taxes are deductible for federal income
tax purposes.
Tax returns have been audited by the Internal Revenue Service through
December 31, 1988 and by the California Franchise Tax Board through December
31, 1990. Under the federal statute of limitations, tax years through 1992
have closed without being audited. Under the California statute of
limitations, the tax year ended December 31, 1991 has closed without audit.
For additional information regarding taxation, see Note 15 of the Notes to
Consolidated Financial Statements.
ITEM 2. PROPERTIES
Glendale Federal conducts its business through 171 banking offices and 25
loan offices in California. Most of the loan offices are located in a branch
building, but five are located in separately
44
<PAGE>
leased office facilities. The executive offices of the Bank are located at 414
North Central Avenue, Glendale, California. The Bank owns its executive
offices and 86 of its banking offices, as well as 6 other properties in which
service centers and other facilities are located, and leases the premises for
86 of its banking offices, as well as 15 other properties in which service
centers and other facilities are located. The net book value of all offices at
June 30, 1997 was $102 million, which included $13 million of leasehold
improvements. Expirations of leases for facilities range from July 1997 to
April 2034. See Notes 4 and 11 of the Notes to Consolidated Financial
Statements for further information.
The Bank evaluates the suitability and adequacy of all its facilities on a
continuing basis, including branch offices, support buildings and service
centers, and has an active program of relocating, remodeling or closing such
facilities as necessary to maintain efficient and attractive facilities. The
Bank believes its present facilities are adequate for its operating purposes.
ITEM 3. LEGAL PROCEEDINGS
GOODWILL LITIGATION AGAINST THE GOVERNMENT
Following the adoption of the Financial Institutions Reform, Recovery and
Enforcement Act of 1989 ("FIRREA"), the Bank sued the United States Government
(the "Government") contending that FIRREA's treatment of supervisory goodwill
constituted a breach by the Government of its 1981 contract with the Bank,
under which the Bank merged with a Florida thrift and the Bank was permitted
to include the goodwill resulting from the merger in the Bank's regulatory
capital (Glendale Federal Bank, F.S.B. v. United States, No. 90-772C, in the
United States Court of Federal Claims, filed August 15, 1990). In July 1992,
the United States Court of Federal Claims (the "Claims Court") found in favor
of the Bank's position, ruling that the Government breached its express
contractual commitment to permit the Bank to include supervisory goodwill in
its regulatory capital and that the Bank is entitled to seek financial
compensation.
On May 25, 1993, a three-judge panel of the United States Court of Appeals
for the Federal Circuit (the "Federal Circuit") reversed the Claims Court's
July 1992 judgment in favor of the Bank, ruling that the Government was not
liable for breach of contract, and remanded the case for trial of the Bank's
constitutional and other claims. On August 18, 1993, the Federal Circuit
granted the Bank's request for rehearing en banc and vacated the panel
decision reversing the Claims Court's July 1992 judgment. On August 30, 1995
the Federal Circuit, by a 9 to 2 decision, affirmed the judgment of the Claims
Court in favor of the Bank.
The Government subsequently appealed this decision to the United States
Supreme Court and on July 1, 1996, the Supreme Court, by a vote of 7 to 2,
ruled that the Government had breached its contract with the Bank and remanded
the case to the Claims Court for a determination of damages. The trial to
determine damages commenced on February 24, 1997 and is expected to end in the
March 1998 quarter, with a decision anticipated by the end of June 1998. The
Bank completed presentation of its case in chief on July 21, 1997. The Bank
has presented evidence on three alternative damages theories: (1) "Reliance
Damages", pursuant to which the Bank presented evidence of damages in the
amount of approximately $900 million; (2) "Expectation Damages", pursuant to
which the Bank presented evidence of damages in the amount of approximately
$1.5 billion; and (3) "Restitution", pursuant to which the Bank presented
evidence of damages in excess of approximately $1.9 billion.
At a status conference conducted on July 29, 1997 the Claims Court gave its
view of the damages case presented by Glendale Federal. The Court, while
careful to state that it had not yet heard any of the Government's evidence,
indicated that Glendale Federal has presented a strong case on all three of
its damages theories and that the Court had found the Bank's witnesses to be
credible.
Subsequent to the July 29 status conference, the Government filed motions
with the Claims Court seeking leave to plead four new defenses to the Bank's
claims. One of these new defenses asserts
45
<PAGE>
that certain testimony by Glendale Federal witnesses at the trial is
inconsistent with prior documents filed by the Bank and that these
inconsistencies constitute a fraud against the Government that should result
in forfeiture of Glendale Federal's right to compensation for the Government's
breach of contract. The Government also requested the Court to grant summary
judgment on its fraud claim.
In its response to the Government's summary judgment motion, Glendale
Federal stated that the Government's motion is unfounded and without merit and
urged the Court not only to deny the motion but also to levy sanctions against
the Government on the grounds that the fraud claim and related summary
judgment motion appear to have been filed either for their intimidating effect
or for the purpose of harassment, delay or increasing litigation costs. The
Claims Court has not yet decided these matters or established a schedule for
doing so.
On September 2, 1997 the Government began the presentation of its case in
chief.
SHAREHOLDER CLASS ACTION LITIGATION
A wholly-owned subsidiary of the Bank, as the successor by merger to the
Bank's former parent corporation, GLENFED, Inc. ("GLENFED"), is a defendant in
consolidated class actions pending in the United States District Court for the
Central District of California (the "District Court"), entitled In Re GLENFED
Inc. Securities Litigation, Civil No. 91-0818 WJR, originally filed on January
18, 1991. The original consolidated complaint was dismissed by the Court on
July 15, 1991, with leave to amend, for failure to allege with specificity the
securities law and common law fraud claims asserted in the complaint. The
complaint alleged, among other things, that various misrepresentations were
made concerning the financial condition and operations of GLENFED and the Bank
prior to GLENFED's announcement of a $140 million loss on or about January 16,
1991.
After dismissal of the complaint, the plaintiffs filed an amended complaint
which was dismissed by the District Court, which then entered judgment in
favor of GLENFED and the individual officer and director defendants.
Plaintiffs appealed this dismissal and on September 15, 1993, the United
States Court of Appeals for the Ninth Circuit (the "Appeals Court") affirmed
the judgment dismissing the complaint. On December 9, 1994, the Appeals Court,
sitting en banc, reversed the decision of the three-judge panel which had
found in favor of GLENFED on only one of the alternative grounds on which the
District Court had based its opinion. Since the three-judge panel had not
ruled on all the grounds which formed the basis of the District Court's
opinion, the en banc court remanded the case to the three-judge appellate
panel for a ruling on the remaining grounds. On July 13, 1995, the three-judge
panel of the Appeals Court entered an order affirming the dismissal by the
District Court of the outside directors and remanded the remainder of the case
to the District Court for further proceedings.
On November 12, 1996, the court heard GLENFED's and the remaining officers'
and directors' motion for summary judgment and/or summary adjudication. On
January 6, 1997, the court denied the motion for summary judgment but granted
the motion for summary adjudication that: 1) the marketplace was informed of
conditions in the real estate and savings and loan industries during the
relevant time period; and 2) defendants monitored and disclosed the status of
GLENFED's loan loss and non-performing assets and did not make false or
misleading statements in regard to said reserves and assets. The issue
remaining in the case is whether the defendants had a reasonable belief that
certain subsidiaries could be sold without a loss. On April 15, 1997 the court
issued a ruling denying class certification. If the case does not proceed as a
class action, it would involve only the individual claims of the plaintiffs.
Counsel for the purported class has filed a motion in intervention to
substitute other class representatives. The hearing on the motion was heard on
June 3, 1997 and was granted. The new plaintiffs have filed a complaint
seeking class status. A motion for class certification is pending. The company
plans to vigorously oppose the claims of the new plaintiffs.
46
<PAGE>
Certain of the former officers and directors of GLENFED were also named
defendants in a California state court derivative action (entitled Donald P.
Delliquanti, et al. v. Norman M. Coulson, et al. and GLENFED, Inc., as a
nominal defendant, Case No. BC021028, filed February 8, 1991 in Los Angeles
County, California Superior Court) which charges those persons who were
directors of GLENFED during the period covered by the plaintiff's allegations
with breach of fiduciary duty and mismanagement in connection with past write-
downs and loss provisions for real estate loans and investments. Since the
litigation is derivative in nature, the subsidiary of the Bank which is the
successor to GLENFED would be a recipient of any judgment and has no exposure
to damages. On October 8, 1991, the Court sustained the defendant's demurrer
to the second amended complaint in this action and entered judgment in favor
of GLENFED and the individual officer defendants. The plaintiffs filed an
appeal, and on September 1, 1993, the Court of Appeals reversed the decision
of the lower Court. The case is set for trial on May 6, 1998.
OTHER LITIGATION
In addition to the matters described above, Glendale Federal or its
subsidiaries are involved as plaintiff or defendant in various legal actions
incidental to their business, none of which is believed by management to be
material to the financial condition or results of operations of Glendale
Federal and its subsidiaries on a consolidated basis.
ITEM 4. SUBMISSION OF MATTERS TO A VOTE OF SECURITY HOLDERS
On July 23, 1997, a special meeting of stockholders of Glendale Federal Bank
(the "Bank") was held to vote on the proposal to adopt an Agreement and Plan
of Reorganization pursuant to which a holding company, Golden State Bancorp
Inc. ("Golden State"), would be formed for the Bank.
Holders of the Bank's common stock approved the formation of the holding
company with 32,715,297 votes cast "For", 126,997 votes cast "Against" and
120,302 shares abstaining. Holders of the Bank's Noncumulative Preferred
Stock, Series E, approved the formation of the holding company with 3,379,324
votes cast "For", 3,542 votes cast "Against" and 3,675 shares abstaining.
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.
47
<PAGE>
ITEM 4A. EXECUTIVE OFFICERS
The following table sets forth certain information concerning executive
officers of Glendale Federal. Each executive officer below serves at the
discretion of the Board of Directors. The business experience of each during
the last five years is set forth in the paragraphs following the table. All of
the following positions are with the Bank except as expressly indicated for
Messrs. Trafton, Fink, Haynes and Eller.
<TABLE>
<CAPTION>
NAME AGE POSITION(S) HELD
---- --- ----------------
<C> <C> <S>
James W. Bean, Jr. 50 Senior Vice President and Chief Auditor
Vincent L. Beatty 37 Executive Vice President and Director,
Marketing/Communications/Corporate
Relations/Corporate Development
William J. Birch 50 Executive Vice President and Manager,
James R. Eller, Jr. 50 Corporate Counsel and Secretary;
Secretary of Golden State
Howard C. Everakes 46 Executive Vice President and General
Counsel
Richard A. Fink 57 Senior Executive Vice President and
Chief Credit Officer and Director; Vice
Chairman and Director of Golden State
Michael E. Goraleski 49 Executive Vice President and President,
Retail Subsidiaries
John E. Haynes 52 Executive Vice President and Chief
Financial Officer; Chief Financial
Officer of Golden State
Gregory L. Hendry 37 Senior Vice President and Chief
Accounting Officer
Terry D. Hess 50 Executive Vice President and Director,
Business
Lelah L. Jenkins 50 Executive Vice President and Chief
Information Officer
Jeffrey D. Misakian 38 Senior Vice President and Director,
Corporate Relations
Kathryn D. Snyder 40 Executive Vice President and Treasurer
Stephen J. Trafton 51 Chairman of the Board, Chief Executive
Officer and President; Chairman, Chief
Executive Officer and President of
Golden State
Robert R. Trujillo 46 Executive Vice President and Director,
Franchise Management/Sales
Sharon K. Winston 45 Executive Vice President and Director,
Corporate Human Resources
</TABLE>
48
<PAGE>
The following biographical entries are solely with respect to the Bank.
James W. Bean, Jr. has been Senior Vice President and Chief Auditor since
1991.
Vincent L. Beatty has been Executive Vice President and Director,
Marketing/Communications/ Investor Relations/Corporate Development, of
Glendale Federal since February 1997. From April 1990 until May 1992, Mr.
Beatty was Vice President, Strategic Risk Management. He was appointed Senior
Vice President, Strategic Risk Management in May 1992; Senior Vice President
and Director, Lending Operations, in December 1992; Senior Vice President and
Director, Retail Bank Operations, in June 1994; Executive Vice President and
Director, Retail Bank Operations, in October 1994; Executive Vice President
and Director, Bank and Lending Operations, in January 1995; and Executive Vice
President and Director, Loan Sales/Operations/Corporate Development in
February 1996.
William J. Birch has been Executive Vice President and Manager, Retail
Banking, of Glendale Federal since 1992. From 1988 until 1992 he was Senior
Vice President, Corporate Administrative Services. During 1992 Mr. Birch was
Executive Vice President, Bank Operations.
James R. Eller, Jr. has been Corporate Counsel and Secretary of Glendale
Federal since 1992. From 1991 until 1992 he was Vice President, Associate
Counsel and Assistant Secretary of Security Pacific National Bank.
Howard C. Everakes has been General Counsel of Glendale Federal since April
1993 and Executive Vice President since April 1994. From 1989 until 1993 he
was Senior Vice President/Counsel and California Legal Staff Manager.
Richard A. Fink has been Senior Executive Vice President and a Director of
Glendale Federal since May 1992. He served as Chief Legal Officer from May
1992 until April 1994; Director, Corporate Development, from April 1994 until
February 1996; and has been the Bank's Chief Credit Officer since February
1996. From 1980 until May 1992, he was a partner in the law firm of McKenna &
Fitting and was actively involved in advising the Bank with respect to legal
and regulatory matters. On March 31, 1993 a state court receiver was appointed
for McKenna & Fitting.
Michael E. Goraleski has been Executive Vice President and President, Retail
Subsidiaries, since January 1987.
John E. Haynes has been Executive Vice President and Chief Financial Officer
of Glendale Federal since April 1992. In September 1991 he became Senior Vice
President and Chief Accounting Officer. He served as Chief Accounting Officer
until March 1993. He served as Chief Information Officer from January 1995
until July 1996.
Gregory L. Hendry has been Senior Vice President and Chief Accounting
Officer since March 1993. From February 1991 until March 1993 he was Vice
President and Manager, Technical Accounting.
Terry D. Hess has been Executive Vice President and Director, Business
Banking, of Glendale Federal since July 1996. Mr. Hess was Executive Vice
President and Chief Credit Officer from June 1991 until July 1995 and was
Executive Vice President and Director, Community Business Banking from July
1995 until July 1996.
Lelah L. Jenkins has been Executive Vice President and Chief Information
Officer of Glendale Federal since July 1996. From March 1991 to September 1995
she was Director, Company-Wide Systems, of The Walt Disney Company. Ms.
Jenkins joined Glendale Federal in September 1995 as Senior Vice President and
Director, Information Services. From April 1996 until July 1996 she was Senior
Vice President and Director, Technology Services.
49
<PAGE>
Jeffrey D. Misakian has been Senior Vice President and Director, Corporate
Relations, of Glendale Federal since August 1994. From September 1990 until
March 1993 Mr. Misakian was Vice President and Manager, Financial Reporting.
Mr. Misakian was Senior Vice President and Director, Investor Relations and
Financial Reporting, from March 1993 until August 1994.
Kathryn D. Snyder has been Executive Vice President and Treasurer of
Glendale Federal since February 1996. She was Senior Vice President and
Treasurer from January 1991 until November 1992; Executive Vice President and
Treasurer from November 1992 until July 1995; and Executive Vice President,
Asset and Liability Risk Management, and Treasurer from July 1995 until
February 1996.
Stephen J. Trafton has been Chairman of the Board, Chief Executive Officer
and President of Glendale Federal since April 1992. Mr. Trafton joined
Glendale Federal in July 1990 as Senior Executive Vice President and Chief
Financial Officer and served as Chief Financial Officer until April 1992. He
has served as a Director since June 1991. From June 1991 until April 1992 he
was Vice Chairman of the Board.
Robert R. Trujillo has been Executive Vice President and Director, Franchise
Management/Sales since February 1997. From 1989 until July 1992 he was Senior
Vice President and Manager, Branch Development/Promotion and Market Research.
From July 1992 until December 1992 Mr. Trujillo was Senior Vice President and
Director of Marketing; from December 1992 until June 1994 he was Senior Vice
President and Manager of Marketing, Customer Service Quality; from June 1994
until October 1994 he was Senior Vice President and Director, Franchise
Management; from October 1994 until February 1996 he was Executive Vice
President and Director, Franchise Management; and from February 1996 until
February 1997 he was Executive Vice President and Director, Franchise
Management and Marketing.
Sharon K. Winston has been Executive Vice President and Director, Corporate
Human Resources since June 1997. From November 1991 until May 1992 she was
Vice President and Human Resources Compliance Officer. From May 1992 until
August 1994 she was Vice President and Manager, Staffing/Management
Development/Employee Relations and Compliance of Glendale Federal. From August
1994 until June 1997, she was Senior Vice President and Director, Corporate
Human Resources.
50
<PAGE>
PART II
ITEM 5. MARKET FOR REGISTRANT'S COMMON EQUITY AND RELATED STOCKHOLDER MATTERS
PRICE RANGE OF THE REGISTRANT'S COMMON STOCK
Prior to completion of the organization of Golden State as the parent
holding company for the Bank on July 24, 1997, the Bank's common stock was
listed on the New York Stock Exchange ("NYSE") under the symbol "GLN" and was
also listed on the Pacific Stock Exchange ("PSE"). On July 25, 1997, shares of
Golden State common stock, which were exchanged for Bank common stock on a
share-for-share basis in connection with the holding company formation
transaction, began trading on the NYSE and PSE under the new stock symbol
"GSB". The following table sets forth, for the periods indicated, the range of
high and low sale prices of the Bank's common stock:
<TABLE>
<CAPTION>
HIGH LOW
---- ----
<S> <C> <C>
Year Ended June 30, 1997
First Quarter............................................... $20 $15 7/8
Second Quarter.............................................. 23 7/8 17 3/8
Third Quarter............................................... 28 1/8 22 1/2
Fourth Quarter.............................................. 27 22 1/4
Year Ended June 30, 1996
First Quarter............................................... $17 $12 1/8
Second Quarter.............................................. 18 14 5/8
Third Quarter............................................... 19 1/8 15 1/2
Fourth Quarter.............................................. 19 1/8 16
</TABLE>
At the close of business on July 24, 1997, the last day on which the Bank's
common stock was publicly traded, its price was $28 3/4.
The Bank has not paid any cash dividends on its common stock in the last
three fiscal years. Refer to Item 1. "Business--Regulation," and Note 19 of
the Notes to Consolidated Financial Statements for information with respect to
current restrictions on the Bank's ability to pay dividends.
NUMBER OF HOLDERS OF COMMON STOCK
At July 24, 1997, 50,363,923 shares of Bank common stock were outstanding
and held by approximately 8,297 holders of record. All of the outstanding
common stock of the Bank is now owned, directly or indirectly, by Golden
State.
51
<PAGE>
ITEM 6. SELECTED FINANCIAL DATA
The following tables summarize the Bank's financial condition and its
operating results for the past five fiscal years. See Notes 4 and 19 of the
Notes to Consolidated Financial Statements for discussion of acquisitions and
dispositions in fiscal 1997 and 1995 and the Bank's recapitalization in fiscal
1994 which affect the comparability of the information provided in the tables
below.
GLENDALE FEDERAL BANK AND SUBSIDIARIES
CONSOLIDATED FIVE YEAR SUMMARY OF OPERATIONS
(DOLLARS IN THOUSANDS EXCEPT PER SHARE DATA)
<TABLE>
<CAPTION>
YEARS ENDED JUNE 30
----------------------------------------------------------
1997 1996 1995 1994 1993
---------- ---------- ---------- --------- ----------
<S> <C> <C> <C> <C> <C>
Interest income......... $1,072,956 $1,080,035 $1,086,658 $ 989,945 $1,134,310
Interest expense........ 693,972 746,970 768,939 678,664 774,997
---------- ---------- ---------- --------- ----------
Net interest in-
come............... 378,984 333,065 317,719 311,281 359,313
Provision for loan loss-
es..................... 25,204 40,350 66,150 139,726 251,261
---------- ---------- ---------- --------- ----------
Net interest income
after provision for
loan losses........ 353,780 292,715 251,569 171,555 108,052
Other income:
Fee income............. 90,696 69,977 69,311 60,513 58,051
Gain (loss) on sale of
loans, net............ (291) (690) 146 665 3,147
Gain (loss) on sale of
mortgage-backed secu-
rities, net........... (1,804) (34,222) (11,725) 1,099 29,258
Gain on sale of bank-
ing operations........ -- -- 73,713 -- --
Other income (loss),
net................... 62 (707) 3,001 (1,936) (3,461)
---------- ---------- ---------- --------- ----------
Total other income.. 88,663 34,358 134,446 60,341 86,995
Other expenses:
Compensation and em-
ployee benefits....... 114,270 101,502 105,218 126,037 123,388
Occupancy expense,
net................... 31,777 29,698 31,433 37,691 39,535
Regulatory insurance... 16,317 27,491 29,077 38,233 34,881
Advertising and promo-
tion.................. 24,416 24,798 18,855 16,285 11,078
Furniture, fixtures
and equipment......... 12,585 11,605 14,559 24,793 29,585
Stationery, supplies
and postage........... 11,628 10,158 9,065 11,174 11,221
Other general and ad-
ministrative ex-
penses................ 52,231 41,683 35,265 37,449 30,440
---------- ---------- ---------- --------- ----------
Total general and
administrative ex-
penses............. 263,224 246,935 243,472 291,662 280,128
SAIF special assess-
ment.................. 55,519 -- -- -- --
Legal expense--good-
will lawsuit.......... 24,058 1,929 369 304 1,525
Operations of real es-
tate held for sale or
investment............ 935 1,242 (31) 2,690 31,488
Operations of real es-
tate acquired in set-
tlement of loans...... 6,623 8,426 15,034 24,089 44,367
Amortization of good-
will and other intan-
gible assets.......... 5,530 5,147 1,724 9,764 16,028
Write-off of assets
held for Florida dis-
position.............. -- -- -- 136,209 --
---------- ---------- ---------- --------- ----------
Total other ex-
penses............. 355,889 263,679 260,568 464,718 373,536
Earnings (loss) before
income tax provision
(benefit) and
extraordinary items.... 86,554 63,394 125,447 (232,822) (178,489)
Income tax provision
(benefit).............. 36,131 21,342 52,146 (10,171) (39,299)
---------- ---------- ---------- --------- ----------
Earnings (loss) before
extraordinary items.... 50,423 42,052 73,301 (222,651) (139,190)
Extraordinary items,
net.................... -- -- 1,755 14,092 58,344
---------- ---------- ---------- --------- ----------
Net earnings
(loss)............. $ 50,423 $ 42,052 $ 75,056 $(208,559) $ (80,846)
========== ========== ========== ========= ==========
Earnings (loss) applica-
ble to common share-
holders:
Net earnings (loss).... $ 50,423 $ 42,052 $ 75,056 $(208,559) $ (80,846)
Dividends declared on
preferred stock....... (10,841) (16,156) (17,668) (13,759) --
Premium on exchange of
preferred stock for
common stock.......... (4,173) (9,443) -- -- --
---------- ---------- ---------- --------- ----------
Earnings (loss) appli-
cable to common
shareholders.......... $ 35,409 $ 16,453 $ 57,388 $(222,318) $ (80,846)
========== ========== ========== ========= ==========
Earnings (loss) per
share:
Primary:
Earnings (loss) be-
fore extraordinary
items............... $ 0.63 $ 0.36 $ 1.28 $ (6.48) N/A
Net earnings (loss).. 0.63 0.36 1.32 (6.10) N/A
Fully diluted:
Earnings (loss) be-
fore extraordinary
items............... 0.62 0.35 1.16 (6.48) N/A
Net earnings (loss).. 0.62 0.35 1.19 (6.10) N/A
Return on average as-
sets................... 0.33% 0.28% 0.46% (1.19)% (0.45)%
Return on average equi-
ty..................... 5.14 4.45 8.26 (22.18) (12.26)
Efficiency ratio(1)..... 56.04 61.27 62.91 78.53 67.48
</TABLE>
- - -------
(1) Defined as total general and administrative expenses divided by the sum of
net interest income before provision for loan losses plus fee income.
52
<PAGE>
ITEM 6. SELECTED FINANCIAL DATA (CONTINUED)
GLENDALE FEDERAL BANK AND SUBSIDIARIES
CONSOLIDATED FIVE YEAR SUMMARY OF FINANCIAL CONDITION
(DOLLARS IN THOUSANDS EXCEPT PER SHARE DATA)
<TABLE>
<CAPTION>
JUNE 30
---------------------------------------------------------------
1997 1996 1995 1994 1993
----------- ----------- ----------- ----------- -----------
<S> <C> <C> <C> <C> <C>
ASSETS
Cash and amounts due
from banks............. $ 221,557 $ 153,608 $ 139,697 $ 164,576 $ 217,689
Federal funds sold and
assets purchased under
resale agreements...... 632,000 433,000 296,000 315,961 842,767
Other investments....... 31,799 18,877 42,326 166,040 523,725
Loans receivable, net... 11,905,093 10,727,909 9,899,297 9,595,780 10,850,039
Mortgage-backed securi-
ties, net.............. 2,279,534 2,240,790 4,723,457 5,363,779 4,044,744
Real estate held for
sale or investment..... 8,689 12,072 13,303 16,995 48,040
Real estate acquired in
settlement of loans.... 61,500 78,249 105,730 146,835 194,187
Investment in capital
stock of Federal Home
Loan Bank, at cost..... 259,587 192,842 185,799 139,678 126,390
Mortgage servicing as-
sets................... 284,472 127,399 99,122 68,719 83,217
Goodwill and other in-
tangible assets........ 99,533 59,216 63,538 47,781 385,754
Assets held for Florida
disposition, net....... -- -- -- 257,363 --
Other assets............ 434,495 412,602 475,977 519,524 592,281
----------- ----------- ----------- ----------- -----------
$16,218,259 $14,456,564 $16,044,246 $16,803,031 $17,908,833
=========== =========== =========== =========== ===========
LIABILITIES AND STOCK-
HOLDERS' EQUITY
Deposits................ $ 9,356,909 $ 8,723,976 $ 8,734,880 $10,919,806 $11,615,529
Securities sold under
agreements to repur-
chase.................. 768,682 758,050 2,695,176 2,306,274 3,064,995
Borrowings from the
FHLB................... 4,788,000 3,838,000 3,495,000 2,443,428 2,192,272
Other borrowings........ 10,782 10,599 28,883 96,890 141,971
Other liabilities....... 281,812 168,488 148,460 158,419 233,779
Stockholders' equity.... 1,012,074 957,451 941,847 878,214 660,287
----------- ----------- ----------- ----------- -----------
$16,218,259 $14,456,564 $16,044,246 $16,803,031 $17,908,833
=========== =========== =========== =========== ===========
Common shares outstand-
ing.................... 50,348,509 46,729,698 40,719,718 37,737,434 N/A
Book value per common
share.................. $ 17.81 $ 17.37 $ 18.19 $ 17.24 N/A
Tangible book value per
common share........... $ 15.83 $ 16.11 $ 16.63 $ 10.89 N/A
Interest rate spread.... 2.68% 2.41% 1.83% 2.13% 2.25%
Ratio of non-performing
assets to total assets. 1.26% 1.90% 2.22% 3.94% 4.77%
Average equity to aver-
age assets............. 6.45% 6.24% 5.52% 5.34% 3.70%
Regulatory capital ra-
tios:
Tangible capital....... 5.67% 6.29% 5.44% 4.28% 1.87%
Core capital........... 5.67% 6.29% 5.44% 4.65% 2.65%
Risk-based capital..... 11.17% 11.93% 11.15% 9.61% 5.77%
Number of full service
customer facilities..... 166 150 148 217 215
</TABLE>
53
<PAGE>
ITEM 7. MANAGEMENT'S DISCUSSION AND ANALYSIS OF FINANCIAL CONDITION AND
RESULTS OF OPERATIONS
OVERVIEW
EARNINGS PERFORMANCE
The Bank recorded net earnings of $50.4 million, or $0.62 per fully diluted
share, in fiscal 1997, compared to net earnings of $42.1 million, or $0.35 per
fully diluted share, in fiscal 1996 and $75.1 million, or $1.19 per fully
diluted share, in fiscal 1995.
Net earnings for fiscal 1997 included a special assessment by the FDIC of
$55.5 million ($31.9 million after-tax) to recapitalize the SAIF and legal
expenses for the Bank's goodwill litigation of $24.1 million ($13.8 million
after-tax). See "SAIF Special Assessment" below and "Results of Operations--
Legal Expenses--Goodwill Lawsuit" for additional information.
Net earnings for fiscal 1996 included a loss of $28.2 million ($19.7 million
after-tax) on the sale of $1.7 billion of CMOs. See "Sale of CMO Investment
Portfolio" below for additional information. Also included in results of
operations for fiscal 1996 is an after-tax loss of $1.7 million on the sale of
the Bank's former headquarters facility and legal expenses for the goodwill
litigation of $1.9 million ($1.3 million after-tax).
Net earnings for fiscal 1995 included a gain of $50.7 million ($29.7 million
after- tax) resulting from the sale of University Savings, a gain of $23.0
million ($2.3 million after-tax) resulting from the sale of the Bank's Florida
franchise and an extraordinary after-tax gain of $1.8 million resulting from
University Savings' early extinguishment of $42.1 million of borrowings from
the FHLB and legal expenses for the goodwill litigation of $0.4 million ($0.2
million after-tax).
During fiscal 1997 and 1996, the Bank exchanged 1.2 million shares and 2.2
million shares, respectively, of its Series E preferred stock for 3.1 million
shares and 5.9 million shares, respectively, of Bank common stock. See Note 19
of the Notes to Consolidated Financial Statements for additional information
on these transactions.
Excluding the after-tax impact of the non-recurring items mentioned above
and the effect of the preferred stock conversions, adjusted net earnings for
fiscal 1997 were $96.2 million, or $1.39 per fully-diluted share compared to
adjusted net earnings for fiscal 1996 of $64.8 million, or $0.99 per fully
diluted share, and adjusted net earnings in fiscal 1995 of $41.5 million, or
$0.57 per fully diluted share.
The 48% improvement in adjusted net earnings in fiscal 1997 over fiscal 1996
reflects higher net interest income, lower credit-related costs, increases in
loan servicing income and other fees and service charges and reduced FDIC
insurance premiums, partially offset by an increase in the Bank's effective
income tax rate and increases in certain general and administrative expenses
due to expansion of the Bank's business lines and the acquisitions of
TransWorld and OneCentral.
The 56% improvement in adjusted net earnings in fiscal 1996 over fiscal 1995
reflects higher net interest income, lower credit-related costs and an
increase in other fees and service charges, partially offset by reduced loan
servicing income and an increase in general and administrative expenses. See
"Results of Operations" for a further discussion of factors affecting the
Bank's earnings performance.
The Bank's interest rate spread was 2.68% at June 30, 1997, as compared with
2.41% and 1.83% at June 30, 1996 and 1995, respectively. The Bank's interest
rate spread improved by 27 basis points in fiscal 1997 primarily due to a
decline in the Bank's cost of funds and, to a lesser extent, due to an
increase in the yield on its interest-earning assets. The decrease in the cost
of funds reflects a lower
54
<PAGE>
interest rate environment, the replacement of maturing higher-cost FHLB
advances with lower-cost advances and a decline in deposit costs due in part
to a change in the mix of deposits from higher-cost certificates of deposit to
lower-cost daily access accounts and to the addition of lower-costing deposits
obtained in the TransWorld and OneCentral acquisitions.
The Bank's interest rate spread significantly improved in fiscal 1996, as
compared to fiscal 1995, primarily due to a decline in the Bank's cost of
funds and, to a lesser extent, due to an increase in the yield on its
interest-earning assets. The increase in the earning-asset yield was primarily
due to increases in rates borne by adjustable-rate loans and mortgage-backed
securities, the sale of the Bank's lower yielding fixed-rate CMO portfolio and
the partial reinvestment of the proceeds from that sale into higher yielding
adjustable-rate loans. The decrease in the cost of funds reflects the reduced
level of higher-cost borrowings resulting from the repayment of such
borrowings with a portion of the proceeds of the CMO sales, a decrease in
overall interest rates and a decline in deposit costs.
See "Results of Operations--Net Interest Income" for additional discussion
of the Bank's interest rate spread and the impact possible future interest
rate changes could have on the Bank's net interest income.
See Note 1 of the Notes to Consolidated Financial Statements for information
on current accounting pronouncements and their impact on the Bank's
consolidated financial statements.
CENFED ACQUISITION
On August 18, 1997, Golden State entered into an agreement to acquire CENFED
Financial Corporation and its federal savings bank subsidiary, CenFed Bank.
The agreement is subject to regulatory and other approvals and is expected to
close in the first calendar quarter of 1998. The terms of the transaction
provide for a tax-free exchange of 1.2 shares of Golden State common stock for
each outstanding share of CENFED's common stock. This acquisition will be
accounted for as a pooling-of-interests.
At June 30, 1997, CENFED operated 18 branches and had $2.3 billion in
assets, including $1.5 billion in gross loans receivable, and $1.5 billion in
deposits, over 79% of which were in certificate of deposit accounts. On a pro-
forma basis as of June 30, 1997, Golden State would have consolidated assets
of $18.5 billion, total deposits of $10.9 billion, stockholders' equity of
$1.1 billion and 184 banking offices.
This acquisition will provide Glendale Federal entry into several markets in
which it does not currently operate. With CENFED's servicing portfolio of SBA
loans Glendale Federal, upon completion of the acquisition, will become the
fourth largest servicer of SBA loans in the State of California.
SAIF SPECIAL ASSESSMENT
On September 30, 1996, President Clinton signed legislation providing for a
special assessment on thrift institutions whose customer deposits are insured
by the Savings Association Insurance Fund (the "SAIF") of the Federal Deposit
Insurance Corporation (the "FDIC"). Pursuant to the new law, a one-time fee
was payable by all SAIF-insured institutions at the rate of $0.657 per $100 of
deposits held by such institutions at March 31, 1995. In the quarter ended
September 30, 1996, the Bank recorded a pre-tax accrual of $58.7 million for
this assessment. In the fourth quarter ended June 30, 1997, the Bank reversed
$3.2 million of this accrual to reflect the actual assessment for fiscal 1997
of $55.5 million. The recapitalization of the SAIF has resulted in lower
deposit insurance premiums beginning with the third quarter of fiscal 1997.
55
<PAGE>
SALE OF CMO INVESTMENT PORTFOLIO
During fiscal 1996, the Bank sold $1.7 billion of its fixed-rate CMO
investments (the "CMO Sale") and recorded a pre-tax loss of $28.2 million. The
Bank's decision to sell most of its CMO portfolio was part of a strategic
realignment of the Bank's mortgage-backed securities portfolio in which $2.8
billion of mortgage-backed securities were reclassified from "held to
maturity" to "available for sale" during the quarter ended December 31, 1995,
in compliance with the implementation guidance for SFAS 115. The
reclassification included the Bank's $1.8 billion fixed-rate CMO portfolio and
$1.0 billion of its adjustable-rate pass-through securities portfolio.
The realignment of the Bank's mortgage-backed securities portfolio and the
Bank's use of proceeds from the CMO Sale to reduce wholesale borrowings
improved the Bank's funding mix of deposits and borrowings, increased its
interest rate spread, reduced its interest-rate risk exposure and made
additional capital available for merger and acquisition or other reinvestment
strategies.
CAPITAL
At June 30, 1997, the Bank's tangible book value was $15.83 per common share
and $14.35 per fully diluted share, versus $16.11 per common share and $14.18
per fully diluted share at June 30, 1996. The Bank's core capital, Tier 1
risk-based capital and total risk-based capital ratios at June 30, 1997 were
5.67%, 10.02% and 11.17%, respectively, placing the Bank in the "well-
capitalized" category as defined by federal regulations, which require 5%
core, 6% Tier 1 risk-based and 10% total risk-based capital to assets ratios
to qualify for that designation. At June 30, 1996, the Bank's core capital,
Tier 1 risk-based capital and total risk-based capital ratios were 6.29%,
10.79% and 11.93%, respectively.
The Bank's capital ratios decreased in the twelve months ended June 30, 1997
due to the completion of the OneCentral and TransWorld acquisitions and the
$1.8 billion increase in assets during the period. The Bank's capital ratios
could decrease in future periods due to, among other things, acquisition
activity and further growth in assets, but the Bank nonetheless expects to
continue to remain in the "well capitalized" category as defined by OTS.
BALANCE SHEET ANALYSIS
The Bank's asset size and composition have been determined principally by
seeking to balance regulatory capital requirements, liquidity, yield and risk.
Consolidated assets of the Bank increased by $1.8 billion, to $16.2 billion,
in the twelve months ended June 30, 1997, primarily through: (i) the purchase
of single-family residential loans in the secondary market; (ii) the
acquisition of TransWorld and OneCentral; (iii) the purchase of $187.4 million
of mortgage servicing rights relating to $17.2 billion of residential loans
receivable; (iv) increases of $199.0 million in federal funds sold and assets
purchased under resale agreements; and (v) a $66.7 million increase in
investment in FHLB capital stock, which was required in order to obtain
additional FHLB advances.
Consolidated liabilities of the Bank increased by $1.7 billion, to $15.2
billion, in the twelve months ended June 30, 1997. This was mainly
attributable to net additional borrowings from the FHLB of $950.0 million and
an increase of $632.9 million in deposits, which includes the purchase of
$405.2 million of deposits relating to acquisitions of TransWorld and
OneCentral.
MORTGAGE-BACKED AND OTHER DEBT AND EQUITY SECURITIES
Mortgage-backed securities held to maturity decreased by $193.4 million in
fiscal 1997 to $1.2 billion at June 30, 1997, primarily due to the principal
payments received on mortgage-backed securities of $190.5 million.
56
<PAGE>
Mortgage-backed securities available for sale increased by $232.2 million in
fiscal 1997 to $1.1 billion at June 30, 1997, due to purchases of $504.0
million, primarily consisting of $370.0 million and $74.6 million of
adjustable-rate and fixed-rate securities, respectively, issued by GNMA,
partially offset by principal payments received on mortgage-backed securities
of $285.4 million.
Other debt and equity securities held to maturity decreased by $8.1 million
in fiscal 1997, primarily due to the reclassification of $7.1 million of U.S.
Government debt securities from "held to maturity" to "available for sale" in
the second quarter ending December 31, 1996, as well as maturities of
$4.0 million, partially offset by purchases of $3.0 million during the entire
fiscal year.
Other debt and equity securities available for sale of $27.8 million at June
30, 1997 was primarily due to purchases of $181.5 million, of which $163.2
million and $16.1 million, respectively, relate to the TransWorld and
OneCentral acquisitions and the $7.1 million reclassification from held to
maturity noted above, offset by sales of $156.4 million in securities from the
TransWorld and OneCentral acquisitions and maturities of $5.4 million.
LOANS RECEIVABLE
Loans receivable held for investment increased by $1.2 billion, to $11.9
billion, in the twelve months ended June 30, 1997. The increase was primarily
due to loans purchased for investment totaling $2.6 billion and loans
originated for investment, net of refinances, of $651.0 million, partially
offset by principal payments of $1.9 billion, and loans transferred to real
estate acquired in settlement of loans ("REO") of $156.8 million. The loans
purchased included $1.1 billion of single-family residential, adjustable-rate
mortgage loans and $1.2 billion of single-family residential, fixed-rate
mortgage loans, purchased in the secondary market. The loans purchased also
included $35.6 million of agricultural loans and $173.8 million of loans
acquired with the purchase of OneCentral and TransWorld, as previously
discussed.
Loans receivable held for sale decreased by $14.3 million, to $19.0 million,
in the twelve months ended June 30, 1997, primarily due to securitization of
loans for mortgage-backed securities in the amount of $42.2 million, and
fixed-rate loan sales totaling $78.8 million, partially offset by term loan
originations of $80.3 million and the net transfer of loans from held for
investment totaling $26.7 million. See Note 2 of the Notes to Consolidated
Financial Statements for additional information on the transfer of loans from
held for investment.
As of June 30, 1997, commitments of the Bank to purchase loans in the
secondary market totaled $297.6 million and was comprised of $207.2 million
fixed rate loans and $90.4 million adjustable rate loans. At that date,
commitments of the Bank to originate loans and sell mortgage-backed securities
totaled $43.8 million and $14.0 million, respectively. As of June 30, 1997,
commitments on outstanding letters of credit totaled $1.4 million.
New commitments under lines of credit that were purchased or generated
through the Bank's consumer and commercial lending programs are summarized as
follows (in thousands):
<TABLE>
<CAPTION>
YEARS ENDED JUNE
30
----------------
1997 1996
-------- -------
<S> <C> <C>
Consumer loans............................................ $168,335 $70,718
Commercial loans.......................................... 251,749 7,560
-------- -------
$420,084 $78,278
======== =======
</TABLE>
New commitments under consumer lines of credit during fiscal 1997 include
$17.6 million related to the acquisition of TransWorld. New commitments under
commercial lines of credit during fiscal 1997 include $92.9 million purchased
in the TransWorld and OneCentral acquisitions, and $80 million of agricultural
loan commitments, of which $50 million were purchased in December 1996.
57
<PAGE>
The following table summarizes the outstanding commitments and related
outstanding principal balances on lines of credit under the Bank's consumer
and commercial lending programs (in thousands):
<TABLE>
<CAPTION>
JUNE 30
-----------------
1997 1996
-------- --------
<S> <C> <C>
Consumer loans:
Credit limit balance.................................. $309,013 $137,989
Outstanding principal balance......................... 71,847 17,906
Commercial loans:
Credit limit balance.................................. 213,332 7,564
Outstanding principal balance......................... 88,927 2,291
</TABLE>
Term loan originations by property type (including the refinanced portion of
the Bank's loans) and loans purchased in the secondary market are summarized
as follows (dollars in millions):
<TABLE>
<CAPTION>
YEARS ENDED JUNE 30
-----------------------------------------------------
1997 1996 1995
----------------- ----------------- -----------------
AMOUNT % OF TOTAL AMOUNT % OF TOTAL AMOUNT % OF TOTAL
------ ---------- ------ ---------- ------ ----------
<S> <C> <C> <C> <C> <C> <C>
Originations:
Permanent Loans:
Single-family 1-4
units.............. $ 726 23.0% $ 778 26.9% $ 691 32.2%
Multi-family 5-36
units.............. 22 0.7 26 0.9 65 3.0
Multi-family 37 or
more units......... 9 0.3 6 0.2 24 1.1
Non-residential..... 8 0.3 13 0.4 42 2.0
Land................ -- -- 1 -- 7 0.3
Construction Loans:
Single-family 1-4
units.............. 4 0.1 16 0.7 12 0.6
Multi-family 5-36
units.............. 3 0.1 5 0.2 7 0.3
Multi-family 37 or
more units......... -- -- -- -- -- --
Non-residential..... -- -- -- -- -- --
Commercial loans...... 30 1.0 1 -- -- --
Consumer loans........ 16 0.5 21 0.7 19 0.9
------ ----- ------ ----- ------ -----
Total Origina-
tions............ 818 26.0 867 30.0 867 40.4
------ ----- ------ ----- ------ -----
Secondary Market Pur-
chases (1-4 units):
Adjustable............ 1,136 36.0 2,024 70.0 374 17.5
Fixed................. 1,198 38.0 -- -- 904 42.1
------ ----- ------ ----- ------ -----
Total Purchases... 2,334 74.0 2,024 70.0 1,278 59.6
------ ----- ------ ----- ------ -----
$3,152 100.0% $2,891 100.0% $2,145 100.0%
====== ===== ====== ===== ====== =====
</TABLE>
Term loan originations for fiscal 1997 declined 6% from fiscal 1996
primarily due to a decline in refinancing activity. Loans refinanced totaled
$86.6 million, or 11% of total originations, for the year ended June 30, 1997,
compared to $153.4 million, or 18% of total originations, for the year ended
June 30, 1996.
Term loan originations for fiscal 1996 remained unchanged compared to fiscal
1995. Loan originations for the first six months of fiscal 1995 included
originations by University Savings and the Florida franchise of $132 million
and $18 million, respectively. Compensating for the loss of originations from
the Bank's former Washington and Florida operations in fiscal 1996 was an
increase in fixed-rate lending attributable to an overall decline in interest
rates, partially offset by a decrease in loans to facilitate the sale of major
REO properties.
58
<PAGE>
Multi-family residential and non-residential real estate loans have
primarily been made to finance the disposition of REO and real estate held for
sale or investment ("REI") or to refinance maturing loans. The single-family
residential and multi-family residential construction loans originated in the
current fiscal year represent outstanding commitments made before the Bank's
construction lending program was terminated during fiscal 1997.
NON-PERFORMING ASSETS AND RESTRUCTURED LOANS
The following table summarizes the Bank's NPAs and restructured loans at the
dates indicated (dollars in thousands):
<TABLE>
<CAPTION>
JUNE 30
-------------------------------
1997 1996
--------------- ---------------
% OF % OF
DOLLAR TOTAL DOLLAR TOTAL
AMOUNT ASSETS AMOUNT ASSETS
-------- ------ -------- ------
<S> <C> <C> <C> <C>
Non-accrual loans............................... $140,295 0.86% $192,445 1.33%
REO and other assets............................ 64,663 0.40 82,204 0.57
-------- ---- -------- ----
Total NPAs...................................... $204,958 1.26% $274,649 1.90%
======== ==== ======== ====
Restructured loans.............................. $ 31,064 0.19% $ 9,194 0.06%
======== ==== ======== ====
</TABLE>
The following table summarizes NPA and restructured loan activity in fiscal
1997 (in thousands):
<TABLE>
<CAPTION>
JUNE 30, PAYOFFS/ JUNE 30,
1996 SALES/ 1997
BALANCE ADDITIONS FORECLOSURES WRITE-DOWNS OTHER BALANCE
-------- --------- ------------ ----------- --------- --------
<S> <C> <C> <C> <C> <C> <C>
Non-Accrual Loans:
Single-family 1-4
units................. $119,978 $186,313 $(113,453) $ (2,229) $(107,620) $ 82,989
Multi-family 5-36
units................. 33,123 51,016 (27,670) (2,521) (32,861) 21,087
Multi-family 37 or
more units............ 14,461 5,727 (5,653) (3,074) (8,340) 3,121
Non-residential........ 23,860 37,989 (9,973) (1,614) (19,590) 30,672
Commercial............. 22 2,113 -- (28) (1,248) 859
Consumer............... 1,001 1,374 -- -- (808) 1,567
-------- -------- --------- -------- --------- --------
Total................ $192,445 $284,532 $(156,749) $ (9,466) $(170,467) $140,295
======== ======== ========= ======== ========= ========
REO and Other Assets:
Single-family 1-4
units................. $ 39,693 $ 9,426 $ 85,927 $ (1,826) $ (99,104) $ 34,116
Multi-family 5-36
units................. 11,668 1,294 22,287 (1,349) (25,486) 8,414
Multi-family 37 or
more units............ 4,827 2,477 5,540 (295) (10,616) 1,933
Non-residential........ 25,893 14 8,856 (875) (13,719) 20,169
Consumer............... 123 -- -- -- (92) 31
-------- -------- --------- -------- --------- --------
Total................ $ 82,204 $ 13,211 $ 122,610 $ (4,345) $(149,017) $ 64,663
======== ======== ========= ======== ========= ========
Total NPAs:
Single-family 1-4
units................. $159,671 $195,739 $ (27,526) $ (4,055) $(206,724) $117,105
Multi-family 5-36
units................. 44,791 52,310 (5,383) (3,870) (58,347) 29,501
Multi-family 37 or
more units............ 19,288 8,204 (113) (3,369) (18,956) 5,054
Non-residential........ 49,753 38,003 (1,117) (2,489) (33,309) 50,841
Commercial............. 22 2,113 -- (28) (1,248) 859
Consumer............... 1,124 1,374 -- -- (900) 1,598
-------- -------- --------- -------- --------- --------
Total................ $274,649 $297,743 $ (34,139) $(13,811) $(319,484) $204,958
======== ======== ========= ======== ========= ========
Restructured Loans:
Single-family 1-4
units................. $ 3,222 $ 3,371 $ -- $ -- $ (4,425) $ 2,168
Multi-family 5-36
units................. 2,197 1,637 -- -- (158) 3,676
Multi-family 37 or
more units............ 2,251 16,244 -- -- (164) 18,331
Non-residential........ 1,524 5,010 -- -- 355 6,889
-------- -------- --------- -------- --------- --------
Total................ $ 9,194 $ 26,262 $ -- $ -- $ (4,392) $ 31,064
======== ======== ========= ======== ========= ========
</TABLE>
59
<PAGE>
The $69.7 million, or 25%, decrease in NPAs for the twelve months ended June
30, 1997 reflects $149.0 million in sales of REO through the Bank's regular
liquidation process, $92.2 million in non-accrual loans being sold or paid off
and $78.3 million in non-accrual loans being reinstated to accrual status,
partially offset by NPA additions of $297.7 million. For the twelve months
ended June 30, 1997, 66% of NPA additions were loans and REO that were secured
by single-family residences. Non- accrual non-residential loan additions
during the period included one loan in the amount of $12.7 million secured by
a shopping center.
The $21.9 million increase in restructured loans for the twelve months ended
June 30, 1997 was primarily due to the reclassification of a performing loan
in the amount of $16.2 million that had been restructured by Union Federal
Bank prior to the Bank's acquisition of the loan from that institution in June
1995 and a total of $10.0 million of new restructured loans transferred from
non-accrual status, partially offset by $4.4 million of restructured loans
being transferred to performing status.
The following table further identifies the Bank's non-accrual loans by state
and by property type as of June 30, 1997 (in thousands):
<TABLE>
<CAPTION>
CALIFORNIA FLORIDA OTHER TOTAL
---------- ------- ------ --------
<S> <C> <C> <C> <C>
Single-family 1-4 units...................... $ 61,776 $13,815 $7,398 $ 82,989
Multi-family:
5-36 units................................. 21,087 -- -- 21,087
37 or more units........................... 3,121 -- -- 3,121
Non-residential:
Office buildings........................... 5,014 314 -- 5,328
Shopping centers........................... 21,341 -- -- 21,341
Mobile home park........................... 1,503 -- -- 1,503
Commercial/industrial...................... 2,323 177 -- 2,500
-------- ------- ------ --------
Total non-residential...................... 30,181 491 -- 30,672
Commercial................................... 859 -- -- 859
Consumer..................................... 1,567 -- -- 1,567
-------- ------- ------ --------
$118,591 $14,306 $7,398 $140,295
======== ======= ====== ========
</TABLE>
The following table further identifies the Bank's REO and other repossessed
assets 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
------- ------- ------ -------
Total real estate......................... 41,241 18,184 5,207 64,632
Other repossessed assets...................... 31 -- -- 31
------- ------- ------ -------
$41,272 $18,184 $5,207 $64,663
======= ======= ====== =======
</TABLE>
60
<PAGE>
As of June 30, 1997, except for $516,000 of single family restructured loans
in Florida, all of the Bank's restructured loans were in the state of
California.
Total delinquent loans decreased by $66.0 million, to $215.3 million, in the
twelve months ended June 30, 1997. This decrease was attributable primarily to
the single-family residential and multi-family residential portfolios, in
which delinquent loans declined by $49.3 million and $28.3 million, to
$146.2 million and $31.0 million, respectively. At June 30, 1997, single-
family residential and multi-family residential loans comprised 68% and 14%,
respectively, of total delinquent loans.
If California and the states in which the Bank has significant loan
concentrations experience an economic downturn, resulting in a significant
decline in property values or a significant increase in unemployment, the
level of NPAs and delinquent loans could increase. At June 30, 1997, the three
states in which the Bank had its largest loan concentrations were California
($8.9 billion), Florida ($899.0 million) and New York ($245.0 million).
ALLOWANCE FOR LOAN LOSSES
Glendale Federal uses an internal asset review system to identify problem
assets. The Bank's asset classification process, in accordance with applicable
regulations, provides for the classification of assets into the categories of
satisfactory, special mention, substandard, doubtful or loss. The Bank's
determination of the level and the allocation of the allowance for loan losses
and, correspondingly, the provisions for such losses, is based on various
judgments, assumptions and projections regarding a number of factors,
including, but not limited to, asset classifications, current and forecasted
economic and market conditions, loan portfolio composition, historical loan
loss experience and industry experience. The allowance for loan losses is
adjusted quarterly to reflect management's current assessment of the effect of
these factors on estimated inherent loan losses. While management uses all
information available to it to estimate losses on loans, future changes to the
allowance may become necessary based on changes in economic and market
conditions. Various regulatory agencies, as part of their examination process,
periodically review the Bank's allowance for loan losses. Such agencies may
require the Bank to make changes to the allowance based on their judgments and
the information available to them at the time of their examination.
The following table sets forth the allocation of Glendale Federal's
allowance for loan losses at June 30, 1997 and 1996 by property type (dollars
in thousands):
<TABLE>
<CAPTION>
JUNE 30, 1997 JUNE 30, 1996
------------------------------- -------------------------------
PERCENT PERCENT
GROSS OF GROSS OF
LOAN ALLOWANCE LOAN ALLOWANCE
PORTFOLIO TO LOAN PORTFOLIO TO LOAN
ALLOWANCE BALANCE BALANCE ALLOWANCE BALANCE BALANCE
--------- ----------- --------- --------- ----------- ---------
<S> <C> <C> <C> <C> <C> <C>
Single-family 1-4 units. $ 52,579 $ 8,821,828 0.60% $ 56,833 $ 7,580,312 0.75%
Multi-family:
5-36 units............ 43,852 1,477,549 2.97 48,628 1,564,542 3.11
37 or more units...... 16,496 345,052 4.78 26,062 400,415 6.51
Non-residential......... 35,280 1,207,013 2.92 47,260 1,357,225 3.48
Commercial.............. 7,552 160,061 4.72 4,699 10,391 45.22
Consumer................ 8,000 120,685 6.63 3,274 73,158 4.48
-------- ----------- -------- -----------
$163,759 $12,132,188 1.35% $186,756 $10,986,043 1.70%
======== =========== ======== ===========
</TABLE>
The allocation of the allowance to each category is not necessarily
indicative of future losses and does not restrict the use of the allowance to
absorb losses in any other category.
61
<PAGE>
Specific valuation allowances of $14.0 million and $26.5 million have been
established for impaired loans and are included in the allowance for loan
losses. Specific valuation allowances are provided when management determines
that, for a specific loan, default appears probable and the amount of the
expected loss is measurable. The balances of impaired loans with related
specific valuation allowances at June 30, 1997 and 1996 totaled $78.7 million
and $106.5 million, respectively. Those impaired loans without related
specific valuation allowances at June 30, 1997 and 1996 totaled $64.1 million
and $52.3 million, respectively.
The allowance for loan losses declined by $23.0 million, to $163.8 million,
in fiscal 1997. The decrease in the allowance during this period reflects
improving NPA and delinquency trends, a reduced number of high-risk, large,
and multiple loan borrower relationships and an overall improvement in the
total loan portfolio. Credit quality continued to improve, reflecting the
lowest level of NPAs since fiscal 1988, and the lowest level of charge-offs
since March 1989. Loans secured by single-family residences have a lower
historical loss experience than those loans secured by multi-family and non-
residential properties, and generally result in lower charge-offs. The Bank,
therefore, requires proportionally lower levels of allowance for loan losses
against the single-family residential loan portfolio than it requires for the
other loan portfolios. The increases in allowance allocations to consumer and
commercial lending reflect growth in the respective loan portfolios and the
Bank's limited experience to date in managing the credit performance of these
new lines of business. The ratios of allowance to non-accrual loans and total
gross loans at June 30, 1997 were 116.7% and 1.4%, respectively, compared to
97.0% and 1.7%, respectively, at June 30, 1996.
A summary of activity in the allowance for loan losses by property type
during fiscal 1997 is as follows (in thousands):
<TABLE>
<CAPTION>
BALANCE ADDITIONS BALANCE
JUNE 30, DUE TO JUNE 30,
1996 ADDITIONS CHARGE-OFFS RECOVERIES ACQUISITIONS 1997
-------- --------- ----------- ---------- ------------ --------
<S> <C> <C> <C> <C> <C> <C>
Single-family 1-4 units. $ 56,833 $21,352 $(25,773) $ 167 $ -- $ 52,579
Multi-family:
5-36 units............ 48,628 5,972 (10,756) 8 -- 43,852
37 or more units...... 26,062 (3,954) (5,860) 248 -- 16,496
Non-residential......... 47,260 (362) (12,996) 1,159 219 35,280
Commercial.............. 4,699 (4,511) (68) 3,575 3,857 7,552
Consumer................ 3,274 6,707 (3,043) 1,062 -- 8,000
-------- ------- -------- ------ ------ --------
$186,756 $25,204 $(58,496) $6,219 $4,076 $163,759
======== ======= ======== ====== ====== ========
</TABLE>
A summary of activity in the allowance for loan losses by property type
during fiscal 1996 is as follows (in thousands):
<TABLE>
<CAPTION>
BALANCE BALANCE
JUNE 30, JUNE 30,
1995 ADDITIONS CHARGE-OFFS RECOVERIES 1996
-------- --------- ----------- ---------- --------
<S> <C> <C> <C> <C> <C>
Single-family 1-4 units...... $ 44,483 $ 45,818 $(33,617) $ 149 $ 56,833
Multi-family:
5-36 units................. 41,736 19,779 (13,175) 288 48,628
37 or more units........... 31,569 2,185 (7,923) 231 26,062
Non-residential.............. 83,086 (24,265) (14,490) 2,929 47,260
Commercial................... 4,176 (4,093) (974) 5,590 4,699
Consumer..................... 4,092 926 (2,842) 1,098 3,274
-------- -------- -------- ------- --------
$209,142 $ 40,350 $(73,021) $10,285 $186,756
======== ======== ======== ======= ========
</TABLE>
62
<PAGE>
Additions to the allowance for loan losses declined by $15.1 million, to
$25.2 million, in fiscal 1997, compared to fiscal 1996, reflecting
management's assessment that there is a decreased risk of loss inherent in the
loan portfolio, as evidenced by decreases in NPAs and delinquent loans. The
negative balances shown in the "Additions" column in the above tables
represent the reallocation of the allowance among the different portfolios and
reflects management's current assessment of the shifting of the relative risks
of loss inherent in the different portfolios.
If the recent economic improvements in the Bank's principal market areas do
not continue, the Bank's loans could be adversely impacted resulting in
increases in NPAs and higher charge-offs. Such increases could require a
larger allowance for loan losses.
LIABILITY COMPOSITION
The Bank's ratios of deposits and borrowings to total interest-earning
liabilities were 63% and 37%, respectively, at June 30, 1997, compared to
ratios of 65% and 35%, respectively, at June 30, 1996. The Bank continues to
emphasize the attraction of retail deposits, especially low-cost demand
deposits. The ratio of deposits to borrowings, however, is impacted by the
Bank's ability to fund asset growth with growth in retail deposits. The Bank
expects to replace borrowings with retail deposits over time through a
combination of retail sales efforts and acquisitions of deposits. See the
deposit composition table following for additional information.
DEPOSITS
The Bank uses retail deposits as its core source of funds for lending and
asset purchase purposes and as a customer base for providing additional
financial services. The Bank's total deposits increased by $632.9 million, to
$9.4 billion, in fiscal 1997. Included in the net deposit inflows in daily
access and certificates were $62.6 million and $6.2 million, respectively, of
deposits purchased in the OneCentral acquisition, and $259.5 million and $76.8
million, respectively, of deposits purchased in the TransWorld acquisition.
Glendale Federal's deposit composition at June 30, 1997 and 1996 was as
follows (dollars in thousands):
<TABLE>
<CAPTION>
JUNE 30
----------------------------------
1997 1996
---------------- ----------------
% OF % OF
BALANCE TOTAL BALANCE TOTAL
---------- ----- ---------- -----
<S> <C> <C> <C> <C>
Checking.................................... $1,198,011 12.8% $ 778,980 8.9%
Savings..................................... 452,225 4.8 492,777 5.7
Money market................................ 2,119,553 22.7 1,719,319 19.7
---------- ----- ---------- -----
Total daily access........................ 3,769,789 40.3 2,991,076 34.3
---------- ----- ---------- -----
Short-term certificates (1 year or less).... 2,703,538 28.9 3,047,207 34.9
Long-term certificates (over 1 year)........ 2,700,906 28.9 2,437,991 27.9
Jumbo and brokered certificates............. 182,676 1.9 247,702 2.9
---------- ----- ---------- -----
Total certificates........................ 5,587,120 59.7 5,732,900 65.7
---------- ----- ---------- -----
Total deposits............................ $9,356,909 100.0% $8,723,976 100.0%
========== ===== ========== =====
</TABLE>
During fiscal 1997, checking accounts increased by $419 million, or 53.8%,
to $1.198 billion. The increase in checking accounts includes $173.4 million
from the TransWorld and OneCentral acquisitions. Management believes that the
overall increase in daily access deposits in fiscal 1997 reflects the Bank's
aggressive branch marketing efforts and advertising campaign instituted
throughout California. During fiscal 1997, the Bank's short-term certificates
of deposit decreased $343 million, partially offset by a $263 million increase
in long-term certificates. This shift reflects the Bank's strategy
63
<PAGE>
to offer promotional rates on its 15, 18 and 21 month certificate products in
order to attract new customers and funds and to retain existing customers.
BORROWINGS
Total borrowings increased by $960.8 million, to $5.6 billion, during the
twelve months ended June 30, 1997 to support asset growth. Borrowings from the
FHLB increased by $950.0 million to $4.8 billion. During fiscal 1997,
adjustable-rate FHLB borrowings increased by $2.3 billion, to $2.9 billion,
while fixed-rate FHLB borrowings decreased by $1.4 billion, to $1.9 billion.
The Bank increased its adjustable-rate FHLB borrowings during fiscal 1997
because it was able to obtain favorable financing from the FHLB on this
product and thus reduce its cost of borrowings. Total borrowings as of June
30, 1997 and 1996 included $4.2 billion and $2.1 billion, respectively, of
borrowings due within one year. See "Liquidity and Asset and Liability
Management--Asset and Liability Management" below for additional discussion of
the Bank's borrowings.
STOCKHOLDERS' EQUITY
Stockholders' equity increased by $54.6 million, to $1.0 billion, during
fiscal 1997, primarily due to net earnings of $50.4 million, proceeds of $4.6
million received from the issuance of common stock related to the exercise of
stock options and a $10.2 million decrease in the net unrealized loss recorded
on the portfolio of debt and equity securities available for sale, partially
offset by dividends declared of $10.8 million on the Bank's Series E preferred
stock. See Note 19 of the Notes to Consolidated Financial Statements for
additional information on the Bank's stockholders' equity.
During the twelve months ended June 30, 1997, the Bank issued 3.1 million
shares of common stock in exchange for 1.2 million shares of the Bank's Series
E preferred stock. See Note 19 of the Notes to Consolidated Financial
Statements for additional information regarding these transactions.
LIQUIDITY AND ASSET AND LIABILITY MANAGEMENT
LIQUIDITY
The Bank's primary sources of funds consist of retail deposits, borrowings
from the FHLB, principal repayments on loans and mortgage-backed securities
and sales of securities under agreements to repurchase. The Bank also obtains
funds from its operations. Each of the Bank's sources of liquidity is subject
to various uncertainties beyond the control of the Bank. Scheduled loan
payments are a relatively stable source of funds, while loan and mortgage-
backed security prepayments and deposit flows may vary widely in reaction to
market conditions, primarily prevailing interest rates. As a measure of
protection against these uncertainties, the Bank generally has back-up sources
of funds available to it. At June 30, 1997, funds estimated to be available
from these sources totaled approximately $3.5 billion and consisted primarily
of the repurchase agreement markets and FHLB advances.
During the twelve months ended June 30, 1997, the Bank experienced a net
cash outflow from investing activities of $1.3 billion, primarily due to the
purchase of loans and mortgage-backed securities and to term loan
originations, partially offset by principal payments on loans and mortgage-
backed securities. The Bank experienced positive cash flows from operating
activities during the period of $343.0 million. The Bank's financing
activities during the period resulted in a net cash inflow of $1.2 billion,
consisting principally of net increases in deposits and borrowings.
During June 30, 1997, the Bank's average liquidity ratio was 5.75%. The
current minimum regulatory requirement for this ratio is 5%.
64
<PAGE>
ASSET AND LIABILITY MANAGEMENT
Savings institutions are subject to interest rate risk to the degree that
their interest-bearing liabilities, consisting principally of deposits, FHLB
advances and other borrowings, mature or reprice at different frequencies, or
on different bases, than their interest-earning assets, which consist
predominantly of intermediate or long-term real estate loans and mortgage-
backed securities. Interest rate risk is increased by the difference in
aggregate amounts of interest-earning assets and interest-bearing liabilities.
One of the Bank's primary financial objectives is to manage the interest
rate risk inherent in its business. The one-year GAP represents the estimated
difference between the amounts of interest-earning assets and interest-bearing
liabilities maturing or repricing within one year, based on assumptions as to
the expected repayment of assets and liabilities. The interest rate
sensitivity of the Bank's assets and liabilities could vary substantially if
actual experience differs from the assumptions used. The Maturity and Rate
Sensitivity Analysis table in Item 1. "Business--Asset and Liability
Management" sets forth the projected maturities, based upon contractual
maturities as adjusted for projected prepayments and "repricing mechanisms"
(provisions for changes in the interest rates of assets and liabilities), of
the Bank's major asset and liability categories as of June 30, 1997.
The following table is a summary of Glendale Federal's one-year GAP at the
dates indicated (dollars in millions):
<TABLE>
<CAPTION>
JUNE 30
----------------
1997 1996
------- -------
<S> <C> <C>
Interest-earning assets maturing or repricing within one
year........................................................ $11,640 $11,004
Interest-bearing liabilities maturing or repricing within one
year........................................................ 9,282 7,956
------- -------
One-year maturity GAP........................................ $ 2,358 $ 3,048
======= =======
One-year GAP as a percent of total assets.................... 14.5% 21.1%
======= =======
</TABLE>
The $690 million decrease in the one-year GAP during fiscal 1997 was
primarily due to a $1.3 billion increase in liabilities maturing or repricing
within one year, partially offset by a $636 million increase in assets
maturing or repricing within one year. The growth in one-year liabilities was
primarily due to an increase of $1.5 billion in FHLB borrowings that mature or
reprice within one year, partially offset by a decrease of $329 million in
certificates of deposits. The net growth in assets during fiscal 1997 was
funded with short-term borrowings and deposit growth. The growth of one-year
assets was principally due to increases of $345 million and $190 million in
adjustable-rate single-family residential loans and commercial/consumer loans,
respectively, that mature or reprice within one year, and an increase of $199
million in federal funds sold and assets purchased under resale agreements.
The Bank is better protected against rising interest rates with a positive
one-year GAP. However, the Bank remains subject to possible interest rate
spread compression, which would adversely impact the Bank's net interest
income if interest rates rise. This is primarily due to the lag in the
repricing of the indices to which the Bank's adjustable-rate loans and
mortgage-backed securities are tied, as well as the repricing frequencies and
periodic interest rate caps on such adjustable-rate loans and mortgage-backed
securities, and to an increase in the cost of the Bank's liabilities which are
subject to monthly repricing. The amount of such interest rate spread
compression would depend upon the frequency and severity of such interest rate
fluctuations. The positive one-year GAP could decrease in future periods due
to, among other things, the use of short-term adjustable-rate borrowings to
purchase long-term fixed-rate loans in the secondary market.
The Bank's Asset/Liability Management Committee ("ALCO") is responsible for
implementing the interest rate risk management policy adopted by the Bank.
Among other things, the Bank's policy statement sets forth the limits
established by the Board of Directors on acceptable changes in net
65
<PAGE>
interest income and net portfolio value resulting from specified changes in
interest rates. ALCO reviews, among other things, economic conditions, the
interest rate outlook, the demand for loans, the availability of deposits and
Glendale Federal's current operating results, liquidity, capital and interest
rate risk exposure. Based on such reviews, ALCO formulates a strategy that is
intended to implement the objectives set forth in Glendale Federal's business
plan without exceeding the net interest income and net portfolio value limits
set forth in the interest rate risk management policy statement.
The following tables present the Bank's gross loan portfolio, including
loans owned and serviced by the Bank and loans owned and serviced by others,
and the Bank's gross mortgage-backed securities portfolio (before adjustment
for the unrealized loss on mortgage-backed securities available for sale) by
note type and the distribution of adjustable-rate loans and mortgage-backed
securities among the major underlying indices at the dates indicated (dollars
in millions):
<TABLE>
<CAPTION>
JUNE 30, 1997
----------------------------------------------
LOANS LOANS
OWNED AND OWNED AND MORTGAGE- PERCENT
SERVICED SERVICED BACKED OF
BY BANK BY OTHERS SECURITIES TOTAL TOTAL
--------- --------- ---------- ------- -------
<S> <C> <C> <C> <C> <C>
Adjustable:
6-month Treasury Bills......... $ 328 $ 32 $ 411 $ 771 5%
1-Year Treasury Bills.......... 2,452 2,135 1,285 5,872 41
11th District Cost of Funds.... 3,551 71 131 3,753 26
Prime.......................... 288 -- 8 296 2
Other.......................... 115 7 117 239 2
------ ------ ------ ------- ---
6,734 2,245 1,952 10,931 76
Fixed............................ 1,070 2,083 297 3,450 24
------ ------ ------ ------- ---
Total............................ $7,804 $4,328 $2,249 $14,381 100%
====== ====== ====== ======= ===
<CAPTION>
JUNE 30, 1996
----------------------------------------------
LOANS LOANS
OWNED AND OWNED AND MORTGAGE- PERCENT
SERVICED SERVICED BACKED OF
BY BANK BY OTHERS SECURITIES TOTAL TOTAL
--------- --------- ---------- ------- -------
<S> <C> <C> <C> <C> <C>
Adjustable:
6-month Treasury Bills......... $ 384 $ 44 $ 433 $ 861 7%
1-Year Treasury Bills.......... 2,445 1,905 1,241 5,591 42
11th District Cost of Funds.... 3,855 81 154 4,090 31
Prime.......................... 63 -- 12 75 1
Other.......................... 167 45 154 366 3
------ ------ ------ ------- ---
6,914 2,075 1,994 10,983 84
Fixed............................ 928 1,069 227 2,224 16
------ ------ ------ ------- ---
Total............................ $7,842 $3,144 $2,221 $13,207 100%
====== ====== ====== ======= ===
</TABLE>
66
<PAGE>
RESULTS OF OPERATIONS
NET INTEREST INCOME
The following table provides information on net interest income for the past
three fiscal years, setting forth average balances of interest-earning assets
and interest-bearing liabilities, the interest income earned and interest
expense recorded thereon and the resulting average yield-cost ratios (dollars
in thousands):
<TABLE>
<CAPTION>
YEAR ENDED JUNE 30, 1997 YEAR ENDED JUNE 30, 1996 YEAR ENDED JUNE 30, 1995
------------------------------ ------------------------------ ------------------------------
AVERAGE INTEREST AVERAGE AVERAGE INTEREST AVERAGE AVERAGE INTEREST AVERAGE
BALANCES INCOME/ YIELD/ BALANCES INCOME/ YIELD/ BALANCES INCOME/ YIELD/
(1) EXPENSE COST (1) EXPENSE COST (1) EXPENSE COST
----------- ---------- ------- ----------- ---------- ------- ----------- ---------- -------
<S> <C> <C> <C> <C> <C> <C> <C> <C> <C>
Interest-earning As-
sets:
Loans receivable,
net(2)............... $11,341,678 $ 861,858 7.60% $10,268,121 $ 803,432 7.82% $ 9,713,502 $ 721,003 7.42%
Mortgage-backed
securities, net(3)... 2,243,784 149,551 6.67 3,423,747 216,812 6.33 5,070,658 303,587 5.99
----------- ---------- ----------- ---------- ----------- ----------
Total loans and
mortgage-backed
securities........... 13,585,462 1,011,409 7.44 13,691,868 1,020,244 7.45 14,784,160 1,024,590 6.93
Federal funds sold and
assets purchased
under resale
agreements........... 665,738 37,237 5.59 674,159 39,347 5.84 668,984 38,142 5.70
Other investments(4).. 273,471 24,310 8.89 208,057 20,444 9.83 279,097 23,926 8.57
----------- ---------- ----------- ---------- ----------- ----------
Total investments..... 939,209 61,547 6.55 882,216 59,791 6.78 948,081 62,068 6.55
----------- ---------- ----------- ---------- ----------- ----------
Total interest-earning
assets............... 14,524,671 1,072,956 7.39 14,574,084 1,080,035 7.41 15,732,241 1,086,658 6.91
---------- ---------- ----------
All other assets....... 677,837 578,912 717,954
----------- ----------- -----------
Total assets.......... $15,202,508 $15,152,996 $16,450,195
=========== =========== ===========
Interest-bearing
Liabilities:
Non-interest-bearing
demand deposits...... $ 551,196 $ -- 0.00% $ 315,804 $ -- 0.00% $ 221,993 $ -- 0.00%
Interest-bearing
demand deposits(5)... 2,328,604 88,248 3.79 1,910,682 73,547 3.85 1,612,899 50,607 3.14
Savings deposits...... 458,070 9,848 2.15 520,129 11,381 2.19 824,067 18,525 2.25
----------- ---------- ----------- ---------- ----------- ----------
Total daily access.... 3,337,870 98,096 2.94 2,746,615 84,928 3.09 2,658,959 69,132 2.60
Certificates.......... 5,621,222 307,086 5.46 6,085,586 348,906 5.73 6,698,055 343,762 5.13
----------- ---------- ----------- ---------- ----------- ----------
Total deposits........ 8,959,092 405,182 4.52 8,832,201 433,834 4.91 9,357,014 412,894 4.41
Securities sold under
agreements to
repurchase........... 335,809 18,642 5.55 1,869,194 108,839 5.82 2,927,313 165,681 5.66
Borrowings from FHLB.. 4,698,383 268,634 5.72 3,332,272 202,258 6.07 3,034,373 180,558 5.95
Other borrowings...... 40,119 1,514 3.77 43,784 2,039 4.66 104,529 9,806 9.38
----------- ---------- ----------- ---------- ----------- ----------
Total borrowings...... 5,074,311 288,790 5.69 5,245,250 313,136 5.97 6,066,215 356,045 5.87
----------- ---------- ----------- ---------- ----------- ----------
Total interest-bearing
liabilities.......... 14,033,403 693,972 4.95 14,077,451 746,970 5.31 15,423,229 768,939 4.99
---------- ---------- ----------
All other liabilities.. 188,772 130,297 118,641
Stockholders' equity... 980,333 945,248 908,325
----------- ----------- -----------
Total liabilities and
stockholders' equity. $15,202,508 $15,152,996 $16,450,195
=========== =========== ===========
Difference between
average interest-
earning assets and
interest- bearing
liabilities........... $ 491,268 $ 496,633 $ 309,012
=========== =========== ===========
Net interest income.... $ 378,984 $ 333,065 $ 317,719
========== ========== ==========
Yield-cost spread...... 2.44% 2.10% 1.92%
==== ==== ====
Effective net
spread(6)............. 2.61% 2.29% 2.02%
==== ==== ====
</TABLE>
67
<PAGE>
- - --------
(1) Average balances are primarily computed on daily balances during the
period. When such balances are not available, averages are computed on a
monthly basis. Average balances include the effect of discounts and
premiums on loans, investment securities, deposits and borrowings acquired
in acquisitions, as well as deferred loan fees and the effects of hedging
transactions.
(2) Non-accrual loans are included in the average balances for the periods;
however, interest on such loans has been excluded in computing the average
yields for the periods.
(3) The yields for available for sale securities included in this category are
based upon historical amortized cost balances without the effects of fair
value adjustments.
(4) Includes certificates of deposit, other debt and equity securities and
investment in capital stock of FHLB.
(5) Includes money market and interest-bearing checking accounts.
(6) The effective net spread for a period is net interest income divided by
average interest-earning assets.
The following rate/volume analysis depicts the increase (decrease) in net
interest income attributable to interest rate changes (change in rate
multiplied by prior period average balance) and volume changes (change in
average balance multiplied by prior period rate) when compared to the
preceding year (in thousands):
<TABLE>
<CAPTION>
YEARS ENDED JUNE 30
----------------------------------------------------------
1997 VERSUS 1996 1996 VERSUS 1995
CHANGES DUE TO CHANGES DUE TO
---------------------------- ----------------------------
VOLUME RATE TOTAL VOLUME RATE TOTAL
-------- -------- -------- --------- ------- --------
<S> <C> <C> <C> <C> <C> <C>
Interest income:
Loans receivable, net. $ 81,639 $(23,213) $ 58,426 $ 42,399 $40,030 $ 82,429
Mortgage-backed secu-
rities, net.......... (78,333) 11,072 (67,261) (103,216) 16,441 (86,775)
-------- -------- -------- --------- ------- --------
Total loans and
mortgage-backed
securities......... 3,306 (12,141) (8,835) (60,817) 56,471 (4,346)
Federal funds sold and
assets purchased
under resale
agreement............ (476) (1,634) (2,110) 290 915 1,205
Other investments..... 5,964 (2,098) 3,866 (6,676) 3,194 (3,482)
-------- -------- -------- --------- ------- --------
Total investments... 5,488 (3,732) 1,756 (6,386) 4,109 (2,277)
-------- -------- -------- --------- ------- --------
Total interest in-
come............... 8,794 (15,873) (7,079) (67,203) 60,580 (6,623)
Interest expense:
Deposits--daily ac-
cess................. 17,469 (4,301) 13,168 2,351 13,445 15,796
Deposits--certifi-
cates................ (25,855) (15,965) (41,820) (33,105) 38,249 5,144
-------- -------- -------- --------- ------- --------
Total deposits...... (8,386) (20,266) (28,652) (30,754) 51,694 20,940
Securities sold under
agreements to
repurchase........... (85,370) (4,827) (90,197) (61,430) 4,588 (56,842)
Borrowings from FHLB.. 78,641 (12,265) 66,376 18,002 3,698 21,700
Other borrowings...... (160) (365) (525) (4,163) (3,604) (7,767)
-------- -------- -------- --------- ------- --------
Total borrowings.... (6,889) (17,457) (24,346) (47,591) 4,682 (42,909)
-------- -------- -------- --------- ------- --------
Total interest ex-
pense.............. (15,275) (37,723) (52,998) (78,345) 56,376 (21,969)
-------- -------- -------- --------- ------- --------
Net interest income..... $ 24,069 $ 21,850 $ 45,919 $ 11,142 $ 4,204 $ 15,346
======== ======== ======== ========= ======= ========
</TABLE>
- - --------
Note: Non-accrual loans are included in the average balances for the periods;
however, interest on such loans has been excluded from interest income
for the periods. The change in interest not due solely to volume or rate
has been allocated in proportion to the absolute dollar amounts of the
change in each.
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<PAGE>
Net interest income increased by $45.9 million to $379.0 million in fiscal
1997, compared to fiscal 1996, because of favorable volume changes and an
improvement in the yield-cost spread. Volume changes, which contributed $24.1
million to the increase in net interest income, were primarily related to
changes in the mixes of both deposits and borrowings which resulted in a
reduction to interest expense of $15.3 million. On the asset side, an increase
in the Bank's investment of FHLB stock and a shift in the mix from mortgage-
backed securities to loans receivable increased interest income by $8.8
million.
The yield-cost spread increased by 34 basis points, to 2.44%, in the twelve
months ended June 30, 1997, compared to the same period last year, primarily
due to a decrease in the Bank's cost of funds of 36 basis points to 4.95%. The
decrease in the Bank's cost of funds during the year ended June 30, 1997,
compared to last year, was primarily due to a change in the mix of deposits
from higher-cost certificates of deposit to lower-cost daily access accounts,
the replacement of maturing higher-cost FHLB advances with lower-cost advances
and to lower interest rates prevailing during the period compared to last
year.
Interest income on loans receivable increased by $58.4 million, to $861.9
million, in fiscal 1997, compared to last year, primarily due to portfolio
growth. The average balance of loans receivable, net, increased by $1.1
billion, to $11.3 billion, during the year ended June 30, 1997, contributing
$81.6 million to the growth. This was due to the Bank's purchases, in the
secondary market, of $2.3 billion of loans during fiscal 1997. The effect of
growth in the loan portfolio was offset by a decrease in portfolio yield of 22
basis points. The decrease in portfolio yield was due to the effects of the
aforementioned lower interest rate environment on the Bank's portfolio of
adjustable-rate loans. The effect of declining interest rates was partially
offset by the effect of a declining level of non-accrual loans as the Bank
does not recognize income on these assets during the period they are non-
accrual, while their balances are included in the asset base for yield
calculation purposes. The average balance of non-accrual loans in fiscal 1997
and 1996 was $236.8 million and $302.3 million, respectively. The impact of
non-accrual loans on the yield on loans and mortgage-backed securities was a
reduction in yield of 7 basis points in fiscal 1997 versus a reduction of 12
basis points in fiscal 1996.
Interest income on mortgage backed securities decreased by $67.3 million, to
$149.6 million, in fiscal 1997, compared to fiscal 1996, primarily due to the
sale of $1.7 billion of lower-yielding CMOs in the second and third quarters
of fiscal 1996. Partially offsetting the effect of portfolio reductions, was
an increase in the yield on mortgage-backed securities of 34 basis points to
6.67% in the remaining portfolio of mortgage-backed securities.
Interest income on federal funds sold and assets purchased under resale
agreements decreased by $2.1 million, to $37.2 million, in fiscal 1997,
compared to last year, primarily due to the lower interest rate environment
prevailing in fiscal 1997, compared to fiscal 1996. The yield on federal funds
sold and securities purchased under resale agreements decreased by 25 basis
points to 5.59% during the year ended June 30, 1997, compared to last year,
reflecting a reduction by the Federal Reserve Board of the federal funds rates
late in fiscal 1996.
Interest income on other investments increased by $3.9 million to $24.3
million in fiscal 1997, compared to last year, primarily due to an increase in
the average portfolio balance of $65.4 million. During the year, the Bank
increased its investment in FHLB stock by $66.7 million to obtain additional
borrowings from the FHLB in compliance with the FHLB's requirements. These
purchases of FHLB stock contributed $5.0 million to the increased interest
income.
Interest expense on daily access deposits increased by $13.2 million, to
$98.1 million, in fiscal 1997, compared to fiscal 1996, primarily due to a
$591.3 million, or 22% increase in the average balance in daily access
accounts during the year ended June 30, 1997, compared to the year ended June
30, 1996. This growth in average balance contributed $17.5 million to the
increase in interest
69
<PAGE>
expense. The growth in average daily access account balances was due to the
addition of $322.1 million of daily access accounts related to the
acquisitions of TransWorld Bank and OneCentral Bank, and to internally-
developed account growth. The increase in interest expense was offset by a 15
basis point reduction in the average cost of daily access accounts. The
decrease in average cost was due to the low cost of deposits acquired from
TransWorld and OneCentral, and to the lower interest rates prevailing during
the year ended June 30, 1997, compared to last year.
Interest expense on certificate accounts decreased by $41.8 million, to
$307.1 million, in fiscal 1997, compared to fiscal 1996, due to the combined
effects of decreasing average balances and to the lower interest rate
environment prevailing during the year ended June 30, 1997 compared to last
year. Average balances in certificate accounts decreased by $464.4 million, or
8%, due to management's efforts to change the mix of deposits toward daily
access accounts. This decrease contributed $25.9 million to the reduction in
interest expense on certificate accounts. The average cost of certificate
accounts decreased by 27 basis points to 5.46% due to both the lower interest
rate environment prevailing during the year ended June 30, 1997 compared to
last year, and to growth in daily access deposits allowing management to price
certificate accounts less aggressively, while maintaining approximately the
same retail-wholesale funding mix.
Interest expense on borrowings decreased by $24.3 million to $288.8 million
in fiscal 1997, compared to fiscal 1996, primarily due to the replacement of
maturing higher-cost FHLB borrowings with lower-cost FHLB borrowings, and to
the decline in the interest rate environment. The cost of borrowings decreased
28 basis points to 5.69% during fiscal 1997 compared to fiscal 1996.
Contributing to the decrease in interest expense was a $170.9 million decrease
in the average balance of borrowings compared to last year.
The Bank has, in the past, entered into interest rate exchange agreements
("swaps") to reduce the effect of rising interest rates on short-term deposits
and FHLB advances, and the effect thereof on interest expense. The Bank
predominantly paid fixed interest rates and received variable interest rates
under its swap contracts. The impact of swaps for the years ended June 30,
1997 and 1996 was to increase the total cost of funds by 2 basis points. The
impact of swaps for the year ended June 30, 1995 was to increase the total
cost of funds by 3 basis points. At June 30 1997, no swaps were outstanding.
During fiscal 1996, the Federal Reserve Board lowered the federal funds rate
by a total of 0.75%, to 5.25%. This reduced the Bank's borrowing costs.
Because adjustments to interest rates on adjustable-rate loans and mortgage-
backed securities tend to follow changes in market rates, the impact of lower
interest rates is experienced in yields for these assets more slowly than in
the cost of the Bank's short-term borrowings. If current interest rates were
to remain stable, the Bank would not expect its interest rate spread to change
significantly. However, in March 1997, the Federal Reserve Board increased the
federal funds rate by 0.25% to 5.5%. This increase, and any future increases
in short-term interest rates could result in interest rate spread compression
depending on the timing and magnitude of the increase.
Net interest income before provision for loan losses increased by $15.3
million, to $333.1 million, in fiscal 1996, compared to fiscal 1995, primarily
due to an improvement in the yield-cost spread and to an increase in the
amount by which average interest-earning assets exceeded average interest-
bearing liabilities. These factors were partially offset by a reduced level of
interest-earning assets and the loss of $18.0 million of net interest income
recorded by University Savings in the first six months of fiscal 1995 prior to
being sold.
The yield-cost spread increased by 18 basis points, to 2.10%, in fiscal
1996, compared to fiscal 1995. This improvement reflected the sale of $1.7
billion of lower yielding fixed-rate CMOs in the second and third quarters of
fiscal 1996 (the "CMO Sale") and the purchase of higher yielding whole
70
<PAGE>
loans in the secondary market, consisting of $1.3 billion of predominantly
fixed-rate loans yielding 8.89% that were purchased in fiscal 1995 and $2.0
billion of adjustable-rate loans that were purchased in fiscal 1996. Higher
costing borrowings were incurred to replace the deposits sold in the sale of
the Bank's Florida operations. A portion of these borrowings were replaced
with lower costing deposits obtained through branch acquisitions at the end of
the fourth quarter of fiscal 1995 and through repayment with proceeds from the
CMO Sale in fiscal 1996. Approximately $500 million of higher costing
certificates of deposit matured during fiscal 1996 and were replaced with
lower costing daily access accounts.
Interest income on loans receivable increased by $82.4 million, to $803.4
million, in fiscal 1996, compared to fiscal 1995. The increase was due to the
combined effects of portfolio growth and increased yields on the portfolio.
The average loan portfolio balance increased by $554.6 million, or 6 percent,
due to purchases of $2.0 billion of adjustable rate loans during the year. The
loan purchases were made to replace $1.7 billion of lower yielding CMOs sold
during the year. The increase in the average loan portfolio balance
contributed $42.4 million to the increase in interest income. The average
yield of the loan portfolio increased by 40 basis points to 7.82% during
fiscal 1996. This increase was primarily due to the purchase of higher
yielding loans during fiscal 1996 and 1995. The improvement in average yield
contributed $40.0 million to the increase in interest income.
Interest income on mortgage-backed securities decreased by $86.8 million, to
$216.8 million, during fiscal 1996, compared to fiscal 1995. This decrease was
primarily due to a $1.65 billion decrease in the average balance of mortgage-
backed securities during fiscal 1996 compared to fiscal 1995 arising from the
previously mentioned sale of $1.7 billion of CMO's during fiscal 1996. The
decline in the average balance of mortgage-backed securities reduced interest
income by $103.2 million, offset by the $16.4 million impact of the increase
in the mortgage-backed securities portfolio yield. The increase in portfolio
yield was primarily due to the upward impact on portfolio yield resulting from
the sale of lower-yielding CMO's.
The declining level of non-accrual loans also had a positive impact on
interest income. The average balance of non-accrual loans in fiscal 1996 and
1995 was $302.3 million and $472.5 million, respectively. The impact of non-
accrual loans on the yield on loans and mortgage-backed securities was a
decrease of 12 basis points in fiscal 1996 and 14 basis points in fiscal 1995.
Interest income on federal funds sold and assets purchased under resale
agreements increased by $1.2 million to $39.3 million during fiscal 1996,
compared to the prior year, primarily due to a 14 basis point increase in the
portfolio yield arising from a year-over-year increase in short-term interest
rates.
Interest income on other investments decreased by $3.5 million, to $20.4
million, in fiscal 1996, compared to fiscal 1995, primarily due to a decline
of $71.0 million in the average portfolio balance arising from the sale of
University Savings in January 1995 and its lower-yielding investments. The
decline in the average portfolio contributed $6.7 million of the decline in
interest income relating to this portfolio. This decline was partially offset
by a 126 basis point improvement to 9.83% in the average portfolio yield, due
to the increase in yield of the Bank's remaining securities after the
University sale.
Interest expense on daily access accounts increased by $15.8 million, to
$84.9 million, in fiscal 1996, compared to fiscal 1995. This increase was due
primarily to the higher level of interest rates prevailing during fiscal 1996,
compared to 1995. The increase in interest rates accounted for $13.4 million
of the increase. The average balance in daily access accounts increased by
$87.7 million, or 3 percent, in fiscal 1996, compared to fiscal 1995. This
increase was due to the impact of the purchase of the daily access deposits of
Independence One and Union Federal Banks of $237.1 million, partially offset
by net outflows of deposits to higher-interest bearing instruments in the
higher interest-rate environment prevailing during fiscal 1996.
71
<PAGE>
Interest expense on certificate accounts increased by $5.1 million, to
$348.9 million, in fiscal 1996, compared to fiscal 1995, due to the offsetting
effects of increased interest rates and a reduced certificate deposit base.
The increased cost of deposit certificates during fiscal 1996 reflects the
higher interest rates prevailing during the year compared to fiscal 1995, and
contributed $38.2 million to the increase in interest expense. The average
deposit base decreased by $612.5 million during fiscal 1996 compared to 1995,
and was due primarily to the sale during fiscal 1995, of $3.1 billion of
certificate accounts through the sales of the Bank's Florida franchise and
University Savings, partially offset by acquisitions of $769.9 million of
certificate accounts from Union Federal Bank and Independence One Bank.
Interest expense on securities sold under agreements to repurchase decreased
by $56.8 million, to $108.8 million, in fiscal 1996, compared to fiscal 1995,
primarily due to decreased short-term borrowings. Average short-term
borrowings decreased by $1.1 billion during fiscal 1996, primarily due to
reduced borrowing needs following the previously mentioned sale of $1.7
billion of CMO's. The decrease in average short-term borrowings contributed
$61.4 million of the decrease in interest expense. This decrease was partially
offset by a 16 basis point increase in the average cost of short term
borrowings, due to the effect of the higher interest rate environment
prevailing during fiscal 1996 compared to fiscal 1995.
Interest expense on borrowings from the FHLB increased by $21.7 million, to
$202.3 million, in fiscal 1996, compared to fiscal 1995, due to the combined
effects of increased borrowings and of the higher interest rates prevailing in
fiscal 1996 compared to fiscal 1995. Average borrowings from the FHLB
increased by $297.9 million in fiscal 1996, compared to fiscal 1995. The
increase in average borrowings from the FHLB was due to management's use of
longer-term advances to extend a portion of the Bank's liability maturities.
The increase in average borrowings increased interest expense by $18.0
million. The higher interest rates prevailing during fiscal 1996 compared with
fiscal 1995, along with use of longer-term borrowings, increased the cost of
FHLB borrowings by 12 basis points, contributing $3.7 million to the increase
in interest expense on borrowings from the FHLB.
Interest expense on other borrowings decreased by $7.8 million, to $2.0
million, during the year ended June 30, 1996, compared to the year ended June
30, 1995, due to decreases in both average borrowings and the average cost of
borrowings. These decreases are both primarily due to repayments in the first
quarter of fiscal 1996 of $3.4 million of subordinated debentures bearing
interest at 14.9% and of $13.5 million of collateralized notes bearing
interest at 11.6%.
PROVISION FOR LOAN LOSSES
Provision for loan losses totaled $25.2 million in fiscal 1997, a decrease
of $15.1 million or 38% compared to $40.4 million in fiscal 1996, and a
decrease of $40.9 million or 62% compared to $66.2 million in fiscal 1995. The
significant reduction in the provision was primarily due to steadily declining
NPAs and delinquent loans, lower net charge-offs and management's assessment
that there is a decreased risk of loss inherent in the Bank's loan portfolios.
NPAs at June 30, 1997 totaled $205.0 million, which represents a 25% decline
from the $274.6 million of NPAs recorded at June 30, 1996, and a 42% decline
from the $355.5 million recorded at June 30, 1995. Net charge-offs to the
allowance for loan losses totaled $52.3 million in fiscal 1997, compared to
$62.7 million in fiscal 1996 and $188.7 million in fiscal 1995. The allowance
for loan losses is determined based on, among other things, the application to
the loan portfolios of factors used in the Bank's allowance for loan loss
evaluation process. The application of these factors is discussed in "Balance
Sheet Analysis--Allowance for Loan Losses".
72
<PAGE>
LOAN SERVICING INCOME, NET
Loan servicing income, net, increased by $9.6 million or 40%, to $33.8
million, in fiscal 1997, compared to fiscal 1996. This increase was
attributable to increased servicing fees earned resulting from recent
purchases of mortgage servicing assets ("MSA"), partially offset by the
corresponding increase in the amortization of MSA. The valuation of mortgage
servicing is significantly impacted by market prepayment expectations of the
loans underlying the MSA. If prepayment expectations increase from the levels
as of June 30, 1997, recognition of valuation allowances relating to the value
of the Bank's MSA and increases in the rate of amortization of the asset may
be necessary, depending upon the frequency and magnitude of such increases.
Loan servicing income, net, decreased by $6.3 million or 21%, to $24.2
million, in fiscal 1996, compared to fiscal 1995, primarily due to adjustments
made in the September 1995 quarter to the value of the Bank's MSA. In the
September 1995 quarter, an adjustment totaling $5.9 million was made to reduce
the carrying value of the Bank's MSA due to an increase in prepayment
expectations and to changes in the underlying assumptions used to value those
assets.
During fiscal 1997, the Bank purchased servicing rights relating to $17.2
billion of loans for $187.3 million, which included servicing rights relating
to $11.5 billion of predominantly fixed-rate mortgage loans purchased for
$112.8 million in the fourth quarter of fiscal 1997. During fiscal 1996, the
Bank purchased servicing rights relating to $3.7 billion of loans for $50.8
million.
The Bank's portfolio of loans serviced for others totaled $29.6 billion at
June 30, 1997 and included the above-mentioned $11.5 billion of loans sub-
serviced by a third party which will be transferred to the Bank for servicing
in the first quarter of fiscal 1998. Loans serviced for others at June 30,
1996 and 1995 totaled $14.1 billion and $11.7 billion, respectively.
OTHER FEES AND SERVICE CHARGES
Other fees and service charges increased by $11.1 million or 24%, to $56.9
million, in fiscal 1997, compared to fiscal 1996. This increase was due
primarily to increases in deposit fee income and ATM fees of $7.6 million and
$1.7 million, respectively, related to growth in the number of transaction
accounts, and an increase in commissions and brokerage fees of $1.9 million
related to higher sales from the Bank's securities brokerage subsidiary.
Other fees and service charges increased by $6.9 million or 18%, to $45.8
million, in fiscal 1996 compared to fiscal 1995, which included six months of
the Bank's Florida and Washington operations. This increase primarily reflects
an increase in deposit fee income of $4.4 million related to growth in the
number of transaction accounts and an increase in commissions and broker fees
of $2.3 million related to higher sales from the Bank's securities brokerage
subsidiary.
LOSS ON SALE OF MORTGAGE-BACKED SECURITIES, NET
The Bank recorded a loss on sale of mortgage-backed securities, net of $1.8
million in fiscal 1997, primarily due to provisions for loss related to loans
sold in prior years subject to recourse obligations.
Loss on sale of mortgage-backed securities, net of $34.2 million in fiscal
1996 primarily reflected the previously discussed $28.2 million loss on the
CMO Sale and $6.6 million of recourse related losses, including fees for
recourse removal transactions. See "Overview--Sale of CMO Investment
Portfolio" for additional discussion regarding the CMO Sale.
Loss on sale of mortgage-backed securities, net, of $11.7 million in fiscal
1995 consisted primarily of provisions for loss related to loans sold in prior
years subject to recourse obligations and fees for recourse removal
transactions.
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<PAGE>
GAIN ON SALE OF BANKING OPERATIONS
The gain on sale of banking operations totaling $73.7 million in fiscal
1995, resulted from the sales of University Savings and the Bank's Florida
franchise. The Bank recorded gains of $50.7 million and $23.0 million on the
sales of University Savings and the Florida franchise, respectively. The
recorded gains of $50.7 million and $23.0 million were offset by $21.0 million
and $20.7 million, respectively, in income tax expense related to the sales.
GENERAL AND ADMINISTRATIVE EXPENSES
General and administrative expenses, excluding legal expenses for the
goodwill litigation, increased by $16.3 million to $263.2 million in fiscal
1997, compared with $246.9 million in fiscal 1996. The increase primarily
reflected costs associated with the Bank's new business lines, new branches
and, to a lesser degree, the acquisitions of TransWorld and OneCentral,
partially offset by reduced regulatory insurance premiums. General and
administrative expenses may increase in future periods as the Bank continues
to expand its business lines, enhance the value of its franchise and maintain
a higher level of marketing activity. Management intends the new business
lines to result in additional fee income, higher yielding loans and lower
costing deposits.
The Bank has an ongoing program designed to ensure that its operational and
financial systems will not be adversely affected by year 2000 software
failures due to processing errors arising from calculations using the year
2000 date. The Bank expects to incur $25 million to $30 million over the next
three years on its program to redevelop, replace or repair its computer
applications to try to make them "year 2000" compliant. While the Bank
believes it is doing everything technologically possible to assure year 2000
compliance, it is to some extent dependent upon vendor cooperation. The Bank
is requiring its computer systems and software vendors to represent that the
products provided are or will be year 2000 compliant and has planned a program
of testing for compliance. It is recognized that any year 2000 compliance
failures could result in additional expense to the Bank.
As a result of the reduced assessment from the FDIC following the SAIF
recapitalization, regulatory insurance in fiscal 1997 decreased by $11.2
million or 41%, to $16.3 million, compared to fiscal 1996. The decrease also
reflected the $1.1 million refund from the FDIC for a portion of the second
quarter assessment.
General and administrative expenses increased by $3.5 million, to $246.9
million, in fiscal 1996 compared to fiscal 1995, due to costs associated with
new business lines, increased advertising and legal expenses, and the
operation of 18 banking offices acquired in the fourth quarter of fiscal 1995.
The increase was partially offset by the sales of the Bank's Florida and
Washington operations in fiscal 1995. General and administrative expenses
attributable to the Bank's Washington operations were $6.6 million in fiscal
1995 prior to the sale of those operations.
LEGAL EXPENSE--GOODWILL LAWSUIT
Legal expenses related to the Bank's trial in the Court of Federal Claims to
determine damages in its breach of contract suit against the federal
government were significantly higher in fiscal 1997 at $24.1 million compared
to $1.9 million and $0.4 million, respectively, in fiscal 1996 and 1995.
Management expects to incur legal expenses of up to approximately $6 million
pretax per quarter for the duration of the damages trial, which is currently
estimated to be completed sometime in the March 1998 quarter. See Item 3.
"Legal Proceedings" for further discussion.
74
<PAGE>
OPERATIONS OF REO
Operations of REO resulted in losses of $6.6 million, $8.4 million and $15.0
million in fiscal 1997, 1996 and 1995, respectively. Losses in fiscal 1997
were primarily due to $7.5 million in provisions to adjust the REO portfolio
to current fair value and $6.2 million of operating expenses. These expenses
were partially offset by gains realized on the sale of REO (after market
valuation adjustments) of $7.2 million. Losses in fiscal 1996 were primarily
due to $12.1 million in provisions to adjust the REO portfolio to current fair
value and $7.2 million of operating expenses. These expenses were partially
offset by gains realized on the sale of REO (after market valuation
adjustments) of $10.9 million, of which $2.1 million was recognized in the
September 1995 quarter in connection with the August 1995 sale of
underperforming loans and REO. Losses in fiscal 1995 were primarily due to
$16.8 million in provisions to adjust the REO portfolio to current fair value,
and $10.6 million of operating expenses. These expenses were partially offset
by gains realized on the sale of REO (after market valuation adjustments) of
$12.4 million, which included a $2.3 million gain recorded in December 1994 by
University Savings.
The declining trend in losses in REO operations mirrored the trend in the
level of new REOs and a shift in the composition of the REO inventory from
multi-family residential and non-residential properties to smaller balance
single-family residential properties. Total REO decreased by $16.7 million, to
$61.5 million as of June 30, 1997, compared to $78.2 million at June 30, 1996,
while the percentage of single-family residential properties to total REO
increased to 53% as of June 30, 1997, compared to 48% at June 30, 1996.
Foreclosures of single-family residences represented 70% of the total dollar
amount of foreclosures for fiscal 1997, compared to 61% for fiscal 1996 and
31% for fiscal 1995.
AMORTIZATION OF GOODWILL AND OTHER INTANGIBLE ASSETS
Amortization of goodwill totaled $5.5 million, $5.1 million and $1.7 million
in fiscal 1997, 1996 and 1995, respectively. The increase in fiscal 1997, as
compared to fiscal 1996, reflected the impact of the amortization of the
goodwill of $45.8 million relating to the acquisitions of TransWorld and
OneCentral in the second half of fiscal 1997. The increase in fiscal 1996, as
compared to fiscal 1995, reflected the impact of the amortization of $42.9
million in purchase premiums, together with an adjustment to record the assets
acquired at fair value, relating to purchases of deposits in the fourth
quarter of fiscal 1995, partially offset by the decrease in goodwill
amortization resulting from the fiscal 1995 sale of the Bank's Washington
operations. On an annual basis, the goodwill of $40.0 million relating to the
acquisition of TransWorld in the fourth quarter of fiscal 1997, together with
the goodwill relating to the OneCentral acquisition, will increase the Bank's
amortization expense in future years by $3.1 million.
INCOME TAX PROVISION
The Bank recorded income tax provisions before extraordinary items of $36.1
million, $21.3 million and $52.1 million in fiscal 1997, 1996 and 1995,
respectively. The effective tax rates in those fiscal years were 41.7%, 33.7%
and 41.6%, respectively. Changes in the effective rates are discussed in Note
15 of the Notes to Consolidated Financial Statements.
The Bank utilized its remaining net operating loss carryforwards to offset
the gains from the sales of the Florida franchise and University Savings in
fiscal 1995. The goodwill associated with the Florida franchise was included
in the book basis of the assets sold but was not included in the tax basis of
these assets. The tax gain was greater than the book gain from the sale,
primarily by the amount of the goodwill.
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EXTRAORDINARY ITEM, NET
Extraordinary item, net for fiscal 1995 consisted of a $1.8 million gain
(net of income taxes of $1.3 million) resulting from University Savings' early
extinguishment of $42.1 million of borrowings from the Federal Home Loan Bank
of Seattle.
FORWARD-LOOKING INFORMATION
The discussions contained above in "Management's Discussion and Analysis of
Financial Condition and Results of Operations" and Item 1. "Business" are
intended to provide information to facilitate the understanding and assessment
of the consolidated financial condition of Glendale Federal as reflected in
the accompanying consolidated financial statements and footnotes and should be
read and considered in conjunction therewith. These discussions include
forward-looking statements within the meaning of Section 21E of the Exchange
Act regarding management's beliefs, estimates, projections, and assumptions
with respect to future operations. All forward-looking statements herein are
subject to risks and uncertainties, including the risks and uncertainties
detailed herein and from time to time in Glendale Federal's OTS reports and
filings. Actual results and operations for any future period may vary
materially from those projected herein and from past results discussed herein.
ITEM 8.FINANCIAL STATEMENTS AND SUPPLEMENTARY DATA
See Index to Financial Statements on Page 80 and Financial Statements
beginning on Page F-1.
ITEM 9. CHANGES IN AND DISAGREEMENTS WITH ACCOUNTANTS ON ACCOUNTING AND
FINANCIAL DISCLOSURE
None
PART III
ITEM 10. DIRECTORS AND EXECUTIVE OFFICERS OF THE REGISTRANT
That portion of Golden State's definitive Proxy Statement filed with the
Securities Exchange Commission pursuant to Regulation 14A for use in
connection with Golden State's Annual Meeting of Stockholders to be held on
October 28, 1997 ("Proxy Statement") appearing under the caption "Election of
Directors" is incorporated herein by reference.
ITEM 11. EXECUTIVE COMPENSATION
That portion of Golden State's Proxy Statement appearing under the caption
"Executive Compensation and Other Information" is incorporated herein by
reference.
ITEM 12. SECURITY OWNERSHIP OF CERTAIN BENEFICIAL OWNERS AND MANAGEMENT
That portion of Golden State's Proxy Statement appearing under the caption
"Beneficial Ownership of Golden State's Securities" is incorporated herein by
reference.
ITEM 13. CERTAIN RELATIONSHIPS AND RELATED TRANSACTIONS
That portion of Golden State's Proxy Statement appearing under the caption
"Executive Compensation and Other Information--Certain Relationships and
Related Transactions" is incorporated herein by reference.
76
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PART IV
ITEM 14. EXHIBITS, FINANCIAL STATEMENT SCHEDULES AND REPORTS ON FORM 8-K
<TABLE>
<CAPTION>
EXHIBIT
NUMBER
-------
<C> <S>
3.1 Amended and Restated Charter of the Bank.
3.2 Amended and Restated Bylaws of the Bank.
4.1 Section 5 of the Amended and Restated Charter of the Bank. (Included
in Exhibit 3.1)
4.3 Supplementary Charter Section to Section 5(C) of the Amended and
Restated Charter of the Bank dated July 24, 1997, regarding 1997-A
Noncumulative Preferred Stock. (Included in Exhibit 3.1)
4.4(a) Warrant Agreement dated as of February 23, 1993 between the Bank and
Chemical Trust Company of California. (4.5)
4.5(b) Warrant Agreement dated as of August 15, 1993 between the Bank and
Chemical Trust Company of California. (4.5)
10.4(c) Sheltered Pay Plan.(10.4)
10.6 Board of Directors Retirement Plan, as amended.
10.7 Amended Employment Agreement between Glendale Federal and Stephen J.
Trafton dated January 1, 1997.
10.8 Employment Agreement between Glendale Federal and Stephen J. Trafton
dated July 23, 1997.
10.9 Form of employment agreement. Executed agreements are with Vincent L.
Beatty, William J. Birch, Howard C. Everakes, Richard A. Fink, Michael
E. Goraleski, John E. Haynes, Terry D. Hess, Lelah L. Jenkins, Kathryn
D. Snyder and Robert R. Trujillo.
11.1 Statement Regarding Computation of Per Share Earnings (Loss).
22.1(c) List of Subsidiaries.
23.1 Consent of KPMG Peat Marwick LLP.
</TABLE>
- - --------
(a) Exhibits previously filed with Glendale Federal Bank Form OC, dated June
15, 1993 under the Exhibit Numbers indicated in parentheses and
incorporated herein by reference.
(b) Exhibits previously filed with Glendale Federal 10-K, dated June 30, 1994
under the Exhibit Numbers indicated.
(c) Exhibit previously filed with Glendale Federal 10-K, dated June 30, 1996
under the Exhibit Number indicated.
FINANCIAL STATEMENTS AND SCHEDULES
See Index to Financial Statements on page 80, and Financial Statements
commencing on page F-1. Financial Statement Schedules have been omitted
because they are not applicable or the required information is shown in the
Consolidated Financial Statements or Notes thereto.
REPORTS ON FORM 8-K FILED DURING THE QUARTER ENDED JUNE 30, 1997
June 3, 1997--The following events were reported pursuant to Item 5 of Form
8-K: (i) the court in In Re GLENFED Inc. Securities Litigation, Civil No. 91-
0818 WJR, a case in which a subsidiary of Glendale Federal is a defendant,
granted the motion in intervention of new plaintiffs; and (ii) the new
plaintiffs have filed a complaint seeking class certification.
77
<PAGE>
SIGNATURES
PURSUANT TO THE REQUIREMENTS OF SECTION 13 OR 15(d) OF THE SECURITIES
EXCHANGE ACT OF 1934, THE REGISTRANT HAS DULY CAUSED THIS REPORT TO BE SIGNED
ON ITS BEHALF BY THE UNDERSIGNED, THEREUNTO DULY AUTHORIZED.
GLENDALE FEDERAL BANK, FEDERAL SAVINGS BANK
Date: September 22, 1997
/s/ Stephen J. Trafton
By: _________________________________
Stephen J. Trafton
Chairman of The Board, Chief
Executive Officer and President
PURSUANT TO THE REQUIREMENTS OF THE SECURITIES ACT OF 1934, THIS REPORT HAS
BEEN SIGNED BELOW BY THE FOLLOWING PERSONS ON BEHALF OF THE REGISTRANT AND ON
THE DATE INDICATED:
<TABLE>
<S> <C>
/s/ Stephen J. Trafton Date: September 22, 1997
- - ---------------------------------------
Stephen J. Trafton
Chairman of The Board, Chief Executive
Officer and President
(Principal Executive Officer)
/s/ John E. Haynes Date: September 22, 1997
- - ---------------------------------------
John E. Haynes
Executive Vice President and Chief Financial
Officer (Principal Financial Officer)
/s/ Gregory L. Hendry Date: September 22, 1997
- - ---------------------------------------
Gregory L. Hendry
Senior Vice President and Chief Accounting
Officer (Principal Accounting Officer)
- - ---------------------------------------
Diane C. Creel, Director
/s/ Richard H. Daniel Date: September 22, 1997
- - ---------------------------------------
Richard H. Daniel, Director
/s/ Brian P. Dempsey Date: September 22, 1997
- - ---------------------------------------
Brian P. Dempsey, Director
/s/ Richard A. Fink Date: September 22, 1997
- - ---------------------------------------
Richard A. Fink, Director
/s/ John F. King Date: September 22, 1997
- - ---------------------------------------
John F. King, Director
/s/ John F. Kooken Date: September 22, 1997
- - ---------------------------------------
John F. Kooken, Director
</TABLE>
78
<PAGE>
<TABLE>
<S> <C>
- - ---------------------------------------
Orin S. Kramer, Director
/s/ Paul J. Orfalea Date: September 22, 1997
- - ---------------------------------------
Paul J. Orfalea, Director
/s/ Gilbert R. Vasquez Date: September 22, 1997
- - ---------------------------------------
Gilbert R. Vasquez, Director
</TABLE>
79
<PAGE>
INDEX TO FINANCIAL STATEMENTS
<TABLE>
<CAPTION>
PAGE
----
<S> <C>
Annual Financial Statements
Report of Management.................................................... F-1
Independent Auditors' Report............................................ F-2
Consolidated Statements of Financial Condition as of June 30, 1997 and
1996................................................................... F-3
Consolidated Statements of Operations for years ended June 30, 1997,
1996 and 1995.......................................................... F-4
Consolidated Statements of Changes in Stockholders' Equity for years
ended June 30, 1997, 1996 and 1995..................................... F-5
Consolidated Statements of Cash Flows for years ended June 30, 1997,
1996 and 1995.......................................................... F-6
Notes to Consolidated Financial Statements.............................. F-8
</TABLE>
80
<PAGE>
GLENDALE FEDERAL BANK, FSB
REPORT OF MANAGEMENT
The management of Glendale Federal Bank, Federal Savings Bank (the "Bank")
has responsibility for the preparation, integrity, and reliability of the
consolidated financial statements and related financial information of the
Bank and its subsidiaries contained in this report. The consolidated financial
statements were prepared in accordance with generally accepted accounting
principles appropriate in the circumstances and necessarily included judgments
and estimates by management.
Management has established and is responsible for maintaining a system of
internal controls designed to provide reasonable assurance as to the integrity
and reliability of the financial statements and the protection of assets from
unauthorized use or disposition. The system of internal controls includes: an
effective financial accounting structure; a comprehensive internal audit
function; an independent audit committee (the "Committee") of the Board of
Directors; and financial and operating policies and procedures. The Bank's
management also fosters standards of business ethics as documented by the
Bank's employee handbook and management guide, appropriate levels of
management authority and responsibility, an effective corporate organizational
structure, and appropriate selection and training of personnel.
The Board of Directors, primarily through the Committee, oversees the
adequacy of the Bank's system of internal controls. The Committee, whose
members are neither officers nor employees of the Bank, meets at least
quarterly with management, internal auditors, and the independent auditors to
review the functioning of each and to ensure that each is properly discharging
its responsibilities.
The Bank's consolidated financial statements are audited by KPMG Peat
Marwick LLP, the Bank's independent auditors, whose audit is made in
accordance with generally accepted auditing standards and includes such audit
procedures as they consider necessary to express the opinion in their report
that follows.
Management recognizes and cautions that there are inherent limitations in
the effectiveness of any internal control environment. However, management
believes that, as of June 30, 1997, the Bank's system of internal controls, as
described above, provided reasonable assurance as to the integrity and
reliability of the financial statements and related financial information and
the safeguarding of assets.
/s/ Stephen J. Trafton August 28, 1997
- - ------------------------------- ----------------
Stephen J. Trafton Date
Chairman of the Board,
Chief Executive Officer and President
/s/ John E. Haynes August 28, 1997
- - ------------------------------- ----------------
John E. Haynes Date
Executive Vice President and
Chief Financial Officer
F-1
<PAGE>
INDEPENDENT AUDITORS' REPORT
The Board of Directors
Glendale Federal Bank, Federal Savings Bank
We have audited the accompanying consolidated statements of financial
condition of Glendale Federal Bank, Federal Savings Bank and subsidiaries (the
Bank) as of June 30, 1997 and 1996, and the related consolidated statements of
operations, changes in stockholders' equity and cash flows for each of the
years in the three-year period ended June 30, 1997. These consolidated
financial statements are the responsibility of the Bank's management. Our
responsibility is to express an opinion on these consolidated financial
statements based on our audits.
We conducted our audits in accordance with generally accepted auditing
standards. Those standards require that we plan and perform the audit to
obtain reasonable assurance about whether the financial statements are free of
material misstatement. An audit includes examining, on a test basis, evidence
supporting the amounts and disclosures in the financial statements. An audit
also includes assessing the accounting principles used and significant
estimates made by management, as well as evaluating the overall financial
statement presentation. We believe that our audits provide a reasonable basis
for our opinion.
In our opinion, the consolidated financial statements referred to above
present fairly, in all material respects, the financial position of Glendale
Federal Bank, Federal Savings Bank and subsidiaries as of June 30, 1997 and
1996 and the results of their operations and their cash flows for each of the
years in the three-year period ended June 30, 1997 in conformity with
generally accepted accounting principles.
KPMG Peat Marwick LLP
Los Angeles, California
July 23, 1997, except for Note 24
of the Notes to Consolidated Financial Statements
which is as of August 18, 1997
F-2
<PAGE>
GLENDALE FEDERAL BANK AND SUBSIDIARIES
CONSOLIDATED STATEMENTS OF FINANCIAL CONDITION
(DOLLARS IN THOUSANDS EXCEPT SHARE DATA)
<TABLE>
<CAPTION>
JUNE 30
------------------------
1997 1996
----------- -----------
ASSETS
<S> <C> <C>
Cash and amounts due from banks...................... $ 221,557 $ 153,608
Federal funds sold and assets purchased under resale
agreements.......................................... 632,000 433,000
Certificates of deposit--substantially restricted.... 4,005 10,786
Other debt and equity securities held to maturity, at
amortized cost (fair value: $8,135 in 1996)......... -- 8,091
Other debt and equity securities available for sale,
at fair value....................................... 27,794 --
Mortgage-backed securities held to maturity, at
amortized cost (fair value: $1,166,941 in 1997 and
$1,351,344 in 1996)................................. 1,162,825 1,356,235
Mortgage-backed securities available for sale, at
fair value.......................................... 1,116,709 884,555
Loans receivable, net of allowance for loan losses of
$163,759 in 1997 and $186,756 in 1996............... 11,886,090 10,694,594
Loans held for sale, at lower of cost or market...... 19,003 33,315
Real estate held for sale or investment.............. 8,689 12,072
Real estate acquired in settlement of loans.......... 61,500 78,249
Interest receivable.................................. 102,940 89,237
Investment in capital stock of Federal Home Loan
Bank, at cost....................................... 259,587 192,842
Premises and equipment, at cost, less accumulated de-
preciation.......................................... 134,936 126,368
Mortgage servicing assets............................ 284,472 127,399
Goodwill and other intangible assets, less accumu-
lated amortization ($22,110 in 1997 and $16,580 in
1996)............................................... 99,533 59,216
Other assets......................................... 196,619 196,997
----------- -----------
$16,218,259 $14,456,564
=========== ===========
<CAPTION>
LIABILITIES AND STOCKHOLDERS' EQUITY
<S> <C> <C>
LIABILITIES:
Deposits............................................. $ 9,356,909 $ 8,723,976
Securities sold under agreements to repurchase....... 768,682 758,050
Borrowings from the Federal Home Loan Bank........... 4,788,000 3,838,000
Other borrowings..................................... 10,782 10,599
Other liabilities and accrued expenses............... 221,540 131,224
Income taxes payable................................. 60,272 37,264
----------- -----------
Total liabilities................................. 15,206,185 13,499,113
----------- -----------
STOCKHOLDERS' EQUITY:
Preferred stock, Series E, $1.00 par value per share
and $25.00 liquidation preference per share
(8,050,000 shares authorized; 4,621,982 shares
issued and outstanding at June 30,1997; 5,823,882
shares issued and outstanding at June 30, 1996)..... 4,622 5,824
Common stock, $1.00 par value per share (100,000,000
shares authorized; 50,348,509 shares issued and
outstanding at June 30, 1997; 46,729,698 shares
issued and outstanding at June 30, 1996)............ 50,349 46,730
Additional paid-in capital........................... 793,111 790,724
Net unrealized holding loss on debt and equity secu-
rities available for sale........................... (1,154) (11,391)
Retained earnings--substantially restricted.......... 165,146 125,564
----------- -----------
Total stockholders' equity....................... 1,012,074 957,451
----------- -----------
$16,218,259 $14,456,564
=========== ===========
</TABLE>
See accompanying Notes to Consolidated Financial Statements
F-3
<PAGE>
GLENDALE FEDERAL BANK AND SUBSIDIARIES
CONSOLIDATED STATEMENTS OF OPERATIONS
(IN THOUSANDS EXCEPT PER SHARE DATA)
<TABLE>
<CAPTION>
YEARS ENDED JUNE 30
----------------------------------
1997 1996 1995
---------- ---------- ----------
<S> <C> <C> <C>
Interest income:
Loans receivable.......................... $ 861,858 $ 803,432 $ 721,003
Mortgage-backed securities................ 149,551 216,812 303,587
Investments............................... 61,547 59,791 62,068
---------- ---------- ----------
Total interest income................... 1,072,956 1,080,035 1,086,658
---------- ---------- ----------
Interest expense:
Deposits.................................. 405,182 433,834 412,894
Short-term borrowings..................... 18,642 108,839 165,681
Other borrowings.......................... 270,148 204,297 190,364
---------- ---------- ----------
Total interest expense.................. 693,972 746,970 768,939
---------- ---------- ----------
Net interest income..................... 378,984 333,065 317,719
Provision for loan losses.................. 25,204 40,350 66,150
---------- ---------- ----------
Net interest income after provision for
loan losses............................ 353,780 292,715 251,569
Other income:
Loan servicing income, net................ 33,795 24,208 30,460
Other fees and service charges............ 56,901 45,769 38,851
Gain (loss) on sale of loans, net......... (291) (690) 146
Loss on sale of mortgage-backed securi-
ties, net................................ (1,804) (34,222) (11,725)
Gain on sale of banking operations........ -- -- 73,713
Other income (loss), net.................. 62 (707) 3,001
---------- ---------- ----------
Total other income...................... 88,663 34,358 134,446
---------- ---------- ----------
Other expenses:
Compensation and employee benefits........ 114,270 101,502 105,218
Occupancy expense, net.................... 31,777 29,698 31,433
Advertising and promotion................. 24,416 24,798 18,855
Regulatory insurance...................... 16,317 27,491 29,077
Furniture, fixtures and equipment......... 12,585 11,605 14,559
Stationery, supplies and postage.......... 11,628 10,158 9,065
Other general and administrative ex-
penses................................... 52,231 41,683 35,265
---------- ---------- ----------
Total general and administrative ex-
penses................................. 263,224 246,935 243,472
SAIF special assessment................... 55,519 -- --
Legal expense--goodwill lawsuit........... 24,058 1,929 369
Operations of real estate held for sale
or investment............................ 935 1,242 (31)
Operations of real estate acquired in
settlement of loans...................... 6,623 8,426 15,034
Amortization of goodwill and other intan-
gible assets............................. 5,530 5,147 1,724
---------- ---------- ----------
Total other expenses.................... 355,889 263,679 260,568
---------- ---------- ----------
Earnings before income tax provision and
extraordinary item........................ 86,554 63,394 125,447
Income tax provision....................... 36,131 21,342 52,146
---------- ---------- ----------
Earnings before extraordinary item......... 50,423 42,052 73,301
Extraordinary item, net.................... -- -- 1,755
---------- ---------- ----------
Net earnings............................ $ 50,423 $ 42,052 $ 75,056
========== ========== ==========
Earnings applicable to common shareholders:
Net earnings.............................. $ 50,423 $ 42,052 $ 75,056
Dividends declared on preferred stock..... (10,841) (16,156) (17,668)
Premium on exchange of preferred stock
for common stock......................... (4,173) ( 9,443) --
---------- ---------- ----------
$ 35,409 $ 16,453 $ 57,388
========== ========== ==========
Earnings per share:
Primary:
Earnings before extraordinary item...... $ 0.63 $ 0.36 $ 1.28
Net earnings............................ $ 0.63 $ 0.36 $ 1.32
Fully diluted:
Earnings before extraordinary item...... $ 0.62 $ 0.35 $ 1.16
Net earnings............................ $ 0.62 $ 0.35 $ 1.19
</TABLE>
See accompanying Notes to Consolidated Financial Statements
F-4
<PAGE>
GLENDALE FEDERAL BANK AND SUBSIDIARIES
CONSOLIDATED STATEMENTS OF CHANGES IN STOCKHOLDERS' EQUITY
(DOLLARS IN THOUSANDS EXCEPT PER SHARE DATA)
<TABLE>
<CAPTION>
NET UNREALIZED
HOLDING GAIN
PREFERRED STOCK PREFERRED STOCK (LOSS) ON DEBT
SERIES D SERIES E COMMON STOCK ADDITIONAL AND EQUITY
------------------- ------------------- ------------------ PAID-IN DEBT SECURITIES RETAINED
SHARES AMOUNT SHARES AMOUNT SHARES AMOUNT CAPITAL AVAILABLE FOR SALE EARNINGS*
---------- ------- ---------- ------- ---------- ------- ---------- ------------------ ---------
<S> <C> <C> <C> <C> <C> <C> <C> <C> <C>
Balance, June
30, 1994........ 2,927,653 $ 2,928 8,050,000 $ 8,050 37,737,434 $37,737 $792,946 $ (5,727) $ 42,280
Conversion of
Series D
Preferred Stock
into common
stock .......... (2,927,653) (2,928) -- -- 2,927,653 2,928 -- -- --
Net unrealized
holding gain on
debt and equity
securities
available for
sale............ -- -- -- -- -- -- -- 5,764 --
Stock options
exercised....... -- -- -- -- 52,500 53 426 -- --
5-year warrants
exercised....... -- -- -- -- 2,131 2 -- -- --
Dividends
declared on
preferred stock
($0.022 per
share, Series D
and $2.188 per
share, Series
E).............. -- -- -- -- -- -- -- -- (17,668)
Net earnings.... -- -- -- -- -- -- -- -- 75,056
---------- ------- ---------- ------- ---------- ------- -------- -------- --------
Balance, June
30, 1995........ -- -- 8,050,000 8,050 40,719,718 40,720 793,372 37 99,668
Exchange of
Series E
Preferred Stock
for common
stock........... -- -- (2,226,118) (2,226) 5,901,771 5,902 (3,676) -- --
Net unrealized
holding loss on
debt and equity
securities
available for
sale............ -- -- -- -- -- -- -- (11,428) --
Stock options
exercised....... 106,000 106 1,028 -- --
5-year warrants
exercised....... -- -- -- -- 2,209 2 -- -- --
Dividends de-
clared on Series
E preferred
stock ($2.188
per share)...... -- -- -- -- -- -- -- -- (16,156)
Net earnings.... -- -- -- -- -- -- -- -- 42,052
---------- ------- ---------- ------- ---------- ------- -------- -------- --------
Balance, June
30, 1996........ -- -- 5,823,882 5,824 46,729,698 46,730 790,724 (11,391) 125,564
Exchange of
Series E
Preferred Stock
for common
stock........... -- -- (1,201,900) (1,202) 3,103,872 3,104 (1,902) -- --
Net unrealized
holding gain on
debt and equity
securities
available for
sale............ -- -- -- -- -- -- -- 10,237 --
Stock options
exercised....... -- -- -- -- 512,125 512 4,263 -- --
5-year warrants
exercised....... -- -- -- -- 414 1 -- -- --
7-year warrants
exercised....... -- -- -- -- 2,400 2 26 -- --
Dividends de-
clared on Series
E preferred
stock ($2.188
per share)...... -- -- -- -- -- -- -- -- (10,841)
Net earnings.... -- -- -- -- -- -- -- -- 50,423
---------- ------- ---------- ------- ---------- ------- -------- -------- --------
Balance, June
30, 1997........ -- $ -- 4,621,982 $ 4,622 50,348,509 $50,349 $793,111 $ (1,154) $165,146
========== ======= ========== ======= ========== ======= ======== ======== ========
<CAPTION>
TOTAL
STOCKHOLDERS'
EQUITY
-------------
<S> <C>
Balance, June
30, 1994........ $ 878,214
Conversion of
Series D
Preferred Stock
into common
stock .......... --
Net unrealized
holding gain on
debt and equity
securities
available for
sale............ 5,764
Stock options
exercised....... 479
5-year warrants
exercised....... 2
Dividends
declared on
preferred stock
($0.022 per
share, Series D
and $2.188 per
share, Series
E).............. (17,668)
Net earnings.... 75,056
-------------
Balance, June
30, 1995........ 941,847
Exchange of
Series E
Preferred Stock
for common
stock........... --
Net unrealized
holding loss on
debt and equity
securities
available for
sale............ (11,428)
Stock options
exercised....... 1,134
5-year warrants
exercised....... 2
Dividends de-
clared on Series
E preferred
stock ($2.188
per share)...... (16,156)
Net earnings.... 42,052
-------------
Balance, June
30, 1996........ 957,451
Exchange of
Series E
Preferred Stock
for common
stock........... --
Net unrealized
holding gain on
debt and equity
securities
available for
sale............ 10,237
Stock options
exercised....... 4,775
5-year warrants
exercised....... 1
7-year warrants
exercised....... 28
Dividends de-
clared on Series
E preferred
stock ($2.188
per share)...... (10,841)
Net earnings.... 50,423
-------------
Balance, June
30, 1997........ $1,012,074
=============
</TABLE>
- - -----
*substantially restricted
See accompanying Notes to Consolidated Financial Statements
F-5
<PAGE>
GLENDALE FEDERAL BANK AND SUBSIDIARIES
CONSOLIDATED STATEMENTS OF CASH FLOWS
(IN THOUSANDS)
<TABLE>
<CAPTION>
YEARS ENDED JUNE 30
-------------------------------------
1997 1996 1995
----------- ----------- -----------
<S> <C> <C> <C>
CASH FLOWS FROM OPERATING ACTIVITIES:
Net earnings ........................... $ 50,423 $ 42,052 $ 75,056
Adjustments to reconcile net earnings to
net cash provided by operating activi-
ties:
Amortization of discounts and accretion
of premiums, net...................... 11,064 8,054 13,709
Accretion of deferred loan fees........ (4,355) (5,546) (9,740)
Provision for loan losses.............. 25,204 40,350 66,150
Loss (gain) on sale of loans, net...... 291 690 (146)
Loss on sale of mortgage-backed securi-
ties, net............................. 1,804 34,222 11,725
Gain on sale of University Savings
Bank.................................. -- -- (50,713)
Gain on sale of Florida banking opera-
tions................................. -- -- (23,000)
Depreciation........................... 15,065 16,115 16,867
Amortization of mortgage servicing as-
sets.................................. 27,342 22,559 19,131
Provision for impairment of mortgage
servicing assets...................... 4,047 -- --
Provision for losses on real estate.... 7,706 11,610 16,323
Gain on sale of real estate............ (7,220) (10,880) (10,310)
Amortization of goodwill and other in-
tangible assets....................... 5,530 5,147 1,724
Provision for deferred income taxes.... 10,364 19,132 23,873
Extraordinary item, net................ -- -- (1,755)
Net change in loans originated or pur-
chased for resale..................... 39,249 (2,649) (10,232)
(Increase) decrease in interest receiv-
able.................................. (8,851) 7,158 (11,324)
FHLB stock dividend received........... (13,693) (9,612) (8,259)
(Increase) decrease in other assets.... 434 20,298 (6,881)
Increase (decrease) in other liabili-
ties.................................. 177,937 (27,698) (41,393)
Other items............................ 630 (24,286) 7,613
----------- ----------- -----------
Total adjustments...................... 292,548 104,664 3,362
----------- ----------- -----------
Net cash provided by operating activi-
ties................................... 342,971 146,716 78,418
----------- ----------- -----------
CASH FLOWS FROM INVESTING ACTIVITIES:
Net change in other debt and equity se-
curities with original maturities of 3
months or less......................... (3,809) 9,268 7,826
Purchase of certificates of deposit..... (125,476) (26,264) (15,466)
Proceeds from maturities of certificates
of deposit............................. 132,257 25,537 14,123
Purchase of other debt and equity secu-
rities held to maturity................ (3,000) (5,000) (11,507)
Proceeds from maturities of other debt
and equity securities held to maturity. 7,800 20,045 6,685
Purchase of other debt and equity secu-
rities available for sale.............. (2,113) -- --
Proceeds from sales and maturities of
other debt and equity securities avail-
able for sale.......................... 161,760 -- 21,000
Purchase of mortgage-backed securities
held to maturity....................... -- (2,982) (1,286)
Principal payments on mortgage-backed
securities held to maturity............ 190,545 495,999 697,046
Purchase of mortgage-backed securities
available for sale..................... (505,083) (113,218) --
Principal payments on mortgage-backed
securities available for sale.......... 285,404 355,975 14,835
Proceeds from sale of mortgage-backed
securities available for sale.......... -- 1,671,934 --
Loans originated for investment, net of
refinances............................. (590,924) (364,471) (631,545)
Loans purchased for investment.......... (2,430,461) (2,107,509) (1,549,955)
Net change in undisbursed loan funds.... (10,353) 7,507 (11,073)
Principal payments on loans held for in-
vestment............................... 1,894,857 1,428,501 892,846
Proceeds from sale of loans held for in-
vestment............................... -- 159,079 143,943
Cash invested in real estate............ (12,515) (16,115) (22,046)
Cash received from real estate invest-
ments and sale of real estate acquired
in settlement of loans................. 101,679 108,482 174,004
Purchase of FHLB stock.................. (53,052) (17,187) (52,603)
Redemption of FHLB stock................ -- 19,756 2,882
Net (increase) decrease in premises and
equipment.............................. (19,810) 20,559 52,251
Purchase of mortgage servicing assets... (197,091) (26,479) (51,476)
Premiums paid on deposits purchased..... -- -- (11,297)
Payment for purchase of TransWorld Bank. (64,419) -- --
Payment for purchase of OneCentral Bank. (11,111) -- --
Proceeds from sale of Florida banking
operations............................. -- -- 243,005
Proceeds from sale of University Savings
Bank................................... -- -- 205,147
----------- ----------- -----------
Net cash (used) provided by investing
activities............................. (1,254,915) 1,643,417 117,339
----------- ----------- -----------
</TABLE>
Statement continued on next page
F-6
<PAGE>
GLENDALE FEDERAL BANK AND SUBSIDIARIES
CONSOLIDATED STATEMENTS OF CASH FLOWS--(CONTINUED)
(IN THOUSANDS)
<TABLE>
<CAPTION>
YEARS ENDED JUNE 30
-------------------------------------
1997 1996 1995
----------- ----------- -----------
<S> <C> <C> <C>
CASH FLOWS FROM FINANCING ACTIVITIES:
Net increase (decrease) in deposits..... $ 227,776 $ (10,904) $(1,730,040)
Net change in short-term borrowings with
original maturities of 3 months or
less................................... 10,632 (1,937,126) 1,710,120
Proceeds from funding of securities sold
under agreements to repurchase......... -- -- 815,902
Repayment of securities sold under
agreement to repurchase................ -- -- (2,013,340)
Proceeds from fundings of FHLB advances. 2,300,000 2,988,000 2,300,000
Repayments of FHLB advances............. (1,350,000) (2,645,000) (1,197,000)
Repayment of other borrowings........... (2,492) (18,284) (69,917)
Sale of FHLB advances................... -- -- (39,057)
Proceeds from issuance of common stock.. 4,804 1,136 481
Payment of dividends on preferred stock. (11,827) (17,044) (17,746)
----------- ----------- -----------
Net cash provided (used) by financing
activities............................. 1,178,893 (1,639,222) (240,597)
----------- ----------- -----------
Net increase (decrease) in cash and cash
equivalents............................ 266,949 150,911 (44,840)
Cash and cash equivalents at beginning
of year................................ 586,608 435,697 480,537
----------- ----------- -----------
Cash and cash equivalents at end of
year................................... $ 853,557 $ 586,608 $ 435,697
=========== =========== ===========
</TABLE>
See accompanying Notes to Consolidated Financial Statements
F-7
<PAGE>
GLENDALE FEDERAL BANK AND SUBSIDIARIES
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
JUNE 30, 1997, 1996 AND 1995
NOTE 1: BASIS OF PRESENTATION AND SUMMARY OF SIGNIFICANT ACCOUNTING AND
REPORTING POLICIES
PRINCIPLES OF CONSOLIDATION AND PRESENTATION
The consolidated financial statements include the accounts of Glendale
Federal Bank, Federal Savings Bank and its subsidiaries ("Glendale Federal" or
the "Bank"). The Bank's business consists primarily of attracting deposits
from the public and originating and purchasing loans secured by mortgages on
residential real estate. The Bank's subsidiaries are engaged primarily in
general insurance and securities brokerage services. All significant
intercompany balances and transactions have been eliminated in consolidation,
including 200,686 Bank common shares held by a subsidiary of the Bank at June
30, 1997. Certain reclassifications have been made to prior years'
consolidated financial statements to conform to the June 30, 1997
presentation.
On July 23, 1997, shareholders of Glendale Federal approved the formation of
a holding company for the Bank, named Golden State Bancorp Inc. ("Golden
State"). 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 the Bank's common stock automatically became an equal number
of shares of Golden State common stock and the Bank's Noncumulative Preferred
Stock, Series E automatically became an equal number of shares of Golden State
Noncumulative Convertible Preferred Stock, Series A. The Bank's two classes of
warrants became exercisable solely to purchase common stock of Golden State.
Glendale Federal will retain its name. The current board of directors of the
Bank are also the board of directors of Golden State. Golden State was
capitalized with a dividend of $14.9 million from Glendale Federal. Such
dividend will be used for general working capital purposes and for payment of
dividends on Golden State's preferred stock.
RISKS AND UNCERTAINTIES
In the normal course of its business, the Bank encounters two significant
types of risk: economic and regulatory. There are four main components of
economic risk: interest rate risk, credit risk, market risk and concentrations
of credit risk. The Bank is subject to interest rate risk to the degree that
its interest-bearing liabilities mature or reprice at different speeds, or on
different bases, from its interest-earning assets. Credit risk is the risk of
default on the Bank's loan portfolio that results from the borrowers'
inability or unwillingness to make contractually required payments. Market
risk reflects changes in the value of collateral underlying loans receivable,
the valuation of real estate held by the Bank, and the valuation of loans held
for sale, mortgage-backed securities available for sale and mortgage servicing
assets. The Bank's lending activities are concentrated in California. The
largest concentration of the Bank's loan portfolio is located in Southern
California. The ability of the Bank'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 Bank has an ongoing program designed to ensure that its operational and
financial systems will not be adversely affected by year 2000 software
failures due to processing errors arising from calculations using the year
2000 date. The Bank expects to incur $25 million to $30 million over the next
three years on its program to redevelop, replace or repair its computer
applications to try to make them "year 2000" compliant. While the Bank
believes it is doing everything technologically possible to assure year 2000
compliance, it is to some extent dependent upon vendor cooperation. The Bank
is requiring its computer systems and software vendors to represent that the
products provided are or will be year 2000 compliant and has planned a program
of testing for compliance. It is recognized that any year 2000 compliance
failures could result in additional expense to the Bank.
F-8
<PAGE>
GLENDALE FEDERAL BANK AND SUBSIDIARIES
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS--(CONTINUED)
JUNE 30, 1997, 1996 AND 1995
The Bank is subject to the regulations of various government agencies. These
regulations can and do change significantly from period to period. The Bank
also undergoes periodic examinations by the 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.
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,
such as the allowance for loan losses, mortgage servicing assets and the
realization of the deferred tax assets. Actual results could differ
significantly from those estimates and assumptions.
SHORT-TERM HIGHLY LIQUID INVESTMENTS
The Bank's short-term highly liquid investments consist of federal funds
sold and securities purchased under agreements to resell. The Bank invests in
these assets to maximize its return on liquid funds.
Glendale Federal is required by the Federal Reserve System to maintain non-
interest earning cash reserves against certain of its transaction accounts and
term deposit accounts. At June 30, 1997 and 1996, the required reserves
totaled $61,892,000 and $60,944,000, respectively. Actual reserves totaled
$62,454,000 and $63,491,000 at June 30, 1997 and 1996, respectively.
INVESTMENTS IN DEBT AND EQUITY SECURITIES
The Bank's investment in debt securities consists principally of U.S.
Treasury securities and mortgage-backed securities purchased by the Bank or
created when the Bank exchanges pools of loans for mortgage-backed securities
("securitized loans"). The Bank classifies its investment in debt and equity
securities as held to maturity securities, trading securities and available
for sale securities as applicable. The Bank did not hold any trading
securities at June 30, 1997 or 1996.
Securities are designated as held to maturity if the Bank has the positive
intent and the ability to hold the securities to maturity. Held to maturity
securities are carried at amortized cost, adjusted for the amortization of any
related deferred origination costs and premiums or the accretion of any
related deferred origination fees and discounts into interest income using the
interest method over the estimated remaining period until maturity. Unrealized
losses on held to maturity securities, reflecting a decline in value judged by
the Bank to be other than temporary, are charged to income and reported under
the caption "Gain (loss) on sale of mortgage-backed securities, net" in the
Consolidated Statements of Operations.
The Bank classifies securities as available for sale when at the time of
purchase it determines that such securities may be sold at a future date or if
the Bank does not have the positive intent or ability to hold such securities
to maturity. Securities designated as available for sale are recorded at fair
value. Changes in the fair value of debt and equity securities available for
sale are included in shareholders' equity as unrealized holding gains or
losses net of the related tax effect. Unrealized losses on available for sale
securities reflecting a decline in value judged to be other than temporary,
are charged to income in the Consolidated Statement of Operations. Realized
gains or losses on available for sale securities are computed on the specific
identification basis. Deferred origination costs and fees, and purchased
premiums and discounts, are amortized and accreted to interest income using
the interest method over the estimated remaining period until maturity.
F-9
<PAGE>
GLENDALE FEDERAL BANK AND SUBSIDIARIES
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS--(CONTINUED)
JUNE 30, 1997, 1996 AND 1995
The Bank classifies securities it intends to sell presently as trading
securities. Such securities are generally comprised of securities created by
the Bank to facilitate the sale of loans originated and held for sale. Trading
securities are recorded at fair value, determined by the lesser of quoted
market prices for similar securities or commitment prices for those securities
under mandatory commitments to sell. Changes in fair value are recognized in
earnings in the period in which the change occurs under the caption "Gain
(loss) on sale of mortgage-backed securities". The Bank held no trading
securities at June 30, 1997 or 1996.
In November 1995, the Financial Accounting Standards Board (the "FASB")
issued implementation guidance for Statement of Financial Accounting Standards
No. 115, "Accounting for Certain Investments in Debt and Equity Securities"
("SFAS 115"). The guidance caused the Bank to reassess the appropriateness of
the classifications of its securities and account for resulting
reclassifications at fair value in accordance with SFAS 115. During the second
quarter of fiscal 1996, the Bank, in accordance with the implementation
guidance, reclassified $2.8 billion of mortgage-backed securities from held to
maturity to available for sale. Pursuant to the transfer to available for sale
and the subsequent sale of $1.7 billion of CMOs, the Bank recorded a pre-tax
loss of $28.2 million during fiscal 1996. See Note 7--Mortgage-Backed
Securities for additional information.
LOANS RECEIVABLE HELD FOR SALE
The Bank may designate certain of its loans receivable as being held for
sale. In determining the level of loans held for sale, the Bank considers
whether such loans would be sold in response to liquidity needs,
asset/liability management requirements, regulatory capital needs and other
factors. The Bank originates and/or purchases loans that meet certain yield
and other guidelines for its own portfolio. Such loans are designated as held
for investment at the time of origination or purchase based on a specific
identification method. Loans that do not meet such guidelines are designated
as held for sale.
Loans held for sale are recorded at the lower of aggregate cost or market
value. Unrealized losses are recorded as a reduction in earnings and are
included under the caption "Gain (loss) on sale of loans, net" in the
Consolidated Statement of Operations. Realized gains and losses from the sale
of loans receivable are computed under the specific identification method.
GAINS AND LOSSES FROM SALE OF LOANS
The Bank 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 exceed or are less than the Bank's investment
in the loans (which includes the unpaid principal balance of the loans,
unearned discounts, premiums and deferred fees and costs at the time of sale).
To the extent sales of loans involve the sale of part of a loan or a pool of
loans with disproportionate credit and prepayment risks, the cost basis is
allocated based upon the relative fair market value of the portion sold to the
portion retained on the date of sale.
In most cases, the Bank sells loans and continues to service such loans for
the investor. In these cases, the Bank includes in its recognition of gain or
loss on the loan sale an amount measured by an allocation of the carrying
amount of the loans sold between the value of the loans sold and the value of
the servicing rights and any other interests retained, if any, based on their
relative fair values at the
F-10
<PAGE>
GLENDALE FEDERAL BANK AND SUBSIDIARIES
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS--(CONTINUED)
JUNE 30, 1997, 1996 AND 1995
date of sale. The resulting mortgage servicing asset ("MSA") or liability is
amortized in proportion to and over the period of estimated net servicing
income or loss. The Bank evaluates the MSA for impairment or increased
obligation based on the MSA's fair value.
The Bank estimates fair values by discounting servicing asset cashflows
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 in all strata with impairment. For purposes
of defining impairment strata, the Bank groups loans by interest rate, by
whether the loan is government-insured, and by whether the loan has a fixed or
adjustable interest rate.
If loans are sold with recourse, the estimated liability under the recourse
provision is provided for in the computation of the gain or loss. For loan
sales after December 31, 1996, in accordance with the requirements of
Statement of Financial Accounting Standards No. 125, "Accounting for Transfers
and Servicing of Financial Assets and Extinguishment of Liabilities" ("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, 1997.
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, as of June 30, 1997 and 1996, the
allowance for loan losses is adequate based on information currently available
to it. Deterioration in the economies of the Bank's principal market areas
could adversely impact the Bank's loan portfolios and higher charge-offs and
increases in non-performing assets could result. Such an adverse impact could
also require a larger allowance for loan losses.
The Bank considers a loan to be impaired when, based upon current
information and events, it believes it is probable that the Bank will be
unable to timely collect all amounts due according to the contractual terms of
the loan agreement. Non-accrual income property loans, non-accrual single-
family loans or borrowing relationships with unpaid balances greater than
$500,000, non-accrual business banking loans with unpaid balances of greater
than $100,000, troubled debt restructurings, and certain performing loans are
measured individually for impairment. Loans not included in the preceding
categories are collectively measured for impairment. Specific valuation
allowances are established for impaired collateralized loans at the difference
between the loan amount and the fair value of 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. Impaired loans may be
left on accrual status during the period the Bank is
F-11
<PAGE>
GLENDALE FEDERAL BANK AND SUBSIDIARIES
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS--(CONTINUED)
JUNE 30, 1997, 1996 AND 1995
pursuing repayment of the loan. Such loans are placed on non-accrual status at
the point that either: (1) they become 90 days delinquent; or (2) the Bank
determines the borrower is incapable of, or has ceased efforts toward,
continuing performance under the terms of the loan. 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.
When an impaired loan is either sold, transferred to REO or written down, any
related valuation allowance is charged off.
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 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 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"). During fiscal 1995, the Bank adopted Statement of
Financial Accounting Standards No. 118, "Accounting by Creditors for
Impairment of a Loan-Income Recognition and Disclosures" ("SFAS 118"). SFAS
118 requires that TDRs be reported as such based on whether the restructuring
was made at an interest rate equal to or greater than the rate that the Bank
was willing to accept at the time of the restructuring for a loan of
comparable risk and whether the loan is impaired based on the terms of the
restructuring agreement. Loans that are restructured at rates greater than or
equal to the rate the Bank was willing to accept at the time of restructuring
and that are not impaired based on the terms of the restructuring are reported
as TDRs only in the year of the restructuring. All other TDRs are reported in
years following the restructuring until repaid.
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 balance is classified "Doubtful".
Loans are returned to accrual status only when the loan is reinstated and
ultimate collectibility of current interest is no longer in doubt. Interest
income on impaired loans is recognized based on the loan's accrual and
classification status as discussed above.
Loan origination fees and direct origination costs are deferred at
origination and the net amounts deferred are accreted or amortized to interest
income over the contractual lives of the loans, using the interest method.
Accretion of discounts and amortization of premiums and deferred origination
fees and costs is discontinued when loans are placed on non-accrual status.
F-12
<PAGE>
GLENDALE FEDERAL BANK AND SUBSIDIARIES
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS--(CONTINUED)
JUNE 30, 1997, 1996 AND 1995
LOAN SERVICING AND MORTGAGE SERVICING RIGHTS
The Bank 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.
These loans are not included with loans receivable or any other asset in the
accompanying consolidated statements of financial condition.
The Bank from time-to-time enters into transactions to acquire the rights to
service pools of loans for others and collect the servicing and related fees.
The amount paid by the Bank for these rights is capitalized as Mortgage
Servicing Assets ("MSA"). The Bank also sells loans and retains the right to
service the loans for the investors. During fiscal 1997, the Bank adopted
Statement of Financial Accounting Standards No. 122, "Accounting for Mortgage
Servicing Rights" ("SFAS 122"). SFAS 122 was superseded, for transactions
recorded after December 31, 1996, by SFAS 125. Both SFAS 122 and SFAS 125
require, and the Bank recorded, the recognition of a servicing asset or
liability and other retained interests as an allocation of the carrying amount
of the assets sold between the asset sold and the servicing obligation and
other retained interests based on the relative fair value of the assets sold
to the interests retained. SFAS 125 also requires that MSA be evaluated for
impairment based on the asset's fair value. The Bank estimates fair values by
discounting servicing asset cash flows using discount and prepayment rates
that it believes market participants would use. For purposes of measuring
impairment, MSA is stratified by the Bank based upon whether the loans are
fixed-rate or adjustable-rate, and whether the loans are government-insured.
MSA is amortized in proportion to, and over the period that the servicing
rights generate net servicing fee income.
ACCOUNTING FOR REAL ESTATE
Real estate acquired in settlement of loans ("REO") is recorded at the lower
of fair value reduced by estimated selling costs, or the recorded investment
in the loan at the time of foreclosure generally as determined by recent
appraisals. Thereafter, the property is carried at the lower of acquisition
cost or fair value reduced by estimated selling costs, as reflected by
subsequent appraisals or sales agreements. Specific valuation allowances on
REO are recorded through a charge to operations for estimated costs to sell
and if there is a further deterioration in fair value. The Bank also provides
a general allowance for inherent losses on REO recorded through a charge to
operations.
Real estate held for sale or investment ("REI") is carried at the lower of
cost or fair value less estimated costs to sell.
Changes in estimated selling and disposal costs, and declines in fair values
are provided through a valuation allowance. Net gains or losses on disposal of
REO and REI are charged to operations as incurred.
Gains on real estate sales financed by the Bank are recognized only when the
transactions meet the down-payment and continuing investment criteria of
Statement of Financial Accounting Standards No. 66, "Accounting for Sales of
Real Estate." Losses are recognized when identified.
F-13
<PAGE>
GLENDALE FEDERAL BANK AND SUBSIDIARIES
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS--(CONTINUED)
JUNE 30, 1997, 1996 AND 1995
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. Renewals and 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 and 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 the 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,
1997, goodwill totaled $64.5 million and had a weighted average remaining life
of 17 years.
In fiscal 1995, the Bank acquired $194 million in deposits of Independence
One Bank of California, Federal Savings Bank ("Independence One") and $812
million in deposits of Union Federal Bank ("Union Federal"). The Bank paid a
purchase premium of $4.4 million for the Independence One deposits and a
purchase premium of $6.9 million for the Union Federal deposits. The Bank
accepted as part of the consideration for assuming Union Federal's deposit
liabilities certain of Union Federal's assets at their existing gross book
values. These purchase premiums, together with an adjustment to record the
assets acquired from Union Federal at fair value, totaled $42.9 million, and
are reflected under the caption "Goodwill and other intangible assets" in the
Consolidated Statements of Financial Condition. These intangible assets are
being amortized over 10 years using the straight-line method. At June 30,
1997, these intangible assets totaled $35.0 million with a remaining life of
eight years.
In fiscal 1997, the Bank acquired OneCentral Bank ("OneCentral") with total
assets of $74.3 million for $11.1 million in cash which includes out-of-pocket
expenses and TransWorld Bancorp ("TransWorld") with total assets of $372.4
million for $64.4 million in cash which includes out-of-pocket expenses. The
Bank recorded goodwill of $5.8 million and $40.0 million, respectively, in the
OneCentral and TransWorld transactions, which is being amortized over 15 years
using the straight-line method. The goodwill relating to these acquisitions
had a remaining balance of $45.4 million at June 30, 1997.
Periodically, the Bank evaluates the recoverability of its deposit purchase
premium assets based upon the rate of attrition of deposit relationships
acquired. Goodwill is evaluated for impairment on the basis of the estimated
undiscounted cash flows of the acquired franchise.
DERIVATIVE FINANCIAL INSTRUMENTS
The Bank has in the past used various strategies to minimize interest rate
risk, including interest rate futures contracts and interest rate exchange
agreements ("swaps"). The Bank's accounting policy relating to interest rate
futures contracts is to amortize deferred gains and losses on futures
contracts into interest income or expense over the expected remaining life of
the hedged asset or liability. The
F-14
<PAGE>
GLENDALE FEDERAL BANK AND SUBSIDIARIES
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS--(CONTINUED)
JUNE 30, 1997, 1996 AND 1995
conditions for obtaining and maintaining hedge accounting treatment require
identification of asset or liability to be hedged and linking the swap to the
asset or liability being hedged. The notional amounts of interest rate swaps
are not reflected in the Consolidated Statements of Financial Condition, but
are disclosed in the Notes to Consolidated Financial Statements. 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 Bank does not hold any derivative financial
instruments for trading purposes.
SECURITIES SOLD UNDER AGREEMENTS TO REPURCHASE
The Bank 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 Bank and its subsidiaries file a consolidated Federal income tax return.
The Bank uses the asset and liability method of accounting for income taxes.
Under the asset and liability method, deferred tax assets and liabilities are
recognized for the future tax consequences attributable to differences between
the financial statement carrying amounts of existing assets and liabilities
and their respective tax bases and operating loss and tax credit
carryforwards. Deferred tax assets and liabilities are measured using enacted
tax rates expected to apply to taxable income in the years in which those
temporary differences are expected to be recovered or settled. The effect on
deferred tax assets and liabilities of a change in tax rates is recognized in
income in the period that includes the enactment date.
NET INCOME PER SHARE
Net income per share of common stock is based on the weighted-average number
of common and common equivalent shares outstanding during the year.
CURRENT ACCOUNTING PRONOUNCEMENTS
In October 1995, the FASB issued Statement of Financial Accounting Standards
No. 123, "Accounting for Stock-Based Compensation" ("SFAS 123"), which defines
a fair value based method of accounting for employee stock options or similar
equity instruments granted after December 31, 1994. SFAS 123 is effective for
the Bank beginning with the fiscal year ending June 30, 1997. However, SFAS
123 also allows an entity to continue to account for these plans according to
Accounting Principles Board Opinion No. 25, "Accounting for Stock Issued to
Employees" ("APB 25"), provided pro forma disclosures of net income and
earnings per share are made as if the fair value based method of accounting
defined by SFAS 123 had been applied. The Bank elects to continue measuring
compensation cost related to employee stock purchase options using APB 25, and
provides pro forma disclosures as required by SFAS 123 in Note 22 of the Notes
to Consolidated Financial Statements.
F-15
<PAGE>
GLENDALE FEDERAL BANK AND SUBSIDIARIES
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS--(CONTINUED)
JUNE 30, 1997, 1996 AND 1995
In June 1996, the FASB issued SFAS 125, which superseded SFAS 122 and
established the accounting for transfers and servicing of financial assets and
extinguishment of liabilities. This statement specifies when financial assets
and liabilities are to be removed from an entity's financial statements,
specifies the accounting for servicing assets and liabilities, and specifies
the accounting for assets that can be contractually prepaid in such a way that
the holder would not recover substantially all of its recorded investment.
Under SFAS 125, an entity recognizes only assets it controls and liabilities
it has incurred, derecognizes assets only when control has been surrendered,
and derecognizes liabilities only when they have been paid, or the entity is
legally released from being the primary obligor under the liability judicially
or by the creditor. SFAS 125 requires that the selling entity continue to
carry retained interests, including servicing assets, relating to assets it
has derecognized. Such retained interests are recorded based on the relative
fair values of the retained interests and derecognized assets at the date of
transfer. Transfers not meeting the criteria for sale recognition are
accounted for as a secured borrowing with pledge of collateral. Under SFAS 125
certain collateralized borrowings may result in asset derecognition when the
assets provided as collateral may be derecognized based on whether the secured
party takes control over the collateral and whether the secured party is: (1)
permitted to repledge or sell the collateral; and (2) the debtor does not have
the right to redeem the collateral on short notice. Extinguishments of
liabilities are recognized only when the debtor pays the creditor and is
relieved of its obligation for the liability or when the debtor is legally
released from being the primary obligor under the liability, either judicially
or by the creditor.
SFAS 125 requires an entity to recognize its obligation to service financial
assets that are retained in a transfer of assets in the form of a servicing
asset or liability. The servicing asset or liability is to be amortized in
proportion to and over the period of net servicing income or loss. Servicing
assets and liabilities are to be assessed for impairment based on their fair
value.
SFAS 125 modifies the accounting for interest-only strips or retained
interests in securitizations, such as capitalized servicing fees receivable,
that can contractually be prepaid or otherwise settled in such a way that the
holder would not recover substantially all of its recorded investment, to
require their classification as available for sale or as trading securities.
Interest-only strips and retained interests are to be recorded at market
value. Changes in market value are included in operations if strips or
retained interests are classified as trading securities, or in shareholders'
equity as unrealized holding gains or losses, net of the related tax effect,
if they are classified as available for sale.
SFAS 125 is effective for transfers and servicing of financial assets and
extinguishments of liabilities occurring after December 31, 1996, and is
required to be applied prospectively. As a result of loans sold with servicing
rights retained, the Bank recorded $1.1 million in mortgage servicing assets
and $70,000 in related amortization during fiscal 1997, pursuant to SFAS 125
and Statement of Financial Accounting Standards No. 122, "Mortgage Servicing
Rights" ("SFAS 122"), an accounting pronouncement with substantially the same
requirements. SFAS 122 was applicable to the Bank during the six-month period
July 1, 1996 through December 31, 1996.
In February 1997, the FASB issued Statement of Financial Accounting
Standards No. 128, "Earnings per Share" ("SFAS 128") and Statement of
Financial Accounting Standards No. 129, "Disclosure of Financial Information
About Capital Structure" ("SFAS 129"). SFAS 128 simplifies the standards found
in Accounting Principles Board Opinion No. 15 ("APB 15") for computing
earnings per share ("EPS"), and makes them comparable to international
standards.
F-16
<PAGE>
GLENDALE FEDERAL BANK AND SUBSIDIARIES
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS--(CONTINUED)
JUNE 30, 1997, 1996 AND 1995
Under SFAS 128, the Bank is required to present both basic and diluted EPS
on the face of its statements of operations. Basic EPS, which replaces primary
EPS required by APB 15 for entities with complex capital structures, excludes
common stock equivalents and is computed by dividing income available to
common stockholders by the weighted-average number of common shares
outstanding for the period. Diluted EPS gives effect to all dilutive potential
common shares that were outstanding during the period.
SFAS 128 is effective for financial statements for both interim and annual
periods ending after December 15, 1997 and earlier application is not
permitted. Upon adoption of SFAS 128, all prior-period EPS data will be
restated. The Bank will adopt SFAS 128 effective December 31, 1997. The Bank
is evaluating the impact of this pronouncement on its consolidated financial
statements.
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. As SFAS 129 makes no changes to previous accounting
pronouncements as those pronouncements applied to the Bank, adoption of SFAS
129 will have no impact on the Bank's results of operations and financial
condition.
In June 1997, the FASB issued Statement of Financial Accounting Standards
No. 130, "Reporting Comprehensive Income" ("SFAS 130"). SFAS 130 requires the
inclusion of comprehensive income, either in a separate statement for
comprehensive income, or as part of a combined statement of income and
comprehensive income in a full-set of general-purpose financial statements.
Comprehensive income is defined as the change in equity of a business
enterprise during a period from transactions and other events and
circumstances, excluding those resulting from investments by and distributions
to owners. SFAS 130 requires that comprehensive income is to 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.
SFAS 130 is effective for the Bank's fiscal year beginning July 1, 1998.
SFAS 130 requires the presentation of information already contained in the
Bank's financial statements and therefore is not expected to have an impact on
the Bank's financial position or results of operation.
In June 1997, the FASB also issued Statement of Financial Accounting
Standards No. 131, "Disclosures About Segments of an Enterprise and Related
Information" ("SFAS 131"). SFAS 131 establishes standards for the reporting of
information about operating segments by public business enterprises in their
annual and interim financial reports issued to shareholders.
SFAS 131 requires that a public business enterprise report financial and
descriptive information, including profit or loss, certain specific revenue
and expense items, and segment assets, about its reportable operating
segments. Operating segments are defined as components of an enterprise about
which separate financial information is available that is evaluated regularly
by the chief operating decision-maker in deciding how to allocate resources
and in assessing performance.
SFAS 131 is effective for the Bank's financial statements for periods
beginning after December 15, 1997. SFAS 131 is a disclosure requirement and
therefore is not expected to have an effect on the Bank's financial position
or results of operations.
F-17
<PAGE>
GLENDALE FEDERAL BANK AND SUBSIDIARIES
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS--(CONTINUED)
JUNE 30, 1997, 1996 AND 1995
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
-----------------------------
1997 1996 1995
-------- --------- --------
<S> <C> <C> <C>
Cash paid for:
Interest....................................... $707,087 $ 738,407 $777,914
Income taxes................................... 24,672 12,623 16,018
Non-cash investing and financing activities:
Net assets acquired for Union Federal deposits. -- -- 463,240
Principal reductions to loans due to foreclo-
sure.......................................... 156,820 186,157 294,822
Loans exchanged for mortgage-backed securities. 42,222 145,826 268,436
Loans made to facilitate the sale of real
estate held for investment and real estate
acquired in settlement of loans............... 60,118 85,157 139,522
Conversion of Series D preferred stock into
common stock.................................. -- -- 2,928
Exchange of Series E preferred stock for common
stock......................................... 1,202 2,226 --
Issuance of common stock in exchange for Series
E preferred stock............................. 3,104 5,902 --
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.............. 28,846 24,344 263,334
Loans originated for investment, subsequently
identified to sale portfolio................ 1,596 -- --
Transfers of loans from held for sale to held
for investment:
Troubled credits previously transferred to
held for sale, but deemed non-salable....... (3,768) (3,064) --
Loans originated for sale, subsequently
identified to investment portfolio.......... -- (1,275) --
Other........................................ -- (73) --
Fair value of TransWorld net assets acquired... 24,377 -- --
Fair value of OneCentral net assets acquired... 5,306 -- --
</TABLE>
The transfers from held for investment loans were primarily of troubled
loans which the Bank sold to remove the credit and/or collateral risk arising
from the credit. The transfer in fiscal 1996 of troubled credits back to held
for investment represents a single loan that was deemed unsalable in fiscal
1996.
During fiscal 1997, 1996 and 1995, the Bank received income tax refunds of
$8,383,000, $6,630,000 and $323,000, respectively.
F-18
<PAGE>
GLENDALE FEDERAL BANK AND SUBSIDIARIES
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS--(CONTINUED)
JUNE 30, 1997, 1996 AND 1995
NOTE 3: NET EARNINGS PER SHARE INFORMATION
For the purpose of calculating net earnings per share, the Bank used the
following numbers of shares for the periods presented (in thousands):
<TABLE>
<CAPTION>
YEARS ENDED JUNE 30
--------------------
1997 1996 1995
------ ------ ------
<S> <C> <C> <C>
Primary net earnings per share.......................... 56,029 47,593 46,038
Fully diluted net earnings per share.................... 57,524 47,593 65,389
</TABLE>
The weighted average number of common shares outstanding for fiscal 1997,
1996 and 1995 excludes 200,686 shares held by a subsidiary of the Bank. Such
shares are eliminated in consolidation.
NOTE 4: ACQUISITIONS AND DISPOSITIONS
On May 16, 1997, the Bank completed its acquisition of TransWorld Bancorp
("TransWorld") and its principal subsidiary TransWorld Bank, which added nine
bank offices to the Bank's retail network. At that date, TransWorld had $372.4
million in assets, including $163.2 million of U.S. Government and federal
agency debt securities and $135.8 million in gross real estate, commercial and
consumer loans, and $336.3 million in deposits. The Bank paid $64.4 million
which includes out-of-pocket expenses, for the transaction and, under the
purchase method of accounting, recognized goodwill of $40.0 million after
recording the net assets acquired from TransWorld at fair value.
On January 31, 1997, the Bank completed its acquisition of OneCentral Bank
("OneCentral"). At that date, OneCentral had $74.3 million in assets,
including $38.0 million in gross real estate, commercial and consumer loans,
and $68.8 million in deposits. The Bank paid $11.1 million which includes out-
of-pocket expenses, for the transaction and, under the purchase method of
accounting, recognized goodwill of $5.8 million after recording the net assets
acquired from OneCentral at fair value.
The following table summarizes, as of the date of each respective
acquisition, the composition of loans purchased from TransWorld and OneCentral
(in thousands):
<TABLE>
<CAPTION>
TRANSWORLD ONECENTRAL TOTAL % OF TOTAL
---------- ---------- -------- ----------
<S> <C> <C> <C> <C>
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:
Real estate loans................ 62,028 16,741 78,769 45
Term loans....................... 51,929 16,356 68,285 39
SBA loans........................ 7,894 -- 7,894 5
Lines of credit.................. 1,033 1,196 2,229 1
-------- ------- -------- ---
122,884 34,293 157,177 90
-------- ------- -------- ---
$135,766 $37,992 $173,758 100%
======== ======= ======== ===
</TABLE>
F-19
<PAGE>
GLENDALE FEDERAL BANK AND SUBSIDIARIES
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS--(CONTINUED)
JUNE 30, 1997, 1996 AND 1995
The following table summarizes, as of the date of each respective
acquisition, the composition of deposits purchased from TransWorld and
OneCentral (in thousands):
<TABLE>
<CAPTION>
TRANSWORLD ONECENTRAL TOTAL % OF 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>
In June 1995, the Bank purchased 13 of the 14 branch offices of Union
Federal, including deposits totaling approximately $812 million and with a
weighted average cost of 4.9%. The Bank paid a purchase premium of $6.9
million and accepted certain of Union Federal's assets as part of the
consideration for assuming Union Federal's deposit liabilities. The assets
included Union Federal's entire portfolio of single-family residential loans
with unpaid principal amounts totaling approximately $181 million, a $220
million portfolio of performing multi-family residential and commercial real
estate loans, $3 million of REO and $24 million of mortgage-backed securities.
The purchase premium paid by the Bank, net of an adjustment to record the
assets acquired from Union Federal at fair value, totaled $42.9 million and is
reflected under the caption "Goodwill and other intangible assets" in the
Consolidated Statements of Financial Condition.
In May 1995, the Bank purchased $194 million in deposits of Independence
One. The Bank paid a purchase premium of 2.27% of deposits, or $4.4 million.
The acquisition added three bank offices to the Bank's franchise network.
On January 6, 1995, the Bank sold University Savings to First Interstate
Bank of Washington N.A. for $205.1 million in cash, which equaled 1.42 times
University Savings' book value at December 31, 1994 and 1.72 times its
tangible book value at that date. The Bank received cash in exchange for all
of the stock of University Savings, which had $1.2 billion in assets as of
December 31, 1994. Included in the sale of University Savings as of January 6,
1995 were deposit liabilities totaling $918.1 million and a gross loan
portfolio totaling $826.7 million. The Bank recorded a gain of $29.7 million,
net of $21.0 million in income tax expense associated with the sale.
University Savings' net earnings totaled $11.7 million in fiscal 1995 through
January 6, 1995. University Savings' net earnings totaled $13.5 million in
fiscal 1994.
On December 15, 1994, the Bank sold its 60-branch Florida franchise,
including deposits, banking offices, furniture and equipment, to Barnett
Banks, Inc. ("Barnett") for $243 million, or 7.40% of the $3.3 billion in
deposits transferred to Barnett. The Bank funded the sale at the time of
closing with FHLB advances and reverse repurchase agreements totaling $3.0
billion, substantially all of which repriced monthly. The Bank's use of
borrowings from the FHLB and reverse repurchase agreements to fund the Florida
franchise sale transaction was part of an overall strategy which included the
sale of non-performing and underperforming loans and the sale of securities,
the proceeds of which were
F-20
<PAGE>
GLENDALE FEDERAL BANK AND SUBSIDIARIES
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS--(CONTINUED)
JUNE 30, 1997, 1996 AND 1995
used, along with excess liquidity, to retire then outstanding reverse
repurchase agreements, which released the encumbrances on the assets subject
to these agreements. These assets, along with additional loans and mortgage-
backed securities, were used as collateral for the $3.0 billion of reverse
repurchase agreements and FHLB borrowings used to fund the transaction at the
time of closing. The Bank recorded a gain at the time of closing of $2.3
million, net of $20.7 million in income tax expense associated with the sale.
In connection with this sale, the Bank wrote off in March 1994, $136.2 million
of unamortized goodwill and other assets associated with the Florida franchise
and eliminated the remaining $192 million of such goodwill at the closing of
the sale in December 1994.
NOTE 5: 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
-----------------
1997 1996
-------- --------
<S> <C> <C>
Federal funds sold..................................... $ -- $ 33,000
Securities purchased under resale agreements........... 482,000 375,000
Whole loans purchased under resale agreements.......... 150,000 25,000
-------- --------
$632,000 $433,000
======== ========
</TABLE>
The following table further summarizes information with respect to assets
purchased under resale agreements at June 30, 1997 (in thousands):
<TABLE>
<CAPTION>
JUNE 30,
1997
--------
<S> <C>
Balance at year end............................................. $632,000
Average amount outstanding during the year...................... 600,318
Maximum amount outstanding at any month-end..................... 765,000
</TABLE>
Amounts outstanding with individual brokers at June 30, 1997 which exceeded
ten percent of stockholders' equity were (in thousands):
<TABLE>
<CAPTION>
BOOK
VALUE MARKET
INCLUDING WEIGHTED VALUE OF
ACCRUED AVERAGE UNDERLYING
BROKER INTEREST MATURITY SECURITIES
------ --------- -------- ----------
<S> <C> <C> <C>
Credit Suisse First Boston.................. $150,027 1 day $153,011
======== ===== ========
</TABLE>
The weighted average interest rate on federal funds sold and assets
purchased under resale agreements was 6.49% and 5.69% at June 30, 1997 and
1996, respectively. Accrued interest receivable on these securities was
$115,000 and $205,000 at June 30, 1997 and 1996, respectively, and is included
in "Interest receivable" in the accompanying Consolidated Statements of
Financial Condition.
Assets purchased under resale agreements are collateralized by certain
mortgage-backed securities and whole loans at June 30, 1997 and 1996. At June
30, 1997 and 1996, the Bank held only assets purchased under agreements to
resell identical assets. The assets underlying the agreements are held in the
custodial accounts of a third party trustee for the Bank until the maturities
of the agreements.
F-21
<PAGE>
GLENDALE FEDERAL BANK AND SUBSIDIARIES
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS--(CONTINUED)
JUNE 30, 1997, 1996 AND 1995
NOTE 6: OTHER DEBT AND EQUITY SECURITIES
The following tables summarize the Bank's other debt and equity securities
held to maturity and available for sale with related remaining maturity data
as of the dates indicated (in thousands):
<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>
<TABLE>
<CAPTION>
JUNE 30, 1996
--------------------------------------
GROSS GROSS
AMORTIZED UNREALIZED UNREALIZED FAIR
COST GAINS LOSSES VALUE
--------- ---------- ---------- ------
<S> <C> <C> <C> <C>
Held to maturity:
U.S. Government and Federal Agency ob-
ligations: Maturing within 1 year.... $8,086 $-- $-- $8,086
Equity securities..................... 5 44 -- 49
------ ---- ---- ------
$8,091 $ 44 $-- $8,135
====== ==== ==== ======
</TABLE>
Fair values at June 30, 1997 and 1996 were based upon quotations for similar
or identical securities.
The weighted average interest rate on other debt and equity securities was
5.32% and 4.80% at June 30, 1997 and 1996, respectively. Interest receivable
on these securities was $259,000 at June 30, 1997, and is included in
"Interest receivable" in the accompanying Consolidated Statements of Financial
Condition. There was no Interest receivable on these securities at June 30,
1996.
During fiscal 1997, the Bank sold $156,357,000 in securities from the
TransWorld and OneCentral acquisitions at a gross realized loss of $2,000.
These securities were all classified as available for sale at the dates of the
acquisitions.
There were no sales of other debt and equity securities during fiscal 1996
and 1995.
Other debt securities include net discounts amounting to $91,000 at June 30,
1997. There were no discounts or premiums on other debt securities at June 30,
1996.
There were no other debt securities pledged as collateral for securities
sold under agreements to repurchase or other borrowings at June 30, 1997 and
1996.
F-22
<PAGE>
GLENDALE FEDERAL BANK AND SUBSIDIARIES
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS--(CONTINUED)
JUNE 30, 1997, 1996 AND 1995
NOTE 7: MORTGAGE-BACKED SECURITIES
The following tables summarize the Bank's mortgage-backed securities held to
maturity and available for sale as of the dates indicated (in thousands):
<TABLE>
<CAPTION>
JUNE 30, 1997
-------------------------------------------
GROSS GROSS
AMORTIZED UNREALIZED UNREALIZED
COST GAINS LOSSES FAIR VALUE
---------- ---------- ---------- ----------
<S> <C> <C> <C> <C>
Held to maturity:
FNMA............................. $ 423,111 $10,462 $ (898) $ 432,675
FHLMC............................ 264,946 1,631 (413) 266,164
GNMA............................. 238,862 931 (1,774) 238,019
Pass-through securities.......... 214,188 2,338 (5,080) 211,446
Other............................ 21,718 -- (3,081) 18,637
---------- ------- -------- ----------
$1,162,825 $15,362 $(11,246) $1,166,941
========== ======= ======== ==========
Available for sale:
Pass-through securities.......... $ 512,983 $ 606 $ (8,202) $ 505,387
Collateralized mortgage obliga-
tions........................... 24,823 6 (62) 24,767
GNMA............................. 521,586 5,500 -- 527,086
FHLMC............................ 44,837 130 (58) 44,909
FNMA............................. 14,066 41 (39) 14,068
Residual collateralized mortgage
obligations..................... 100 -- (100) --
Other............................ 634 88 (230) 492
---------- ------- -------- ----------
$1,119,029 $ 6,371 $ (8,691) $1,116,709
========== ======= ======== ==========
</TABLE>
<TABLE>
<CAPTION>
JUNE 30, 1996
-------------------------------------------
GROSS GROSS
AMORTIZED UNREALIZED UNREALIZED
COST GAINS LOSSES FAIR VALUE
---------- ---------- ---------- ----------
<S> <C> <C> <C> <C>
Held to maturity:
FNMA............................. $ 490,138 $ 7,857 $ (2,730) $ 495,265
FHLMC............................ 296,641 1,151 (2,012) 295,780
GNMA............................. 284,023 480 (3,711) 280,792
Pass-through securities.......... 258,796 2,168 (3,967) 256,997
Residual collateralized mortgage
obligations..................... 277 -- (277) --
Other............................ 26,360 121 (3,971) 22,510
---------- ------- -------- ----------
$1,356,235 $11,777 $(16,668) $1,351,344
========== ======= ======== ==========
Available for sale:
Pass-through securities.......... $ 728,438 $ 292 $(16,447) $ 712,283
Collateralized mortgage obliga-
tions........................... 58,095 208 (143) 58,160
GNMA............................. 113,928 13 -- 113,941
FHLMC............................ 142 1 -- 143
FNMA............................. 28 -- -- 28
---------- ------- -------- ----------
$ 900,631 $ 514 $(16,590) $ 884,555
========== ======= ======== ==========
</TABLE>
F-23
<PAGE>
GLENDALE FEDERAL BANK AND SUBSIDIARIES
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS--(CONTINUED)
JUNE 30, 1997, 1996 AND 1995
Amounts outstanding with individual issuers at June 30, 1997 which exceeded
ten percent of stockholders' equity were (in thousands):
<TABLE>
<CAPTION>
MARKET
VALUE OF
CARRYING UNDERLYING
ISSUER AMOUNT SECURITIES
------ -------- ----------
<S> <C> <C>
FHLMC................................................. $309,855 $311,073
FNMA.................................................. 437,179 446,743
GNMA.................................................. 765,948 765,105
Prudential Home Securities............................ 288,179 288,179
Residential Funding Corp.............................. 241,556 242,025
</TABLE>
During fiscal 1996, the Bank sold $1.7 billion of its collateralized
mortgage obligations ("CMOs"). The Bank's decision to sell most of its CMO
portfolio was part of a strategic realignment of the Bank's mortgage-backed
securities portfolio in which $2.8 billion of mortgage-backed securities were
reclassified from "held to maturity" to "available for sale" during the
quarter ended December 31, 1995, in compliance with implementation guidance
for SFAS 115. The reclassification included the Bank's $1.8 billion fixed-rate
CMO portfolio and $1.0 billion of its adjustable-rate pass-through securities
portfolio.
The bank recorded a pre-tax loss of $28.2 million on the sale of CMOs during
fiscal 1996. As of June 30, 1997, CMOs totaling $24.8 million were classified
as available for sale. The Bank recorded in its stockholders' equity accounts
an unrealized loss at June 30, 1997 of $1.2 million, net of tax, on the
available for sale portfolio. The Bank has no immediate plans to sell the
remaining CMOs or the pass-through portfolio.
The carrying values of mortgage-backed securities as of June 30, 1997 and
1996 were net of unamortized premiums of $35,558,000, and $39,001,000,
respectively, and deferred loan origination fees, net of deferred loan
origination costs, on securitized loans of the Bank of $2,636,000 and
$3,041,000 at June 30, 1997 and 1996, respectively.
The weighted average interest rates of mortgage-backed securities were 6.78%
and 6.26% at June 30, 1997 and 1996, respectively. Interest receivable related
to mortgage-backed securities outstanding at June 30, 1997 and 1996 totaled
$15,276,000 and $15,147,000, respectively. The Bank uses mortgage-backed
securities as collateral for various borrowings. At June 30, 1997 and 1996,
$786,976,000 and $784,259,000, respectively, of mortgage-backed securities
were pledged as collateral for various borrowings.
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
-----------------------------
1997 1996 1995
------- ---------- --------
<S> <C> <C> <C>
Proceeds from sales.................... $41,602 $1,816,876 $ 12,006
======= ========== ========
Gross realized gains................... $ 638 $ 7,821 $ 151
Gross realized losses.................. (2,442) (42,043) (11,876)
------- ---------- --------
Net gain (loss)........................ $(1,804) $ (34,222) $(11,725)
======= ========== ========
</TABLE>
F-24
<PAGE>
GLENDALE FEDERAL BANK AND SUBSIDIARIES
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS--(CONTINUED)
JUNE 30, 1997, 1996 AND 1995
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
---------------------------
1997 1996 1995
------- -------- --------
<S> <C> <C> <C>
Cash gain (loss)............................... $ (620) $(29,095) $ (93)
Deferred fees recognized on sale............... 469 1,402 142
Recourse provision and fees.................... (1,499) (6,568) (11,679)
Other items.................................... (154) 39 (95)
------- -------- --------
$(1,804) $(34,222) $(11,725)
======= ======== ========
</TABLE>
See Note 8--"Loans Receivable" for a discussion of loans sold with recourse.
F-25
<PAGE>
GLENDALE FEDERAL BANK AND SUBSIDIARIES
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS--(CONTINUED)
JUNE 30, 1997, 1996 AND 1995
NOTE 8: LOANS RECEIVABLE
COMPOSITION
Loans receivable held for investment at the dates indicated are summarized
as follows (in thousands):
<TABLE>
<CAPTION>
JUNE 30
------------------------
1997 1996
----------- -----------
<S> <C> <C>
Residential loans:
Existing structures:
1-4 units......................................... $ 8,766,536 $ 7,501,733
5-36 units........................................ 1,472,654 1,559,097
37 or more units.................................. 345,052 400,415
Construction:
1-4 units......................................... 7,726 16,794
5-36 units........................................ 4,895 5,445
Land loans............................................ 9,779 18,250
Non-residential loans:
Existing structures............................... 1,196,703 1,338,975
Construction...................................... 531 --
Home equity and improvement loans..................... 28,563 28,470
----------- -----------
Total real estate loans......................... 11,832,439 10,869,179
----------- -----------
Commercial loans...................................... 160,061 10,391
Consumer loans:
Equity.............................................. 45,709 10,079
Unsecured........................................... 39,712 21,788
Deposit accounts.................................... 15,702 17,113
Auto and recreational vehicle....................... 13,838 17,588
Mobile homes........................................ 5,724 6,590
----------- -----------
Total consumer loans............................ 120,685 73,158
----------- -----------
Total gross loans receivable.................... 12,113,185 10,952,728
Less:
Unearned discounts (net of premium)................. (38,824) (34,772)
Undisbursed loan funds.............................. (1,807) (12,160)
Deferred loan fees.................................. (22,705) (24,446)
Allowance for loan losses........................... (163,759) (186,756)
----------- -----------
Loans receivable, net........................... $11,886,090 $10,694,594
=========== ===========
</TABLE>
The Bank had residential real estate loans held for sale totaling $19.0
million as of June 30, 1997, compared with $33.3 million as of June 30, 1996.
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 7.73% and 7.74% at June 30, 1997 and 1996,
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
0.9% and 0.15% at June 30, 1997 and
F-26
<PAGE>
GLENDALE FEDERAL BANK AND SUBSIDIARIES
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS--(CONTINUED)
JUNE 30, 1997, 1996 AND 1995
1996, respectively. Interest receivable on loans receivable (including
interest on loans classified as held for sale) was $82,680,000 and $70,539,000
at June 30, 1997 and 1996, 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 $5.4 billion and $4.4 billion at June 30, 1997 and 1996,
respectively.
CREDIT RISK AND CONCENTRATION
A summary of activity in the allowance for loan losses during fiscal 1997,
1996 and 1995 is as follows (dollars in thousands):
<TABLE>
<CAPTION>
REAL ESTATE CONSUMER COMMERCIAL
LOANS LOANS LOANS TOTAL
----------- -------- ---------- ---------
<S> <C> <C> <C> <C>
Balance--June 30, 1994.............. $ 310,187 $ 4,475 $ 6,052 $ 320,714
Provision for loan losses........... 67,872 2,562 (4,284) 66,150
Charge-offs......................... (199,042) (4,595) (2,340) (205,977)
Recoveries.......................... 10,706 1,840 4,748 17,294
Acquisition of Union Federal loans.. 17,350 -- -- 17,350
Sale of University Savings.......... (6,199) (190) -- (6,389)
--------- ------- ------- ---------
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
========= ======= ======= =========
Percent of type of gross loans re-
ceivable........................... 1.25% 6.63% 4.72% 1.35%
========= ======= ======= =========
</TABLE>
Included in the allowance for loan losses activity for fiscal 1995 is the
reversal of University Savings' allowance for loan losses which totaled $6.4
million as of January 6, 1995, the effective date of the sale, and the
establishment of an allowance for loan losses which totaled $17.4 million
related to the loans purchased in the Union Federal transaction. Included in
total charge-offs for fiscal 1995 are charge-offs of $34.0 million and $18.8
million on loans secured by multi-family residential properties and non-
residential properties, respectively, related to the $166 million loan sale
completed in October 1994 and charge-offs of $17.0 million and $20.3 million
on such loans, respectively, related to the August 1995 $176 million loan
sale.
Included in the allowance for loan losses activity for fiscal 1997 are the
recognition of commercial loan loss allowances of $1.0 million and $2.8 million
pursuant to the recording of the acquisitions of OneCentral and TransWorld,
respectively.
F-27
<PAGE>
GLENDALE FEDERAL BANK AND SUBSIDIARIES
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS--(CONTINUED)
JUNE 30, 1997, 1996 AND 1995
The following is a summary of non-accrual loans, troubled debt
restructurings and other impaired loans (in thousands):
<TABLE>
<CAPTION>
JUNE 30
--------------------------
1997 1996 1995
-------- -------- --------
<S> <C> <C> <C>
Non-accrual loans................................... $140,295 $192,445 $244,242
Troubled debt restructurings........................ 31,064 9,194 38,542
Recorded investment in other impaired loans......... 51,846 70,289 83,137
-------- -------- --------
$223,205 $271,928 $365,921
======== ======== ========
</TABLE>
At June 30, 1997 and 1996, impaired loans and the related specific loan loss
allowances were as follows (in thousands):
<TABLE>
<CAPTION>
JUNE 30
---------------------------------------------------------------
1997 1996
------------------------------- -------------------------------
ALLOWANCE ALLOWANCE
RECORDED FOR NET RECORDED FOR NET
INVESTMENT LOSSES INVESTMENT INVESTMENT LOSSES INVESTMENT
---------- --------- ---------- ---------- --------- ----------
<S> <C> <C> <C> <C> <C> <C>
Non-accrual loans:
With specific allow-
ances................ $ 20,036 $ 4,550 $ 15,486 $ 42,575 $11,344 $ 31,231
Without specific
allowances........... 39,845 -- 39,845 36,782 -- 36,782
-------- ------- -------- -------- ------- --------
59,881 4,550 55,331 79,357 11,344 68,013
-------- ------- -------- -------- ------- --------
TDRs:
With specific allow-
ances................ 16,648 323 16,325 -- -- --
Without specific
allowances........... 14,416 -- 14,416 9,194 -- 9,194
-------- ------- -------- -------- ------- --------
31,064 323 30,741 9,194 -- 9,194
-------- ------- -------- -------- ------- --------
Other impaired loans:
With specific allow-
ances................ 42,046 9,078 32,968 63,987 15,118 48,869
Without specific
allowances........... 9,800 -- 9,800 6,302 -- 6,302
-------- ------- -------- -------- ------- --------
51,846 9,078 42,768 70,289 15,118 55,171
-------- ------- -------- -------- ------- --------
$142,791 $13,951 $128,840 $158,840 $26,462 $132,378
======== ======= ======== ======== ======= ========
</TABLE>
Other impaired loans without specific allowances totaling $9.8 million and
$6.3 million as of June 30, 1997 and 1996, respectively, in the table above,
include loans for which a portion of the loan balance has been charged-off.
The average net recorded investment in impaired loans for the years ended
June 30, 1997, 1996 and 1995 was $164 million, $175 million and $353 million,
respectively. Interest income of $7.4 million, $7.8 million and $11.0 million
for fiscal 1997, 1996 and 1995, respectively, was recognized on impaired loans
during the period of impairment.
Loans in non-accrual status as of June 30, 1997, 1996 and 1995 had interest
due but not recognized of approximately $7.1 million, $10.5 million and $13.6
million, respectively. The amount of
F-28
<PAGE>
GLENDALE FEDERAL BANK AND SUBSIDIARIES
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS--(CONTINUED)
JUNE 30, 1997, 1996 AND 1995
interest income on these loans that was included in net earnings in fiscal
1997, 1996 and 1995 was $5.3 million, $5.8 million and $5.5 million,
respectively. Net interest forgone related to troubled debt restructurings
totaled $0.5 million, $0.2 million and $0.7 million in 1997, 1996 and 1995,
respectively. Interest income recorded on troubled debt restructurings for
fiscal 1997, 1996 and 1995 was $2.4 million, $0.7 million and $2.6 million,
respectively. The Bank has no commitments to lend additional funds to
borrowers whose loans were classified as non-performing or troubled debt
restructurings.
The following table further identifies the Bank's non-accrual loans by state
and by property type as of June 30, 1997 (in thousands):
<TABLE>
<CAPTION>
CALIFORNIA FLORIDA OTHER TOTAL
---------- ------- ------ --------
<S> <C> <C> <C> <C>
Single-family 1-4 units...................... $ 61,776 $13,815 $7,398 $ 82,989
Multi-family:
5-36 units................................. 21,087 -- -- 21,087
37 or more units........................... 3,121 -- -- 3,121
Non-residential:
Office buildings........................... 5,014 314 -- 5,328
Shopping centers........................... 21,341 -- -- 21,341
Mobile home park........................... 1,503 -- -- 1,503
Commercial/industrial...................... 2,323 177 -- 2,500
-------- ------- ------ --------
Total non-residential.................... 30,181 491 -- 30,672
Commercial................................... 859 -- -- 859
Consumer..................................... 1,567 -- -- 1,567
-------- ------- ------ --------
$118,591 $14,306 $7,398 $140,295
======== ======= ====== ========
</TABLE>
The following table further identifies the Bank's non-accrual loans by state
and by property type as of June 30, 1996 (in thousands):
<TABLE>
<CAPTION>
CALIFORNIA FLORIDA OTHER TOTAL
---------- ------- ------ --------
<S> <C> <C> <C> <C>
Single-family 1-4 units...................... $100,515 $13,305 $6,158 $119,978
Multi-family:
5-36 units................................. 33,123 -- -- 33,123
37 or more units........................... 13,943 518 -- 14,461
Non-residential:
Office buildings........................... 8,230 -- -- 8,230
Shopping centers........................... 6,635 1,330 -- 7,965
Industrial park............................ 1,886 -- -- 1,886
Land....................................... 2,709 -- -- 2,709
Commercial/industrial...................... 1,501 -- 1,569 3,070
-------- ------- ------ --------
Total non-residential.................... 20,961 1,330 1,569 23,860
Commercial................................... 22 -- -- 22
Consumer..................................... 1,001 -- -- 1,001
-------- ------- ------ --------
$169,565 $15,153 $7,727 $192,445
======== ======= ====== ========
</TABLE>
F-29
<PAGE>
GLENDALE FEDERAL BANK AND SUBSIDIARIES
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS--(CONTINUED)
JUNE 30, 1997, 1996 AND 1995
At June 30, 1997 and 1996, outstanding commitments to originate loans
totaled $39 million and $44 million, respectively.
In previous years, the Bank sold certain loans with limited recourse
requirements. These provisions require the Bank to repurchase loans on which
the borrower has defaulted. The present value of all future estimated loan
losses are provided for at the time of such sales. Subsequent adjustments to
estimates of future losses are charged to gain or loss on sale of mortgage-
backed securities. In fiscal 1991, the Bank entered into certain transactions
whereby its recourse obligations were reduced to reduce risk-based capital
requirements (the "recourse reduction transactions"). In each transaction, the
Bank retained the risk of first loss up to a specified level for which the
Bank maintains a liability for recourse obligations. The remainder of the
Bank's recourse obligations were transferred to an independent third party. In
fiscal 1996, for certain recourse reduction transactions, the recourse
reduction agreements expired or were cancelled by the Bank and the full amount
of the recourse obligations reverted back to the Bank from the independent
third party. There were no sales of loans and mortgage-backed securities with
recourse provisions in fiscal 1997 or 1996. The Bank had recourse obligations
for approximately $1.1 billion of loans sold with recourse at June 30, 1997
for which the Bank is contingently liable for up to $561 million in future
losses. The Bank's recorded liability under these obligations was $13.7
million and $14.2 million at June 30, 1997 and 1996, respectively, and is
included in "Other liabilities and accrued expenses" in the accompanying
Consolidated Statements of Financial Condition.
A summary of the balance of loans sold with recourse at the dates indicated
is as follows (in thousands):
<TABLE>
<CAPTION>
JUNE 30
---------------------
1997 1996
---------- ----------
<S> <C> <C>
Loans with original loan-to-value ("LTV") ratios
less than or equal to 80%........................ $ 713,078 $ 781,943
Loans with original LTV ratios greater than 80%:
With Private Mortgage Insurance ("PMI")......... 84,675 106,191
Without PMI..................................... 46,660 83,698
---------- ----------
844,413 971,832
Recourse reduction transactions................... 246,282 285,848
---------- ----------
$1,090,695 $1,257,680
========== ==========
Recorded liability for recourse................... $ 13,724 $ 14,238
========== ==========
</TABLE>
F-30
<PAGE>
GLENDALE FEDERAL BANK AND SUBSIDIARIES
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS--(CONTINUED)
JUNE 30, 1997, 1996 AND 1995
The following table summarizes the Bank's gross loan portfolio, including
loans held for sale, by state and by property type as of June 30, 1997 (in
thousands):
<TABLE>
<CAPTION>
CALIFORNIA FLORIDA OTHER(1) TOTAL
---------- -------- ---------- -----------
<S> <C> <C> <C> <C>
Single-family 1-4 units.............. $5,898,034 $657,266 $2,266,528 $ 8,821,828
Multi-family:
5-36 units......................... 1,431,089 46,189 271 1,477,549
37 or more units................... 282,970 59,566 2,516 345,052
Non-residential:
Office buildings................... 359,341 33,437 6,934 399,712
Shopping centers................... 299,034 32,558 8,981 340,573
Warehouse/storage.................. 69,626 17,574 -- 87,200
Hotels/motels...................... 10,487 8,987 7,245 26,719
Industrial parks................... 90,563 2,124 -- 92,687
Land............................... 6,825 2,745 207 9,777
Mobile home parks.................. 21,771 7,296 2,240 31,307
Commercial/industrial.............. 190,331 28,707 -- 219,038
---------- -------- ---------- -----------
Total non-residential............ 1,047,978 133,428 25,607 1,207,013
Commercial........................... 156,966 -- 3,095 160,061
Consumer............................. 118,480 2,174 31 120,685
---------- -------- ---------- -----------
$8,935,517 $898,623 $2,298,048 $12,132,188
========== ======== ========== ===========
</TABLE>
- - --------
(1) The state with the largest loan balance in this category is New York with
$245 million, substantially all of which is single-family.
The following table summarizes the Bank's gross loan portfolio, including
loans held for sale, by state and by property type as of June 30, 1996 (in
thousands):
<TABLE>
<CAPTION>
CALIFORNIA FLORIDA OTHER(1) TOTAL
---------- -------- ---------- -----------
<S> <C> <C> <C> <C>
Single-family 1-4 units.............. $5,298,058 $642,447 $1,639,807 $ 7,580,312
Multi-family:
5-36 units......................... 1,530,080 34,175 287 1,564,542
37 or more units................... 308,501 82,068 9,846 400,415
Non-residential:
Office buildings................... 407,582 46,232 7,002 460,816
Shopping centers................... 347,200 36,640 11,127 394,967
Warehouse/storage.................. 89,677 18,554 -- 108,231
Hotels/motels...................... 10,764 14,082 20,300 45,146
Industrial parks................... 99,268 2,503 -- 101,771
Land............................... 14,573 3,469 208 18,250
Mobile home parks.................. 22,119 10,384 5,013 37,516
Commercial/industrial.............. 135,946 52,061 2,521 190,528
---------- -------- ---------- -----------
Total non-residential............ 1,127,129 183,925 46,171 1,357,225
Commercial........................... 4,959 -- 5,432 10,391
Consumer............................. 69,185 3,929 44 73,158
---------- -------- ---------- -----------
$8,337,912 $946,544 $1,701,587 $10,986,043
========== ======== ========== ===========
</TABLE>
- - --------
(1) The state with the largest loan balance in this category is New York with
$236 million, substantially all of which is single-family.
F-31
<PAGE>
GLENDALE FEDERAL BANK AND SUBSIDIARIES
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS--(CONTINUED)
JUNE 30, 1997, 1996 AND 1995
The Bank's collateral requirements are the same, regardless of the region in
which the loans are originated. Loans originated and purchased are secured by
real estate with a principal amount of generally no more than 80% of the
appraised value. Loans with LTV ratios in excess of 80% require private
mortgage insurance ("PMI"), or if they meet certain criteria, can be made at
higher interest rates and fees at the option of the loan applicant. These
loans are priced higher in rate, fee and margin than those for which mortgage
insurance is obtained to recognize the increased credit risk assumed by the
Bank. This option is available only on loans with a maximum loan amount of
$300,000 and an LTV ratio of no more than 90% without negative amortization
features, where the purpose of the loan is to purchase, or to refinance an
existing Glendale Federal loan secured by, a one-unit, single-family
residence.
The following table summarizes the Bank's first trust deed real estate loan
portfolio by original loan-to-value ratio, including those classified as held
for sale, at the dates indicated (dollars in thousands):
<TABLE>
<CAPTION>
JUNE 30
---------------------------------------
1997 1996
------------------- -------------------
AMOUNT PERCENT AMOUNT PERCENT
----------- ------- ----------- -------
<S> <C> <C> <C> <C>
Loans with LTV ratio less than or equal
to 80%................................ $10,107,249 86% $ 9,196,477 85%
Loans with LTV ratio greater than 80%:
With PMI............................. 715,165 6 694,365 6
Without PMI.......................... 964,844 8 957,255 9
----------- --- ----------- ---
$11,787,258 100% $10,848,097 100%
=========== === =========== ===
</TABLE>
NOTE 9: 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
----------------
1997 1996
------- -------
<S> <C> <C>
Single-family........................................... $34,116 $39,693
Multi-family............................................ 10,347 16,495
Non-residential......................................... 5,955 10,835
Land.................................................... 14,214 15,058
------- -------
64,632 82,081
General allowance....................................... (3,132) (3,832)
------- -------
$61,500 $78,249
======= =======
</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
----------------------------
1997 1996 1995
-------- -------- --------
<S> <C> <C> <C>
Beginning balance........................... $ 26,688 $ 30,719 $ 35,227
Provision for losses........................ 7,539 12,110 16,846
Charge-offs................................. (11,321) (16,141) (21,354)
-------- -------- --------
Ending balance.............................. $ 22,906 $ 26,688 $ 30,719
======== ======== ========
</TABLE>
F-32
<PAGE>
GLENDALE FEDERAL BANK AND SUBSIDIARIES
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS--(CONTINUED)
JUNE 30, 1997, 1996 AND 1995
The following table further identifies the Bank's REO by state and property
type as of June 30, 1997 (in thousands):
<TABLE>
<CAPTION>
CALIFORNIA FLORIDA OTHER TOTAL
---------- ------- ------ -------
<S> <C> <C> <C> <C>
Single-family 1-4 units................ $28,207 $ 4,170 $1,739 $34,116
Multi-family:
5-36 units........................... 8,309 105 -- 8,414
37 or more units..................... 1,933 -- -- 1,933
Non-residential:
Office buildings..................... 1,625 60 -- 1,685
Shopping centers..................... 298 -- -- 298
Hotels/motels........................ 102 -- 3,468 3,570
Land................................. 365 13,849 -- 14,214
Industrial park...................... 402 -- -- 402
------- ------- ------ -------
Total non-residential................ 2,792 13,909 3,468 20,169
------- ------- ------ -------
Total real estate.................. $41,241 $18,184 $5,207 $64,632
======= ======= ======
General allowance...................... (3,132)
-------
$61,500
=======
</TABLE>
The following table further identifies the Bank's REO by state and property
type as of June 30, 1996 (in thousands):
<TABLE>
<CAPTION>
CALIFORNIA FLORIDA OTHER TOTAL
---------- ------- ------ -------
<S> <C> <C> <C> <C>
Single-family 1-4 units................ $34,461 $ 5,232 $ -- $39,693
Multi-family:
5-36 units........................... 11,668 -- -- 11,668
37 or more units..................... 4,827 -- -- 4,827
Non-residential:
Office buildings..................... 8,165 59 -- 8,224
Shopping centers..................... 786 -- -- 786
Land................................. 573 14,052 433 15,058
Commercial/Industrial................ 1,183 -- 642 1,825
------- ------- ------ -------
Total non-residential................ 10,707 14,111 1,075 25,893
------- ------- ------ -------
Total real estate.................. $61,663 $19,343 $1,075 $82,081
======= ======= ======
General allowance...................... (3,832)
-------
$78,249
=======
</TABLE>
Operations of REO are summarized as follows (in thousands):
<TABLE>
<CAPTION>
YEARS ENDED JUNE 30
---------------------------
1997 1996 1995
------- -------- --------
<S> <C> <C> <C>
Gain on sale of REO.......................... $ 7,164 $ 10,880 $ 12,376
Provision for losses......................... (7,539) (12,110) (16,846)
Net operating expenses....................... (6,248) (7,196) (10,564)
------- -------- --------
$(6,623) $ (8,426) $(15,034)
======= ======== ========
</TABLE>
F-33
<PAGE>
GLENDALE FEDERAL BANK AND SUBSIDIARIES
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS--(CONTINUED)
JUNE 30, 1997, 1996 AND 1995
NOTE 10: INVESTMENT IN CAPITAL STOCK OF FEDERAL HOME LOAN BANK ("FHLB")
The Bank's investment in capital stock of FHLB, at cost, totaled
$259,587,000 and $192,842,000 at June 30, 1997 and 1996, respectively. The
Bank earned 6.3%, 5.4% and 5.3% from dividends received during fiscal 1997,
1996 and 1995, respectively. Dividends receivable on FHLB stock totaled
$3,870,800 and $2,498,300 at June 30, 1997 and 1996, respectively, and is
included in "Interest receivable" in the accompanying Consolidated Statements
of Financial Condition. As a member of the FHLB system, the Bank is required
to maintain an investment in the capital stock of the FHLB in an amount at
least equal to the greater of 1% of residential mortgage assets, or 5% of
outstanding borrowings (advances) from the FHLB, or 0.3% of total assets. FHLB
capital stock is pledged to secure FHLB advances.
NOTE 11: PREMISES AND EQUIPMENT
Premises and equipment at the dates indicated are summarized as follows (in
thousands):
<TABLE>
<CAPTION>
JUNE 30
--------------------
1997 1996
--------- ---------
<S> <C> <C>
Buildings and leasehold improvements................ $ 163,780 $ 155,227
Furniture, fixtures and equipment................... 105,062 88,205
Land................................................ 22,726 22,171
--------- ---------
291,568 265,603
Less accumulated depreciation and amortization...... (156,632) (139,235)
--------- ---------
$ 134,936 $ 126,368
========= =========
</TABLE>
In fiscal 1996, the Bank sold its former headquarters facility for
approximately $30 million. The Bank recorded a pre-tax loss on this sale of
$2.5 million during fiscal 1996, which is included in "Other income (loss),
net" in the Consolidated Statements of Operations.
Operating expenses include provisions for depreciation and amortization of
$14,849,000, $15,755,000 and $16,854,000 for fiscal 1997, 1996 and 1995,
respectively.
The Bank leases certain of its office buildings and branch offices, as well
as certain equipment, under non-cancelable operating leases. Rental expense
incurred in fiscal 1997, 1996 and 1995 was $16,093,000, $15,140,000, and
$20,126,000, respectively. Minimum future lease payments on building and
equipment leases at June 30, 1997, were as follows (in thousands):
<TABLE>
<S> <C>
Due in one year.................................................. $ 17,654
Due in two years................................................. 14,888
Due in three years............................................... 12,705
Due in four years................................................ 11,406
Due in five years................................................ 9,257
Due thereafter................................................... 50,300
--------
$116,210
========
</TABLE>
F-34
<PAGE>
GLENDALE FEDERAL BANK AND SUBSIDIARIES
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS--(CONTINUED)
JUNE 30, 1997, 1996 AND 1995
NOTE 12: MORTGAGE SERVICING ASSETS
The Bank's portfolio of loans serviced for others totaled $29.6 billion at
June 30, 1997 and included $11.5 billion of loans sub-serviced by a third
party which will be transferred to the Bank in September 1997. Loans serviced
for others at June 30, 1996 and 1995 totaled $14.2 billion and $11.7 billion,
respectively.
The following table summarizes activity in the portfolio of loans serviced
for others (in millions):
<TABLE>
<CAPTION>
YEARS ENDED JUNE 30
-------------------------
1997 1996 1995
------- ------- -------
<S> <C> <C> <C>
Beginning portfolio of loans serviced for
others..................................... $14,168 $11,678 $10,085
Add: Servicing purchased................... 17,184 3,696 2,803
Servicing retained on loans sold......... 92 -- --
Less: Amortization, prepayments and
foreclosures............................ (1,846) (1,206) (1,210)
------- ------- -------
Ending portfolio of loans serviced for
others..................................... $29,598 $14,168 $11,678
======= ======= =======
</TABLE>
In accordance with SFAS 125, the Bank has combined its mortgage servicing
rights and capitalized servicing fees during 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
----------------------------
1997 1996 1995
-------- -------- --------
<S> <C> <C> <C>
MORTGAGE SERVICING ASSETS ACTIVITY:
Beginning balance................................. $127,399 $ 99,122 $ 68,719
Purchases......................................... 187,343 50,836 51,537
Originated servicing rights....................... 1,119 -- --
Amortization...................................... (27,342) (22,559) (19,131)
Decrease due to sale of University Savings........ -- -- (2,003)
-------- -------- --------
Ending balance.................................... $288,519 $127,399 $ 99,122
======== ======== ========
VALUATION ALLOWANCE ACTIVITY:
Beginning balance................................. $ --
Additions charged to loan servicing income........ (4,047)
--------
Ending balance.................................... $ (4,047)
========
</TABLE>
F-35
<PAGE>
GLENDALE FEDERAL BANK AND SUBSIDIARIES
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS--(CONTINUED)
JUNE 30, 1997, 1996 AND 1995
NOTE 13: DEPOSITS
Deposits at the dates indicated are summarized as follows (dollars in
thousands):
<TABLE>
<CAPTION>
JUNE 30
---------------------------------------------------------
1997 1996
---------------------------- ----------------------------
WEIGHTED PERCENT WEIGHTED PERCENT
AVERAGE OF TOTAL AVERAGE OF TOTAL
RATE AMOUNT DEPOSITS RATE AMOUNT DEPOSITS
-------- ---------- -------- -------- ---------- --------
<S> <C> <C> <C> <C> <C> <C>
Checking................ 0.37% $1,198,011 12.8% 0.56% $ 778,980 8.9%
Savings................. 2.15 452,225 4.8 2.15 492,777 5.7
Money market............ 4.25 2,119,553 22.7 4.37 1,719,319 19.7
Certificates:
5.00% and lower........ 4.83 1,046,824 11.2 4.79 1,790,616 20.5
5.01%--6.00%........... 5.56 4,277,651 45.7 5.48 3,085,829 35.4
6.01%--7.00%........... 6.24 227,948 2.4 6.43 638,282 7.3
7.01%--8.00%........... 7.24 32,839 0.4 7.28 182,292 2.1
8.01%--9.00%........... 8.27 1,595 0.0 8.23 2,396 0.0
9.01%--10.00%.......... 9.45 263 0.0 9.45 259 0.0
10.01% and over........ 0.00 -- 0.0 11.55 33,226 0.4
---------- ----- ---------- -----
Total certificates.... 5.46 5,587,120 59.7 5.46 5,732,900 65.7
---------- ----- ---------- -----
4.37% $9,356,909 100.0% 4.62% $8,723,976 100.0%
========== ===== ========== =====
</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, 1997 and 1996 was
$3,186,000 and $3,092,000, 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, 1997 are as
follows (in thousands):
<TABLE>
<S> <C>
No stated maturity............................................ $3,769,789
Maturing within one year:
1st quarter................................................. 1,702,209
2nd quarter................................................. 849,236
3rd quarter................................................. 410,486
4th quarter................................................. 1,217,896
Maturing within two years..................................... 1,242,220
Maturing within three years................................... 94,176
Maturing within four years.................................... 43,954
Maturing within five years.................................... 25,846
Maturing thereafter........................................... 1,097
----------
$9,356,909
==========
</TABLE>
F-36
<PAGE>
GLENDALE FEDERAL BANK AND SUBSIDIARIES
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS--(CONTINUED)
JUNE 30, 1997, 1996 AND 1995
Deposits of $100,000 or more included in the above tables had the following
remaining maturities at June 30, 1997 (in thousands):
<TABLE>
<S> <C>
3 months and under............................................ $1,391,674
Over 3 months to 6 months..................................... 164,321
Over 6 months to 12 months.................................... 315,134
Over 12 months................................................ 262,825
----------
$2,133,954
==========
</TABLE>
Interest expense on deposits by type is summarized as follows (in
thousands):
<TABLE>
<CAPTION>
YEARS ENDED JUNE 30
--------------------------
1997 1996 1995
-------- -------- --------
<S> <C> <C> <C>
Checking....................................... $ 4,322 $ 4,115 $ 5,867
Savings........................................ 9,848 11,381 18,525
Money market................................... 83,926 69,432 44,740
Certificates................................... 307,086 348,906 343,762
-------- -------- --------
$405,182 $433,834 $412,894
======== ======== ========
</TABLE>
At June 30, 1997 and 1996, approximately $113,564,000 and $76,524,000,
respectively, of the Bank's real estate loans and mortgage-backed securities
were pledged as collateral for certain public deposits.
NOTE 14: 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
-------------------------------
1997 1996 1995
-------- --------- ----------
<S> <C> <C> <C>
Balance at year end........................... $768,682 $ 758,050 $2,695,176
Average amount outstanding during the year.... 335,809 1,869,194 2,927,313
Maximum amount outstanding at any month-end... 776,302 2,987,948 4,172,953
Weighted average interest rate during the
year......................................... 5.55% 5.82% 5.66%
Weighted average interest rate on year-end
balances..................................... 5.66% 5.50% 6.15%
</TABLE>
The Bank incurred interest expense on securities sold under agreements to
repurchase of $18.6 million, $109 million, and $166 million for fiscal 1997,
1996 and 1995, respectively.
Mortgage-backed securities were sold under agreements to repurchase at June
30, 1997 and are contractually due July 1997. These agreements require the
Bank to repurchase identical securities to those which were sold. The
securities underlying the agreements were delivered to the dealers who
arranged the transactions.
F-37
<PAGE>
GLENDALE FEDERAL BANK AND SUBSIDIARIES
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS--(CONTINUED)
JUNE 30, 1997, 1996 AND 1995
Amounts outstanding with individual brokers at June 30, 1997 which exceeded
ten percent of stockholders' equity were (dollars in thousands):
<TABLE>
<CAPTION>
BOOK VALUE
INCLUDING WEIGHTED MARKET VALUE
ACCRUED AVERAGE OF PLEDGED
BROKER INTEREST MATURITY SECURITIES
------ ---------- -------- ------------
<S> <C> <C> <C>
Goldman Sachs & Co. ..................... $279,377 21 days $288,051
Credit Suisse First Boston............... 184,600 30 days 190,259
Nomura Securities International.......... 164,124 30 days 167,456
Salomon Brothers Inc. ................... 141,680 2 days 142,872
</TABLE>
Securities sold under agreements to repurchase are collateralized as follows
(in thousands):
<TABLE>
<CAPTION>
JUNE 30
-----------------------------------------------
1997 1996
----------------------- -----------------------
BOOK VALUE BOOK VALUE
INCLUDING INCLUDING
ACCRUED ACCRUED
INTEREST MARKET VALUE INTEREST MARKET VALUE
---------- ------------ ---------- ------------
<S> <C> <C> <C> <C>
Mortgage-backed securities;
book value
includes accrued interest of
$5,167 in 1997
and $5,827 in 1996........... $788,516 $788,638 $790,086 $772,755
</TABLE>
FEDERAL HOME LOAN BANK
The Bank has a line of credit with the Federal Home Loan Bank of San
Francisco in the amount of $5,650,000,000 at June 30, 1997 and 1996. All
advances under this FHLB line of credit are collateralized with mortgages and
FHLB stock.
FHLB advances are summarized as follows (dollars in thousands):
<TABLE>
<CAPTION>
WEIGHTED WEIGHTED
BALANCE AT AVERAGE BALANCE AT AVERAGE
JUNE 30, 1997 RATE JUNE 30, 1996 RATE
------------- -------- ------------- --------
<S> <C> <C> <C> <C>
Fixed-rate, fixed-term............ $1,900,000 5.75% $3,250,000 6.03%
Variable-rate, fixed-term......... 2,888,000 5.70 588,000 5.46
---------- ----------
$4,788,000 5.72% $3,838,000 5.94%
========== ==========
</TABLE>
The Bank incurred interest expense on FHLB advances of $269 million, $202
million, and $181 million for fiscal 1997, 1996, and 1995, respectively.
These advances are secured by the investment in stock of the FHLB totaling
$259.6 million and $192.8 million at June 30, 1997 and 1996, respectively, as
well as certain mortgage loans and mortgage-backed and other debt securities
aggregating $5.3 billion and $4.3 billion at June 30, 1997 and 1996,
respectively.
F-38
<PAGE>
GLENDALE FEDERAL BANK AND SUBSIDIARIES
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS--(CONTINUED)
JUNE 30, 1997, 1996 AND 1995
The maturities of FHLB advances with corresponding weighted average interest
rates at June 30, 1997 are as follows (dollars in thousands):
<TABLE>
<CAPTION>
WEIGHTED
AVERAGE
AMOUNT RATE
---------- --------
<S> <C> <C>
Maturing in one year.................................. $3,388,000 5.72%
Maturing in two years................................. 500,000 5.64
Maturing in four years................................ 900,000 5.77
----------
Total............................................... $4,788,000 5.72%
==========
</TABLE>
At June 30, 1997, interest rates, both fixed and variable, ranged from 5.39%
to 5.98%. At June 30, 1996, the range was 5.37% to 8.08%.
OTHER BORROWINGS
Other borrowings are summarized as follows (dollars in thousands):
<TABLE>
<CAPTION>
JUNE 30
---------------
1997 1996
------- -------
<S> <C> <C>
Convertible subordinated debentures due March 2001 with inter-
est at 7.75%................................................. $10,506 $10,506
Notes payable with weighted average interest rates of 7.82%
and 8.75% at June 30, 1997 and 1996, respectively............ 276 93
------- -------
$10,782 $10,599
======= =======
</TABLE>
Convertible Subordinated Debentures
In March 1986, the former holding company of the Bank, GLENFED, Inc.
("GLENFED") issued $75,000,000 of 7.75% Convertible Subordinated Debentures in
the European market. In fiscal 1989, GLENFED repurchased $15,064,000 of the
debentures. During fiscal 1994, $49,065,000 of the debentures were exchanged
for common stock of Glendale Federal as part of a comprehensive
recapitalization of the Bank and the payment obligations with respect to the
remaining debentures were assumed by a wholly-owned subsidiary of the Bank.
The balances outstanding at June 30, 1997 and 1996 were $10,506,000. The
debentures, which mature on March 15, 2001, became convertible at the option
of the holder into common stock of the Bank at the rate of $706.25 per share
subsequent to the recapitalization. Prior to the recapitalization, the
debentures were convertible into common stock of GLENFED at the rate of $28.25
per share.
The Bank incurred interest expense on other borrowings of $1.5 million, $2
million and $10 million for fiscal 1997, 1996 and 1995, respectively.
No collateral was pledged for other borrowings at June 30, 1997 or 1996.
F-39
<PAGE>
GLENDALE FEDERAL BANK AND SUBSIDIARIES
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS--(CONTINUED)
JUNE 30, 1997, 1996 AND 1995
The aggregate contractual maturities for other borrowings at June 30, 1997
are as follows (in thousands):
<TABLE>
<S> <C>
Maturing within five years....................................... $10,506
Maturing thereafter.............................................. 276
-------
$10,782
=======
</TABLE>
NOTE 15: INCOME TAXES
<TABLE>
<CAPTION>
YEARS ENDED JUNE 30
------------------------
1997 1996 1995
------- ------- -------
<S> <C> <C> <C>
Current taxes:
Federal.............................................. $14,481 $ 2,210 $28,273
State................................................ 11,286 -- --
------- ------- -------
$25,767 $ 2,210 $28,273
------- ------- -------
Deferred taxes:
Federal.............................................. 12,153 12,755 13,285
State................................................ (1,789) 6,377 10,588
------- ------- -------
10,364 19,132 23,873
------- ------- -------
Income tax provision before extraordinary items........ 36,131 21,342 52,146
Income tax expense on extraordinary items.............. -- -- 1,289
------- ------- -------
$36,131 $21,342 $53,435
======= ======= =======
</TABLE>
The following is a summary of the income tax liability (in thousands):
<TABLE>
<CAPTION>
JUNE 30
---------------
1997 1996
------- -------
<S> <C> <C>
Current taxes............................................. $15,150 $ 6,352
Deferred taxes............................................ 45,122 30,912
------- -------
$60,272 $37,264
======= =======
</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
------------------
1997 1996 1995
---- ----- -----
<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.................................................. 7.2 6.6 5.6
Valuation allowance on deferred tax assets............... (0.1) (12.5) (60.6)
Excess of book over tax basis of assets sold............. -- -- 54.3
Other.................................................... (0.4) 4.6 7.3
---- ----- -----
Consolidated effective income tax rate..................... 41.7% 33.7% 41.6%
==== ===== =====
</TABLE>
F-40
<PAGE>
GLENDALE FEDERAL BANK AND SUBSIDIARIES
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS--(CONTINUED)
JUNE 30, 1997, 1996 AND 1995
The components of the net deferred tax liability are as follows (in
thousands):
<TABLE>
<CAPTION>
JUNE 30
-----------------
1997 1996
-------- --------
<S> <C> <C>
Deferred tax liabilities:
Loan fees.................................................. $ 50,367 $ 51,765
Income recognized for tax purposes on the cash basis....... 2,202 3,331
Capitalized interest....................................... 2,200 2,249
Settlement of pension obligations.......................... 8,204 7,890
FHLB stock dividends....................................... 35,109 28,485
Gains on sales of loans.................................... 7,253 8,298
Other...................................................... 4,744 4,947
-------- --------
Gross deferred tax liabilities............................... 110,079 106,965
-------- --------
Deferred tax assets:
State franchise tax........................................ 5,432 6,058
Net operating loss and tax credit carryovers............... 9,764 17,556
Provision for losses on real estate........................ 1,828 5,225
Provision for losses on loans.............................. 28,169 27,545
Accretion of discount on notes............................. 1,159 1,602
Earnings from partnerships and joint ventures.............. 1,830 995
Mortgage servicing assets.................................. 6,285 3,466
Net unrealized holding loss................................ 839 4,685
Other...................................................... 9,651 9,022
-------- --------
Gross deferred tax assets.................................... 64,957 76,154
Valuation allowance.......................................... -- (101)
-------- --------
Net deferred tax assets...................................... 64,957 76,053
-------- --------
Net deferred tax liability................................... $ 45,122 $ 30,912
======== ========
</TABLE>
Management has assessed the realizability of the Bank's deferred tax assets
and has concluded that it is more likely than not that all deferred tax assets
will be realized.
For taxable years beginning prior to January 1, 1996, a savings institution
that met certain definitional tests relating to the composition of its assets
and the sources of its income (a "qualifying savings institution") was
permitted to establish reserves for bad debts, and 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 Bank utilized the experience method in these years.
On August 20, 1996, the President signed the Small Business Job Protection
Act (the "Act") into law. One provision of the Act repealed the reserve method
of accounting for bad debts for savings institutions effective for taxable
years beginning after 1995. The Bank, therefore, is required to use the
specific charge-off method on its 1996 and subsequent federal income tax
returns. The Bank is required to recapture its "applicable excess reserves",
which are its federal tax bad debt reserves in excess of the base year reserve
amount described in the following paragraph. The Bank will include one-sixth
of its applicable excess reserves in taxable income in each year from 1996
through 2001.
F-41
<PAGE>
GLENDALE FEDERAL BANK AND SUBSIDIARIES
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS--(CONTINUED)
JUNE 30, 1997, 1996 AND 1995
As of December 31, 1995, the Bank had approximately $72 million of applicable
excess reserves. As of June 30, 1996, the Bank had fully provided for the tax
related to this recapture. The base year reserves will continue to be subject
to recapture and the Bank could be required to recognize a tax liability if:
(1) the Bank fails to qualify as a "bank" for federal income tax purposes; (2)
certain distributions are made with respect to the stock of the Bank; (3) the
bad debt reserves are used for any purpose other than to absorb bad debt
losses; or (4) there is a change in federal tax law. The enactment of this
legislation is expected to have no material impact on the Bank's operations or
financial position.
In accordance with Statement of Financial Accounting Standards No. 109
"Accounting for Income Taxes," a deferred tax liability has not been
recognized for the tax bad debt base year reserves of the Bank. The base year
reserves are generally the balance of reserves as of December 31, 1987 reduced
proportionately for reductions in the Bank's loan portfolio since that date.
At June 30, 1997, the amount of those reserves was approximately $153 million.
The amount of the unrecognized deferred tax liability at June 30, 1997 was
approximately $54 million. This deferred tax liability could be recognized in
the future under the conditions described in the preceding paragraph.
In August 1993 the Internal Revenue Service completed its examination of the
Bank's federal income tax returns through 1988. In April 1995, the Bank
resolved all disputed issues related to the examination and paid a deficiency
of $562,000 plus interest.
In July 1993 the Bank received notices from the California Franchise Tax
Board proposing to assess taxes for the years 1988, 1989 and 1990 in the
amount of $5.3 million. The Bank 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 16: FINANCIAL INSTRUMENTS
RISK MANAGEMENT
Derivative financial instruments are utilized by the Bank to minimize the
effect of future fluctuations in the interest rates of specifically identified
assets or liabilities. The Bank has entered into interest rate swaps with
other financial institutions under terms that provide mutual payment of
interest on the notional amount of the swap. In accordance with these
arrangements, one party pays interest at a fixed rate and the other party pays
interest at rates that vary according to a specified index. The Bank has not
entered into any swaps as an intermediary. The Bank had an interest rate swap
with a notional amount of $200 million at June 30, 1996, which constituted the
Bank's only involvement in these agreements. The swap matured in April of
1997. As of June 30, 1997, the Bank had no interest rate swaps outstanding.
The Bank generally is not required to give collateral or other securities to
support the interest rate exchange agreements. However, collateral totaling
$10.0 million of mortgage-backed securities was given for certain agreements
as of June 30, 1996.
F-42
<PAGE>
GLENDALE FEDERAL BANK AND SUBSIDIARIES
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS--(CONTINUED)
JUNE 30, 1997, 1996 AND 1995
The following table presents the Bank's interest rate exchange agreements at
June 30, 1996 (dollars in thousands):
<TABLE>
<CAPTION>
JUNE 30, 1996
---------------------------------------------
NOTIONAL WEIGHTED AVERAGE
TYPE AMOUNT INTEREST RATE TERMS TO MATURITY
---- --------- ---------------- -----------------
<S> <C> <C> <C>
Paid--Fixed....................... $(200,000) 7.23% April 1997
Received--Variable................ 200,000 5.46
</TABLE>
Futures contracts provide another means of managing the risks of changing
interest rates. These contracts primarily represent commitments to purchase or
sell securities at a future date and at a specified price or yield. As of June
30, 1997 and 1996, the Bank had no futures positions outstanding.
At June 30, 1996, $6,776,000 of call options were outstanding to hedge the
Bank's market indexed certificates of deposit product against market
fluctuations. The balance of market indexed certificates of deposits was
$617,000 and $6,555,000 at June 30, 1997 and 1996, respectively. At June 30,
1997 and 1996 there were no put options outstanding.
FAIR VALUE
Fair value estimates, methods, and assumptions are set forth below for the
Bank's financial instruments.
Short-Term Investments and Debt and Equity Securities
The fair value of short-term investments and debt and equity securities is
estimated based on bid prices published in financial newspapers or bid
quotations received from securities dealers.
The following table represents the carrying value and fair value of
investments and mortgage-backed securities at June 30, 1997 and 1996 (in
thousands):
<TABLE>
<CAPTION>
JUNE 30, 1997 JUNE 30, 1996
--------------------- ---------------------
CARRYING CARRYING
AMOUNT FAIR VALUE AMOUNT FAIR VALUE
---------- ---------- ---------- ----------
<S> <C> <C> <C> <C>
Short-term investments............. $ 636,005 $ 651,254 $ 443,786 $ 446,787
========== ========== ========== ==========
Debt securities:
Maturing within 1 year........... $ 14,813 $ 14,813 $ 8,086 $ 8,086
Maturing in 1-5 years............ 4,974 4,974 -- --
Maturing in 5-10 years........... 5,903 5,903 -- --
Equity securities.................. 2,104 2,104 5 49
---------- ---------- ---------- ----------
$ 27,794 $ 27,794 $ 8,091 $ 8,135
========== ========== ========== ==========
Mortgage-backed securities:
Adjustable....................... $1,975,116 $1,977,454 $2,006,840 $2,001,375
Fixed............................ 304,418 306,196 233,950 234,524
---------- ---------- ---------- ----------
$2,279,534 $2,283,650 $2,240,790 $2,235,899
========== ========== ========== ==========
</TABLE>
F-43
<PAGE>
GLENDALE FEDERAL BANK AND SUBSIDIARIES
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS--(CONTINUED)
JUNE 30, 1997, 1996 AND 1995
Loans
Fair values are estimated for portfolios of loans with similar financial
characteristics. Loans are segregated by type such as single-family
residential mortgage, multi-family, non-residential, commercial and consumer.
Each loan category is further segmented into fixed and adjustable rate
interest terms and by performing and non-performing categories.
The fair value of performing loans is calculated by discounting cash flows
through their estimated maturity using estimated market discount rates that
reflect the credit and interest rate risk inherent in the loan, adjusted to
reflect differences in servicing costs. The estimate of maturity is based on
market prepayment estimates for each loan classification.
Fair value for non-performing loans is based on estimated cash flows
discounted using a rate commensurate with the risk associated with the
estimated cash flows. Assumptions regarding credit risk, cash flows, and
discount rates are judgmentally determined by using available market
information.
The following table presents information for loans, including loans held for
sale and net of allowance for loan losses as of June 30, 1997 and 1996 (in
thousands):
<TABLE>
<CAPTION>
JUNE 30, 1997 JUNE 30, 1996
----------------------- ------------------------
CARRYING CARRYING
AMOUNT FAIR VALUE AMOUNT FAIR VALUE
----------- ----------- ----------- -----------
<S> <C> <C> <C> <C>
Single-family 1-4 units:...... $ 8,769,249 $ 8,821,167 $ 7,523,479 $ 7,546,118
Multi-family:
5-36 units.................. 1,433,697 1,354,117 1,515,914 1,429,324
37 or more units............ 328,556 313,512 374,353 353,177
Non-residential............... 1,171,733 1,127,805 1,309,965 1,246,136
Consumer...................... 112,685 112,262 69,884 69,562
Commercial.................... 152,509 153,585 5,692 5,687
----------- ----------- ----------- -----------
11,968,429 11,882,448 10,799,287 10,650,004
Less unearned discounts,
undisbursed loan funds and
deferred loan fees........... (63,336) -- (71,378) --
----------- ----------- ----------- -----------
$11,905,093 $11,882,448 $10,727,909 $10,650,004
=========== =========== =========== ===========
</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, 1997 and
1996. 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.
F-44
<PAGE>
GLENDALE FEDERAL BANK AND SUBSIDIARIES
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS--(CONTINUED)
JUNE 30, 1997, 1996 AND 1995
The following table presents information for deposit liabilities (in
thousands):
<TABLE>
<CAPTION>
JUNE 30, 1997 JUNE 30, 1996
--------------------- ---------------------
CARRYING CARRYING
AMOUNT FAIR VALUE AMOUNT FAIR VALUE
---------- ---------- ---------- ----------
<S> <C> <C> <C> <C>
Checking.......................... $1,198,011 $1,198,011 $ 778,980 $ 778,980
Savings........................... 452,225 452,225 492,777 492,777
Money market...................... 2,119,553 2,119,553 1,719,319 1,719,319
Certificates with remaining
maturities:
In six months or less........... 2,551,447 2,552,549 3,422,891 3,422,446
Between six months and one year. 1,628,382 1,629,630 1,085,110 1,083,607
Between one and three years..... 1,336,395 1,337,201 1,100,419 1,091,786
Beyond three years.............. 70,896 69,330 124,480 122,731
---------- ---------- ---------- ----------
$9,356,909 $9,358,499 $8,723,976 $8,711,646
========== ========== ========== ==========
</TABLE>
Borrowings
The estimate of the fair value of the Bank's borrowings was based on the
discounted value of the future cash flows expected to be paid on such
borrowings using estimated market discount rates that reflect borrowings with
similar terms and maturities.
The following table represents the carrying value and fair value of the
Bank's borrowings at June 30, 1997 and 1996 (in thousands):
<TABLE>
<CAPTION>
JUNE 30, 1997 JUNE 30, 1996
--------------------- ---------------------
CARRYING CARRYING
AMOUNT FAIR VALUE AMOUNT FAIR VALUE
---------- ---------- ---------- ----------
<S> <C> <C> <C> <C>
Securities sold under agreements to
repurchase........................ $ 768,682 $ 766,068 $ 758,050 $ 756,995
Borrowings from the FHLB........... 4,788,000 4,765,643 3,838,000 3,780,378
Subordinated debt.................. 10,506 10,506 10,506 11,880
Notes payable...................... 276 276 93 93
---------- ---------- ---------- ----------
$5,567,464 $5,542,493 $4,606,649 $4,549,346
========== ========== ========== ==========
</TABLE>
Other Financial Instruments
Financial instruments of the Bank, as included in the Consolidated
Statements of Financial Condition, for which fair value approximates the
carrying amount at June 30, 1997 and 1996 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.
F-45
<PAGE>
GLENDALE FEDERAL BANK AND SUBSIDIARIES
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS--(CONTINUED)
JUNE 30, 1997, 1996 AND 1995
Interest Rate Swap Agreements
As of June 30, 1997, the Bank had no interest rate swaps outstanding.
As of June 30, 1996, the Bank had entered into interest rate swap agreements
with certain financial institutions having a notional principal amount
totaling $200,000,000. At June 30, 1996 the estimated fair value of the
interest rate swap agreement was a net payable of $2,740,000.
The fair value of interest rate swap agreements was obtained from dealer
quotes. This value represents the estimated amount the Bank would pay to
terminate the agreements, taking into account current interest rates and, when
appropriate, the current creditworthiness of the counterparties.
Commitments
As discussed further in Note 17, the Bank had various commitments
outstanding as of June 30, 1997 and 1996 which are not reflected in the
accompanying consolidated financial statements. The fair value of the
commitments is estimated to approximate the fees currently charged or paid to
enter into similar agreements, taking into account the remaining terms of the
agreements and the present creditworthiness of the counterparties. The
uncertainty involving the attempt to determine the likelihood, as well as the
timing of a commitment being drawn upon, coupled with the lack of established
markets and the diversity of fee structures that exist, would not result in
what the Bank believes to be a meaningful estimate of fair value.
Limitations
Fair value estimates are made at a specific point in time, based on relevant
market information and information about the financial instrument. These
estimates do not reflect any premium or discount that could result from
offering for sale at one time the Bank's entire holdings of a particular
financial instrument. Fair value estimates are based on judgments regarding
future expected loss experience, current economic conditions, risk
characteristics of various financial instruments, and other factors. These
estimates are subjective in nature and involve uncertainties and matters of
significant judgment and therefore cannot be determined with precision.
Changes in assumptions could significantly affect the estimates.
Fair value estimates are based on existing on-and off-balance sheet
financial instruments without attempting to estimate the value of anticipated
future business and value of assets and liabilities that are not considered
financial instruments. Other significant assets and liabilities that are not
considered financial assets or liabilities include deferred tax liabilities,
premises and equipment, mortgage servicing assets and goodwill. In addition,
the tax ramifications related to the realization of the unrealized gains and
losses can have a significant effect on fair value estimates and have not been
considered in any of the estimates.
F-46
<PAGE>
GLENDALE FEDERAL BANK AND SUBSIDIARIES
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS--(CONTINUED)
JUNE 30, 1997, 1996 AND 1995
NOTE 17: 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
-----------------
1997 1996
-------- --------
<S> <C> <C>
Commitments to sell loans and mortgage-backed securities........ $ 14,000 $ 17,880
Standby and commercial letters of credit ....................... 1,432 8,995
Unused lines of credit.......................................... 363,203 125,504
Commitments to originate loans receivable:
Variable...................................................... 18,961 33,962
Fixed......................................................... 24,884 9,939
Commitments to purchase loans receivable:
Variable...................................................... 90,419 135,396
Fixed......................................................... 207,162 172,000
</TABLE>
Agreements to sell loans and mortgage-backed securities contain
representations and warranties regarding the underwriting and documentation of
the underlying loans. To the extent the Bank is deemed to have breached any of
these representations and warranties, the sales agreement allows the purchaser
to demand repurchase of the loans causing the breach. The Bank does not
anticipate it will be required to make material repurchases or incur material
losses related to loans and mortgage-backed securities it has sold or
committed to sell at June 30, 1997.
As more fully discussed in Note 8 of the Notes to Consolidated Financial
Statements, in the past, the Bank sold loans and mortgage-backed securities
with recourse for credit losses. The Bank provided for the estimated recourse
losses at the time of sale, and evaluates, on a quarterly basis, the adequacy
of the liability for recourse losses. However, significant changes in future
losses may require additions to the recourse liability recorded in the caption
"Other liabilities and accrued expenses in the Consolidated Statements of
Financial Condition."
Commitments to sell residential mortgage loans for a fixed price are
generally entered into between the date the application is taken and the date
the loans are sold into the secondary market. Risks arise from the possible
inability of counter-parties to meet the terms of commitments and movement in
interest rates and related prices.
The Bank makes contractual commitments to extend credit, which are legally
binding agreements to lend money to customers at predetermined interest rates
for a specified period of time. The Bank applies the same credit standards
used in the lending process when extending these commitments, and periodically
reassesses the customers' credit worthiness through ongoing credit reviews.
Additional risks associated with providing these commitments arise when these
commitments are drawn upon, such as the demands on liquidity that the Bank
would experience if a significant portion were drawn down at once. However,
this is considered unlikely, as many commitments expire without having been
drawn upon.
F-47
<PAGE>
GLENDALE FEDERAL BANK AND SUBSIDIARIES
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS--(CONTINUED)
JUNE 30, 1997, 1996 AND 1995
Upon approval of a loan application, the Bank normally gives the applicant a
commitment that the Bank will make the approved loan within a specified time
period, normally 10 to 45 days, at a rate of interest and on other terms
determined on the basis of market conditions as of the date of the commitment.
The Bank evaluates each customer's creditworthiness on a case-by-case basis.
The amount of collateral obtained, if it is deemed necessary by the Bank upon
extension of credit, is based on management's credit evaluation of the
borrower. Collateral held varies, but may include accounts receivable;
inventory, property, plant and equipment; income-producing commercial
properties; and agricultural products. For single-family lending, collateral
consists of trust-deeds on one-to four-unit residential real estate. The Bank
does not anticipate any significant loss as a result of these transactions.
On February 1, 1994, the Bank entered into a five year contract for the
outsourcing of its data processing and item processing operations. The
contract is based on certain volume levels. If the contract is terminated
prior to its expiration, a termination charge would be incurred, the amount of
which would be dependent upon the nature of the termination and the time
remaining on the contract.
The Bank and certain of its subsidiaries are involved in litigation arising
in the normal course of business. Although the legal responsibility and
financial impact with respect to such litigation cannot presently be
ascertained, the Bank does not anticipate that the final resolution of these
matters will result in the payment of monetary damages that would be material
in relation to the consolidated financial condition or results of operations
of the Bank.
NOTE 18: 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,
1997, the minimum regulatory capital requirements were:
. Tangible and core capital, consisting principally of stockholders' equity,
but excluding most intangible assets such as goodwill and any net unrealized
holding gains or losses on debt securities available for sale.
. 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, 1997, 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, 1997 that management
believes have changed the institution's category.
F-48
<PAGE>
GLENDALE FEDERAL BANK AND SUBSIDIARIES
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS--(CONTINUED)
JUNE 30, 1997, 1996 AND 1995
The following table summarizes the Bank's actual capital and required
capital as of June 30, 1997 and 1996 (dollars in thousands):
<TABLE>
<CAPTION>
TIER 1
TANGIBLE CORE RISK-BASED RISK-BASED
CAPITAL CAPITAL CAPITAL CAPITAL
-------- -------- ---------- ----------
JUNE 30, 1997
- - -------------
<S> <C> <C> <C> <C>
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%
<CAPTION>
JUNE 30, 1996
- - -------------
<S> <C> <C> <C> <C>
Actual capital:
Amount........................... $906,796 $906,796 $906,796 $1,001,666
Ratio............................ 6.29% 6.29% 10.79% 11.93%
FIRREA minimum required capital:
Amount........................... $216,154 $432,307 N/A $ 675,515
Ratio............................ 1.50% 3.00% N/A 8.00%
FDICIA well capitalized required
capital:
Amount........................... N/A $720,512 $509,692 $ 841,338
Ratio............................ N/A 5.00% 6.00% 10.00%
</TABLE>
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, 1997 and 1996 (in thousands):
<TABLE>
<CAPTION>
JUNE 30
----------------------
1997 1996
---------- ----------
<S> <C> <C>
Capital in accordance with GAAP........................ $1,012,074 $ 957,451
Adjustments for tangible and core capital:
Goodwill and other intangible assets................. (99,533) (59,216)
Investments in and advances to non-permissible
subsidiaries........................................ (362) (2,830)
Net unrealized holding loss (gain) on debt securities
available for sale.................................. 1,154 11,391
---------- ----------
Total tangible capital................................. 913,333 906,796
Adjustments for core capital........................... -- --
---------- ----------
Total core capital..................................... 913,333 906,796
Adjustments for risk-based capital:
Allowance for general loan losses(1)................. 113,006 104,339
Equity risk investments required to be deducted...... (9,113) (9,469)
---------- ----------
Total risk-based capital............................... $1,017,226 $1,001,666
========== ==========
</TABLE>
- - --------
(1) Limited to 1.25% of risk-weighted assets.
F-49
<PAGE>
GLENDALE FEDERAL BANK AND SUBSIDIARIES
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS--(CONTINUED)
JUNE 30, 1997, 1996 AND 1995
NOTE 19: STOCKHOLDERS' EQUITY
On September 17, 1993, the Bank completed a comprehensive recapitalization
(the "Recapitalization") which included, among other things, the merger of the
Bank's former holding company, GLENFED, into a subsidiary of the Bank, the
exchange of common stock of the Bank and rights to purchase Bank common stock
for $49,065,000 in principal amount of GLENFED's 7.75% convertible
subordinated debentures, the reclassification of the previously outstanding
Series B and Series C Preferred Stock of the Bank into a new Noncumulative
Convertible Preferred Stock, Series D (the "Series D Preferred Stock") all of
which was subsequently converted to common stock of the Bank, the issuance of
$201 million of a new Noncumulative Preferred Stock, Series E (the "Series E
Preferred Stock") and the issuance of $250 million of Bank common stock
through a rights offering to the former holders of GLENFED common stock,
GLENFED convertible subordinated debentures, the Series B and Series C
Preferred Stock of the Bank and certain standby purchasers.
DESCRIPTION OF BANK SECURITIES
Common Stock
The Bank's Charter authorizes the issuance of 100 million shares of common
stock with a par value of $1.00 per share. Holders of common stock are
entitled to receive dividends when, as and if declared by the Board of
Directors of the Bank out of assets of the Bank legally available for payment,
subject to the superior rights of the holders of any series of preferred stock
that may be issued.
Preferred Stock
Two series of preferred stock have been issued: 8.9 million shares of
Noncumulative Convertible Preferred Stock, Series D (the "Series D Preferred
Stock") and 8.0 million shares of Noncumulative Convertible Preferred Stock,
Series E (the "Series E Preferred Stock"). All of the Series D Preferred Stock
remaining outstanding at August 27, 1994 were mandatorily converted into
common stock in accordance with their original terms on a share-for-share
basis on that date.
F-50
<PAGE>
GLENDALE FEDERAL BANK AND SUBSIDIARIES
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS--(CONTINUED)
JUNE 30, 1997, 1996 AND 1995
The Series E Preferred Stock has a par value of $1.00 per share and a
liquidation preference of $25 per share. The Series E Preferred Stock provides
for noncumulative dividends, when, as and if declared, at an annual rate of
8.75% of its liquidation preference and is convertible, at the option of the
holders thereof, into common stock at any time at a conversion price of $10.40
per share, and will be subject to adjustment in certain events. Subject to
applicable laws and regulations, the Series E Preferred Stock will be
redeemable, in whole or in part, at the option of the Bank, on 20 to 45 days
notice, from time to time at any time 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 E
CONVERTIBLE PREFERRED
YEAR 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 redemption of Series E Preferred Stock will be subject to certain
limitations imposed by OTS regulations of general application.
During fiscal 1997 and 1996, the Bank entered into separately negotiated
agreements with certain holders of its Series E preferred stock providing, in
the aggregate, for exchanges of 1,201,900 shares and 2,226,118 shares,
respectively, of the Series E preferred stock for 3,103,872 shares and
5,901,771 shares, respectively, of Bank common stock. The exchanges were made
at premiums above the stated conversion rate of 2.404 shares of Bank common
stock for each share of the Series E preferred stock. In accordance with
applicable accounting guidance for calculating net earnings per share, the
excess of the fair value of Bank common stock transferred by the Bank to the
holders of the Series E preferred stock over the fair value of Bank common
stock issuable pursuant to the original conversion terms has been subtracted
from net earnings to arrive at the earnings applicable to common shareholders
in the calculation of earnings per share.
Warrants
The Bank has a class of common stock purchase warrants outstanding (the
"Warrants") totaling 15,549 at June 30, 1997 that were issued in March 1993 in
connection with an exchange of preferred stock for outstanding subordinated
debentures and capital notes. Each Warrant entitles the registered holder
thereof to receive from the Bank one share of common stock for ten Warrants
for no additional consideration at any time until the expiration of the
Warrants on March 10, 1999. The number of shares of common stock for which a
Warrant may be exercised is subject to adjustment from time to time upon the
occurrence of certain events. Registered holders exercised a total of 4,140
Warrants in fiscal 1997.
The Bank has also issued transferable Standby Warrants of which 10.85
million were outstanding at June 30, 1997. Registered holders exercised a
total of 2,400 Standby Warrants in fiscal 1997. Each Standby Warrant entitles
the holder thereof to purchase one share of common stock for a purchase price
of $12.00 per share. The Standby Warrants are exercisable at any time through
August 21, 2000.
F-51
<PAGE>
GLENDALE FEDERAL BANK AND SUBSIDIARIES
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS--(CONTINUED)
JUNE 30, 1997, 1996 AND 1995
RESTRICTION ON STOCKHOLDERS' EQUITY AND DIVIDENDS
Dividends on the Bank's common stock may not be paid unless full cash
dividends on the Bank's Series E 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, in the foreseeable future.
Retained earnings at June 30, 1997 and 1996 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 20: EMPLOYEE BENEFIT PLAN
The Bank has several pension plans (collectively, the "Plan") covering
substantially all of its employees. The benefits are based on years of service
and the employees' average earnings in the five highest consecutive Plan years
for the last 10 years of employment.
The Bank uses, for financial reporting purposes, the projected unit credit
method and continues to base its funding policy on the individual entry age
normal method.
F-52
<PAGE>
GLENDALE FEDERAL BANK AND SUBSIDIARIES
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS--(CONTINUED)
JUNE 30, 1997, 1996 AND 1995
The following table sets forth the Plan's funded status as of March 31, 1997
and 1996 and amounts recognized in the Bank's statements of financial
condition at June 30, 1997 and 1996 (in thousands):
<TABLE>
<CAPTION>
JUNE 30
----------------
1997 1996
------- -------
<S> <C> <C>
Actuarial present value of benefit obligations:
Vested accumulated benefits................................ $46,896 $44,159
Non-vested accumulated benefits............................ 1,780 1,543
------- -------
Total accumulated benefits............................... $48,676 $45,702
======= =======
Projected benefit obligation for service rendered to date.... $57,902 $54,292
Plan assets at fair value; primarily listed stocks, U.S. Gov-
ernment obligations and savings certificates of the Bank.... 80,129 79,873
------- -------
Funded status--Plan assets in excess of projected benefit
obligation.................................................. 22,227 25,581
Items not yet recognized in earnings:
Unrecognized net gain...................................... (4,724) (8,613)
Prior service cost not yet recognized in net periodic pen-
sion cost................................................. 193 210
Unrecognized net asset at June 30, 1997 and 1996 being rec-
ognized over approximately 12 years....................... -- (339)
------- -------
Prepaid pension cost included in "Other assets" at end of
period...................................................... $17,696 $16,839
======= =======
</TABLE>
Net periodic pension income for fiscal 1997, 1996 and 1995 included the
following components (in thousands):
<TABLE>
<CAPTION>
YEARS ENDED JUNE 30
--------------------------
1997 1996 1995
------- -------- -------
<S> <C> <C> <C>
Service cost-benefits earned during the period...... $ 2,376 $ 2,246 $ 2,950
Interest cost on projected benefit obligation....... 4,483 4,306 3,932
Actual return on Plan assets........................ (2,621) (11,566) (4,494)
Net amortization and deferral....................... (5,095) 3,732 (2,477)
------- -------- -------
Net periodic pension income......................... $ (857) $ (1,282) $ (89)
======= ======== =======
</TABLE>
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
----------------------
1997 1996 1995
------ ------ ------
<S> <C> <C> <C>
Weighted average discount rate used to calculate bene-
fit obligations....................................... 8.25% 8.00% 8.50%
Assumed rate of increase in future compensation........ 4.50% 4.50% 4.50%
Expected long-term rate of return on plan assets....... 9.50% 9.50% 9.50%
</TABLE>
The Bank has established a Savings Plan for its employees which allows
participants to make contributions by salary deduction equal to 15% or less of
their salary pursuant to section 401(k) of the Internal Revenue Code.
Employees' contributions vest immediately; the Bank's partial matching
contributions vest over five years. The Bank's contributions to the plan in
fiscal 1997, 1996 and 1995 were $1,713,000, $739,000 and $851,000,
respectively.
F-53
<PAGE>
GLENDALE FEDERAL BANK AND SUBSIDIARIES
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS--(CONTINUED)
JUNE 30, 1997, 1996 AND 1995
KEY EXECUTIVE RETIREMENT SUPPLEMENT PLANS
During fiscal 1992, GLENFED 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 1997, five vested participants were receiving benefits under the plans.
DIRECTORS' RETIREMENT PLANS
The Bank maintains directors' retirement plans for non-employee directors
who serve on its Board of Directors (the "Directors' Plan"). The Directors'
Plan provides that a non-employee director shall, after termination of Board
membership, be entitled to receive a monthly payment equal to: (1) the monthly
Board retainer in effect at the time of termination; plus (2) the fee paid at
such time for attending a Board meeting, for the number of years equal to the
number of years of Board service, but not to exceed twenty years. Payments of
such amounts normally commence at the later of the director's termination date
or the director's attainment of age 65.
NOTE 21: EXTRAORDINARY ITEMS, NET
Extraordinary items, net for fiscal 1995 consisted of a $1.8 million gain
(net of income taxes of $1.3 million) resulting from University Savings' early
extinguishment of $42.1 million of borrowings from the Federal Home Loan Bank
of Seattle.
NOTE 22: STOCK OPTION PLAN
The Bank has a stock option plan (the "Plan") that provides for the granting
of options to employees and directors. The Plan has a term of five years and
allows for awards totaling up to 7.2 million shares of common stock. Options
granted generally have terms of ten years each. All options granted will
become exercisable upon a change in control of the Bank.
In October 1994, the Bank's shareholders approved amendments to the Plan
which, among other things: (1) provide for annual grants of options to acquire
5,000 shares to each non-employee Director; and (2) provides for equitable
adjustments of the exercise or purchase price and the number or class of
shares covered by outstanding awards to preserve the benefit of such awards in
the event of payment of a dividend or distribution to shareholders of the Bank
in property or cash in an amount in excess of the Bank's normal dividend or
distribution policy in effect at the time. Grants to directors are made on the
first day following each annual meeting of the Bank's shareholders with an
exercise price equal to the closing price on the New York Stock Exchange of
the Bank's common stock on such date and vest on the date of the next
succeeding annual meeting.
F-54
<PAGE>
GLENDALE FEDERAL BANK AND SUBSIDIARIES
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS--(CONTINUED)
JUNE 30, 1997, 1996 AND 1995
The following is a summary of the transactions under the Bank's stock option
plan:
<TABLE>
<CAPTION>
NUMBER OF RANGE OF WEIGHTED AVERAGE
SHARES OPTION PRICES EXERCISE PRICE
--------- ------------- ----------------
<S> <C> <C> <C>
Outstanding at June 30, 1994... 1,610,000 $6.375-$ 9.00 $ 8.02
Granted........................ 1,825,000 9.75-12.625 11.70
Cancelled or expired........... (66,250) 9.00-12.625 10.16
Exercised...................... (52,500) 9.00-12.625 9.17
---------
Outstanding at June 30, 1995... 3,316,250 6.375-12.625 9.99
Granted........................ 742,000 14.50-16.125 14.58
Cancelled 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
Cancelled 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
=========
</TABLE>
The number of options exercisable at June 30, 1997, 1996 and 1995 was
2,869,750, 2,244,293 and 1,030,834, respectively, and the weighted average
exercise price of those exercisable options was $10.57, $9.76 and $8.69,
respectively.
The number of options available for future grants at June 30, 1997, 1996 and
1995 was 1,382,375, 661,125 and 1,329,375, respectively.
Information about stock options outstanding at June 30, 1997 was as follows:
<TABLE>
<CAPTION>
OUTSTANDING EXERCISABLE
WEIGHTED -------------------------- --------------------------
EXERCISE AVERAGE REMAINING WEIGHTED WEIGHTED
PRICE CONTRACTUAL LIFE AVERAGE EXERCISE AVERAGE EXERCISE
RANGE (YEARS) NUMBER PRICE NUMBER PRICE
-------- ----------------- --------- ---------------- --------- ----------------
<S> <C> <C> <C> <C> <C>
$6.375-
$9.00 6.3 1,095,750 $ 8.19 1,095,750 $ 8.19
$9.75-
$14.50 7.6 2,171,875 12.34 1,729,000 11.95
$15.50-
$17.75 9.1 1,877,500 17.52 45,000 15.50
--------- ---------
$6.375-
$17.75 8.1 5,145,125 $13.34 2,869,750 $10.57
========= =========
</TABLE>
F-55
<PAGE>
GLENDALE FEDERAL BANK AND SUBSIDIARIES
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS--(CONTINUED)
JUNE 30, 1997, 1996 AND 1995
The Bank applies APB Opinion 25 in accounting for its stock-based
compensation plan. Accordingly, no compensation cost has been recognized for
its stock options. Had the Bank determined compensation cost based on the fair
value at the grant dates of its stock options consistent with SFAS 123, the
Bank's net earnings and earnings per share would have been reduced to the pro
forma amounts as follows:
<TABLE>
<CAPTION>
YEARS ENDED JUNE 30
-------------------
1997 1996
--------- ---------
(IN THOUSANDS,
EXCEPT PER SHARE
DATA)
<S> <C> <C>
Net earnings:
As reported......................................... $50,423 $42,052
Pro forma........................................... 41,418 38,115
Earnings per share:
Primary:
As reported....................................... $ 0.63 $ 0.36
Pro forma......................................... $ 0.47 $ 0.28
Fully diluted:
As reported....................................... $ 0.62 $ 0.35
Pro forma......................................... $ 0.46 $ 0.27
</TABLE>
The weighted average grant-date fair value of stock options granted during
fiscal 1997 and 1996 was $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
--------------------
1997 1996
--------- ---------
<S> <C> <C>
Dividend yield...................................... 0% 0%
Expected volatility................................. 38.6% 42.1%
Risk-free interest rate............................. 6.8% 6.5%
Expected life of option............................. 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.
F-56
<PAGE>
GLENDALE FEDERAL BANK AND SUBSIDIARIES
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS--(CONTINUED)
JUNE 30, 1997, 1996 AND 1995
NOTE 23: QUARTERLY RESULTS OF OPERATIONS (UNAUDITED)
<TABLE>
<CAPTION>
QUARTERS ENDED
--------------------------------------
JUNE 30, MARCH 31, DEC. 31, SEPT. 30,
1997 1997 1996 1996
-------- -------- -------- --------
(IN THOUSANDS, EXCEPT PER SHARE DATA)
<S> <C> <C> <C> <C>
Interest income.......................... $276,347 $268,355 $267,585 $260,669
Interest expense......................... 176,479 171,834 174,353 171,306
-------- -------- -------- --------
Net interest income...................... 99,868 96,521 93,232 89,363
Provision for loan losses................ 3,878 6,143 7,829 7,354
-------- -------- -------- --------
Net interest income after provision for
loan losses............................. 95,990 90,378 85,403 82,009
Other income............................. 23,685 22,717 21,199 21,062
General and administrative expenses...... (67,811) (63,370) (63,469) (68,574)
SAIF special assessment.................. 3,153 -- -- (58,672)
Legal expense--goodwill lawsuit.......... (10,338) (8,202) (4,931) (587)
Other expenses........................... (2,542) (3,541) (4,080) (2,925)
-------- -------- -------- --------
Earnings (loss) before income tax provi-
sion (benefit).......................... 42,137 37,982 34,122 (27,687)
Income tax provision (benefit)........... 17,843 15,090 10,900 (7,702)
-------- -------- -------- --------
Net earnings (loss)...................... $ 24,294 $ 22,892 $ 23,222 $(19,985)
======== ======== ======== ========
Earnings (loss) per share:
Primary................................ $ 0.37 $ 0.34 $ 0.31 $ (0.50)
Fully diluted.......................... $ 0.35 $ 0.33 $ 0.29 $ (0.50)
Dividends per common share declared and
paid.................................... -- -- -- --
Common stock price range:
High................................... $ 27 $ 28 1/8 $ 23 7/8 $ 20
Low.................................... $ 22 1/4 $ 22 1/2 $ 17 3/8 $ 15 7/8
<CAPTION>
QUARTERS ENDED
--------------------------------------
JUNE 30, MARCH 31, DEC. 31, SEPT. 30,
1996 1996 1995 1995
-------- -------- -------- --------
(IN THOUSANDS, EXCEPT PER SHARE DATA)
<S> <C> <C> <C> <C>
Interest income.......................... $256,367 $260,666 $276,569 $286,433
Interest expense......................... 168,908 173,944 195,622 208,496
-------- -------- -------- --------
Net interest income...................... 87,459 86,722 80,947 77,937
Provision for loan losses................ 10,411 10,376 10,394 9,169
-------- -------- -------- --------
Net interest income after provision for
loan losses............................. 77,048 76,346 70,553 68,768
Gain (loss) on sale of CMOs.............. -- 5,722 (33,933) --
Other income............................. 19,133 17,336 14,901 11,199
General and administrative expenses...... (65,509) (63,550) (60,020) (57,856)
Legal expense--goodwill lawsuit.......... (1,005) (702) (176) (46)
Other expense............................ (3,164) (5,707) (4,006) (1,938)
-------- -------- -------- --------
Earnings (loss) before income tax provi-
sion (benefit).......................... 26,503 29,445 (12,681) 20,127
Income tax provision (benefit)........... 8,007 9,047 (2,028) 6,316
-------- -------- -------- --------
Net earnings (loss)...................... $ 18,496 $ 20,398 $(10,653) $ 13,811
======== ======== ======== ========
Earnings (loss) per share:
Primary................................ $ 0.22 $ 0.24 $ (0.37) $ 0.21
Fully diluted.......................... $ 0.22 $ 0.23 $ (0.37) $ 0.21
Dividends per common share declared and
paid.................................... -- -- -- --
Common stock price range:
High................................... $ 19 1/8 $ 19 1/8 $ 18 $ 17
Low.................................... $ 16 $ 15 1/2 $ 14 5/8 $ 12 1/8
</TABLE>
F-57
<PAGE>
GLENDALE FEDERAL BANK AND SUBSIDIARIES
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS--(CONTINUED)
JUNE 30, 1997, 1996 AND 1995
NOTE 24: SUBSEQUENT EVENT
On August 18, 1997, Golden State entered into an agreement to acquire CENFED
Financial Corporation and its principal subsidiary, CenFed Bank. The agreement
is subject to regulatory and other approvals and is expected to close in the
first calendar quarter of 1998. The terms of the transaction provide for a
tax-free exchange of 1.2 shares of Golden State common stock for each
outstanding share of CENFED's common stock. This acquisition will be accounted
for as a pooling-of-interests.
At June 30, 1997, CENFED operated 18 branches and had assets, deposits,
stockholders' equity and common shares outstanding of $2.3 billion, $1.5
billion, $119.4 million and 5,728,607 shares respectively. For the twelve
months ended June 30, 1997, CENFED reported net earnings of $11.3 million.
These amounts are unaudited.
F-58
<PAGE>
EXHIBIT 3.1
Charter No. 5855
AMENDED AND RESTATED CHARTER
----------------------------
GLENDALE FEDERAL BANK, FEDERAL SAVINGS BANK
FEDERAL STOCK CHARTER
Section 1. Corporate Title. The full corporate title of the savings bank
is "Glendale Federal Bank, Federal Savings Bank".
Section 2. Office. The home office shall be located in the County of Los
Angeles, State of California.
Section 3. Duration. The duration of the savings bank is perpetual.
Section 4. Purpose and Powers. The purpose of the savings bank is to pursue
any or all of the lawful objectives of a Federal savings bank chartered under
Section 5 of the Home Owners' Loan Act and to exercise all of the express,
implied, and incidental powers conferred thereby and by all acts amendatory
thereof and supplemental thereto, subject to the Constitution and laws of the
United States as they are now in effect, or as they may hereafter be amended,
and subject to all lawful and applicable rules, regulations, and orders of the
Office of Thrift Supervision (the "Office"). In addition, the savings bank may
make any investment and engage in any activity as may be specifically authorized
by action of the Office, including authorization by delegated authority, in
connection with action approving the issuance of this charter.
Section 5. Capital Stock. The total number of shares of all classes of
the capital stock which the savings bank has the authority to issue is one
hundred and fifty million (150,000,000), of which one hundred million
(100,000,000) shall be common stock of par value of $1.00 per share and of which
fifty million (50,000,000) shall be serial preferred stock of par value of $1.00
per share. Upon the effectiveness of the amendment to this Section 5 set forth
in this sentence, the outstanding shares of common stock then outstanding shall
be deemed combined into the number of whole outstanding shares most nearly equal
to one-tenth of the number of shares of common stock outstanding immediately
prior thereto, and all other formerly outstanding shares shall be returned to
the status of authorized but unissued shares of stock. The shares may be issued
from time to time as authorized by the board of directors without further
approval of shareholders, except as otherwise provided in this Section 5 or to
the extent that such approval is required by
-1-
<PAGE>
governing law, rule, or regulation. The consideration for the issuance of the
shares shall be paid in full before their issuance and shall not be less than
the par value. Neither promissory notes nor future services shall constitute
payment or part payment for the issuance of shares of the savings bank. The
consideration for the shares shall be cash, tangible or intangible property (to
the extent direct investment in such property would be permitted), labor, or
services actually performed for the savings bank, or any combination of the
foregoing. In the absence of actual fraud in the transaction, the value of such
property, labor, or services, as determined by the board of directors of the
savings bank, shall be conclusive. Upon payment of such consideration, such
shares shall be deemed to be fully paid and nonassessable. In the case of a
stock dividend, that part of the surplus of the savings bank which is
transferred to stated capital upon the issuance of shares as a stock dividend
shall be deemed to be the consideration for their issuance.
Except for shares issuable in connection with the conversion of the
savings bank from the mutual to the stock form of capitalization, no shares of
capital stock (including shares issuable upon conversion, exchange, or exercise
of other securities) shall be issued, directly or indirectly, to officers,
directors, or controlling persons of the savings bank other than as part of a
general public offering or as qualifying shares to a director, unless their
issuance or the plan under which they would be issued has been approved by a
majority of the total votes eligible to be cast at a legal meeting.
Nothing contained in this Section 5 (or in any supplementary charter
sections hereto) shall entitle the holders of any class of a series of capital
stock to vote as a separate class or series or to more than one vote per share,
except as to the cumulation of votes for the election of directors, subject to
the limitation in Section 8 hereof; provided, that this restriction on voting
--------
separately by class or series shall not apply:
(i) To any provision which would authorize the holders of preferred stock,
voting as a class or series, to elect some members of the board of
directors, less than a majority thereof, in the event of default in the
payment of dividends on any class or series of preferred stock or to
remove any such director so elected;
(ii) To any provision which would require the holders of preferred stock,
voting as a class or series to approve the merger or consolidation of the
savings bank with another corporation or the sale, lease, or conveyance
(other than by mortgage or pledge) of properties or business in exchange
for securities of a corporation other than the savings bank
-2-
<PAGE>
if the preferred stock is exchanged for securities of such other
corporation; provided, that no provision may require such approval for
--------
transactions undertaken with the assistance or pursuant to the direction
of the Office, the Federal Deposit Insurance Corporation or the Resolution
Trust Corporation; or
(iii) To any amendment which would adversely change the specific terms of
any class or series of capital stock as set forth in this Section 5 (or in
any supplementary charter sections hereto), including any amendment which
would create or enlarge any class or series ranking prior thereto or on
parity therewith in rights and preferences. An amendment which increases
the number of authorized shares of any class or series of capital stock,
or substitutes the surviving savings bank in a merger or consolidation for
the savings bank, shall not be considered to be such an adverse change.
A description of the different classes and series (if any) of the savings
bank's capital stock and a statement of the designations, and the relative
rights, preferences, and limitations of the shares of each class of and series
(if any) of capital stock are as follows:
A. Common Stock. Except as provided in this Section 5 (or in any
supplementary charter sections thereto), the holders of the common stock
shall exclusively possess all voting power. Each holder of shares of
common stock shall be entitled to one vote for each share held by such
holder, except as to the cumulation of votes for the election of
directors, subject to the limitation in Section 8 hereof.
Whenever there shall have been paid, or declared and set aside for
payment, to the holders of the outstanding shares of any class of stock
having preference over the common stock as to the payment of dividends,
the full amount of dividends and of sinking fund, retirement fund, or
other retirement payments, if any, to which such holders are respectively
entitled in preference to the common stock, then dividends may be paid on
the common stock and on any class or series of stock entitled to
participate therewith as to dividends out of any assets legally available
for the payment of dividends.
In the event of any liquidation, dissolution, or winding up of the savings
bank, the holders of the common stock (and the holders of any class or
series of stock entitled to participate with the common stock in the
distribution of assets) shall be entitled to receive, in cash or in kind,
the assets of the savings bank available for distribution remaining after:
(i) payment or provision for payment of the
-3-
<PAGE>
savings bank's debts and liabilities; (ii) distributions or provisions
for distributions in settlement of its liquidation account; and (iii)
distributions or provisions for distributions to holders of any class
or series of stock having preference over the common stock in the
liquidation, dissolution, or winding up of the savings bank. Each
share of common stock shall have the same relative rights as and be
identical in all respects with all the other shares of common
stock.
B. Preferred Stock. The savings bank may provide in supplementary
charter sections hereto for one or more classes of preferred stock,
which shall be separately identified. The shares of any class may be
divided into and issued in series, with each series separately designated
so as to distinguish shares thereof from the shares of all other series
and classes. The terms of each series shall be set forth in a
supplementary charter section to this charter. All shares of the same
class shall be identical except as to the following relative rights and
preferences, as to which there may be variations between different
series:
(a) The distinctive serial designation and the number of shares
constituting such series;
(b) The dividend rate or the amount of dividends to be paid on
the shares of such series, whether dividends shall be cumulative and,
if so, from which date(s), the payment date(s) for dividends, and the
participating or other special rights, if any, with respect to
dividends;
(c) The voting powers, full or limited, if any, of shares of
such series;
(d) Whether the shares of such series shall be redeemable and,
if so, the price(s) at which, and the terms and conditions on which,
such shares may be redeemed;
(e) The amount(s) payable upon the shares of such series in
the event of voluntary or involuntary liquidation, dissolution, or
winding up of the savings bank;
(f) Whether the shares of such series shall be entitled to the
benefit of a sinking or retirement fund to be applied to the purchase
or redemption of such shares, and if so entitled, the amount of such
fund and the manner of its application, including the price(s) at
which such shares may be redeemed or purchased through the application
of such fund;
-4-
<PAGE>
(g) Whether the shares of such series shall be convertible into, or
exchangeable for, shares of any other class or classes of stock of the savings
bank and, if so, the conversion price(s) or the rate(s) of exchange, and the
adjustments thereof, if any, at which such conversion or exchange may be made,
and any other terms and conditions of such conversion or exchange;
(h) The price or other consideration for which the shares of such series
shall be issued; and
(i) Whether the shares of such series which are redeemed or converted
shall have the status of authorized but unissued shares of serial preferred
stock and whether such shares may be reissued as shares of the same or any other
series of serial preferred stock.
Each share of each series of serial preferred stock shall have the same relative
rights as and be identical in all respects with all the other shares of the same
series.
The board of directors shall have authority to divide, by the adoption of
supplementary charter sections, any authorized class of preferred stock into
series, and, within the limitations set forth in this Subsection 5(B) and the
remainder of this charter, fix and determine the relative rights and preferences
of the shares of any series so established.
Prior to the issuance of any preferred shares of a series established by a
supplementary charter section adopted by the board of directors, the savings
bank shall file with the Secretary of the Office a dated copy of such
supplementary charter section establishing and designating the series and fixing
and determining the relative rights and preferences thereof.
C. Reclassification of Outstanding Preferred Stock. Upon the effectiveness of
this Subsection 5(C), the then outstanding shares of the 12% Noncumulative
Perpetual Preferred Stock, Series B (the "Series B Preferred Stock") and the 12%
Noncumulative Perpetual Preferred Stock, Series C (the "Series C Preferred
Stock") of the savings bank shall, thereby and without necessity of any further
action or occurrence, be converted into Noncumulative Convertible Preferred
Stock, Series D (the "Series D Preferred Stock") of the savings bank on the
following basis and with the following effects:
(a) Each outstanding share of Series B Preferred Stock and Series C
Preferred Stock shall be reclassified and
-5-
<PAGE>
converted into 0.6421 of one share of Series D Preferred Stock; provided,
--------
that no fractional shares of Series D Preferred Stock shall be issued in
connection therewith and Series D Preferred Stock share entitlements of all
former holders of the Series B Preferred Stock and the Series C Preferred
Stock shall be rounded to the nearest whole share of Series D Preferred
Stock;
(b) All provisions of this charter, including supplementary charter
sections hereto, heretofore pertaining to the Series B Preferred Stock or
the Series C Preferred Stock are hereby rescinded and deleted; and
(c) The savings bank shall have no obligation to pay any cash or
stock dividends on or with respect to the Series B Preferred Stock or the
Series C Preferred Stock for any period prior to the effectiveness of this
Subsection 5(C) and no such dividends or amounts in lieu thereof will be
declared or paid.
The powers, designations, preferences and relative, participating, optional
and other special rights, and the qualifications, limitations and
restrictions, of the Series D Preferred Stock and of a separate series of
preferred stock designated "Noncumulative Preferred Stock, Series E" are
set forth in the duly authorized supplementary charter sections hereto that
are identified by reference to, and that became effective upon the
effectiveness of, this Subsection 5(C).
The provisions set forth in this Subsection 5(C) shall become effective
upon the effectiveness of the merger of GLENFED, Inc. with and into
Glendale Investment Corporation, a wholly-owned subsidiary of the savings
bank.
Section 6. Preemptive Rights. Holders of the capital stock of the savings
bank shall not be entitled to preemptive rights with respect to any shares of
the savings bank which may be issued.
Section 7. Liquidation Account. Pursuant to the requirements of the rules
and regulations of the Office, the savings bank shall establish and maintain a
liquidation account for the benefit of its savings account holders as of January
31, 1983 (the "Eligible Savers"). In the event of a complete liquidation of the
savings bank, it shall comply with such rules and regulations with respect to
the amount and the priorities on liquidation of each of the savings bank's
Eligible Saver's" inchoate interest in the liquidation account, to the extent it
is still in existence. Provided, however, that an Eligible Saver's inchoate
interest in the liquidation account shall not entitle
-6-
<PAGE>
such Eligible Saver to any voting rights at meetings of the savings bank's
shareholders.
Section 8. Directors. The savings bank shall be under the direction of a
board of directors. The authorized number of directors shall not be fewer than
five nor more than fifteen (i) subject to the terms of any supplementary charter
section hereto and (ii) except when a greater number is approved by the Office.
Except as may be required in connection with the election of directors under the
terms of any supplementary charter section hereto, the exact number of directors
shall be fixed from time to time by the board of directors pursuant to a
resolution adopted by a majority of the entire board of directors.
A. Election of Directors. The directors shall be divided into three
classes, as nearly equal in number as possible. The members of each class
shall be elected for a term of three years and until their successors are
elected and qualified. One class shall be elected by ballot annually.
B. Newly Created Directorships and Vacancies. The provisions of this
Subsection 8(B) are subject to the terms of any supplementary charter
section hereto. Any vacancies in the board of directors resulting from
death, resignation, retirement, disqualification, removal from office or
other cause shall be filled by the affirmative vote of a majority of
directors then in office, although less than a quorum, or by the sole
remaining director or by the shareholders at the next election of
directors. Directors so chosen shall hold office for a term expiring at the
annual meeting of shareholders at which the term of the class to which they
have been elected expires. A director elected to fill a vacancy by reason
of an increase in the number of directorships shall be elected by a
majority vote of the directors then in office, although less than a quorum
of the board of directors, to serve until the next election of the class
for which such director shall have been chosen; provided, that if the
--------
holders of any class or classes of stock or series thereof of the savings
bank, voting separately, are entitled to elect one or more directors,
vacancies and newly created directorships of such class or classes or
series may be filled by a majority of the directors elected by such class
or classes or series thereof then in office, or by a sole remaining
director so elected. If the number of directors is changed, any increase or
decrease shall be apportioned among the three classes so as to make all
classes as nearly equal in number as possible. If, consistent with the
preceding requirement, the increase or decrease may be allocated to more
than one class, the increase or decrease may be allocated to any such class
the board of directors selects in its discretion. No decrease
-7-
<PAGE>
in the number of directors constituting the board of directors shall
shorten the term of any incumbent director.
C. Removal. The provisions of this Subsection 8(C) are subject to
the terms of any supplementary charter section hereto. At a meeting
of shareholders called expressly for that purpose, any director may
be removed only for cause by the holders of a majority of the shares
then entitled to vote at an election of directors. If less than the
entire board of directors is to be removed and at the time of the
shareholders' meeting cumulative voting would be in effect for the
election of directors, no one of the directors may be removed if the
votes cast against the removal would be sufficient to elect a
director if then cumulatively voted at an election of the class of
directors of which such director is a part. Cause for removal
shall exist only if the director whose removal is proposed has been
convicted of a felony by a court of competent jurisdiction to be
liable for gross negligence or misconduct in the performance of such
director's duty to the savings bank and such adjudication is no longer
subject to direct appeal.
Section 9. Amendment of Charter. Except as provided in Section 5 hereof,
no amendment, addition, alteration, change or repeal of this charter shall be
made, unless such is first proposed by the board of directors of the savings
bank, then preliminarily approved by the Office, which preliminary approval may
be granted by the Office pursuant to regulations specifying preapproved charter
amendments, and thereafter approved by the shareholders by a majority of the
total votes eligible to be cast at a legal meeting. Any amendment, addition,
alteration, change, or repeal so acted upon shall be effective upon filing with
the Office in accordance with regulatory procedures or on such other date as the
Office may specify in its preliminary approval.
Section 10. Certain Business Combinations.
A. Higher Vote for Certain Business Combinations. In addition to any
affirmative vote of holders of a class or series of capital stock of the savings
bank required by law or this charter and except as otherwise expressly provided
in Subsection B of this Section 10, a Business Combination (as hereinafter
defined) with or upon a proposal by a Related Person (as hereinafter defined)
with or upon a proposal by a Related Person (as hereinafter defined) shall
require the affirmative vote of the holders of at least two-thirds of the Voting
Stock (as hereinafter defined) of the savings bank voting together as a single
class. Such affirmative votes shall be required notwithstanding the fact that no
vote may be required, or that a lesser percentage may be specified, by law or
the Office.
-8-
<PAGE>
B. When Higher Vote Is Not Required. The provisions of Subsection A of
this Section 10 shall not be applicable to any particular Business Combination
and such Business Combination shall require only such affirmative vote as is
required by law, regulation and any other provision of this charter, if all of
the conditions specified in any one of the following Paragraphs (i), (ii) or
(iii) are met:
(i) Approval by Directors. The Business Combination has been approved
by a vote of a majority of all of the Continuing Directors (as
hereinafter defined);
(ii) Combination With Subsidiary. The Business Combination is solely
between the savings bank and a subsidiary of the savings bank and such
Business Combination does not have the direct or indirect effect set
forth in Subsection C(ii) (e) of this Section 10; or
(iii) Price and Procedural Conditions. The proposed Business
Combination will be consummated within three years after the date the
Related Person became a Related Person (the "Determination Date") and
all of the following conditions have been met:
(a) The aggregate amount of cash and fair market value (as of
the date of the consummation of the Business Combination) of
consideration other than cash, to be received per share of
common stock in such Business Combination by holders thereof
shall be at least equal to the highest of the following: (x)
the highest per share price, including any brokerage commissions,
transfer taxes and soliciting dealers' fees (with appropriate
adjustments for recapitalizations, reclassifications, stock
splits, reverse stock splits and stock dividends) paid by the
Related Person for any shares of common stock acquired by it
including those shares acquired by the Related Party before
the Determination Date; or (y) the fair market value of the
common stock of the savings bank (as determined by the
Continuing Directors) on the date the Business Combination
is first proposed (the "Announcement Date");
(b) The aggregate amount of cash and fair market value (as of
the date of the consummation of the Business Combination) of
consideration other than cash, to be received per share of any
class or series of preferred stock in such Business Combination
by holders thereof shall be at least equal to the highest of the
following: (x) the highest per share price, including any
brokerage commissions, transfer taxes and
-9-
<PAGE>
soliciting dealers' fee (with appropriate adjustments for
recapitalizations, reclassifications, stock splits, reverse stock splits
and stock dividends) paid by the Related Person for any shares of such
class or series of preferred stock acquired by it including those shares
acquired by the Related Person before the Determination Date; (u) the fair
market value of such class or series of preferred stock of the savings
bank (as determined by the Continuing Directors) on the Announcement Date;
and (z) the highest preferential amount per share of such class or series
of preferred stock to which the holders thereof would be entitled in the
event of voluntary or involuntary liquidation, dissolution or winding up
of the affairs of the savings bank (regardless of whether the Business
Combination to be consummated constitutes such an event);
(c) The consideration to be received by holders of a particular class or
series of outstanding common or preferred stock shall be in cash or in the
same form as the Related Person has previously paid for shares of such
class or series of stock. If the Related Person has paid for shares of any
class or series of stock with varying forms of consideration, the form of
consideration given for such class or series of stock in the Business
Combination shall be either cash or the form used to acquire the largest
number of shares of such class or series of stock previously acquired by
it;
(d) No Extraordinary Event (as hereinafter defined) occurs after the
Related Person has become a Related Person and prior to the consummation
of the Business Combination; and
(e) A proxy or information statement describing the proposed Business
Combination and complying with the requirements of the Securities Exchange
Act of 1934, as amended, and the rules and regulations thereunder (or any
subsequent provisions replacing such Act, rules or regulations) (the
"Act"), is mailed to public shareholders of the savings bank at least 30
days prior to the consummation of such Business Combination (whether or
not such proxy or information statement is required pursuant to such Act
or subsequent provisions although such proxy or information statement will
only be filed with the Office if a filing is required by such Act or
subsequent provisions) and shall contain at the front thereof in a
prominent place a recommendation, if any, of the Continuing Directors of
the advisability or inadvisability of the Business
-10-
<PAGE>
Combination and of any investment banking firm selected by a majority of
the Continuing Directors, as to the fairness of the Business Combination
from the point of view of the shareholders of the savings bank other than
the Related Person.
C. Certain Definitions. For purposes of this Section 10:
(i) A "person" shall mean any individual, corporation, partnership, bank,
association, joint stock company, trust, unincorporated organization or similar
company, or a group of "persons" acting or agreeing to act together in the
manner set forth in Rule 13d-5 under the Act, as in effect on January 1,
1993.
(ii) "Business Combination" shall mean any of the following transactions, when
entered into by the savings bank or a subsidiary of the savings bank with, or
upon a proposal by, a Related Person:
(a) the merger or consolidation of the savings bank or any subsidiary of
the savings bank;
(b) the sale, lease, exchange, mortgage, pledge, transfer or other
disposition (in one or a series of transactions) of any assets of the
savings bank or any subsidiary of the savings bank having an aggregate
fair market value of $25 million or more;
(c) the issuance or transfer by the savings bank or any subsidiary of the
savings bank (in one or a series of transactions) of securities of the
savings bank or subsidiary having an aggregate fair market value of $25
million or more;
(d) the adoption of a plan or proposal for the liquidation or dissolution
of the savings bank;
(e) the reclassification of securities (including a reverse stock split),
recapitalization, consolidation or any other transaction (whether or not
involving a Related Person) which has the direct or indirect effect of
increasing the voting power, whether or not then exercisable, of a Related
Person in any class or series of capital stock of the savings bank or
any subsidiary of the savings bank; or
(f) any agreement, contract or other arrangement providing directly or
indirectly for any of the foregoing.
-11-
<PAGE>
(iii) "Related Person" shall mean any person (other than the savings bank,
a subsidiary of the savings bank, or any profit sharing, employee stock
ownership or other employee benefit plan of the savings bank or a
subsidiary of the savings bank or any trustee of or fiduciary with respect
to any such plan acting in such capacity) that is the direct or indirect
beneficial owner (as defined in Rule 13d-3 and Rule 13d-5 under the Act, as
in effect on January 1, 1993) of more than ten percent (10%) of the
outstanding Voting Stock of the savings bank, and any Affiliate or
Associate of any such person.
(iv) "Continuing Director" shall mean any member of the board of directors
of the savings bank who is not affiliated with a Related Person and who was
a member of the board of directors of the savings bank immediately prior to
the time that the Related Person became a Related Person, and any successor
to a Continuing Director who is not affiliated with the Related Person and
is recommended to succeed a Continuing Director by a majority of Continuing
Directors who are then members of the board of directors of the savings
bank.
(v) "Affiliate" and "Associate" shall have the respective meanings ascribed
to such terms in Rule 12b-2 under the Act, as in effect on January 1, 1993.
(vi) "Extraordinary Event" shall mean, as to any Business Combination and
Related Person, any of the following events that is not approved by a
majority of all Continuing Directors:
(a) any failure to declare and pay at the regular date therefor any
full quarterly dividend (whether or not cumulative) on outstanding
preferred stock;
(b) any reduction in the annual rate of dividends paid on the common
stock (except as necessary to reflect any subdivision of the common
stock);
(c) any failure to increase the annual rate of dividends paid on the
common stock as necessary to reflect any reclassification (including
any reverse stock split), recapitalization, reorganization or any
similar transaction that has the effect of reducing the number of
outstanding shares of the common stock; or
(d) the receipt by the Related Person, after the Determination Date,
of a direct or indirect benefit (except proportionately as a
shareholder) from any loans, advances, guarantees, pledges or other
financial
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<PAGE>
assistance or any tax credits or other tax advantages provided by
the savings bank or any subsidiary of the savings bank, whether in
anticipation of or in connection with the Business Combination or
otherwise.
(vii) A majority of all Continuing Directors shall have the power to make
all determinations with respect to this Section 10, including, without
limitation, the transactions that are Business Combinations, the persons
who are Related Persons, the time at which a Related Person became a
Related Person, and the fair market value of any assets, securities or
other property, and any such determinations of such Continuing Directors
shall be conclusive and binding.
(viii) "Voting Stock" shall mean all outstanding shares of the common or
preferred stock of the savings bank entitled to vote generally in the
election of directors and each reference to a proportion of Voting Stock
shall refer to shares having such proportion of the number of shares
entitled to be cast, excluding all shares beneficially owned or controlled
by the Related Person.
(ix) In the event of any Business Combination in which the savings bank
survives, the phrase "consideration other than cash" as used in Subsections
B(iii) (a) and B(iii) (b) of this Section 10 shall include the shares of
common stock and/or the shares of any other class or series of preferred
stock retained by the holders of such shares.
D. No Effect on Fiduciary Obligations of Related Persons. Nothing contained
in this Section 10 shall be construed to relieve any Related Person from
any fiduciary obligation imposed by law.
-13-
<PAGE>
Section 11. Higher Vote Requirements for Certain Amendments.
Notwithstanding Section 9 hereof, the affirmative vote of the holders of at
least two-thirds of the total votes eligible to be cast at a legal meeting shall
be required to amend, repeal or adopt any provisions inconsistent with Section
8, 10 hereof and this Section 11.
GENDALE FEDERAL BANK,
FEDERAL SAVINGS BANK
By: /s/ Stephen J. Trafton
------------------------------
Chairman of the Board, Chief
Executive Officer and President
Attest: /s/ James R. Eller, Jr.
------------------------------
Secretary
OFFICE OF THRIFT SUPERVISION
By: /s/ Jonathan L. Fiechter
------------------------------
Acting Director
Attest: /s/ Nadine Y. Washington
------------------------------
Corporate Secretary
Declared effective this 23rd day of August, 1993.
-14-
<PAGE>
SUPPLEMENTARY CHARTER SECTION
TO
SECTION 5(C) OF THE FEDERAL STOCK CHARTER
OF
GLENDALE FEDERAL BANK, FEDERAL SAVINGS BANK
Dated: July 24, 1997
Establishing the Series and Fixing the Powers, Designations, Preferences
and Relative, Participating, Optional and Other Special Rights, and the
Qualifications, Limitations and Restrictions, of the Noncumulative
Preferred Stock, Series 1997-A.
1. Designation and Rank.
--------------------
There is hereby established a series of shares of preferred stock,
which series of preferred stock shall be designated as the "Noncumulative
Preferred Stock, Series 1997-A" (the "Series 1997-A Preferred Stock"). The
-----------------------------
authorized number of shares of Series 1997-A Preferred Stock shall be 5,000,000.
Each share of Series 1997-A Preferred Stock shall have a par value of $1.00 per
share and a liquidation preference of $25.00 per share as hereinafter provided.
The Series 1997-A Preferred Stock shall be superior and prior in
rank to all classes of common stock of the savings bank (collectively, the
"Common Stock") and to all other classes and series of equity securities of the
------------
savings bank now or hereafter authorized, issued or outstanding other than
the Series 1997-A Preferred Stock and any other class or series of equity
securities of the savings bank that is expressly designated as ranking on a
parity with (the "Parity Stock") or senior to (the "Senior Stock") the Series
------------ ------------
1997-A Preferred Stock as to either or both of dividend rights and rights upon
liquidation, winding up or dissolution of the savings bank. The Series 1997-A
Preferred Stock shall be junior to all creditors of the savings bank, including
savings bank depositors. The Common Stock and all other classes and series of
equity securities of the savings bank that do not constitute Parity Stock or
Senior Stock are collectively referred to herein as "Junior Stock." There shall
------------
be no limitation on the number of shares, series or classes of Parity Stock and
Junior Stock that may be created or established.
-1-
<PAGE>
The number of shares of Series 1997-A Preferred Stock may be
increased or decreased from time to time by action of not less than a majority
of the members of the board of directors then in office; provided, that no
--------
decrease effected solely through such action of the board of directors shall
reduce the number of shares of Series 1997-A Preferred Stock to a number less
than the number of shares then outstanding plus the number of shares reserved
for issuance upon the exercise of outstanding options, rights or warrants, if
any, to purchase shares of Series 1997-A Preferred Stock, or upon the conversion
of any outstanding securities issued by the savings bank that are convertible
into shares of Series 1997-A Preferred Stock.
2. Dividends.
---------
(a) Payment of Dividends. Holders of shares of Series 1997-A
--------------------
Preferred Stock shall be entitled to receive, when, as and if declared by the
board of directors or a duly authorized committee thereof, out of funds legally
available therefor, noncumulative cash dividends at an annual rate (the "Annual
------
Dividend Rate") of 8.75% of the amount of the per share liquidation preference
- - -------------
of the Series 1997-A Preferred Stock. Such noncumulative cash dividends shall be
payable, if declared, quarterly on January 1, April 1, July 1 and October 1 in
each year, or, if such day is not a business day, then on the next business day
(each such date being referred to herein as a "Dividend Payment Date"). The
---------------------
first Dividend Payment Date shall be October 1, 1997. Each declared dividend
shall be payable to the holders of Series 1997-A Preferred Stock of record
whose names appear on the stock books of the savings bank at the close of
business on such record dates, not more than 60 calendar days nor less than 30
calendar days preceding the related Dividend Payment Date, as determined by the
board of directors or a duly authorized committee thereof (each such date being
referred to herein as a "Record Date"). Quarterly dividend periods (each a
-----------
"Dividend Period") shall commence on and include December 1, March 1, June 1 and
---------------
September 1 of each year and end on and include the day next preceding the
commencement of the next following Dividend Period; provided, that the first
--------
Dividend Period shall commence on the day of the commencement of the Dividend
Period in which shares of Series 1997-A Preferred Stock first shall be issued
and outstanding (the "Original Issue Date") and shall end on and include
-------------------
the last day of such Dividend Period.
The amount of dividends per share for each full Dividend Period
shall be computed by dividing by four an amount equal to (i) the Annual Dividend
Rate, (ii) multiplied by the amount of the liquidation preference of such share.
Dividends for any period of less than a full three months shall be computed on
the basis of a 360-day year composed of twelve 30 day months and the actual
number of days elapsed in such period.
(b) Dividends Noncumulative. The right of holders of Series 1997-A
-----------------------
Preferred Stock to receive dividends shall be noncumulative. Accordingly, if the
board
-2-
<PAGE>
of directors or a duly authorized committee thereof does not declare a dividend
to be payable in respect of any Dividend Period, the holders of shares of Series
1997-A Preferred Stock shall have no right to receive a dividend in respect of
such Dividend Period, and the savings bank shall have no obligation to pay a
dividend in respect of such Dividend Period, at any time thereafter, whether or
not dividends are declared and payable in respect of any future Dividend Period.
(c) Priority as to Dividends. No full dividends shall be declared or paid
------------------------
or set apart for payment on any class or series of equity securities ranking, as
to dividends, on a parity with the Series 1997-A Preferred Stock for any
Dividend Period (in whole or in part) unless full dividends have been or
contemporaneously are declared and paid (or declared and a sum sufficient for
the payment thereof set apart for such payment) on the Series 1997-A Preferred
Stock for such Dividend Period. If dividends are not paid in full (or declared
and a sum sufficient for such full payment is not so set apart) in any Dividend
Period upon the Series 1997-A Preferred Stock and any other equity security
ranking on a parity with the Series 1997-A Preferred Stock as to dividends,
dividends declared upon shares of Series 1997-A Preferred Stock and such other
equity security shall be declared pro rata based upon the respective amounts
that would have been paid on the Series 1997-A Preferred Stock and such other
equity security had dividends been paid thereon in full.
The savings bank shall not declare, pay or set apart funds for the payment
of any dividend or other distribution (other than in Common Stock or other
Junior Stock) with respect to any Common Stock or other Junior Stock of the
savings bank, or purchase or redeem, or set apart funds for the purchase or
redemption of, any such Common Stock or other Junior Stock through a sinking
fund or otherwise, (i) unless and until the savings bank shall have paid full
dividends on the Series 1997-A Preferred Stock in respect of the four most
recent Dividend Periods (or such lesser number of Dividend Periods as shares of
Series 1997-A Preferred Stock have been outstanding), or funds have been paid
over to the dividend disbursing agent of the savings bank for payment of such
dividends (or set apart for such purpose if the savings bank then has no
separate dividend disbursing agent), and (ii) the savings bank has declared a
cash dividend on the Series 1997-A Preferred Stock at the Annual Dividend Rate
for the current Dividend Period, and sufficient funds have been paid over to the
dividend disbursing agent for the savings bank for the payment of such cash
dividend for such current Dividend Period (or set apart for such purpose if the
savings bank then has no separate dividend disbursing agent).
No dividend shall be paid or set aside for holders of Series 1997-A
Preferred Stock for any Dividend Period unless full dividends have been paid or
set aside for the holders of each class or series of equity securities of the
savings bank, if any, ranking prior to the Series 1997-A Preferred Stock as to
dividends for such Dividend Period.
-3-
<PAGE>
3. Redemption.
----------
(a) General. The shares of Series 1997-A Preferred Stock are not subject
-------
to mandatory redemption, and shall not be redeemable prior to October 1, 1998.
On or after October 1, 1998, the savings bank may, at its option, redeem the
shares of Series 1997-A Preferred stock at any time or from time to time, in
whole or in part, upon notice as provided in paragraph 3(b) below, by resolution
of the board of directors, at the following redemption prices per share: If
redeemed during the twelve-month period beginning on October 1 of the years
indicated below,
<TABLE>
<CAPTION>
Redemption Redemption
Year Price Year Price
---- ---------- ---- ----------
<S> <C> <C> <C>
1998 $ 26.09375 2001 $ 25.43750
1999 $ 25.87500 2002 $ 25.21875
2000 $ 25.65625 2003 $ 25.00000
</TABLE>
and thereafter at a redemption price equal to the $25.00 liquidation preference
per share of Series 1997-A Preferred Stock plus, in each case, an amount equal
to any declared but unpaid dividend, without interest. The holders of shares of
the Series 1997-A Preferred Stock shall not have the option or right to compel
the savings bank to redeem any shares of Series 1997-A Preferred Stock.
If less than all of the outstanding shares of Series 1997-A Preferred Stock
are to be redeemed, the savings bank shall select the shares that are to be
redeemed pro rata, by lot or by substantially equivalent method. On and after
the date selected for redemption, dividends shall cease to accrue on the shares
of Series 1997-A Preferred Stock called for redemption, and such shares shall
be deemed no longer to be outstanding; provided, that the redemption price
--------
(including any declared but unpaid dividends to the date fixed for redemption)
has been duly paid or provided for. If a notice to convert shares of Series
1997-A Preferred Stock as provided in paragraph 4(b) below relating to shares of
Series 1997-A Preferred Stock that are to be redeemed shall be received by the
savings bank, and the certificates representing such shares shall be surrendered
to the savings bank, on or prior to the fifth day immediately preceding the
redemption date specified in the Notice of Redemption relating to such shares,
then such shares may not be redeemed.
(b) Notice of Redemption. Notice of any redemption, setting forth (i) the
--------------------
date and place fixed for redemption, (ii) the redemption price and (iii) a
statement that dividends on the shares of Series 1997-A Preferred Stock to be
redeemed will cease to accrue on the stated date fixed for redemption, shall be
mailed, postage prepaid, at least 20 days but not more than 45 days prior to
such redemption date to each holder of record of Series 1997-A Preferred Stock
to be redeemed at his or her address as the same shall appear on the stock
books of the savings bank. If less than
-4-
<PAGE>
all of the shares of Series 1997-A Preferred Stock owned by such holder are then
to be redeemed, such notice shall specify the number of shares thereof that are
to be redeemed and the numbers of the certificates representing such shares.
If such notice of redemption shall have been so mailed, and if on or
immediately preceding the redemption date specified in such notice all funds
necessary for such redemption shall have been set aside by the savings bank
separate and apart from its other funds in trust for the account of the
holders of the shares of Series 1997-A Preferred Stock to be redeemed so as to
be and continue to be available therefor, then, on and immediately following
such redemption date, notwithstanding that any certificate for shares of Series
1997-A Preferred Stock so called for redemption shall not have been surrendered
for cancellation, the shares of Series 1997-A Preferred Stock so called for
redemption shall be deemed no longer to be outstanding and all rights with
respect to such shares of Series 1997-A Preferred Stock so called for redemption
shall forthwith cease and terminate, except for the right of the holders thereof
to receive out of the funds so set aside in trust the amount payable on
redemption thereof, but without interest, upon surrender (and endorsement or
assignment for transfer, if required by the savings bank) of the certificates
for such shares of Series 1997-A Preferred Stock.
In the event that holders of shares of Series 1997-A Preferred Stock that
shall have been redeemed shall not within two years (or any longer period if
required by law) immediately following the redemption date therefor claim any
amount deposited in trust with a bank or trust company for the redemption of
such shares, such bank or trust company shall, upon demand and if permitted by
applicable law, pay over to the savings bank any such unclaimed amount so
deposited with it, and shall thereupon be relieved of all responsibility in
respect thereof, and thereafter the holders of such shares shall, subject to
applicable escheat laws, look only to the savings bank for payment of the
redemption price thereof, but without interest from the date of redemption.
(c) Status of Shares Redeemed. Shares of Series 1997-A Preferred Stock
-------------------------
redeemed, purchased or otherwise acquired for value by the savings bank shall,
after such acquisition, have the status of authorized and unissued shares of
preferred stock and may be reissued by the savings bank at any time as shares of
any series of preferred stock other than as shares of Series 1997-A Preferred
Stock.
4. Conversion.
----------
(a) General. Holders of Series 1997-A Preferred Stock shall be entitled to
-------
convert any or all of their shares of Series 1997-A Preferred Stock into fully
paid and nonassessable shares of Common Stock. Shares of Series 1997-A Preferred
Stock may initially be converted into shares of Common Stock at a conversion
price per share of Common Stock (the "Conversion Price") as set forth in
----------------
subparagraph
-5-
<PAGE>
4(c)(1) below, and subject to adjustment as provided herein. The number of
shares of Common Stock issuable upon conversion of each share of Series 1997-A
Preferred Stock shall be equal to $25.00 divided by the Conversion Price then in
effect; provided, that no fractional shares shall be issued upon conversion of
--------
any shares of Series 1997-A Preferred Stock. If the calculation of the number
of shares of Common Stock issuable upon such conversion in accordance with the
preceding sentence results in a fraction, an amount shall be paid by the savings
bank in cash to the holder of the shares of Series 1997-A Preferred Stock being
converted of record as of the date of such conversion based upon the Current
Market Price of the Common Stock (determined as provided in subparagraph 4(c)(6)
hereof) as of the date of conversion.
(b) Surrender of Certificates. Each conversion of shares of Series 1997-A
-------------------------
Preferred Stock shall be effected by the surrender of the certificate
representing the shares of Series 1997-A Preferred Stock to be converted at the
office of the savings bank or of the trust company appointed by the savings bank
for such purpose (or at such other location or locations in the continental
United States as may from time to time be designated by the Secretary of the
savings bank in a notice to the registered holders of shares of Series 1997-A
Preferred Stock), together with any required stock transfer tax stamps and a
written notice by the holder of such Series 1997-A Preferred Stock stating such
holder's desire to convert such shares into Common Stock, the number (in whole
shares) of shares to be converted, and the name or names (with addresses) in
which such holder wishes the certificate or certificates for the shares of
Common Stock to be issued and shall include instructions for delivery thereof.
Promptly after such surrender and the receipt by the savings bank of such
written notice, each person named in the prescribed notice shall be entitled to
become, and shall be registered in the original stock books of the savings bank
as, the record holder of the number of shares of Common Stock issuable upon such
conversion. In the event less than all of the shares of Series 1997-A Preferred
Stock represented by a certificate are to be converted by a holder, upon such
conversion the savings bank shall issue and deliver, or cause to be issued and
delivered, to the holder a certificate or certificates for the shares of Series
1997-A Preferred Stock not so converted. If the savings bank calls for the
redemption of any shares of Series 1997-A Preferred Stock, the rights of
conversion provided for herein shall cease and terminate, as to the shares
designated for such redemption, at the close of business on the fifth day
immediately preceding the redemption date specified in the notice provided in
paragraph 3(b), unless the savings bank defaults in the payment of the
redemption price therefor.
(c) Conversion Price Determination and Adjustment.
---------------------------------------------
(1) The Conversion Price shall be equal to $10.40.
(2) In the event the savings bank shall, at any time or from time to
time while any shares of Series 1997-A Preferred Stock are outstanding, (i)
declare
-6-
<PAGE>
and pay a dividend on its Common Stock that is payable in shares of Common
Stock, (ii) subdivide its outstanding Common Stock into a greater number of
shares, (iii) combine its outstanding Common Stock into a smaller number of
shares, or (iv) issue by reclassification of or capital reorganization relating
to its Common Stock any shares of capital stock of the savings bank, the
Conversion Price in effect immediately prior to such action shall be adjusted so
that the holder of any shares of Series 1997-A Preferred Stock thereafter
surrendered for conversion shall be entitled to receive the number and kind of
shares of capital stock of the savings bank that such holder would have owned
immediately following, and as a result of, such action had such shares of Series
1997-A Preferred Stock been converted immediately prior to the record date for
such action (or if no record date is established in connection with such event,
the effective date for such action). An adjustment made pursuant to this
subparagraph (c)(2) shall become effective immediately following the record date
in the event of a stock dividend and shall become effective immediately
following the effective date in the event of any subdivision, combination or
reclassification. If, as a result of an adjustment made pursuant to this
subparagraph (c)(2), the holder of any shares of Series 1997-A Preferred Stock
thereafter surrendered for conversion shall become entitled to receive shares of
two or more classes of capital stock of the savings bank, the board or directors
(whose determination with respect to the matter shall be conclusive and shall
be described in a resolution adopted with respect thereto) shall determine the
allocation of the adjusted Conversion Price between or among shares of such
classes of capital stock.
(3) In the event that the savings bank shall, at any time or from
time to time while any shares of the Series 1997-A Preferred Stock are
outstanding, issue to holders of shares of Common Stock as a dividend or
distribution, including by way of reclassification, recapitalization, merger or
otherwise, any right or warrant to purchase shares of Common Stock at a purchase
price per share that is less than the Current Market Price of a share of Common
Stock on the record date for such dividend or distribution or if, upon the
occurrence of some event, holders of then outstanding rights or warrants become
entitled by the terms of such rights or warrants to purchase shares of Common
Stock at such a purchase price, then the Conversion Price shall be adjusted by
multiplying such Conversion Price by a fraction, the numerator of which shall be
the number of shares of Common Stock outstanding on the day immediately
preceding such record date or event plus the number of shares of Common Stock
that could be purchased at the Current Market Price of a share of Common Stock
on such record date or event for the maximum aggregate consideration payable
upon exercise in full of all such rights or warrants, and the denominator of
which shall be the number of shares of Common Stock outstanding on the day
immediately preceding such record date or event plus the maximum number of
shares of Common Stock that could be acquired upon exercise in full of all such
rights or warrants, such adjustment to become effective immediately prior to the
opening of business on the day immediately following such record date or
event.
-7-
<PAGE>
(4) In the event that the savings bank shall, at any time or from
time to time while any shares of the Series 1997-A Preferred Stock are
outstanding, issue to holders of shares of Common Stock as a dividend or
distribution, including by way of reclassification, recapitalization, merger or
otherwise, any evidence of indebtedness or assets (including rights or warrants
to purchase capital stock or other securities, but excluding any rights or
warrants referred to in subparagraph (c)(3) hereof, any dividend or distribution
paid in cash out of the surplus or retained earnings of the savings bank and any
dividend or distribution referred to in subparagraph (c)(2) hereof), then the
Conversion Price in effect immediately prior to such action shall be adjusted by
multiplying such Conversion Price by a fraction, the numerator of which shall be
the Current Market Price of a share of Common Stock on the record date for such
issuance, less the fair market value (as determined by the board of directors,
whose determination shall be conclusive) of the portion of the assets or
evidences of indebtedness so distributed allocable to one share of Common Stock,
and the denominator of which shall be the Current Market Price of a share of
Common Stock, such adjustment to become effective immediately prior to the
opening of business on the day immediately following such record date.
(5) In the event the savings bank shall, at any time or from time to
time while any shares of the Series 1997-A Preferred Stock are outstanding,
issue, sell or exchange shares of Common Stock (other than pursuant to any right
or warrant to purchase or acquire shares of Common Stock referred to in
subparagraph (c)(3) hereof and other than pursuant to any dividend reinvestment
plan or employee or director incentive or benefit plan or arrangement, including
any employment, severance or consulting agreement of the savings bank or any
subsidiary of the savings bank heretofore or hereafter adopted) for
consideration having a fair market value (as determined by the board of
directors, whose determination of the matter shall be conclusive) on the date of
such issuance, sale or exchange less than the Current Market Price of such
shares on the date of such issuance, sale or exchange, then the Conversion Price
in effect immediately prior to such action shall be adjusted by multiplying such
Conversion Price by a fraction, the numerator of which shall be the sum of (i)
the Current Market Price of the shares of Common Stock outstanding on the day
the first public announcement of such issuance, sale or exchange plus (ii)
the fair market value of the consideration received by the savings bank in
respect of such issuance, sale or exchange of shares of Common Stock (including
any amount received by the savings bank in connection with the issuance of a
right or warrant), and the denominator of which shall be the product of (A) the
Current Market Price of a share of Common Stock on the day the first public
announcement of such issuance, sale or exchange, multiplied by (B) the sum of
the number of shares of Common Stock outstanding on such day and the number of
shares of Common Stock so issued, sold or exchanged by the savings bank, such
adjustment to become effective immediately prior to the opening of business on
the day immediately following the date of such issuance.
-8-
<PAGE>
(6) For all purposes relating to the series 1997-A Preferred Stock: the
"Current Market Price" of a security on any day shall mean the average of the
--------------------
Closing Prices (as hereinafter defined) of such security for the ten consecutive
Trading Days (as hereinafter defined) ending on the Trading Day immediately
preceding the day in question; the "Closing Price" of a security shall mean the
-------------
last sale price for such security as shown on the New York Stock Exchange
Composite Transactions Tape, or if no such sale has taken place on such day,
then the average of the closing bid and ask prices for such security on the New
York Stock Exchange, or, if such security is not listed or admitted to trading
on the New York Stock Exchange, then on the principal national securities
exchange on which such security is listed or admitted to trading, or, if such
security is not listed or admitted to trading on any national securities
exchange, then on the National Association of Securities Dealers Automated
Quotations National Market System, or, if such security is not quoted on such
National Market System, then the average of the closing bid and ask prices as
furnished by any New York Stock Exchange member firm selected from time to time
by the board of directors of the savings bank for such purposes (other than the
savings bank or any affiliate thereof); provided, that, if such security is not
-------- ----
listed, admitted to trading or quoted on any securities exchange or interdealer
quotation system the "Current Market Price" of such security shall be the fair
market value thereof as determined in good faith by the board of directors of
the savings bank; and "Trading Day" shall mean a day on which the New York Stock
-----------
Exchange or, if such security is not listed or admitted to trading thereon, the
principal national securities exchange on which the Common Stock is listed or
admitted to trading is open for the transaction of business or, if the Common
Stock is not so listed or admitted, then any day that is not a Saturday, Sunday
or other day on which depositary institutions in the City of Los Angeles or the
City of New York are authorized obligated by law to close.
(7) Whenever the Conversion Price is adjusted as provided herein, the
savings bank shall (i) compute the adjusted Conversion Price and cause to be
prepared a certificate signed by the chief financial or accounting officer of
the savings bank setting forth the adjusted Conversion Price and showing in
reasonable detail the facts upon which such adjustment is based and the
computation thereof, (ii) file such certificate with the transfer agent for
the Series 1997-A Preferred Stock, and (iii) notify the registered holder of the
Series 1997-A Preferred Stock of such adjustment and the adjusted Conversion
Price.
(8) Notwithstanding the provisions of this paragraph 4(c), no adjustment
in the Conversion Price shall be required unless such adjustment (plus any
adjustments not previously made) would require an increase or decrease of at
least one percent (1%) in the Conversion Price; provided, that any adjustments
--------
which by reason of this subparagraph 4(c)(8) are not required to be made shall
be carried forward and taken into account in any subsequent adjustment.
Notwithstanding any other provision of this paragraph 4(c), the savings bank
shall not be required to make any adjustment to the Conversion Price for the
issuance of any shares of Common
-9-
<PAGE>
Stock pursuant to any plan providing for the reinvestment of dividends or
interest payable on securities of the savings bank and the investment of
additional optional accounts in shares of Common Stock under such plan. The
savings bank may make such adjustments in the Conversion Price, in addition to
those required by this paragraph 4(c), as it considers to be advisable in order
to avoid or diminish any income tax to holders of the Series 1997-A Preferred
Stock resulting from any dividend or distribution or other reason. The savings
bank shall have the power to resolve any ambiguity or correct any error in this
paragraph 4(c) and its actions in doing so shall be final and conclusive.
(d) Consolidation, Merger or Certain Other Actions. In the event of
----------------------------------------------
a consolidation or merger or similar transaction (however named) pursuant to
which the outstanding shares of Common Stock are by operation of law exchanged
for, or changed, reclassified or converted into other stock or securities, or
cash or other property, or any combination thereof ("Consideration"), there
-------------
shall be no adjustment to the Conversion Price by virtue thereof, but the
outstanding shares of Series 1997-A Preferred Stock shall be assumed by and
shall become preferred stock of any successor or resulting entity (including the
savings bank and any entity that directly or indirectly owns all or any part of
the outstanding capital stock of such successor or resulting entity), having in
respect of such entity insofar as possible the same powers, preferences, and
relative, participating, optional or other special rights, and qualifications,
limitations or restrictions, that the Series 1997-A Preferred Stock had
immediately prior to such transaction, except that after such transaction each
share of Series 1997-A Preferred Stock shall be convertible, otherwise on the
terms and conditions provided hereby, into the Consideration so receivable by a
holder of the number of shares of Common Stock into which such shares of Series
1997-A Preferred Stock could have been converted immediately prior to such
transaction if such holder failed to exercise any rights of election to receive
any kind or amount of Consideration receivable upon such transaction. If the
savings bank shall enter into any agreement providing for any such transaction,
then the savings bank shall as soon as practicable thereafter give notice of
such agreement and the material terms thereof to each holder of Series 1997-A
Preferred Stock.
(e) Reserved Shares. The savings bank shall reserve out of the authorized
---------------
but unissued shares of its Common Stock, sufficient shares of such Common Stock
to provide for the conversion of shares of Series 1997-A Preferred Stock from
time to time as such shares of Series 1997-A Preferred Stock are presented for
conversion. The savings bank shall take all action necessary so that all shares
of Common Stock that may be issued upon conversion of shares of Series 1997-A
Preferred Stock will upon issue be validly issued, fully paid and nonassessable,
and free from all liens and charges in respect of the issuance or delivery
thereof.
-10-
<PAGE>
(f) Repayment of Certain Dividends to the Savings Bank. Any
--------------------------------------------------
funds that at any time shall have been deposited by the savings bank or on its
behalf with a paying or disbursing agent for the purpose of paying dividends on
any shares of Series 1997-A Preferred Stock which shall not be required for such
purpose because of the conversion of such shares of Series 1997-A Preferred
Stock shall forthwith after such conversion be repaid to the savings bank by
such paying or disbursing agent.
5. Liquidation Preference.
----------------------
(a) Liquidating Distributions. In the event of any
-------------------------
liquidation, dissolution or winding up of the savings bank, whether voluntary or
involuntary, the holders of shares of Series 1997-A Preferred Stock shall be
entitled to receive for each share thereof, out of the assets of the savings
bank legally available for distribution to shareholders under applicable law, or
the proceeds thereof, before any payment or distribution of such assets or
proceeds shall be made to holders of shares of Common Stock or any other Junior
Stock (subject to the rights of the holders of any class or series of equity
securities having preference with respect to distributions upon liquidation and
the savings bank's general creditors, including its depositors), liquidating
distributions in the amount of $25.00 per share, plus an amount per share equal
to any dividends theretofore declared but unpaid, without interest.
If the amounts available for distribution in respect of shares of
Series 1997-A Preferred Stock and any other outstanding Parity Stock are not
sufficient to satisfy the full liquidation rights of all of the outstanding
shares of Series 1997-A Preferred Stock and such Parity Stock, then the holders
of such outstanding shares shall share ratably in any such distribution of
assets in proportion to the full respective preferential amounts to which they
are entitled.
After payment of the full amount of the liquidating distribution to
which they are entitled pursuant to this paragraph 5(a), the holders of shares
of Series 1997-A Preferred Stock will not be entitled to any further
participation in any liquidation distribution of assets by the savings bank.
All distributions made in respect of Series 1997-A Preferred Stock in
connection with such a liquidation, dissolution or winding up of the savings
bank shall be made pro rata to the holders entitled thereto.
(b) Consolidation, Merger or Certain Other Actions. Neither
----------------------------------------------
the merger or other business combination of the savings bank with or into any
other person, nor the sale of all or substantially all of the assets of the
savings bank, shall be deemed to be a liquidation, dissolution or winding up of
the savings bank for purposes of this paragraph 5.
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6. Voting Rights.
-------------
(a) General. The holders of Series 1997-A Preferred Stock
-------
shall not be entitled to any voting rights, except to the extent, if any,
required by applicable law or as set forth below in this paragraph 6.
(b) Right to Elect Directors. If dividends on the shares of
------------------------
Series 1997-A Preferred Stock shall not have been paid for six Dividend Periods
the authorized number of directors of the savings bank shall thereupon be
increased by two. Subject to compliance with any requirement for regulatory
approval of (or non-objection to) persons serving as directors, the holders of
shares of Series 1997-A Preferred Stock, voting together as a class with the
holders of any other stock constituting Parity Stock as to dividends and upon
which the same voting rights as those of the Series 1997-A Preferred Stock have
been conferred and are irrevocable, shall have the exclusive right, but shall
not be obligated, to elect the two additional directors at the savings bank's
next annual meeting of shareholders and at each subsequent annual meeting until
dividends have been paid or declared on the Series 1997-A Preferred Stock and
set apart for payment for four consecutive Dividend Periods. Such directors
shall be deemed to be in a class separate from the classes of directors
established by Section 8 of the charter of the savings bank. The term of such
directors elected thereby shall terminate upon the payment or the declaration
and setting aside for payment of full dividends on the Series 1997-A Preferred
Stock for four consecutive Dividend Periods.
(c) Certain Voting Rights. So long as any shares of Series
---------------------
1997-A Preferred Stock are outstanding, the savings bank shall not, without the
consent or vote of the holders of at least two-thirds of the outstanding shares
of Series 1997-A Preferred Stock, voting separately as a class, (i) amend, alter
or repeal or otherwise change any provision of the charter of the savings bank
or this Supplementary Charter Section if such amendment, alteration, repeal or
change would materially and adversely affect the rights, preferences, powers or
privileges of the Series 1997-A Preferred Stock, or (ii) authorize, create,
issue or increase the authorized or issued amount of any class or series of any
equity securities of the savings bank, or any warrants, options or other rights
convertible or exchangeable into any class or series of any equity securities of
the savings bank, ranking prior to the Series 1997-A Preferred Stock, either as
to dividend rights or rights on liquidation, dissolution or winding up of the
savings bank.
The creation or issuance of stock that is Parity Stock or Junior
Stock in respect of the payment of dividends or the distribution of assets upon
liquidation, dissolution or winding up of the savings bank, or a merger,
consolidation, reorganization or other business combination in which the savings
bank is not the surviving or successor entity, or an amendment that increases
the number of authorized shares of Series 1997-A Preferred Stock or substitutes
the surviving entity
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in a merger or consolidation for the savings bank, shall not be deemed to be a
material and adverse change requiring a vote of the holders of shares of Series
1997-A Preferred Stock pursuant to this paragraph 6(c).
7. No Sinking Fund.
---------------
No sinking fund shall be established for the retirement or redemption
of shares of Series 1997-A Preferred Stock.
8. Preemptive Rights.
-----------------
No holder of shares of Series 1997-A Preferred Stock shall have any
preemptive rights in respect of any shares of the savings bank that may be
issued.
9. No Other Rights.
---------------
The shares of Series 1997-A Preferred Stock shall not have any powers,
designations, preferences or relative, participating, optional and other special
rights except as set forth in the charter, including this Supplementary Charter
Section or as otherwise required by law.
10. Compliance with Applicable Law.
------------------------------
Payments by the savings bank to holders of Series 1997-A Preferred
Stock in respect of dividends or the redemption of shares of Series 1997-A
Preferred Stock shall be subject to any restrictions and limitations placed on
capital distributions by the savings bank under applicable law and regulations.
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EXHIBIT 3.2
[LETTERHEAD OF GLENDALE FEDERAL BANK]
[SEAL]
VIA FEDERAL EXPRESS
- - -------------------
Kenneth P. Slosser
Assistant Regional Director
Office of Thrift Supervision
18300 Von Karmen Avenue, Suite 800
Irvine, California 92715
Dear Mr. Slosser:
Pursuant to Section 552.5(b)(2) of the OTS regulations for federal stock
associations, enclosed on behalf of Glendale Federal Bank, Federal Savings Bank
(the "Bank"), are three (3) copies of two proposed amendments to the Bank's
bylaws. I hereby certify that the proposed amendments are permissible under all
applicable laws, rules and regulations. The effect of both amendments is to
conform the provisions being amended to the parallel OTS model bylaw provisions.
Thus, the amendment to the first sentence of Article II, Section 7, of the
Bank's bylaws conforms that sentence to the first sentence of Article II,
Section 7, of the model bylaws and the amendment to the first sentence
of Article III, Section 6, of the Bank's bylaws conforms that sentence to the
first sentence of Article III, Section 6, of the model bylaws.
On December 20, 1994 the Bank's Board of Directors adopted such amendments,
effective upon completion of the notice and waiting period requirements of
Section 552.5(b)(2), and authorized this submission.
Very truly yours,
/s/ James R. Eller, Jr.
------------------------------
James R. Eller, Jr.
Enclosure
<PAGE>
AMENDED AND RESTATED BYLAWS
---------------------------
GLENDALE FEDERAL BANK, FEDERAL SAVINGS BANK
ARTICLE I - HOME OFFICE
The home office of the bank shall be at Glendale in the County of Los
Angeles, in the State of California.
ARTICLE II - SHAREHOLDERS
Section 1. Place of Meetings. All annual and special meetings of
shareholders shall be held at the home office of the bank or at such other place
in the State in which the principal place of business of the bank is located as
the board of directors may determine.
Section 2. Annual Meeting. A meeting of the shareholders of the bank for
the election of directors and for the transaction of any other business of the
bank shall be held annually within 120 days after the end of the bank's fiscal
year on the fourth Tuesday of October if not a legal holiday, and if a legal
holiday, then on the next day following which is not a legal holiday, at 10:00
a.m., or at such other date and time within such 120-day period as the board of
directors may determine.
Section 3. Special Meetings. To the extent any supplementary charter
section addresses any matter addressed in this section, the specific provisions
of the supplementary charter section shall govern the holders of any class or
series of preferred stock then outstanding by reason of such supplementary
charter section, notwithstanding anything to the contrary herein. Special
meetings of the shareholders for any purpose or purposes, unless otherwise
prescribed by the regulations of the Office of Thrift Supervision (the "OTS"),
may be called at any time by the chairman of the board, the president, or a
majority of the board of directors, and shall be called by the chairman of the
board, the president or the secretary upon the written request of the holders of
not less than one-tenth of all of the outstanding capital stock of the bank
entitled to vote at the meeting. Such written request shall state the purpose
or purposes of the meeting and shall be delivered to the home office of the bank
addressed to the chairman of the board, the president or the secretary.
Section 4. Conduct of Meetings. Annual and special meetings shall be
conducted in accordance with applicable regulations of the OTS and these bylaws.
The chairman of the
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board shall be the presiding officer at such meetings. If the chairman is not
able to preside, he shall designate a vice chairman to be the presiding officer.
If the chairman is unable to make such a designation, a majority of the
executive committee of the board of directors shall designate the presiding
officer. The business of the meetings need not be conducted in accordance with
any particular rules of procedure but shall be conducted in such manner as the
presiding officer shall determine will result in the orderly disposition of the
business to be conducted.
Section 5. NOTICE OF MEETINGS. To the extent any supplementary charter
section addresses any matter addressed in this section, the specific provisions
of the supplementary charter section shall govern the holders of any class or
series of preferred stock then outstanding by reason of such supplementary
charter section, notwithstanding anything to the contrary herein. Written notice
stating the place, day, and hour of the meeting and the purpose(s) for which the
meeting is called shall be delivered not fewer than 10 nor more than 50 days
before the date of the meeting, either personally or by mail, by or at the
direction of the chairman of the board, the president or the secretary, or the
directors calling the meeting, to each shareholder of record entitled to vote at
such meeting. If mailed, such notice shall be deemed to be delivered when
deposited in the mail, addressed to the shareholder at the address as it appears
on the stock transfer books or records of the bank as of the record date
prescribed in Section 6 of this Article II with postage prepaid. When any
shareholders' meeting, either annual or special, is adjourned for 30 days or
more, notice of the adjourned meeting shall be given as in the case of an
original meeting. It shall not be necessary to give any notice of the time and
place of any meeting adjourned for less than 30 days or of the business to be
transacted at the meeting, other than an announcement at the meeting at which
such adjournment is taken.
Section 6. FIXING OF RECORD DATE. For the purpose of determining
shareholders entitled to notice of or to vote at any meeting of shareholders or
any adjournment, or shareholders entitled to receive payment of any dividend, or
in order to make a determination of shareholders for any other proper purpose,
the board of directors shall fix in advance a date as the record date for any
such determination of shareholders. Such date in any case shall be not more than
60 days and, in case of a meeting of shareholders, not fewer than 10 days prior
to the date on which the particular action, requiring such determination of
shareholders, is to be taken. When a determination of shareholders entitled to
vote at any meeting of shareholders has been made as provided in this section,
such determination shall apply to any adjournment.
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Section 7. Voting Lists. At least 10 days before each meeting of the
shareholders, the officer or agent having charge of the stock transfer books for
shares of the bank shall make a complete list of the shareholders entitled to
vote at such meeting, or any adjournment, arranged in alphabetical order, with
the address and the number of shares held by each. This list of shareholders
shall be kept on file at the home office of the bank and shall be subject to
inspection by any shareholder at any time during usual business hours for a
period of 10 days prior to such meeting. Such list shall also be produced and
kept open at the time and place of the meeting and shall be subject to
inspection by any shareholder during the entire time of the meeting. The
original stock transfer books shall constitute prima facie evidence of the
shareholders entitled to examine such list or transfer books or to vote at any
meeting of shareholders.
In lieu of making the shareholder list available for inspection by
shareholders as provided in the preceding paragraph, the board of directors may
elect to follow the procedures prescribed in (S) 552.6(d) of the OTS's
regulations as now or hereafter in effect.
Section 8. Quorum. A majority of the outstanding shares of the bank
entitled to vote, represented in person or by proxy, shall constitute a quorum
at a meeting of shareholders. If less than a majority of the outstanding shares
is represented at a meeting, a majority of the shares so represented may adjourn
the meeting from time to time without further notice. At such adjourned meeting
at which a quorum shall be present or represented, any business may be
transacted which might have been transacted at the meeting as originally
notified. The shareholders present at a duly organized meeting may continue to
transact business until adjournment, notwithstanding the withdrawal of enough
shareholders to constitute less than a quorum.
Section 9. Proxies. At all meetings of shareholders, a shareholder may
vote by proxy executed in writing by the shareholder or by his duly authorized
attorney in fact. Proxies solicited on behalf of the management shall be voted
as directed by the shareholder or, in the absence of such direction, as
determined by a majority of the board of directors. No proxy shall be valid
more than eleven months from the date of its execution except for a proxy
coupled with an interest.
Section 10. Voting of Shares in the Name of Two or More Persons. When
ownership stands in the name of two or more persons, in the absence of written
directions to the bank to the contrary, at any meeting of the shareholders of
the bank any one or more of such shareholders may cast, in person or by proxy,
all votes to which such ownership is entitled. In the event an
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attempt is made to cast conflicting votes, in person or by proxy, by the several
persons in whose names shares of stock stand, the vote or votes to which those
persons are entitled shall be cast as directed by a majority of those holding
such and present in person or by proxy at such meeting, but no votes shall be
cast for such stock if a majority cannot agree.
Section 11. Voting of Shares by Certain Holders. Shares standing in the
name of another corporation may be voted by any officer, agent, or proxy as the
bylaws of such corporation may prescribe, or, in the absence of such provision,
as the board of directors of such corporation may determine. Shares held by an
administrator, executor, guardian or conservator may be voted by him, either in
person or by proxy, without a transfer of such shares into his name. Shares
standing in the name of a trustee may be voted by him, either in person or by
proxy, but no trustee shall be entitled to vote shares held by him without a
transfer of such shares into his name. Shares standing in the name of a
receiver may be voted by such receiver, and shares held by or under the control
of a receiver may be voted by such receiver without the transfer into his name
if authority to do so is contained in an appropriate order of the court or other
public authority by which such receiver was appointed.
A shareholder whose shares are pledged shall be entitled to vote such
shares until the shares have been transferred into the name of the pledgee, and
thereafter the pledgee shall be entitled to vote the shares so transferred.
Neither treasury shares of its own stock held by the bank nor shares held
by another corporation, if a majority of the shares entitled to vote for the
election of directors of such other corporation are held by the bank, shall be
voted at any meeting or counted in determining the total number of outstanding
shares at any given time for purposes of any meeting.
Section 12. Cumulative Voting. To the extent any supplementary charter
section addresses any matter addressed in this section, the specific provisions
of the supplementary charter section shall govern the holders of any class or
series of preferred stock then outstanding by reason of such supplementary
charter section, notwithstanding anything to the contrary herein. Every
shareholder entitled to vote at an election for directors shall have the right
to vote, in person or by proxy, the number of shares owned by the shareholder
for as many persons as there are directors to be elected and for whose election
the shareholder has a right to vote, or to cumulate the votes by giving one
candidate as many votes as the number of such directors to be elected multiplied
by the number of shares shall equal or by distributing such votes on the same
principle among any number of candidates.
4
<PAGE>
Section 13. Inspectors of Election. In advance of any meeting of
shareholders, the board of directors may appoint any persons other than nominees
for office as inspectors of election to act at such meeting or any adjournment.
The number of inspectors shall be either one or three. Any such appointment
shall not be altered at the meeting. If inspectors of election are not so
appointed, the chairman of the board or the president may, or on the request of
not fewer than 10 percent of the votes represented at the meeting shall, make
such appointment at the meeting. If appointed at the meeting, the majority of
the votes present shall determine whether one or three inspectors are to be
appointed. In case any person appointed as inspector fails to appear or fails or
refuses to act, the vacancy may be filled by appointment by the board of
directors in advance of the meeting or at the meeting by the chairman of the
board or the president.
Unless otherwise prescribed by regulations of the OTS, the duties of such
inspectors shall include: determining the number of shares and the voting power
of each share, the shares represented at the meeting, the existence of a quorum,
and the authenticity, validity and effect of proxies; receiving votes, ballots,
or consents; hearing and determining all challenges and questions in any way
arising in connection with the rights to vote; counting and tabulating all votes
or consents; determining the result; and such acts as may be proper to conduct
the election or vote with fairness to all shareholders.
Section 14. Nominating Committee. To the extent any supplementary charter
section addresses any matter addressed in this section, the specific provisions
of the supplementary charter section shall govern the holders of any class or
series of preferred stock then outstanding by reason of such supplementary
charter section, notwithstanding anything to the contrary herein. The board of
directors shall act as a nominating committee for selecting the management
nominees for election as directors. Except in the case of a nominee substituted
as a result of the death or other incapacity of a management nominee, the
nominating committee shall deliver written nominations to the secretary at least
20 days prior to the date of the annual meeting. Upon delivery, such nominations
shall be posted in a conspicuous place in each office of the bank. No
nominations for directors except those made by the nominating committee shall be
voted upon at the annual meeting unless other nominations by shareholders are
made in writing and delivered to the secretary of the bank at least five days
prior to the date of the annual meeting. Upon delivery, such nominations shall
be posted in a conspicuous place in each office of the bank. Ballots bearing the
names of all persons nominated by the nominating committee and by shareholders
shall be provided for use at the annual meeting. However, if the nominating
committee shall fail or refuse to act at least 20 days prior to
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<PAGE>
the annual meeting, nominations for directors may be made at the annual meeting
by any shareholder entitled to vote and shall be voted upon.
Section 15. New Business. Any new business to be taken up at the annual
meeting shall be stated in writing and filed with the secretary of the bank at
least five days before the date of the annual meeting, and all business so
stated, proposed, and filed shall be considered at the annual meeting, but no
other proposal shall be acted upon at the annual meeting. Any shareholder may
make any other proposal at the annual meeting and the same may be discussed
and considered, but unless stated in writing and filed with the secretary at
least five days before the meeting, such proposal shall be laid over for action
at an adjourned, special, or annual meeting of the shareholders taking place
30 days or more thereafter. This provision shall not prevent the
consideration and approval or disapproval at the annual meeting of reports of
officers, directors, and committees; but in connection with such reports, no
new business shall be acted upon at such annual meeting unless stated and
filed as herein provided.
Section 16. Informal Action by Shareholders. To the extent any
supplementary charter section addresses any matter addressed in this section,
the specific provisions of the supplementary charter section shall govern the
holders of any class or series of preferred stock then outstanding by reason of
such supplementary charter section, notwithstanding anything to the contrary
herein. Any action required to be taken at a meeting of the shareholders, or any
other action which may be taken at a meeting of shareholders, may be taken
without a meeting if a consent in writing, setting forth the action so taken,
shall be given by all of the shareholders entitled to vote with respect to the
subject matter.
ARTICLE III - BOARD OF DIRECTORS
Section 1. General Powers. The business and affairs of the bank shall be
under the direction of its board of directors. The board of directors shall
annually elect a chairman of the board and a president from among its members
and shall designate, when present, either the chairman of the board or the
president to preside at its meetings.
Section 2. Number and Term. The authorized number of directors shall not
be fewer than five nor more than fifteen (i) subject to the terms of any
supplementary charter section and (ii) except when a greater number is approved
by the OTS. Except as may be required in connection with the election of
directors as provided under the terms of any supplementary charter section,
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the exact number of directors shall be fixed from time to time by the board of
directors pursuant to the resolution adopted by a majority of the entire board
of directors.
The directors shall be divided into three classes, as nearly equal in
number as possible. The members of each class shall be elected for a term of
three years and until their successors are elected and qualified. One class
shall be elected by ballot annually.
Section 3. Regular Meetings. A regular meeting of the board of directors
shall be held without other notice than this by law immediately after, and at
the same place as the annual meeting of shareholders. The board of directors may
provide, by resolution, the time and place, within the bank's normal lending
territory, for the holding of additional regular meetings without other notice
than such resolution.
Section 4. Qualifications. Each director shall at all times be the
beneficial owner of not less than 100 shares of capital stock of the bank unless
the bank is a wholly-owned subsidiary of a holding company.
Section 5. Special Meetings. Special meetings of the board of directors
may be called by or at the request of the chairman of the board, the president,
or one-third of the directors. The persons authorized to call special meetings
of the board of directors may fix any place, within the bank's normal lending
territory, as the place for holding any special meeting of the board of
directors called by such persons.
Members of the board of directors may participate in special meetings by
means of conference telephone or similar communications equipment by which all
persons participating in the meeting can hear each other.
Section 6. Notice. Written notice of any special meeting shall be given
to each director at least two days prior thereto when delivered personally or by
telegram or at least five days prior thereto when delivered by mail at the
address at which the director is most likely to be reached. Such notice shall be
deemed to be delivered when deposited in the mail so addressed, with postage
prepaid if mailed or when delivered to the telegraph company if sent by
telegram. Any director may waive notice of any meeting by a writing filed with
the secretary. The attendance of a director at a meeting shall constitute a
waiver of notice of such meeting, except where a director attends a meeting for
the express purpose of objecting to the transaction of any business because the
meeting is not lawfully called or convened. Neither the business to be
transacted at, nor the
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purpose of, any meeting of the board of directors need be specified in the
notice or waiver of notice of such meeting.
Section 7. Quorum. A majority of the number of directors fixed pursuant to
Section 2 of this Article III or by resolution adopted by a majority of the
entire board of directors shall constitute a quorum for the transaction of
business at any meeting of the board of directors; but if less than such
majority is present at a meeting, a majority of the directors present may
adjourn the meeting from time to time. Notice of any adjourned meeting shall be
given in the same manner as prescribed by Section 6 of this Article III.
Section 8. Manner of Acting. The act of the majority of the directors
present at a meeting at which a quorum is present shall be the act of the board
of directors, unless a greater number is prescribed by regulation of the OTS or
by these bylaws.
Section 9. Action Without a Meeting. Any action required or permitted to
be taken by the board of directors at a meeting may be taken without a meeting
if a consent in writing, setting forth the action so taken, shall be signed by
all of the directors.
Section 10. Resignation. Any director may resign at any time by sending a
written notice of such resignation to the home office of the bank addressed to
the chairman of the board or the president. Unless otherwise specified, such
resignation shall take effect upon receipt by the chairman of the board or the
president. More than three consecutive absences from regular meetings of the
board of directors, unless excused by resolution of the board of directors,
shall automatically constitute a resignation, effective when such resignation is
accepted by the board of directors.
Section 11. Newly Created Directorships and Vacancies. To the extent any
supplementary charter section addresses any matter addressed in this section,
the specific provisions of the supplementary charter section shall govern the
holders of any class or series of preferred stock then outstanding by reason of
such supplemental charter section, notwithstanding anything to the contrary
herein. Any vacancies in the board of directors resulting from death,
resignation, retirement, disqualification, removal from office or other cause
shall be filled by the affirmative vote of a majority of directors then in
office, although less than a quorum, or by the sole remaining director or by the
shareholders at the next election of directors. Directors so chosen shall hold
office for a term expiring at the annual meeting of shareholders at which the
term of the class to which they have been elected expires. A director elected to
fill a vacancy by reason of the increase in the number of directorships
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shall be elected by a majority vote of the directors then in office, although
less than a quorum of the board of directors, to serve until the next election
of directors by shareholders. If the number of directors is changed, any
increase or decrease shall be apportioned among the three classes so as to make
all classes as nearly equal in number as possible. No decrease in the number of
directors constituting the board of directors shall shorten the term of any
incumbent director.
Section 12. Compensation. Directors, as such, may receive a stated salary
for their services. By resolution of the board of directors, a reasonable fixed
sum, and reasonable expenses of attendance, if any, may be allowed for actual
attendance at each regular or special meeting of the board of directors.
Members of either standing or special committees may be allowed such
compensation for actual attendance at committee meetings as the board of
directors may determine.
Section 13. Presumption of Assent. A director of the bank who is present
at a meeting of the board of directors at which action on any bank matter is
taken shall be presumed to have assented to the action taken unless his dissent
or abstention shall be entered in the minutes of the meeting or unless he shall
file a written dissent to such action with the person acting as the secretary of
the meeting before the adjournment thereof or shall forward such dissent by
registered mail to the secretary of the bank within five days after the date a
copy of the minutes of the meeting is received. Such right to dissent shall not
apply to a director who voted in favor of such action.
Section 14. Removal of Directors. To the extent any supplementary charter
section addresses any matter addressed in this section, the specific provisions
of the supplementary charter section shall govern the holders of any class or
series of preferred stock then outstanding by reason of such supplementary
charter section, notwithstanding anything to the contrary herein. At a meeting
of shareholders called expressly for that purpose, any director may be removed
only for cause by a vote of the holders of a majority of the shares then
entitled to vote at an election of directors. If less than the entire board of
directors is to be removed, no one of the directors may be removed if the votes
cast against the removal would be sufficient to elect a director if then
cumulatively voted at an election of the class of directors of which such
director is a part. Cause for removal shall exist only if the director whose
removal is proposed has been convicted of a felony by a court of competent
jurisdiction or has been adjudged to be liable for gross negligence or
misconduct in the performance of such director's duty to the bank and such
adjudication is no longer subject to direct appeal. Whenever the holders of the
shares of any class are entitled to elect one or more directors by the
provisions of
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this charter or supplemental sections thereto, the provisions of this section
shall apply, in respect to the removal of a director or directors so elected, to
the vote of the holders of the outstanding shares of that class and not to the
vote of the outstanding shares as a whole.
ARTICLE IV - EXECUTIVE AND OTHER COMMITTEES
Section 1. Appointment. The board of directors, by resolution adopted by a
majority of the full board, may designated the chief executive officer and two
or more of the other directors to constitute an executive committee. The
designation of any committee pursuant to this Article IV and the delegation of
authority shall not operate to relieve the board of directors, or any director,
of any responsibility imposed by law or regulation.
Section 2. Authority. The executive committee, when the board of directors
is not in session, shall have and may exercise all of the authority of the
board of directors except to the extent, if any, that such authority shall be
limited by the resolution appointing the executive committee; and except also
that the executive committee shall not have the authority of the board of
directors with reference to: the declaration of dividends; the amendment of the
charter or bylaws of the bank, or recommending to the stockholders a plan of
merger, consolidation, or conversion; the sale, lease, or other disposition of
all or substantially all of the property and assets of the bank otherwise than
in the usual and regular course of its business; a voluntary dissolution of the
bank; a revocation of any of the foregoing; or the approval of a transaction in
which any member of the executive committee, directly or indirectly, has any
material beneficial interest.
Section 3. Tenure. Subject to the provisions of Section 8 of this Article
IV, each member of the executive committee shall hold office until the next
regular annual meeting of the board of directors following his or her
designation and until a successor is designated as a member of the executive
committee.
Section 4. Meetings. Regular meetings of the executive committee may be
held without notice at such times and places as the executive committee may fix
from time to time by resolution. Special meetings of the executive committee may
be called by any member thereof upon not less than one day's notice stating the
place, date, and hour of the meeting, which notice may be written or oral. Any
member of the executive committee may waive notice of any meeting and no notice
of any meeting need be given to any member thereof who attends in person. The
notice of a meeting of
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the executive committee need not state the business proposed to be transacted at
the meeting.
Section 5. Quorum. A majority of the members of the executive committee
shall constitute a quorum for the transaction of business at any meeting
thereof, and action of the executive committee must be authorized by the
affirmative vote of a majority of the members present at a meeting at which a
quorum is present.
Section 6. Action Without a Meeting. Any action required or permitted to
be taken by the executive committee at a meeting may be taken without a meeting
if a consent in writing, setting forth the action so taken, shall be signed by
all of the members of the executive committee.
Section 7. Vacancies. Any vacancy in the executive committee may be
filled by a resolution adopted by a majority of the full board of directors.
Section 8. Resignations and Removal. Any member of the executive
committee may be removed at any time with or without cause by resolution adopted
by a majority of the full board of directors. Any member of the executive
committee may resign from the executive committee at any time by giving written
notice to the president or secretary of the bank. Unless otherwise specified,
such resignation shall take effect upon its receipt. The acceptance of such
resignation shall not be necessary to make it effective.
Section 9. Procedure. The executive committee shall elect a presiding
officer from its members and may fix its own rules of procedure which shall not
be inconsistent with these bylaws. It shall keep regular minutes of its
proceedings and report the same to the board of directors for its information at
the meeting held next after the proceedings shall have occurred.
Section 10. Other Committees. The board of directors may by resolution
establish an audit, loan, or other committee composed of directors as they may
determine to be necessary or appropriate for the conduct of the business of the
bank and may prescribe the duties, constitution, and procedures thereof.
ARTICLE V - OFFICERS
Section 1. Positions. The officers of the bank shall be a president, one
or more vice presidents, a secretary, and a treasurer, each of whom shall be
elected by the board of directors. The board of directors may also designate
the chairman of the board as an officer. The president shall be the
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<PAGE>
chief executive officer, unless the board of directors designates the chairman
of the board as chief executive officer. The president shall be a director of
the bank. The offices of the secretary and treasurer may be held by the same
person and a vice president may also be either the secretary or the treasurer.
The board of directors may designate one or more vice presidents as executive
vice president or senior vice president. The board of directors may also elect
or authorize the appointment of such other officers as the business of the bank
may require. The officers shall have such authority and perform such duties as
the board of directors may from time to time authorize or determine. In the
absence of action by the board of directors, the officers shall have such powers
and duties as generally pertain to their respective offices.
Section 2. Election and Term of Office. The officers of the bank shall be
elected annually at the first meeting of the board of directors held after each
annual meeting of the shareholders. If the election of officers is not held at
such meeting, such election shall be held as soon thereafter as possible. Each
officer shall hold office until a successor has been duly elected and qualified
or until the officer's death, resignation or removal in the manner hereinafter
provided. Election or appointment of an officer, employee or agent shall not of
itself create contractual rights. The board of directors may authorize the bank
to enter into an employment contract with any officer in accordance with
regulations of the OTS; but no such contract shall impair the right of the board
of directors to remove any officer at any time in accordance with Section 3 of
this Article V.
Section 3. Removal. Any officer may be removed by the board of directors
whenever in its judgment the best interests of the bank will be served thereby,
but such removal, other than for cause, shall be without prejudice to the
contractual rights, if any, of the person so removed.
Section 4. Vacancies. A vacancy in any office because of death,
resignation, removal, disqualification or otherwise may be filled by the board
of directors for the unexpired portion of the term.
Section 5. Remuneration. The remuneration of the officers shall be fixed
from time to time by the board of directors.
ARTICLE VI - CONTRACTS, LOANS, CHECKS, AND DEPOSITS
Section 1. Contracts. To the extent permitted by regulations of the OTS,
and except as otherwise prescribed by these bylaws with respect to certificates
for shares, the board
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<PAGE>
of directors may authorize any officer, employee or agent of the bank to enter
into any contract or execute and deliver any instrument in the name of and on
behalf of the bank. Such authority may be general or confined to specific
instances.
Section 2. Loans. No loans shall be contracted on behalf of the bank and
no evidence of indebtedness shall be issued in its name unless authorized by the
board of directors. Such authority may be general or confined to specific
instances.
Section 3. Checks, Drafts, etc. All checks, drafts, or other orders for
the payment of money, notes, or other evidences of indebtedness issued in the
name of the bank shall be signed by one or more officers, employees or agents of
the bank in such manner as shall from time to time be determined by the board of
directors.
Section 4. Deposits. All funds of the bank not otherwise employed shall be
deposited from time to time to the credit of the bank in any duly authorized
depositories as the board of directors may select.
ARTICLE VII - CERTIFICATES FOR SHARES AND THEIR TRANSFER
Section 1. Certificates for Shares. Certificates representing shares of
capital stock of the bank shall be in such form as shall be determined by the
board of directors and, to the extent required by regulations of the OTS,
approved by the OTS. Such certificates shall be signed by the chief executive
officer or by any other officer of the bank authorized by the board of
directors, attested by the secretary or an assistant secretary, and sealed with
the corporate seal or a facsimile thereof. The signatures of such officers upon
a certificate may be facsimiles if the certificate is manually signed on behalf
of a transfer agent or a registrar other than the bank itself or one of its
employees. Each certificate for shares of capital stock shall be consecutively
numbered or otherwise identified. The name and address of the person to whom the
shares are issued, with the number of shares and date of issue, shall be entered
on the stock transfer books of the bank. All certificates surrendered to the
bank for transfer shall be cancelled and no new certificate shall be issued
until the former certificate for a like number of shares has been surrendered
and cancelled, except that in the case of a lost or destroyed certificate, a new
certificate may be issued upon such terms and indemnity to the bank as the board
of directors may prescribe.
Section 2. Transfer of Shares. Transfer of shares of capital stock of the
bank shall be made only on its stock transfer books. Authority for such transfer
shall be given only
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<PAGE>
by the holder of record or by his legal representative, who shall furnish proper
evidence of such authority, or by his attorney authorized by a duly executed
power of attorney and filed with the bank. Such transfer shall be made only on
surrender for cancellation of the certificate for such shares. The person in
whose name shares of capital stock stand on the books of the bank shall be
deemed by the bank to be the owner for all purposes.
ARTICLE VIII - FISCAL YEAR; ANNUAL AUDIT
The fiscal year of the bank shall end on the 30th day of June each year.
The bank shall be subject to an annual audit as of the end of its fiscal year
by independent public accountants appointed by and responsible to the board of
directors. The appointment of such accountants shall be subject to annual
ratification by the shareholders.
ARTICLE IX - DIVIDENDS
Subject to the terms of the bank's charter and the regulations and orders
of the OTS, the board of directors may, from time to time, declare, and the bank
may pay, dividends on its outstanding shares of capital stock.
ARTICLE X - CORPORATE SEAL
The board of directors shall provide a bank seal which shall be two
concentric circles between which shall be the name of the bank. The center may
contain any or all of the following: the year or incorporation, the word
"incorporated" followed by the year of incorporation, the word "seal", the words
"United States" or "United States of America" (or the initials "U.S." or
"U.S.A.") and an appropriate scroll or emblem.
ARTICLE XI - AMENDMENTS
These bylaws may be amended in a manner consistent with the regulations of
the OTS at any time by a majority vote of the full board of directors or by a
majority vote of the votes cast by the shareholders of the bank at any legal
meeting.
ARTICLE XII - EMERGENCY PREPAREDNESS
Section 1. Emergency Operations by Surviving Staff. In the event of an
emergency declared by the President of the United States or the person
performing his functions, the officers and employees of this bank will continue
to conduct the affairs of
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<PAGE>
the bank under such guidance from the directors as may be available except as to
matters which by statute require specific approval of the board of directors and
subject to conformance with any governmental directives during the emergency.
Section 2. Emergency Operations by Directors or Members of the Executive
Committee. The board of directors shall have the power, in the absence or
disability of any officer, or upon the refusal of any officer to act, to
delegate and prescribe such officer's powers and duties to any other officer, or
to any director, for the time being. In the event of a state of disaster of
sufficient severity to prevent the conduct and management of the affairs and
business of the bank by its directors and officers as contemplated by these
bylaws, any two or more available members of the then incumbent executive
committee shall constitute a quorum of that committee for the full conduct and
management of the affairs and business of the bank in accordance with the
provisions of Article III of these bylaws. In the event of the unavailability,
at such time, of a minimum of two members of the then incumbent executive
committee, any three available directors shall constitute the executive
committee for the full conduct and management of the affairs and business of the
bank in accordance with the foregoing provisions of this section. This bylaw
shall be subject to implementation by resolutions of the board of directors
passed from time to time for that purpose, and any provisions of these bylaws
(other than this section) and any resolutions which are contrary to the
provisions of this section or to the provisions of any such supplementary
resolutions shall be suspended until it shall be determined by any interim
executive committee acting under this section that it shall be to the advantage
of this bank to resume the conduct and management of its affairs and business
under all of the other provisions of these bylaws.
Section 3. Officer Succession. If consequent upon war or warlike damage or
disaster, the president of this bank cannot be located by the then acting home
office or is unable to assume or to continue normal executive duties, then the
authority and duties of the president shall, without further action of the board
of directors, be automatically assumed by one of the following persons in the
order designated: (list of names in order of succession is shown in the official
minutes of the bank and in the certified copies which are under seal in various
depositories).
Any one of the above persons who in accordance with this resolution
assumes the authority and duties of the president shall continue to serve until
he resigns or until five-sixths of the other officers who are attached to the
then acting home office decide in writing he is unable to perform said duties or
until the elected president of this bank, or a person higher on
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<PAGE>
the above list, shall become available to perform the duties of president of the
bank. If consequent upon war or warlike damage or disaster, the treasurer of
this bank cannot be located by the then acting home office or is unable to
assume or to continue normal executive duties, then the authority and duties of
the treasurer shall, without further action by the board of directors, be
automatically assumed by one of the following persons in the order designed:
(list of names in order of succession is shown in the official minutes of the
bank and in the certified copies which are under seal in various depositories).
The persons assuming the authority and duties of treasurer in accordance
with this resolution shall serve until (1) the elected treasurer or person whose
name is higher on the above list shall be able to function as treasurer, or (2)
until he resigns or is unable as determined by the acting president to perform
the duties of his office. In the case of subparagraph (2) of this paragraph,
the next eligible and available person on the above list shall assume the
authority and duties of the treasurer. Anyone dealing with this bank may accept
a certification by any three officers that a specified individual is acting as
president or that a specified individual is acting as treasurer in accordance
with this bylaw; and anyone accepting such certification may continue to
consider it in force until notified in writing of a change, said notice of
change to carry the signatures of three officers of the bank.
Section 4. Providing for Alternate Locations. The offices of the bank at
which its business shall be conducted shall be the home office thereof located
at 700 North Brand Boulevard, Glendale, California 91203 (and branches, if any),
and any other legally authorized location which may be leased or acquired by
this bank to carry on its business. During an emergency resulting in any
authorized place of business of this bank being unable to function, the business
ordinarily conducted at such location shall be relocated elsewhere in suitable
quarters, in addition to or in lieu of the locations heretofore mentioned, as
may be designated by the board of directors or by the executive committee or by
such persons as are then, in accordance with resolutions adopted from time to
time by the board of directors dealing with the exercise of authority in the
time of such emergency, conducting the affairs of this bank.
Any temporarily relocated place of business of this bank shall be returned
to its legally authorized location as soon as practicable and such temporary
place of business shall then be discontinued.
Section 5. Providing for Acting Home Offices. In case of, and provided
that, because of war or warlike damage or disaster,
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<PAGE>
the home office of this bank is unable temporarily to continue its functions,
the Montrose Branch, located at 2350 Honolulu Avenue, Montrose, California
91020, shall automatically and without further action of the board of directors,
become the "acting home office of this bank"; if by reason of said war or
warlike damage or disaster both the home office of this bank and the said
Montrose Branch of this bank are unable to carry on their functions, then and in
such case, the Sherman Oaks Branch of this bank, located at 13730 Riverside
Drive, Sherman Oaks, California 91413, shall without further action of the board
of directors, become the "acting home office of this bank"; and if neither the
Montrose Branch nor the Sherman Oaks Branch can carry on its functions, then the
Beverly Hills Branch of this bank, located at 9450 Wilshire Boulevard, Beverly
Hills, California 90212, shall without further action of the board of directors,
become the "acting home office of this bank"; and if neither the Montrose
Branch, the Sherman Oaks Branch nor the Beverly Hills Branch can carry on its
functions, then the Newport Beach Branch of this bank, located at 100 Newport
Center Drive, Newport Beach, California 92660, shall without further action of
the board of directors, become the "acting home office of this bank"; and if
neither the Montrose Branch, the Sherman Oaks Branch, the Beverly Hills Branch
nor the Newport Beach Branch can carry on its functions, then the Ventura
Branch of this bank, located at 472 South Mill Road, Ventura, California 93006,
shall without further action of the board of directors, become the "acting home
office of this bank"; and if neither the Montrose Branch, the Sherman Oaks
Branch, the Beverly Hills Branch, the Newport Beach Branch nor the Ventura
Branch can carry on its functions, then the San Mateo Branch of this bank
located at 444 South El Camino Real, San Mateo, California 94402, shall without
further action of the board of directors, become the "acting home office of this
bank"; and if neither the Montrose Branch, the Sherman Oaks Branch, the Beverly
Hills Branch, the Newport Center Branch, the Ventura Branch nor the San Mateo
Branch can carry on its functions, then the East Las Olas Branch of this bank
located at 301 East Las Olas Boulevard, Fort Lauderdale, Florida 33301, shall
without further action of the board of directors, become the "acting home office
of this bank"; and if neither the Montrose Branch, the Sherman Oaks Branch, the
Beverly Hills Branch, the Newport Center Branch, the Ventura Branch, the San
Mateo Branch nor the East Las Olas Branch can carry on its functions, then the
Fresno Branch located at 1177 Fulton Mall, Fresno, California 93721, shall
without further action of the board of directors, become the "acting home office
of this bank." The home office shall resume its functions at its legally
authorized location as soon as practicable.
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<PAGE>
CERTIFICATE OF SECRETARY
OF
GLENDALE FEDERAL BANK,
FEDERAL SAVINGS BANK
I, James R. Eller, Jr., do hereby certify that:
1. I am the duly elected and acting Secretary of Glendale Federal Bank,
Federal Savings Bank, a federally chartered stock savings bank (the "Bank").
2. The foregoing Amended and Restated Bylaws were validly authorized and
approved by resolutions of the Board of Directors of the Bank duly adopted on
July 27, 1993, true and complete copies of which are attached hereto as Exhibit
- - -------------
A, and such resolutions are in full force and effect on the date hereof and have
not been amended, modified or repealed.
IN WITNESS THEREOF, I have executed this Certificate as Secretary of the
Bank this 17th day of August, 1993.
----
/s/ James R. Eller, Jr.
--------------------------------------
James R. Eller, Jr.
Secretary
<PAGE>
EXHIBIT A
RESOLUTIONS ADOPTED BY THE BOARD OF DIRECTORS
OF
GLENDALE FEDERAL BANK, FEDERAL SAVINGS BANK
WHEREAS, the Bank has entered into a plan of reorganization (the "Plan
of Reorganization"), dated as of June 30, 1993, to which Plan of Reorganization
GLENFED, Inc., a Delaware corporation, which is currently the holding company
for the Bank ("GLENFED"), and Glendale Investment Corporation, a California
corporation, which is a wholly-owned subsidiary of the Bank ("Glendale
Investment"), are also parties, for the purpose of assisting the Bank in
complying with the regulatory capital requirements imposed on the Bank pursuant
to a prompt corrective action directive issued by the Office of Thrift
Supervision (the "OTS"); and
WHEREAS, the Plan of Reorganization provides for certain adjustments to
the authorized and outstanding securities of the Bank, including a reduction in
the number of shares of common stock of the Bank outstanding prior to completion
of the transactions provided for in the Plan of Reorganization by means of a
reverse stock split (the "Reverse Stock Split") in which each ten outstanding
shares of common stock shall be combined into one such outstanding share, and a
reclassification (the "Reclassification") of the outstanding shares of 12%
Noncumulative Perpetual Preferred Stock, Series B, and 12% Noncumulative
Perpetual Preferred Stock, Series C, of the Bank into a new series of
preferred stock of the Bank to be designated "Noncumulative Preferred Stock,
Series D" (the "Series D Preferred Stock") and the concurrent creation of an
additional new series of preferred stock of the Bank to be designated
"Noncumulative Preferred Stock, Series E" (the "Series E Preferred Stock"); and
WHEREAS, proposed forms of amendment to the federal charter (the
"Charter") and bylaws (the "Bylaws") of the Bank, including proposed forms of
supplementary charter sections providing for the Series D Preferred Stock and
the Series E Preferred Stock, have been presented to and discussed with the
Board of Directors at this meeting, which forms have been prepared for the
purposes of effecting the Reverse Stock Split and the Reclassification, making
certain other amendments to the Charter and Bylaws for the purpose of conforming
the provisions thereof to the current regulations of the OTS, deleting certain
provisions thereof which
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<PAGE>
are no longer effective and restating the Charter and the Bylaws, including all
amendments thereto, in full.
NOW, THEREFORE, BE IT RESOLVED, that the forms of amended and restated
Charter and Bylaws of the Bank presented at this meeting, including the
supplementary charter sections referred to above, are hereby approved; and
RESOLVED FURTHER, that the chief executive officer of the Bank, and such
other officers of the Bank as he shall designate, are hereby authorized and
empowered to take all such action and file all such applications, notices or
other documents as they may deem necessary or appropriate in order to cause such
amendments to the Charter and the Bylaws, with any such further amendments or
other modifications thereto as such officers shall with the advice of legal
counsel deem necessary or appropriate as a result of suggestions of the OTS or
otherwise and not contrary to the general intents and purposes of the Plan of
Reorganization and these resolutions, to become effective concurrently with the
completion of the other transactions provided for in the Plan of Reorganization,
all as contemplated and provided for therein; and
RESOLVED FURTHER, that such amendments to the Charter and Bylaws shall be
submitted to GLENFED as the sole shareholder of the Bank for its approval and
adoption, as required by the Charter, with the recommendation of this Board of
Directors that such amendments be approved by such shareholder; and
RESOLVED FURTHER, that the amended and restated Charter and Bylaws of the
Bank in the forms filed with the OTS shall be placed in the minute books of the
Bank and thereby made a part of the permanent record of the Bank.
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<PAGE>
BYLAW AMENDMENTS
<PAGE>
EXCERPT FROM THE MINUTES OF THE MEETING OF THE BOARD OF DIRECTORS OF GLENDALE
FEDERAL BANK, FSB, HELD DECEMBER 20, 1994.
BYLAW AMENDMENTS
- - ----------------
Mr. Eller stated that management proposed that the Bank's Bylaws be amended to
(i) require that the list of the Bank's shareholders that is prepared before
each shareholders, meeting be prepared at least twenty days, instead of ten
days, prior to such meeting and (ii) reduce from two days to 24 hours the
minimum period for written notice of special meetings of the Board of Directors
given personally or by telegram. He stated that the proposed Bylaw amendments
would conform the Bank's Bylaws to parallel provisions in the OTS's model
bylaws. He explained that notice of the proposed Bylaw amendments must be
submitted to the OTS at least thirty days prior to their effective date.
Upon motion duly made and seconded, the Board of Directors unanimously adopted
the following resolution:
RESOLVED, that, effective upon completion of the notice and waiting period
requirements of Section 552.5(b)(2) of the regulations of the Office of
Thrift Supervision for Federally Chartered Institutions, the Bylaws of the
Bank are hereby amended as follows:
22
<PAGE>
1. The first sentence of Article II, Section 7, of the Bylaws is hereby
amended in its entirety to read as follows:
"At least 20 days before each meeting of the shareholders, the officer or
agent having charge of the stock transfer books for shares of the bank
shall make a complete list of the shareholders entitled to vote at such
meeting, or any adjournment, arranged in alphabetical order, with the
address and the number of shares held by each."
2. The first sentence of Article III, Section 6, of the Bylaws is hereby
amended in its entirety to read as follows:
"Written notice of any special meeting shall be given to each director at
least 24 hours prior thereto when delivered personally or by telegram and
at least five days prior thereto when delivered by mail at the address at
which the director is most likely to be reached."
RESOLVED FURTHER, that the Chief Executive Officer, the Senior Executive Vice
President and the Secretary of the Bank, and any of them, are hereby authorized
and directed to submit to the Office of Thrift Supervision the amendments to the
Bylaws of the Bank so adopted, together with the certification required by such
Section 552.5(b) (2).
23
<PAGE>
Bylaw Amendment
- - ---------------
Mr. Fink stated that the OTS had indicated that it has no objection to the
proposed amendment to the Bank's Bylaws previously presented to the Directors
that would set a mandatory retirement age for Directors.
Upon motion duly made and seconded, the Board of Directors unanimously adopted
the following resolution:
RESOLVED, that Section 4 of Article III of the Bylaws is hereby amended in
its entirety to read as follows:
Section 4. Qualifications. Each director shall at all times be the
beneficial owner of not less than 100 shares of capital stock of the bank
unless the bank is a wholly-owned subsidiary of a holding company. No
person of an age 70 years or older shall be eligible for election,
reelection, appointment, or reappointment to the board of directors of
the bank. No director shall serve as such beyond the annual meeting of the
bank immediately following the attainment of age 70.
Excerpt from the Minutes of the Meeting of the Board of Directors of Glendale
Federal Bank, FSB, held February 23, 1994, Pages 1 and 2.
<PAGE>
EXHIBIT 10.6
GLENDALE FEDERAL BANK
DIRECTORS' RETIREMENT PLAN
--------------------------
As Amended July 26, 1994
[As Amended November 28, 1995]
[As Amended December 17, 1996]
[As Amended June 23, 1997]
GLENDALE FEDERAL BANK, FEDERAL SAVINGS BANK hereby adopts the Glendale
Federal Bank Directors' Retirement Plan for certain members of the Board of
Directors of the Bank and for certain former members of the Board of Directors
of GLENFED who are not employees of the Bank, GLENFED or any of their respective
subsidiaries. The purpose of the Plan is to recognize and reward the service
devoted to the Bank and GLENFED by Directors, to revise and confirm in plan form
the benefits the Bank is obligated to provide to Directors pursuant to
resolutions of the Board of Directors of the Bank adopted on August 19, 1980 and
August 21, 1984, and to assume the obligations outstanding under the GLENFED
Amended and Restated Directors' Retirement Plan.
ARTICLE I
- - ---------
Definitions
- - -----------
1.01 "Bank" means Glendale Federal Bank, Federal Savings Bank, and its
predecessor Glendale Federal Savings and Loan Association.
1.02 "Board" means the Board of Directors of the Bank and the Board of
Directors of GLENFED.
1.03 "Board Service" means the number of months of service on the Board.
1.04 "Change of Control" means the occurrence of any of the following
events:
(i) any "person" (as such term as used in Sections 13(d) and 14(d)
of the Securities and Exchange Act of 1934 (the "Exchange Act") and the
regulations of the Securities and Exchange Commission (the "SEC") thereunder,
each as in effect on December 21, 1993, and including any such persons that may
be deemed to be acting in concert with respect to the Bank or the acquisition,
ownership or voting of Bank securities) becomes, directly or indirectly, the
"beneficial owner" (as defined in Rule 13d-3 under the Exchange Act and the
regulations of the SEC thereunder, each as in effect on December 21, 1993) of
outstanding securities of the Bank representing 20% or more of the combined
voting power of the Bank's then outstanding securities;
<PAGE>
(ii) at any time during the three-year period after December 21, 1993, the
composition of the Board of Directors of the Bank is changed such that persons
who were directors of the Bank, or of GLENFED, at the beginning of such
three-year period, or persons nominated or elected by a majority of such
persons, do not continue to comprise a majority of the members of such Board of
Directors of the Bank;
(iii) the stockholders of the Bank approve a merger or consolidation of
the Bank with, or a reorganization transaction involving the Bank and, any other
entity, other than a merger, consolidation or reorganization which would result
in the voting securities of the Bank outstanding immediately prior thereto
continuing to represent (either by remaining outstanding or by being converted
into voting securities of the surviving entity) at least 50% of the combined
voting power of the voting securities of the Bank or such surviving entity
outstanding immediately after such merger or consolidation;
(iv) the stockholders of the Bank approve a plan of complete liquidation
of the Bank or an agreement for the sale or disposition by the Bank of more than
50% of its consolidated assets; or
(v) any other event, transaction or series of events or transactions
occurs as a result of which any person may be deemed to "acquire control" of the
Bank (as such terms are defined in the regulations of the Office of Thrift
Supervision set forth at 12 C.F.R. Part 574 as in effect on December 21, 1993.
1.05 "Director" means a member of the Board.
1.06 "Fee" means the monthly base retainer fee received by a Director for
service on the Board plus the fee paid for attending one Board meeting per
month, excluding any additional payments for service on, or chairing meetings of
Committees of the Board.
1.07 "GLENFED" means GLENFED, Inc., which was the parent holding company of
the Bank from January 1986 until August 26, 1993.
1.08 "GLENFED Plan" means the Directors' Retirement Plan as adopted by
Resolution of the Board of Directors of the Bank dated December 17, 1985,
amended by resolutions of the Board of Directors of GLENFED dated July 22, 1986
and September 23, 1986, put in plan format by Resolution of the Board of
Directors of GLENFED dated April 26, 1988, amended by Resolutions of the Board
of Directors of GLENFED dated January 24, 1989, June 26, 1990, September 25,
1990, November 27, 1990, June 23, 1992, and as amended and restated on March 25,
1993.
2
<PAGE>
1.09 "Grantor" means the Bank.
1.10 "Monthly Retirement Benefit" means: (i) in the case of a Retired
Director, the monthly Retirement Benefit payable in the amount and for the
period specified on Schedule A attached hereto, and (ii) in the case of a
Director whose Retirement occurs on or after June 23, 1997, a monthly benefit
equal to the Fee received by such Director immediately prior to Retirement,
payable for a period following such Director's Retirement equal to the
Director's Board Service, up to a maximum of 240 months.
1.11 "Plan" means this Directors' Retirement Plan, as it may be amended
from time to time by the Board.
1.12 "Retired Director" means the members or the Board listed as retired
directors on Schedule A attached.
1.13 "Retirement" means the resignation, decision not to run for
re-election or failure of a Director to be re-elected, or death while a
Director, after five (5) years of Board Service or termination of Board Service
without regard to length of Board Service at the annual meeting of the Bank
immediately following attainment of age 70, but shall not include the removal of
a Director for cause; provided, however, that if a Change of Control shall have
occurred, Retirement shall mean any termination of Board Service within two
years thereafter, other than removal for cause, without regard to the length of
Board Service. For purposes of this Plan, removal "for cause" shall mean removal
on the grounds of the Director's personal dishonesty, incompetence, willful
misconduct, breach of fiduciary duty involving personal profit, intentional
failure to perform the Director's duties of office, or willful violation of any
law, rule or regulation (other than traffic violations or similar offenses) or
final cease and desist order, provided that a Director shall not be deemed to
have been removed for cause unless and until a Director has been notified in
writing that such Director has been found guilty of misconduct of the type
described in this Section 1.13 and specifying the particulars thereof in detail,
and in the case of misconduct that can be cured, the Director shall have failed
to cure the same within a reasonable period of time thereafter.
1.14 "Trust Agreement" means the document through which the Grantor and
Trustee have agreed upon the terms under which the Trustee will hold funds to
secure payments under the Plan.
1.15 "Trustee" means the entity which has entered into a Trust Agreement
with the Bank to, inter alia, receive, safeguard, invest, administer and
----- ----
distribute assets transmitted by the Grantor to secure payments under the Plan.
1.16 "Vested Benefit" means the amount and duration of payment of the
Monthly Retirement Benefit which any Retired Director or any Director whose
Retirement has occurred is entitled to receive under this Plan as in effect on
the later of December 21, 1993 or the date of such Director's Retirement.
3
<PAGE>
ARTICLE II
- - ----------
Plan Participation
- - ------------------
2.01 All Directors who are not participants in the Glendale Federal
Retirement Plan are participants in the Plan.
2.02 A Director who is or has been a participant in the Glendale Federal
Retirement Plan shall accrue Board Service under the Plan during any period
during which such Director is not a participant in the Glendale Federal
Retirement Plan.
ARTICLE III
- - -----------
Retirement Payments
- - -------------------
3.01 A Director, other than a Director removed for cause as defined in
Section 1.13 above, shall be entitled to receive a Monthly Retirement Benefit
payable in accordance with Article IV. The Monthly Retirement Benefit shall be
payable by the Trustee or, in the event the Trustee fails to make any payment
required hereunder within 180 days after notice and demand therefor, by the
Bank.
3.02 There shall be no adjustment to the amount of the Monthly Retirement
Benefit resulting from changes in the amount of monthly Board remuneration
subsequent to Retirement.
3.03 Payments will be made by the Trustee, or by the Bank, if applicable,
to the Director or, in the event of such Director's death prior to the full
distribution of benefits hereunder, to the beneficiary designated by the
Director, and, in the event of the death of such beneficiary prior to the full
distribution of benefits hereunder, to the estate of the survivor of the
Director or such beneficiary, provided that in the case of a Retired Director
entitled to receive a Monthly Retirement Benefit for life, as specified on
Schedule A attached, no Monthly Retirement Benefit shall be payable to any
beneficiary of such Retired Director following such Retired Director's death.
3.04 If a Change of Control shall have occurred, any Director, upon
Retirement thereafter, and any Director or Retired Director whose Retirement
occurred prior to the occurrence of such Change of Control, shall receive the
retirement benefits due under this Plan in a lump sum without discount for early
payment of the benefit due.
4
<PAGE>
ARTICLE IV
- - ----------
Commencement of Payments
- - ------------------------
4.01 The Monthly Retirement Benefit will commence on the first day of the
month following the effective date of Retirement.
4.02 If a Director dies prior to Retirement, but after five years of
service, payment of the Monthly Retirement Benefit to Director's Beneficiary
will commence the first day of the month following such Director's death.
4.03 If a Change of Control shall have occurred the lump sum payment to
the retiring or Retired Director shall be payable within 30 days after such
Change of Control or subsequent retirement, whichever shall last occur.
ARTICLE V
- - ---------
Trust
- - -----
5.01 An irrevocable Grantor's Trust (i.e., "Rabbi Trust") has been or will
be established under which the Trustee will hold, invest and manage assets of
the Bank transmitted to the Trustee to secure the payment of benefits hereunder,
and will distribute Monthly Retirement Benefits to Directors or their designated
beneficiaries, if applicable, under the Plan.
5.02 Assets of the Bank have been or will be transferred to the Trustee
from time-to-time in an amount or amounts sufficient to satisfy all estimated
payment obligations accrued under the Plan.
5.03 A Trust Management Committee of the Grantor, consisting of the Chief
Executive Officer, Chief Financial Officer and such other corporate officer as
shall be designated by the Board or a duly designated committee thereof, shall
be responsible to direct investment actions of the Trustee, monitor reporting by
the Trustee and resolve any problems arising under the Trust or the Plan.
<PAGE>
ARTICLE VI
- - ----------
Plan Amendment/Termination
- - --------------------------
6.01 The Plan may be amended or terminated at any time by the Board so
long as Vested Benefits under the Plan are not decreased for any participant.
ARTICLE VII
- - -----------
Resumption of Benefits/Assumption of GLENFED Plan
- - -------------------------------------------------
7.01 As originally adopted in plan form on March 25, 1993, the Plan
provided a fixed schedule of benefits earned by service on the Board of
Directors of the Bank through and including June 30, 1992. As amended hereby, it
is intended that Board Service from and after June 30, 1992 shall be included in
determining the Monthly Retirement Benefit of any Director under the Plan.
7.02 On August 26, 1993 GLENFED was merged with and into a whollyowned
subsidiary of the Bank, which subsidiary became by operation of law the obligor
for each and all of the obligations of GLENFED under the GLENFED Plan. As
amended hereby, it is intended that the obligation to pay the "Retirement
benefit" provided under the GLENFED Plan shall be and is hereby assumed by the
Bank with the effect that service on the Board of Directors of GLENFED shall be
deemed to have been Board Service under this Plan. By accepting Monthly
Retirement Benefits hereunder, any Director or Retired Director shall waive and
relinquish any right to receive any separate or additional payment from any
person under the GLENFED Plan.
6
<PAGE>
DIRECTORS' RETIREMENT PLAN
SCHEDULE A
<TABLE>
<CAPTION>
Retired Director Monthly Benefit Duration
<S> <C> <C>
W. Bratton 1,833.33 Through 10/1995
R. Breitbard 2,333.33 Through 4/1999
M. Daley 3,083.33 Through 8/2007
M. D'Anjou 1,833.34 Through 6/1997
R. Kearns 3,083.33 Through 10/2002
W. Ketcham 3,083.33 Through 12/2004
R. Langdon 1,833.33 Through 5/1998
R. Ray 2,333.33 Through 7/1999
R. Bachman 1,083.33 Life
C. Dunn 1,083.33 Life
G. Klett 583.45 Life
R. Springer 733.33 Life
</TABLE>
7
<PAGE>
EXHIBIT 10.7
AMENDED
-------
EMPLOYMENT AGREEMENT
--------------------
BETWEEN
-------
GLENDALE FEDERAL BANK, FEDERAL SAVINGS BANK
-------------------------------------------
AND
---
STEPHEN J. TRAFTON
------------------
1
<PAGE>
TABLE OF CONTENTS
<TABLE>
<CAPTION>
Page
----
<S> <C>
1. Position and Duties............................................ 1
2. Executive's Acceptance of Employment........................... 1
3. Term........................................................... 1
4. Confidentiality................................................ 2
5. Compensation................................................... 2
6. Termination of Employment...................................... 4
7. Compensation Upon Termination, Etc............................. 9
8. Arbitration.................................................... 14
9. Notices........................................................ 15
10. Miscellaneous.................................................. 15
</TABLE>
2
<PAGE>
THIS AMENDED EMPLOYMENT AGREEMENT (this "Agreement") dated as of the
1st day of January, 1997, is made by and between GLENDALE FEDERAL BANK, FEDERAL
SAVINGS BANK, a federally-chartered stock form savings bank, with its principal
executive offices at 414 North Central Avenue, Glendale, California (the
"Bank"), and STEPHEN J. TRAFTON, resident of 5022 Hook Tree Road, La Canada,
California (the "Executive").
WHEREAS, the Bank wishes to assure itself of the services of Executive
for the period provided in this Agreement and the Executive is willing to serve
in the employ of the Bank on a full-time basis for said period upon the terms
and conditions hereinafter provided; and
WHEREAS, the Board of Directors of the Bank (the "Board") has
determined that the best interests of the Bank would be served by providing for
the terms and conditions of Executive's employment as set forth herein.
NOW, THEREFORE, in consideration of the mutual covenants herein
contained and intending to be legally bound hereby, the Bank and the Executive
hereby agree as follows:
1. Position and Duties. The Bank hereby agrees to, and hereby does,
-------------------
employ the Executive, for the term of this Agreement, to render services to the
Bank (and its subsidiaries or affiliates) as its President, Chief Executive
Officer and Chairman of the Board ("President, CEO and COB") and in connection
therewith to perform such duties, not inconsistent with the terms of this
Agreement, as the Executive may reasonably be directed to perform by the Board.
In addition to his duties as President, CEO and COB, the Executive is a member
of the Board and he shall serve as a member of the Board until such time as the
shareholders of the Bank may decline to re-elect him or he is ordered to be
suspended as described in Subsection 6(f) hereof. The Executive shall have the
right to devote a reasonable amount of time and effort to industry, community or
charity organizations, and, subject to the provisions of Section 4 hereof, the
Executive may serve as a director of other companies subject to the prior
approval by the Board, except that Executive may not serve as a director of any
financial institution (other than the Bank or a subsidiary thereof).
3
<PAGE>
2. Executive's Acceptance of Employment.
------------------------------------
The Executive hereby accepts such employment and agrees faithfully to perform to
the best of his ability the duties described in Section 1.
3. Term. Subject to Section 6 hereof, the term of the employment of
----
the Executive under this Agreement shall commence on January 1, 1997 (the
"Effective Date") and shall terminate on December 31, 1999 (the "Expiration
Date"). The term of this Agreement may be extended for one (1) year by a vote
of the Board prior to the end of each calendar year. This Agreement will be
deemed amended by a certification attached to the contract of a resolution by
the Board, extending the term.
4. Confidentiality. The Executive agrees:
---------------
(a) To keep secret all confidential matters of the Bank,
specifically indicated to be such by the Bank or established as such by written
Bank policy, and not to disclose them to anyone outside the Bank, either during
or after his employment with the Bank, except with the prior written consent of
the Bank or as required by law; and
(b) To deliver promptly to the Bank on termination of employment
of the Executive all memoranda, notes, records, reports and other documents (and
all copies thereof) with respect to any such confidential matters and other
proprietary information (such as customer lists, supplier lists, etc.) which the
Executive may then possess or have under his control.
5. Compensation. In consideration of the Executive's agreements
------------
contained herein and as compensation to the Executive for the performance of the
services required hereunder, the Bank shall pay or grant to him the following
salary and other compensation and benefits:
(a) A base salary, not less than $735,000.00 per year, as is
determined from time to time by the Board or an appropriate committee thereof,
payable in equal installments not less frequently than monthly in accordance
with the Bank's payroll practices; provided, however, that the Executive's base
salary shall be reviewed by the Board no less frequently than annually on
4
<PAGE>
the basis of the types of factors it generally takes into account in evaluating
the salaries of executive officers of the Bank;
(b) Participation in and the right to receive awards under the
terms and conditions of the 1993 Stock Option and Long-Term Performance
Incentive Plan (the "Incentive Plan");
(c) Participation under any other compensation plan, program or
arrangement, now existing or hereafter adopted by the Bank, as applicable to
executive officers of the Bank, but only if and/or to the extent the Board, or
an appropriate committee thereof administering such plan, program or
arrangement, may determine is appropriate;
(d) Participation on the same terms and conditions as all other
employees in all employee benefit plans, programs or arrangements, pension plans
(including any supplemental pension plan), whether or not qualified within the
meaning of Section 401(a) of the Internal Revenue Code of 1986, as amended (the
"Code"), or welfare plans, including, but not limited to, the defined benefit
plan maintained for the benefit of employees of the Bank (the "Qualified Pension
Plan"), the Sheltered Pay Plan (the "401(k) Plan"), and any Employee Stock
Ownership Plan (the "ESOP"), and any health, life, disability or other welfare
plans, as may be now or hereafter sponsored or maintained for all employees of
the Bank;
(e) Reimbursement for reasonable travel and other expenses
incurred by the Executive in performing his obligations hereunder, pursuant to
the terms and conditions of the applicable policy of the Bank in respect
thereto;
(f) Reasonable vacations, absences on account of temporary
illness, corporate perquisites and fringe benefits customarily enjoyed by
employees or officers of the Bank, each under the terms and conditions of the
policy of the Bank in respect thereto;
(g) Indemnification and protection from liability under 12
C.F.R. Section 545.121; and
5
<PAGE>
(h) An amount not to exceed Five Thousand Dollars ($5,000.00)
per annum for personal financial planning services.
Nothing contained in this Agreement shall prevent the Board from
amending or otherwise altering any plan, program or arrangement, so long as such
amendment or alteration (i) is accomplished pursuant to the terms thereof as in
effect on the Effective Date or on the date such plan or arrangement is adopted,
if adopted after the Effective Date, and (ii) equitably affects all employees,
executive or otherwise, of the Bank previously covered thereunder.
6. Termination of Employment. This Agreement shall terminate upon
-------------------------
the Expiration Date or upon the death of the Executive; provided, however, those
-------- -------
obligations which are contemplated to be performed after the termination of this
Agreement shall survive such termination. The Bank may terminate this Agreement
and the Executive's employment hereunder prior to the Expiration Date for
"Disability" or "Cause", as such terms are herein defined. The Executive may
terminate this Agreement and his employment hereunder prior to the Expiration
Date by his "Resignation for Good Reason", as such terms are hereinafter
defined. Termination of this Agreement, for any reason not set forth above,
shall not be deemed a permitted termination and shall be deemed a breach of this
Agreement. In the event of any termination of this Agreement and/or the
Executive's employment hereunder prior to the Expiration Date, whether a
permitted termination or otherwise, the provisions of Section 7 of this
Agreement shall determine the amount, if any, of any compensation thereafter due
the Executive in respect to such termination.
As used in this Agreement, the following terms shall have the
meanings set forth:
(a) Disability. The Executive shall be entitled to leaves of
----------
absence from the Bank in accordance with the policy of the Bank, for illness or
other temporary disabilities for a period or periods not exceeding an aggregate
of six (6) months in any calendar year, and his compensation and status as an
employee hereunder shall continue during any such period or periods. If, as a
result of the Executive's incapacity due to physical or
6
<PAGE>
mental illness, the Executive shall have been absent from his duties with the
Bank on a full-time basis for six (6) consecutive months, and within thirty (30)
days after written notice of termination is given by the Bank, the Executive
shall not have returned to the full-time performance of his duties, the
Executive shall be deemed to have experienced a Disability and the Bank may
terminate the Executive's employment.
(b) Cause. Termination by the Bank of Executive's employment
-----
for "Cause" shall mean termination for reason of the Executive's personal
dishonesty, incompetence, willful misconduct, breach of a fiduciary duty
involving personal profit, intentional failure to perform stated duties, willful
violation of any law, rule, regulation (other than traffic violations or similar
offenses), final cease-and-desist order or material breach of any provision of
this Agreement. Notwithstanding the foregoing, the Executive shall not be
deemed to have been terminated for Cause unless and until there shall have been
delivered to him a copy of a resolution duly adopted by the affirmative vote of
not less than a majority of the total number of outside directors of the Board
at a meeting of the Board called and held for that purpose (after reasonable
notice to the Executive and an opportunity for the Executive, together with his
counsel, to be heard before the Board), finding that in the good-faith opinion
of the Board the Executive was guilty of conduct set forth above and specifying
the particulars thereof in detail, which resolution shall constitute, with
respect to a termination for Cause by the Bank, a Notice of Termination for
purposes of Subsections 6(h) and 6(i) of this Agreement.
(c) Resignation for Good Reason. For purposes of this
---------------------------
Agreement, "Resignation for Good Reason" shall mean the Executive's election to
resign as a result of the occurrence of one of the events referred to in
Subsection (d) below.
(d) Good Reason. For purposes of this Agreement, "Good Reason",
-----------
absent the Executive's express written consent to the contrary, means the
occurrence of any one of the following events:
(i) removal of the Executive as President and/or CEO
and/or COB of the Bank (by reason other
7
<PAGE>
than death, Disability or Cause), or any other material breach by
the Bank of its obligations contained in this Agreement;
(ii) without the prior written consent of the Executive,
the assignment to the Executive of any duties inconsistent with
his status as President, CEO and COB of the Bank or a substantial
alteration in the nature or status of the Executive's duties and
responsibilities which renders the Executive's position to be of
less dignity, responsibility or scope, provided, however, it
-------- -------
shall not be an event of Good Reason if the Executive is assigned
additional duties for the Bank or any affiliate or subsidiary of
the Bank which are not inconsistent with the duties described in
Section 1 hereof, so long as the aggregate of all duties assigned
to the Executive in connection with his service with the Bank,
its affiliates or subsidiaries do not require the Executive to
devote, on a consistent and sustained basis, substantially more
time than other senior level executives of the Bank are required
to devote to their duties;
(iii) the failure of the Bank to continue in effect any
compensation plan, program or arrangement in which the Executive
then participates specifically set forth in Section 5 hereof or
the failure by the Bank to continue the Executive's participation
therein, except for across-the-board reductions or discontinuance
similarly affecting all Executives of the Bank, unless an
equitable arrangement reasonably acceptable to the Executive
(embodied in an ongoing substitute or alternative plan, program
or arrangement) has been made with respect to such plan;
(iv) the failure of the Bank to obtain an agreement from
any successor to assume and agree to perform this Agreement, as
contemplated in Section 10(b)(ii) hereof;
8
<PAGE>
(v) the failure of the Bank to nominate the Executive to
stand for election as a director of the Bank;
(vi) any purported termination of the Executive's
employment which is not effected pursuant to a Notice of
Termination satisfying the requirements of Subsection (h) below
and, if applicable, Subsection (b) above, and for purposes of
this Agreement, no such purported termination shall be effective;
or
(vii) a Change in Control as hereinafter defined, followed
by any one or more of the events described in Subsections d(i)
through d(vi), inclusive, set forth above that occur within one
(1) year of the Change in Control.
(e) Change in Control. For purposes of this Agreement, a
-----------------
"Change in Control" of the Bank shall mean the occurrence of any of the
following events:
(i) any "person" (as such term as used in Sections 13(d)
and 14(d) of the Securities and Exchange Act of 1934 (the
"Exchange Act") and the regulations of the Securities and
Exchange Commission (the "SEC") thereunder, each as in effect on
the Effective Date of this Agreement and including any such
persons that may be deemed to be acting in concert with respect
to the Bank or the acquisition, ownership or voting of Bank
securities) becomes, directly or indirectly, the "beneficial
owner" (as defined in Rule 13d-3 under the Exchange Act and the
regulations of the SEC thereunder, each as in effect on the
Effective Date of this Agreement of outstanding securities of the
Bank representing 20% or more of the combined voting power of the
Bank's then outstanding securities;
9
<PAGE>
(ii) at any time during the term of this Agreement the
composition of the Board is changed such that persons who were
directors of the Bank, as of the Effective Date, or persons
nominated or elected by a majority of such persons, do not
continue to comprise a majority of the members of such Board;
(iii) at any time during the term of this Agreement the
stockholders of the Bank approve a merger or consolidation of the
Bank with, or a reorganization transaction involving the Bank and
any other entity other than a merger, consolidation or
reorganization which would result in the voting securities of the
Bank outstanding immediately prior thereto continuing to
represent (either by remaining outstanding or by being converted
into voting securities of the surviving entity) at least 55% of
the combined voting power of the voting securities of the Bank or
such surviving entity outstanding immediately after such merger
or consolidation;
(iv) at any time during the term of this Agreement the
stockholders of the Bank approve a plan of complete liquidation
of the Bank or an agreement for the sale or disposition by the
Bank of more than 50% of its consolidated assets; or
(v) at any time during the term of this Agreement any
other event, transaction or series of events or transactions
occurs as a result of which any person may be deemed to "acquire
control" of the Bank (as such terms are defined in the
regulations of the Office of Thrift Supervision set forth at 12
C.F.R. Part 574 as in effect on the Effective Date.
Notwithstanding the provisions of Subsections (i) through (v) of this
Subsection 6(e), it is expressly agreed by the parties, from and after the
Effective Date, that (1) no transaction by which the Bank acquires assets or
stock of a
10
<PAGE>
savings institution, through a merger conversion or otherwise, and (2) no
appointment of a conservator or receiver for the Bank and/or no assisted
transaction pursuant to Section 13(c) of the FDI Act (12 USC 1823(c)), shall be
deemed to constitute a CHANGE IN CONTROL for purposes of this Agreement.
(f) Suspension and Special Regulatory Rules.
---------------------------------------
(i) If the Executive is suspended and/or temporarily
prohibited from participating in the conduct of the Bank's
affairs by a notice served under Sections 8(e)(3) or 8(g)(1) of
the FDI Act (12 U.S.C. 1818(e)(3) or 1818(g)(1), the Bank's
obligations under this Agreement shall be suspended as of the
date of service of such notice, unless stayed by appropriate
proceedings. If the charges in the notice are dismissed, the Bank
may in its discretion (x) pay the Executive all or part of the
compensation withheld while its contract obligations were
suspended and (y) reinstate (in whole or in part) any of its
obligations which were suspended.
(ii) If the Executive is removed and/or permanently
prohibited from participating in the conduct of the Bank's
affairs by an order issued under Sections 8(e)(4) or 8(g)(1) of
the FDI Act (12 U.S.C. 1818(e)(4) or 1818(g)(1), the Bank's
obligations under this Agreement shall terminate as of the
effective date of the order, but vested rights of the contracting
parties shall not be affected.
(iii) All obligations under this Agreement shall be
terminated, except to the extent it is determined that
continuation of such employment is necessary for the continued
operation of the Bank, (x) by the Director of OTS (the
"Director") or his or her designee at the time the FDIC enters
into an agreement to provide assistance to or on behalf of the
Bank under the authority contained in Section 13(c) of the FDI
Act, or (y) by the
11
<PAGE>
Director or his or her designee at any time the Director or his
or her designee approves a supervisory merger to resolve problems
related to operation of the Bank or when the Bank is determined
by the Director to be in unsafe or unsound condition, but in any
of the above-described events, the vested rights of the Executive
shall not be affected.
(iv) If the Bank is in default (as defined in Section
3(x)(1) of the FDI Act) or in the event of receipt of any notice
or order of a default, an agreement to provide assistance or an
approval of a supervisory merger, the suspension or termination
of the Bank's obligations hereunder shall be (x) automatic and
shall not be conditioned upon any further action by the Bank or
delivery of any notice to the Executive and (y) deemed a
suspension or termination of employment jointly and severally by
the Bank and the regulatory body providing assistance or delivery
of such document; provided, however, that (i) such suspension or
termination shall not prejudice the Executive's vested rights
under this Agreement and (2) notwithstanding the foregoing, the
Bank's obligations hereunder shall not be suspended or terminated
to the extent deemed necessary by the Director or his or her
designee for the continued operation of the Bank as provided in
Subsection 6(g)(iii) and 12 C.F.R. Section 563.39(b)(4) and (5).
(g) Notwithstanding other provisions in this Agreement, the Bank
may terminate the Executive's employment at any time, but termination pursuant
to this Subparagraph (g) shall not prejudice the Executive's right to
compensation or benefits as provided in this Agreement.
(h) Notice of Termination. Any purported termination by the
---------------------
Bank or Resignation for Good Reason by the Executive shall be communicated by
written Notice of Termination to the other party hereto in accordance with
Section 9 hereof.
12
<PAGE>
For purposes of this Agreement, a "Notice of Termination" shall mean a notice
which shall indicate the specific termination, resignation or retirement
provision in this Agreement relied upon and shall set forth in reasonable detail
the facts and circumstances claimed to provide a basis for such termination,
resignation or retirement under the provision so indicated.
(i) Date of Termination, Etc. "Date of Termination" shall mean
------------------------
(i) if the Executive's employment is terminated for Cause, the date the Notice
of Termination is given; (ii) if the Executive's employment is terminated for
Disability, thirty days after Notice of Termination is given (provided that the
Executive shall not have returned to the performance of the Executive's duties
on a full-time daily basis during such thirty-day period); or (iii) if the
Executive's employment is terminated for any reason other than Cause or
Disability, the date specified in the Notice of Termination (which shall not be
less than thirty days nor more than sixty days, from the date such Notice of
Termination is given).
7. Compensation Upon Termination
-----------------------------
(a) Death. If the Executive's employment hereunder terminates
-----
by reason of his death, the Executive's surviving spouse and/or beneficiary or
estate (as designated in accordance with any applicable plan) shall be entitled
to receive base salary for the month in which such death occurred together with
a payment representing a pro rata portion of any incentive compensation under
--------
Subsection 5(c) determined to be due for the portion of the incentive period
then completed and any benefits to which the Executive is entitled (i) under any
insurance policies on the life of the Executive which by their respective terms
are payable to the Executive's beneficiary, estate or personal representative,
(ii) under the insurance programs and other employee benefit plans, programs and
arrangements then in effect of the Bank, and (iii) under the 401(k) Plan and the
Bank shall have no further obligation under this Agreement with respect to the
Executive.
(b) Disability. If the Executive's employment hereunder
----------
terminates by reason of his Disability, the Executive shall be entitled to
receive base salary for the month in which
13
<PAGE>
such Disability termination occurred together with a payment representing a pro
---
rata portion of any incentive compensation under Subsection 5(c) determined to
- - ----
be due for the portion of the incentive period then completed and any benefits
provided under such plans and programs then maintained for the benefit of the
Executive or in which he then participates.
(c) Cause. If the Executive's employment hereunder is
-----
terminated by the Bank for Cause, the Bank shall pay to the Executive his full
base salary through the Date of Termination at the rate in effect at the time
Notice of Termination is given and the Bank shall have no further obligations to
the Executive under this Agreement, and the Executive shall have no right to
receive compensation or other benefits for any period after the Date of
Termination, except as provided in Section 8 of this Agreement.
(d) Voluntary Resignation. In the event the Executive resigns
---------------------
other than pursuant to his Resignation for Good Reason, the Bank shall pay to
the Executive his full base salary through the Date of Termination at the rate
in effect at the time Notice of Termination is given and the Bank shall have no
further obligations to the Executive under this Agreement.
(e) Suspension and Special Regulatory Rules. In the event the
---------------------------------------
Bank's obligations hereunder are terminated by the Bank and/or a regulatory body
pursuant to the Suspension and Special Regulatory Rules for reasons that do not
constitute Cause, the Bank shall (i) pay to the Executive his full base salary
through the Date of Termination at the rate then in effect, (ii) honor any other
rights of the Executive that shall have vested through the Date of Termination,
and (iii) have no further obligations to the Executive under this Agreement.
(f) Other. If, prior to the Expiration Date and for reasons
-----
other than the death of the Executive, the Executive's employment hereunder is
terminated (A) by the Bank pursuant to Subsection 6(g), in breach of this
Agreement or otherwise (other than for Cause or Disability), or (B) by the
Executive pursuant to his Resignation for Good Reason, then the Executive shall
be entitled to liquidated damages, and not as severance, in the amounts,
property or rights determined as follows:
14
<PAGE>
(i) the Bank shall pay the Executive his full base salary
through the Date of Termination at the rate in effect at the time
Notice of Termination is given;
(ii) with respect to regular base salary for the period
specified herein, such regular base salary shall be determined at
the rate in effect on the date a Notice of Termination is
delivered (unless a reduction in compensation has preceded the
Executive's Resignation for Good Reason in which case the rate of
base salary shall be the rate in effect prior to such reduction).
In the case of a termination by the Bank (other than for Cause or
Disability) or a termination by the Executive pursuant to his
Resignation for Good Reason under Subsections 6(d) (i), 6(d)(ii),
6(d)(iii), 6(d)(iv), 6(d)(v), or 6(d)(vi), the Executive shall be
entitled to receive his regular base salary for a period of
thirty-six (36) months if the termination occurs at a time when
two (2) years or more remain on the term of the original or
extended contract; twenty-four (24) months if the termination
occurs at a time when two (2) years or less but more than one (1)
year remains on the original or extended term of the contract;
and twelve (12) months if the termination occurs at a time when
one (1) year or less remains on the original or extended term of
the contract. By January 15th of each calendar year prior to a
change in control, the Executive shall elect to receive his base
salary as aforesaid either (A) at the times and in installments
consistent with the Bank's payroll practices then in effect, or
(B) in lieu of any further payments of regular base salary, a
lump sum payment payable not later than the fifteenth day
following the Date of Termination, equal to the amount due
hereunder discounted to present value at a per annum discount
rate equal to the weekly average auction rate for the sale of
fifty-two (52) week notes of
15
<PAGE>
the United States Treasury as published in the Western Edition of
the Wall Street Journal for the auction most recently held as of
the Date of Termination applied to each future payment from the
time it would have become payable ("Discount"). If Executive
fails to exercise his election hereunder, then he shall be deemed
to have elected payment by installments pursuant to the Bank's
regular payroll practices. Regardless of the option exercised by
Executive hereunder, the Bank may, at its option, pay a lump sum
to Executive but at no greater Discount than that specified
herein.
In the case of a termination by the Executive pursuant to his
Resignation for Good Reason under Subsection 6(d)(vii), the
Executive shall be entitled to receive a lump sum payment payable
not later than the fifteenth day following the Date of
Termination and equal to his regular base salary for a period of
thirty-six (36) months. This payment shall not be subject to the
Discount specified above.
(iii) upon entry of judgment favorable to the Executive in
a court of competent jurisdiction or by an arbitration pursuant
to Section 8 hereof or, if earlier, upon settlement of claims
brought by the Executive in arbitration or a court of competent
jurisdiction.
(iv) the Executive shall be deemed to have elected
continuation coverage within the meaning of Section 4980B of the
Internal Revenue Code of 1986 as amended ("Code") and the Bank
shall bear the cost of such coverage until the earliest of (i)
the date continuation coverage need no longer be provided under
Section 4980B of the Code, (ii) the date which is eighteen (18)
months from the Date of Termination, or (iii) the date the
Executive is covered under the plan of another employer. In
addition, the Bank shall pay for the
16
<PAGE>
continuation of life and long-term disability insurance in an
amount equal to the coverage in force at the time of termination
for the same period specified above.
(v) a payment representing a pro rata portion of any
--------
incentive compensation under Subsection 5(c) determined to be due
for the portion of the incentive period then completed.
(vi) the payments provided for in this Subsection (f)
shall be made not later than the applicable date set forth above
for such payment, provided, however, that if the amounts of such
payments cannot be finally determined on or before such day, the
Bank shall pay to the Executive on such day an estimated amount,
as determined in good faith by the Bank, of the minimum amount of
such payments and shall pay the remainder of such payments
(together with interest at the rate provided in Section
1274(b)(2)(B) of the Code) as soon as the amount thereof can be
determined but in no event later than the thirtieth day after the
date upon which such estimated amount shall have been paid. In
the event that the amount of the estimated payments exceeds the
amount subsequently determined to have been due, such excess
shall constitute a loan by the Bank to the Executive payable on
the fifth day after demand by the Bank (together with interest at
the rate provided in Section 1274(b)(2)(B) of the Code).
(vii) all options that have not yet vested at the time of
termination under this provision shall immediately vest. This
provision shall constitute an amendment to the Stock Option
Agreements between the Executive and the Bank.
Notwithstanding the foregoing provisions of this Subsection 7(f), and pursuant
to RB 27a, the total amount of any payment to Executive provided for in this
Subsection 7(f) in connection with a termination, regardless of the reason,
shall not exceed three
17
<PAGE>
times the Executive's average annual compensation. The term "compensation" as
used in the preceding sentence means "compensation" as that term is defined in
RB 27a, and the Executive's average annual compensation shall be based on the
most recent five taxable years as of the Date of Termination, or the Executive's
tenure with the Bank as of the Date of Termination in the event such tenure is
less than five years.
(g) The Executive shall not be required to mitigate the amount
of any payment provided for in this Section 7 by seeking other employment or
otherwise, nor shall the amount of any payment provided for in this Section 7 be
reduced by any compensation earned by the Executive as the result of employment
by another employer, or otherwise.
(h) In addition to all other amounts payable to the Executive
under this Section 7, the Executive shall be entitled to receive all benefits
vested and payable to him as of the Date of Termination under (1) the Qualified
Pension Plan, the 401(k) Plan and any other plan, program or arrangement
relating to retirement, profit sharing, or other benefits including, without
limitation, any employee stock ownership plan, or any plan established as a
supplement to any of the aforenamed plans; (2) the Incentive Plan; and (3) any
health, life, disability or other welfare plan; provided, however,
-------- -------
notwithstanding the foregoing, the Executive shall not be entitled to receive
any benefit otherwise payable to him under any severance plan or policy of the
Bank as of the Date of Termination. No amount payable to the Executive under
Subsection 7(f) shall be considered for any benefit calculation or other purpose
under the Qualified Pension Plan.
(i) Notwithstanding the foregoing provisions of this Section 7,
the amounts payable under this Agreement (i) are subject to and conditioned upon
their compliance with 12 U.S.C. (S)1828(k) and any regulations promulgated
thereunder, and (ii) shall be reduced to the extent necessary to cause the
aggregate of all payments which must be taken into account for purposes of
Section 280G of the Code and any regulations thereunder to be $100.00 less than
the amount which would be deemed an excess parachute payment as defined in
Section 280G(b)(1) of the Code. If, after a reduction to comply with Subsection
(ii) above, the
18
<PAGE>
aggregate of payments will comply with Subsection (i), said condition shall then
be deemed met and the payments may then be made, as reduced.
8. Arbitration. Any disputes hereunder shall be settled by
-----------
arbitration in Los Angeles, California, under the auspices of, and in accordance
with the rules of, the American Arbitration Association, and the decision in
such arbitration shall be final and conclusive on the parties and judgment upon
such decision may be entered in any court having jurisdiction thereof. A party
wishing to initiate an arbitration proceeding with respect to a dispute
regarding a termination shall give the other party written notice to that effect
within thirty (30) days from the Date of Termination. In any arbitration
initiated hereunder, whether by the Bank or the Executive, in which the issue of
whether a valid basis exists for a termination of the Executive by the Bank for
Cause under Subsections 6(b) and 6(f) above is in dispute, the Bank shall
continue to pay to the Executive his regular base salary for a period of nine
(9) months from the date of the written notification from the party initiating
the proceedings and during the pendency of such arbitration, or until such time
as a final order has been entered in the arbitration proceeding to the effect
that a valid termination for Cause by the Bank occurred, whichever occurs first;
provided, however, that the Bank's obligation to continue making such payments
- - -------- -------
of regular base salary, as aforesaid, shall be conditioned on receipt from the
Executive of a written undertaking to repay all such payments, together with
interest thereon at a rate equal to the Bank's average cost of funds for the
period during which such payments are made, in the event that the final judgment
rendered in connection with such arbitration proceeding is that the Bank had a
valid basis for termination of the Executive for Cause.
9. Notices. All notices and other communications which are required
-------
or may be given under this Agreement shall be in writing and shall be delivered
personally or by registered or certified mail addressed to the party concerned
at the following addresses:
If to the Bank:
--------------
19
<PAGE>
Chairman, Compensation Committee
of the Board of Directors
Glendale Federal Bank,
Federal Savings Bank
414 North Central Avenue
Glendale, California 91203
Attention:
If to the Executive:
-------------------
Stephen J. Trafton
5022 Hook Tree Road
La Canada, California 91011
or to such other address as shall be designated by notice in writing to the
other party in accordance herewith. Notices and other communications hereunder
shall be deemed effectively given when personally delivered, or, if mailed, 72
hours after deposit in the United States mail.
10. Miscellaneous
-------------
(a) The terms of this Agreement are intended by the parties as a
final expression of its terms and may not be contradicted by evidence of any
prior or contemporaneous agreement, and no extrinsic evidence whatsoever may be
introduced in any judicial or arbitration proceedings involving this Agreement.
This Agreement supersedes all prior agreements, arrangements (including, but not
limited to, severance arrangements) and undertakings, written or oral, relating
to the subject matter hereof and shall provide for the sole remedies of the
Executive upon termination of employment.
(b) (i) This Agreement shall inure to the benefit of and be
binding upon the Executive, the Executive's heirs,
representatives or estate.
(ii) This Agreement shall be binding upon and inure to the
benefit of the Bank and its successors and assigns. The Bank
shall require any successor (whether direct or indirect, by
20
<PAGE>
purchase, merger, consolidation or otherwise) to all or
substantially all of the business or assets of the Bank, by
written agreement, expressly to assume and agree to perform this
Agreement in the same manner and to the same extent that the Bank
would be required to perform if no such succession had taken
place. As used in this Agreement, "Bank" shall mean (A) the Bank
as defined in the preamble to this Agreement, and (B) any
successor to the business or any of the assets of the Bank which
executes and delivers the agreement provided for in this
Subsection 10(b)(ii) or which otherwise becomes bound by all the
terms and provisions of this Agreement by operation of law.
(c) Except as provided in Paragraph 3, this Agreement may be
amended, modified, superseded, canceled, renewed or extended and the terms or
covenants hereof may be waived, only by a written instrument executed by both of
the parties hereto, or in the case of a waiver, by the party waiving compliance.
The failure of either party at any time or times to require performance of any
provisions hereof shall in no manner affect the right at a later time to enforce
such provisions thereafter. No waiver by either party of the breach of any term
or covenant contained in this Agreement, whether by conduct or otherwise, in any
one or more instances, shall be deemed to be, or construed as, a further or
continuing waiver of any such breach or a waiver of the breach, preceding or
succeeding, of any other term or covenant contained in this Agreement.
(d) In the event any one or more of the covenants, terms or
provisions contained in this Agreement shall be invalid, illegal or
unenforceable in any respect, the validity of the remaining covenants, terms and
provisions contained herein shall be in no way affected, prejudiced or disturbed
thereby.
(e) This Agreement is personal in nature and neither of the
parties hereto shall, without the consent of the other, assign or transfer this
Agreement or any rights or obligations hereunder, except as provided in
Paragraph 10(b) above. Without limiting the foregoing, the Executive's right to
receive payments hereunder shall not be assignable or transferable, whether by
pledge, creation of a security interest
21
<PAGE>
or otherwise, other than a transfer by his will or by the laws of descent or
distribution, and in the event of any attempted assignment or transfer contrary
to this Subsection 10(e), the Bank shall have no liability to pay any amount so
attempted to be assigned or transferred.
(f) This Agreement shall be governed by and construed in
accordance with the laws of the State of California regardless of its principles
of conflict of laws, except as such laws of the State of California may be
preempted by the laws of the United States.
(g) All payments required hereunder shall be made from the
general assets of the Bank and the Executive shall have no rights greater than
the rights of a general creditor of the Bank.
(h) The Bank may withhold from any payment required hereunder
such amounts for federal, state and local income tax as the Bank, in good faith,
determines to be required by applicable laws, provided, however, the Bank shall
provide the Executive with notice of the amount so withheld and shall promptly
pay over such amounts to the appropriate taxing body.
IN WITNESS WHEREOF, the parties have caused this Agreement to be
executed and delivered as of the date first above written.
22
<PAGE>
ATTEST: GLENDALE FEDERAL BANK,
FEDERAL SAVINGS BANK
/s/ James R. Eller, Jr. By: /s/ Diane C. Creel
- - ----------------------------- -------------------------------------
Secretary Diane C. Creel, Chairperson
James R. Eller, Jr. Officer Compensation and
Personnel Committee
WITNESS: EXECUTIVE:
/s/ Sharon K. Winston /s/ Stephen J. Trafton
- - ----------------------------- -----------------------------------------
Sharon K. Winston Stephen J. Trafton
23
<PAGE>
ELECTION
--------
PURSUANT TO THE AMENDED EMPLOYMENT AGREEMENT ("Agreement") between
myself and Glendale Federal Bank, Federal Savings Bank, I hereby elect that, in
the event compensation is due me pursuant to Paragraph 7(f) of the Agreement, I
hereby elect to receive the sums due thereunder in a lump sum in lieu of regular
installments pursuant to the terms of said Agreement.
Dated: ________________________
-----------------------------------------
STEPHEN J. TRAFTON
24
<PAGE>
AMENDMENT TO
------------
AMENDED EMPLOYMENT AGREEMENT BETWEEN
------------------------------------
GLENDALE FEDERAL BANK, FEDERAL SAVINGS BANK AND
-----------------------------------------------
STEPHEN J. TRAFTON
------------------
WHEREAS, on or about January 1, 1997, GLENDALE FEDERAL BANK, FEDERAL
SAVINGS BANK ("Bank"), which is now a wholly-owned subsidiary of Golden State
Bancorp Inc. ("Holding Company"), and STEPHEN J. TRAFTON ("Executive") entered
into an Amended Employment Agreement ("Employment Agreement"); and
WHEREAS, on or about July 23, 1997, Bank and Executive entered into an
-------
Employment Agreement that would take effect upon change of control as designated
in the agreement ("Change of Control Agreement"); and
WHEREAS, Section 6(d) (vii) of the Employment Agreement defines Good
Reason for termination as a Change in Control; and
WHEREAS, Section 6(e) of the Employment Agreement defines when a Change of
Control shall be deemed to occur; and
WHEREAS, the Change of Control Agreement is intended to specifically
define the rights and duties of the parties with regard to a change of control
of Bank and/or Holding Company and specifically provides in Paragraph 12(f) that
the Change of Control Agreement ... "shall supersede any other agreement between
the parties with respect to the subject matter hereof".
NOW, THEREFORE, it is hereby agreed as follows:
1. Sections 6(d) (vii) and 6(e) of the Employment Agreement are hereby
deleted.
2. All rights and duties of the parties with respect to a change of
control of Bank or Holding Company shall be governed exclusively by the
provisions of the Change of Control Agreement.
3. Except as herein provided, all terms and conditions of the Employment
Agreement and Change of Control Agreement shall remain in full force and effect.
Dated: July 23, 1997
-------
"Bank": GLENDALE FEDERAL BANK,
FEDERAL SAVINGS BANK
By:
-------------------------------------------------------
/s/ Stephen J. Trafton
"Executive": -------------------------------------------------------
STEPHEN J. TRAFTON
<PAGE>
EXHIBIT 10.8
EMPLOYMENT AGREEMENT
--------------------
AGREEMENT by and between GLENDALE FEDERAL BANK, FEDERAL SAVINGS BANK (the
"Company"), and STEPHEN J. TRAFTON (the "Executive"), dated as of the 23rd day
----
of July 1997.
----
The Board of Directors of the Company (the "Board"), has determined that it
is in the best interests of the Company and its shareholders to assure that the
Company will have the continued dedication of the Executive, notwithstanding the
possibility, threat or occurrence of a Change of Control (as defined below).
The Board believes it is imperative to diminish the inevitable distraction of
the Executive by virtue of the personal uncertainties and risks created by a
pending or threatened Change of Control and to encourage the Executive's full
attention and dedication to the Company currently and in the event of any
threatened or pending Change of Control, and to provide the Executive with
compensation and benefits arrangements upon a Change of Control which ensure
that the compensation and benefits expectations of the Executive will be
satisfied and which are competitive with those of other corporations. Therefore,
in order to accomplish these objectives, the Board has caused the Company to
enter into this Agreement.
NOW, THEREFORE, IT IS HEREBY AGREED AS FOLLOWS:
1. Certain Definitions. (a) The "Effective Date" shall mean the first
-------------------
date during the Change of Control Period (as defined in Section l(b)) on which a
Change of Control (as defined in Section 2) occurs. Anything in this Agreement
to the contrary notwithstanding, if a Change of Control occurs and if the
Executive's employment with the Company is terminated prior to the date on which
the Change of Control occurs, and if it is reasonably demonstrated by the
Executive that such termination of employment (i) was at the request of a third
party who has taken steps reasonably calculated to effect a Change of Control or
(ii) otherwise arose in connection with or anticipation of a Change of Control,
then for all purposes of this Agreement the "Effective Date" shall mean the date
immediately prior to the date of such termination of employment.
(b) The "Change of Control Period" shall mean the period commencing on the
date hereof and ending on the third anniversary of the date hereof; provided,
however, that commencing on the date one year after the date hereof, and on each
annual anniversary of such date (such date and each annual anniversary thereof
shall be hereinafter referred to as the "Renewal Date"), unless previously
terminated, the Change of Control Period shall be automatically extended so as
to terminate three years from such Renewal Date, unless at least 60 days prior
to the Renewal Date the Company shall give notice to the Executive that the
Change of Control Period shall not be so extended.
2. Change of Control. For purposes of this Section 2, "Company" shall
-----------------
include within its definition Glendale Federal Bank, Federal Savings Bank, and
its holding company, Golden State Bancorp Inc. (the "Holding Company"). For the
purpose of this Agreement, a "Change of Control" shall mean:
1
<PAGE>
(a) The acquisition by any individual, entity or group (within the meaning
of Section 13(d)(3) or 14(d)(2) of the Securities Exchange Act of 1934, as
amended (the "Exchange Act")) (a "Person") of beneficial ownership (within the
meaning of Rule 13d-3 promulgated under the Exchange Act) of 20% or more of
either (i) the then outstanding shares of common stock of the Company (the
"Outstanding Company Common Stock") or (ii) the combined voting power of the
then outstanding voting securities of the Company entitled to vote generally in
the election of directors (the "Outstanding Company Voting Securities");
provided, however, that for purposes of this subsection (a), the following
acquisitions shall not constitute a Change of Control: (i) any acquisition of
its shares directly from the Company, (ii) any acquisition by the Company, (iii)
any acquisition by any employee benefit plan (or related trust) sponsored or
maintained by the Company or any corporation controlled by the Company or (iv)
any acquisition by any corporation pursuant to a transaction which complies with
clauses (i), (ii) and (iii) of subsection (c) of this Section 2; or
(b) Individuals who, as of the date hereof, constitute the Board (the
"Incumbent Board") cease for any reason to constitute at least a majority of the
Board; provided, however, that any individual becoming a director subsequent to
the date hereof whose election, or nomination for election by the Company's
shareholders, was approved by a vote of at least a majority of the directors
then comprising the Incumbent Board shall be considered as though such
individual were a member of the Incumbent Board, but excluding, for this
purpose, any such individual whose initial assumption of office occurs as a
result of an actual or threatened election contest with respect to the election
or removal of directors or other actual or threatened solicitation of proxies or
consents by or on behalf of a Person other than the Board; or
(c) Consummation of a reorganization, merger or consolidation or sale or
other disposition of all or substantially all of the assets of the Company (a
"Business Combination"), in each case, unless, following such Business
Combination, (i) all or substantially all of the individuals and entities who
were the beneficial owners, respectively, of the Outstanding Company Common
Stock and Outstanding Company Voting Securities immediately prior to such
Business Combination beneficially own, directly or indirectly, more than 50% of,
respectively, the then outstanding shares of common stock and the combined
voting power of the then outstanding voting securities entitled to vote
generally in the election of directors, as the case may be, of the corporation
resulting from such Business Combination (including, without limitation, a
corporation which as a result of such transaction owns the Company or all or
substantially all of the Company's assets either directly or through one or more
subsidiaries) in substantially the same proportions as their ownership,
immediately prior to such Business Combination of the Outstanding Company Common
Stock and Outstanding Company Voting Securities, as the case may be, (ii) no
Person (excluding any corporation resulting from such Business Combination or
any employee benefit plan (or related trust) of the Company or such corporation
resulting from such Business Combination) beneficially owns, directly or
indirectly, 20% or more of, respectively, the then outstanding shares of common
stock of the corporation resulting from such Business Combination or the
combined voting power of the then outstanding voting securities of such
corporation except to the extent that such ownership existed prior to the
Business Combination and (iii) at least a majority of the members of the board
of directors of the corporation resulting from such Business Combination were
members of the Incumbent Board at the time of the execution of the initial
agreement, or of the
2
<PAGE>
action of the Board, providing for such Business Combination; or
(d) Approval by the shareholders of the Company of a complete liquidation
or dissolution of the Company.
3. Employment Period. The Company hereby agrees to continue the Executive
-----------------
in its employ, and the Executive hereby agrees to remain in the employ of the
Company subject to the terms and conditions of this Agreement, for the period
commencing on the Effective Date and ending on the third anniversary of such
date (the "Employment Period").
4. Terms of Employment.
-------------------
(a) Position and Duties.
-------------------
(i) During the Employment Period, (A) the Executive's position
(including status, offices, titles and reporting requirements), authority,
duties and responsibilities with the Company and the Holding Company shall be at
least commensurate in all material respects with the most significant of those
held, exercised and assigned at any time during the 120-day period immediately
preceding the Effective Date and (B) the Executive's services shall be performed
at the location where the Executive was employed immediately preceding the
Effective Date or any office or location less than 35 miles from such location.
(ii) During the Employment Period, and excluding any periods of vacation
and sick leave to which the Executive is entitled, the Executive agrees to
devote reasonable attention and time during normal business hours to the
business and affairs of the Company and, to the extent necessary to discharge
the responsibilities assigned to the Executive hereunder, to use the Executive's
reasonable best efforts to perform faithfully and efficiently such
responsibilities. During the Employment Period it shall not be a violation of
this Agreement for the Executive to (A) serve on corporate, civic or charitable
boards or committees, (B) deliver lectures, fulfill speaking engagements or
teach at educational institutions and (C) manage personal investments, so long
as such activities do not significantly interfere with the performance of the
Executive's responsibilities as an employee of the Company in accordance with
this Agreement. It is expressly understood and agreed that to the extent that
any such activities have been conducted by the Executive prior to the Effective
Date, the continued conduct of such activities (or the conduct of activities
similar in nature and scope thereto) subsequent to the Effective Date shall not
thereafter be deemed to interfere with the performance of the Executive's
responsibilities to the Company.
(b) Compensation.
------------
(i) Base Salary. During the Employment Period, the Executive shall
-----------
receive an annual base salary ("Annual Base Salary"), which shall be paid at a
monthly rate, at least equal to twelve times the highest monthly base salary
paid or payable, including any base salary which has been earned but deferred,
to the Executive by the Company and its affiliated companies in respect of the
twelve-month period immediately preceding the month in which the Effective Date
occurs. During the Employment Period, the Annual Base Salary shall be reviewed
no more than 12 months after the last salary increase
3
<PAGE>
awarded to the Executive prior to the Effective Date and thereafter at least
annually. Any increase in Annual Base Salary shall not serve to limit or reduce
any other obligation to the Executive under this Agreement. Annual Base Salary
shall not be reduced after any such increase and the term Annual Base Salary as
utilized in this Agreement shall refer to Annual Base Salary as so increased. As
used in this Agreement, the term "affiliated companies" shall include any
company controlled by, controlling or under common control with the Company.
(ii) Annual Target Bonus. In addition to Annual Base Salary, the
-------------------
Executive shall be awarded, for each fiscal year ending during the Employment
Period, an annual bonus (the "Annual Target Bonus") in cash at least equal to
the Executive's highest target bonus under the Company's Executive Incentive
Plans], or any comparable bonus under any predecessor or successor plan, for the
last three full fiscal years prior to the Effective Date (annualized in the
event that the Executive was not employed by the Company for the whole of such
fiscal year) (the "Recent Annual Target Bonus"). Each such Annual Target Bonus
shall be paid no later than the end of the third month of the fiscal year next
following the fiscal year for which the Annual Target Bonus is awarded, unless
the Executive shall elect to defer the receipt of such Annual Target Bonus.
(iii) Incentive, Savings and Retirement Plans. During the Employment
---------------------------------------
Period, the Executive shall be entitled to participate in all incentive, savings
and retirement plans, practices, policies and programs applicable generally to
other peer executives of the Company and its affiliated companies, but in no
event shall such plans, practices, policies and programs provide the Executive
with incentive opportunities (measured with respect to both regular and special
incentive opportunities, to the extent, if any, that such distinction is
applicable), savings opportunities and retirement benefit opportunities, in each
case, less favorable, in the aggregate, than the most favorable of those
provided by the Company and its affiliated companies for the Executive under
such plans, practices, policies and programs as in effect at any time during the
120-day period immediately preceding the Effective Date or if more favorable to
the Executive, those provided generally at any time after the Effective Date to
other peer executives of the Company and its affiliated companies.
(iv) Welfare Benefit Plans. During the Employment Period, the
---------------------
Executive and/or the Executive's family, as the case may be, shall be eligible
for participation in and shall receive all benefits under welfare benefit plans,
practices, policies and programs provided by the Company and its affiliated
companies (including, without limitation, medical, prescription, dental,
disability, employee life, group life, accidental death and travel accident
insurance plans and programs) to the extent applicable generally to other peer
executives of the Company and its affiliated companies, but in no event shall
such plans, practices, policies and programs provide the Executive with benefits
which are less favorable, in the aggregate, than the most favorable of such
plans, practices, policies and programs in effect for the Executive at any time
during the 120-day period immediately preceding the Effective Date or, if more
favorable to the Executive, those provided generally at any time after the
Effective Date to other peer executives of the Company and its affiliated
companies.
(v) Expenses. During the Employment Period, the Executive shall be
--------
entitled to receive prompt reimbursement for all reasonable expenses incurred by
the Executive in accordance with the most favorable policies, practices and
procedures of the Company and its affiliated companies in effect for the
Executive at any time during the 120-day period immediately preceding the
Effective Date or, if
4
<PAGE>
more favorable to the Executive, as in effect generally at any time thereafter
with respect to other peer executives of the Company and its affiliated
companies.
(vi) Fringe Benefits. During the Employment Period, the Executive
---------------
shall be entitled to fringe benefits, including, without limitation, tax and
financial planning services, payment of club dues, and, if applicable, use of an
automobile and payment of related expenses, in accordance with the most
favorable plans, practices, programs and policies of the Company and its
affiliated companies in effect for the Executive at any time during the 120-day
period immediately preceding the Effective Date or, if more favorable to the
Executive, as in effect generally at any time thereafter with respect to other
peer executives of the Company and its affiliated companies.
(vii) Office and Support Staff. During the Employment Period, the
------------------------
Executive shall be entitled to an office or offices of a size and with
furnishings and other appointments, and to exclusive personal secretarial and
other assistance, at least equal to the most favorable of the foregoing provided
to the Executive by the Company and its affiliated companies at any time during
the 120-day period immediately preceding the Effective Date or, if more
favorable to the Executive, as provided generally at any time thereafter with
respect to other peer executives of the Company and its affiliated companies.
(viii) Vacation. During the Employment Period, the Executive shall be
--------
entitled to paid vacation in accordance with the most favorable plans, policies,
programs and practices of the Company and its affiliated companies as in effect
for the Executive at any time during the 120-day period immediately preceding
the Effective Date or, if more favorable to the Executive, as in effect
generally at any time thereafter with respect to other peer executives of the
Company and its affiliated companies.
5. Termination of Employment. (a) Death or Disability. The Executive's
------------------------- -------------------
employment shall terminate automatically upon the Executive's death during the
Employment Period. If the Company determines in good faith that the Disability
of the Executive has occurred during the Employment Period (pursuant to the
definition of Disability set forth below), it may give to the Executive written
notice in accordance with Section 12(b) of this Agreement of its intention to
terminate the Executive's employment. In such event, the Executive's employment
with the Company shall terminate effective on the 30th day after receipt of such
notice by the Executive (the "Disability Effective Date"), provided that, within
the 30 days after such receipt, the Executive shall not have returned to full-
time performance of the Executive's duties. For purposes of this Agreement,
"Disability" shall mean the absence of the Executive from the Executive's duties
with the Company on a full-time basis for 180 consecutive business days as a
result of incapacity due to mental or physical illness which is determined to be
total and permanent by a physician selected by the Company or its insurers and
acceptable to the Executive or the Executive's legal representative.
(b) Cause. The Company may terminate the Executive's employment during the
-----
Employment Period for Cause. For purposes of this Agreement, "Cause" shall mean:
(i) the willful and continued failure of the Executive to perform
substantially the Executive's duties with the Company or one of its affiliates
(other than any such failure resulting from incapacity due to physical or mental
illness), after a written demand for substantial performance is delivered to the
Executive by the Board or the Chief Executive Officer of the Company which
specifically identifies the
5
<PAGE>
manner in which the Board or Chief Executive Officer believes that the Executive
has not substantially performed the Executive's duties, or
(ii) the willful engaging by the Executive in illegal conduct or gross
misconduct which is materially and demonstrably injurious to the Company.
For purposes of this provision, no act or failure to act, on the part of the
Executive, shall be considered "willful" unless it is done, or omitted to be
done, by the Executive in bad faith or without reasonable belief that the
Executive's action or omission was in the best interests of the Company. Any
act, or failure to act, based upon authority given pursuant to a resolution duly
adopted by the Board or upon the instructions of the Chief Executive Officer or
a senior officer of the Company or based upon the advice of counsel for the
Company shall be conclusively presumed to be done, or omitted to be done, by the
Executive in good faith and in the best interests of the Company. The cessation
of employment of the Executive shall not be deemed to be for Cause unless and
until there shall have been delivered to the Executive a copy of a resolution
duly adopted by the affirmative vote of not less than three-quarters of the
entire membership of the Board at a meeting of the Board called and held for
such purpose (after reasonable notice is provided to the Executive and the
Executive is given an opportunity, together with counsel, to be heard before the
Board), finding that, in the good faith opinion of the Board, the Executive is
guilty of the conduct described in subparagraph (i) or (ii) above, and
specifying the particulars thereof in detail.
(c) Good Reason. The Executive's employment may be terminated by the
-----------
Executive for Good Reason. For purposes of this Agreement, "Good Reason" shall
mean:
(i) the assignment to the Executive of any duties inconsistent in any
respect with the Executive's position (including status, offices, titles and
reporting requirements), authority, duties or responsibilities as contemplated
by Section 4(a) of this Agreement, or any other action by the Company or the
Holding Company which results in a diminution in such position, authority,
duties or responsibilities, excluding for this purpose an isolated,
insubstantial and inadvertent action not taken in bad faith and which is
remedied by the Company promptly after receipt of notice thereof given by the
Executive;
(ii) any failure by the Company to comply with any of the provisions of
Section 4(b) of this Agreement, other than an isolated, insubstantial and
inadvertent failure not occurring in bad faith and which is remedied by the
Company promptly after receipt of notice thereof given by the Executive;
(iii) the Company's requiring the Executive to be based at any office or
location other than as provided in Section 4(a)(i)(B) hereof or the Company's
requiring the Executive to travel on Company business to a substantially greater
extent than required immediately prior to the Effective Date;
(iv) any purported termination by the Company of the Executive's employment
otherwise than as expressly permitted by this Agreement; or
(v) any failure by the Company to comply with and satisfy Section ll(c) of
this Agreement.
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For purposes of this Section 5(c), any good faith determination of "Good Reason"
made by the Executive shall be conclusive. Anything in this Agreement to the
contrary notwithstanding, a termination by the Executive for any reason during
the 30-day period immediately following the first anniversary of the Effective
Date shall be deemed to be a termination for Good Reason for all purposes of
this Agreement.
(d) Notice of Termination. Any termination by the Company for Cause, or by
---------------------
the Executive for Good Reason, shall be communicated by Notice of Termination to
the other party hereto given in accordance with Section 12(b) of this Agreement.
For purposes of this Agreement, a "Notice of Termination" means a written notice
which (i) indicates the specific termination provision in this Agreement relied
upon, (ii) to the extent applicable, sets forth in reasonable detail the facts
and circumstances claimed to provide a basis for termination of the Executive's
employment under the provision so indicated and (iii) if the Date of Termination
(as defined below) is other than the date of receipt of such notice, specifies
the termination date (which date shall be not more than thirty days after the
giving of such notice). The failure by the Executive or the Company to set
forth in the Notice of Termination any fact or circumstance which contributes to
a showing of Good Reason or Cause shall not waive any right of the Executive or
the Company, respectively, hereunder or preclude the Executive or the Company,
respectively, from asserting such fact or circumstance in enforcing the
Executive's or the Company's rights hereunder.
(e) Date of Termination. "Date of Termination" means (i) if the
-------------------
Executive's employment is terminated by the Company for Cause, or by the
Executive for Good Reason, the date of receipt of the Notice of Termination or
any later date specified therein, as the case may be, (ii) if the Executive's
employment is terminated by the Company other than for Cause or Disability, the
Date of Termination shall be the date on which the Company notifies the
Executive of such termination and (iii) if the Executive's employment is
terminated by reason of death or Disability, the Date of Termination shall be
the date of death of the Executive or the Disability Effective Date, as the case
may be.
6. Obligations of the Company upon Termination. (a) Good Reason; Other
------------------------------------------- ------------------
Than for Cause, Death or Disability. If, during the Employment Period, the
- - -----------------------------------
Company shall terminate the Executive's employment other than for Cause or
Disability or the Executive shall terminate employment for Good Reason:
(i) the Company shall pay to the Executive in a lump sum in cash
within 30 days after the Date of Termination the aggregate of the following
amounts:
A. the sum of (1) the Executive's Annual Base Salary through the Date of
Termination to the extent not theretofore paid, (2) the product of (x) the
Recent Annual Target Bonus and (y) a fraction, the numerator of which is the
number of days in the current fiscal year through the Date of Termination, and
the denominator of which is 365 and (3) any compensation previously deferred by
the Executive (together with any accrued interest or earnings thereon) and any
accrued vacation pay, in each case to the extent not theretofore paid (the sum
of the amounts described in clauses (1), (2), and (3) shall be hereinafter
referred to as the "Accrued Obligations"); and
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B. the amount equal to the product of (1) three and (2) the sum of (x) the
Executive's Annual Base Salary and (y) the Recent Annual Target Bonus; and
C. an amount equal to the excess of (a) the actuarial equivalent of the
benefit under the Company's qualified defined benefit retirement plan (the
"Retirement Plan") (utilizing actuarial assumptions no less favorable to the
Executive than those in effect under the Company's Retirement Plan immediately
prior to the Effective Date), and any excess or supplemental retirement plan in
which the Executive participates (together, the "SERP") which the Executive
would receive if the Executive's employment continued for three years after the
Date of Termination assuming for this purpose that all accrued benefits are
fully vested, and, assuming that the Executive's compensation in each of the
three years is that required by Section 4(b)(i) and Section 4(b)(ii), over (b)
the actuarial equivalent of the Executive's actual benefit (paid or payable), if
any, under the Retirement Plan and the SERP as of the Date of Termination;
(ii) for three years after the Executive's Date of Termination, or such
longer period as may be provided by the terms of the appropriate plan, program,
practice or policy, the Company shall continue benefits to the Executive and/or
the Executive's family at least equal to those which would have been provided to
them in accordance with the plans, programs, practices and policies described in
Section 4(b)(iv) of this Agreement if the Executive's employment had not been
terminated or, if more favorable to the Executive, as in effect generally at any
time thereafter with respect to other peer executives of the Company and its
affiliated companies and their families, provided, however, that if the
Executive becomes reemployed with another employer and is eligible to receive
medical or other welfare benefits under another employer provided plan, the
medical and other welfare benefits described herein shall be secondary to those
provided under such other plan during such applicable period of eligibility.
For purposes of determining eligibility (but not the time of commencement of
benefits) of the Executive for retiree benefits pursuant to such plans,
practices, programs and policies, the Executive shall be considered to have
remained employed until three years after the Date of Termination and to have
retired on the last day of such period;
(iii) the Company shall, at its sole expense as incurred, provide the
Executive with outplacement services the scope and provider of which shall be
selected by the Executive in his sole discretion;
(iv) to the extent not theretofore paid or provided, the Company shall
timely pay or provide to the Executive any other amounts or benefits required to
be paid or provided or which the Executive is eligible to receive under any
plan, program, policy or practice or contract or agreement of the Company and
its affiliated companies (such other amounts and benefits shall be hereinafter
referred to as the "Other Benefits"); and
(v) all stock awards shall immediately vest.
(b) Death. If the Executive's employment is terminated by reason of
-----
the Executive's death during the Employment Period, this Agreement shall
terminate without further obligations to the Executive's legal representatives
under this Agreement, other than for payment of Accrued Obligations and the
timely payment or provision of Other Benefits. Accrued Obligations shall be paid
to the
8
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Executive's estate or beneficiary, as applicable, in a lump sum in cash within
30 days of the Date of Termination. With respect to the provision of Other
Benefits, the term Other Benefits as utilized in this Section 6(b) shall
include, without limitation, and the Executive's estate and/or beneficiaries
shall be entitled to receive, benefits at least equal to the most favorable
benefits provided by the Company and affiliated companies to the estates and
beneficiaries of peer executives of the Company and such affiliated companies
under such plans, programs, practices and policies relating to death benefits,
if any, as in effect with respect to other peer executives and their
beneficiaries at any time during the 120-day period immediately preceding the
Effective Date or, if more favorable to the Executive's estate and/or the
Executive's beneficiaries, as in effect on the date of the Executive's death
with respect to other peer executives of the Company and its affiliated
companies and their beneficiaries.
(c) Disability. If the Executive's employment is terminated by reason
----------
of the Executive's Disability during the Employment Period, this Agreement shall
terminate without further obligations to the Executive, other than for payment
of Accrued Obligations and the timely payment or provision of Other Benefits.
Accrued Obligations shall be paid to the Executive in a lump sum in cash within
30 days of the Date of Termination. With respect to the provision of Other
Benefits, the term Other Benefits as utilized in this Section 6 (c) shall
include, and the Executive shall be entitled after the Disability Effective Date
to receive, disability and other benefits at least equal to the most favorable
of those generally provided by the Company and its affiliated companies to
disabled executives and/or their families in accordance with such plans,
programs, practices and policies relating to disability, if any, as in effect
generally with respect to other peer executives and their families at any time
during the 120-day period immediately preceding the Effective Date or, if more
favorable to the Executive and/or the Executive's family, as in effect at any
time thereafter generally with respect to other peer executives of the Company
and its affiliated companies and their families.
(d) Cause; Other than for Good Reason. If the Executive's employment
---------------------------------
shall be terminated for Cause during the Employment Period, this Agreement shall
terminate without further obligations to the Executive other than the obligation
to pay to the Executive (x) his Annual Base Salary through the Date of
Termination, (y) the amount of any compensation previously deferred by the
Executive, and (z) Other Benefits, in each case to the extent theretofore
unpaid. If the Executive voluntarily terminates employment during the
Employment Period, excluding a termination for Good Reason, this Agreement shall
terminate without further obligations to the Executive, other than for Accrued
Obligations and the timely payment or provision of Other Benefits. In such
case, all Accrued Obligations shall be paid to the Executive in a lump sum in
cash within 30 days of the Date of Termination.
7. Non-exclusivity of Rights. Nothing in this Agreement shall
-------------------------
prevent or limit the Executive's continuing or future participation in any plan,
program, policy or practice provided by the Company or any of its affiliated
companies and for which the Executive may qualify, nor, subject to Section
12(f), shall anything herein limit or otherwise affect such rights as the
Executive may have under any contract or agreement with the Company or any of
its affiliated companies. Amounts which are vested benefits or which the
Executive is otherwise entitled to receive under any plan, policy, practice or
program of or any contract or agreement with the Company or any of its
affiliated companies at or subsequent to the Date of Termination shall be
payable in accordance with such plan, policy, practice or program or contract or
agreement except as explicitly modified by this Agreement.
9
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8. Full Settlement. The Company's obligation to make the payments
---------------
provided for in this Agreement and otherwise to perform its obligations
hereunder shall not be affected by any set-off, counterclaim, recoupment,
defense or other claim, right or action which the Company may have against the
Executive or others. In no event shall the Executive be obligated to seek other
employment or take any other action by way of mitigation of the amounts payable
to the Executive under any of the provisions of this Agreement and such amounts
shall not be reduced whether or not the Executive obtains other employment. The
Company agrees to pay as incurred, to the full extent permitted by law, all
legal fees and expenses which the Executive may reasonably incur as a result of
any contest (regardless of the outcome thereof) by the Company, the Executive or
others of the validity or enforceability of, or liability under, any provision
of this Agreement or any guarantee of performance thereof (including as a result
of any contest by the Executive about the amount of any payment pursuant to this
Agreement), plus in each case interest on any delayed payment at the applicable
Federal rate provided for in Section 7872(f)(2)(A) of the Internal Revenue Code
of 1986, as amended (the "Code").
9. Certain Additional Payments by the Company.
------------------------------------------
(a) Anything in this Agreement to the contrary notwithstanding and except
as set forth below, in the event it shall be determined that any payment or
distribution by the Company or its affiliates to or for the benefit of the
Executive (whether paid or payable or distributed or distributable pursuant to
the terms of this Agreement or otherwise, but determined without regard to any
additional payments required under this Section 9) (a "Payment") would be
subject to the excise tax imposed by Section 4999 of the Code or any interest or
penalties are incurred by the Executive with respect to such excise tax (such
excise tax, together with any such interest and penalties, are hereinafter
collectively referred to as the "Excise Tax"), then the Executive shall be
entitled to receive an additional payment (a "Gross-Up Payment") in an amount
such that after payment by the Executive of all taxes (including any interest or
penalties imposed with respect to such taxes), including, without limitation,
any income taxes (and any interest and penalties imposed with respect thereto)
and Excise Tax imposed upon the Gross-Up Payment, the Executive retains an
amount of the Gross-Up Payment equal to the Excise Tax imposed upon the
Payments. Notwithstanding the foregoing provisions of this Section 9(a), if it
shall be determined that the Executive is entitled to a Gross-Up Payment, but
that the Payments do not exceed 110% of the greatest amount (the "Reduced
Amount") that could be paid to the Executive such that the receipt of Payments
would not give rise to any Excise Tax, then no Gross-Up Payment shall be made to
the Executive and the Payments, in the aggregate, shall be reduced to the
Reduced Amount.
(b) Subject to the provisions of Section 9(c), all determinations
required to be made under this Section 9, including whether and when a Gross-Up
Payment is required and the amount of such Gross-Up Payment and the assumptions
to be utilized in arriving at such determination, shall be made by or such other
certified public accounting firm as may be designated by the Executive (the
"Accounting Firm") which shall provide detailed supporting calculations both to
the Company and the Executive within 15 business days of the receipt of notice
from the Executive that there has been a Payment, or such earlier time as is
requested by the Company. In the event that the Accounting Firm is serving as
accountant or auditor for the individual, entity or group effecting the Change
of Control, the Executive shall appoint another nationally recognized accounting
firm to make the determinations required hereunder (which accounting firm shall
then be referred to as the Accounting Firm hereunder). All fees and expenses of
the Accounting Firm shall be borne solely by the Company. Any Gross-Up
10
<PAGE>
Payment, as determined pursuant to this Section 9, shall be paid by the Company
to the Executive within five days of the receipt of the Accounting Firm's
determination. Any determination by the Accounting Firm shall be binding upon
the Company and the Executive. As a result of the uncertainty in the application
of Section 4999 of the Code at the time of the initial determination by the
Accounting Firm hereunder, it is possible that Gross-Up Payments which will not
have been made by the Company should have been made ("Underpayment"), consistent
with the calculations required to be made hereunder. In the event that the
Company exhausts its remedies pursuant to Section 9(c) and the Executive
thereafter is required to make a payment of any Excise Tax, the Accounting Firm
shall determine the amount of the Underpayment that has occurred and any such
Underpayment shall be promptly paid by the Company to or for the benefit of the
Executive.
(c) The Executive shall notify the Company in writing of any claim by the
Internal Revenue Service that, if successful, would require the payment by the
Company of the Gross-Up Payment. Such notification shall be given as soon as
practicable but no later than ten business days after the Executive is informed
in writing of such claim and shall apprise the Company of the nature of such
claim and the date on which such claim is requested to be paid. The Executive
shall not pay such claim prior to the expiration of the 30 day period following
the date on which it gives such notice to the Company (or such shorter period
ending on the date that any payment of taxes with respect to such claim is due).
If the Company notifies the Executive in writing prior to the expiration of such
period that it desires to contest such claim, the Executive shall:
(i) give the Company any information reasonably requested by the Company
relating to such claim,
(ii) take such action in connection with contesting such claim as the
Company shall reasonably request in writing from time to time, including,
without limitation, accepting legal representation with respect to such claim by
an attorney reasonably selected by the Company,
(iii) cooperate with the Company in good faith in order effectively to
contest such claim, and
(iv) permit the Company to participate in any proceedings relating to such
claim;
provided, however, that the Company shall bear and pay directly all costs and
expenses (including additional interest and penalties) incurred in connection
with such contest and shall indemnify and hold the Executive harmless, on an
aftertax basis, for any Excise Tax or income tax (including interest and
penalties with respect thereto) imposed as a result of such representation and
payment of costs and expenses. Without limitation on the foregoing provisions of
this Section 9(c), the Company shall control all proceedings taken in connection
with such contest and, at its sole option, may pursue or forgo any and all
administrative appeals, proceedings, hearings and conferences with the taxing
authority in respect of such claim and may, at its sole option, either direct
the Executive to pay the tax claimed and sue for a refund or contest the claim
in any permissible manner, and the Executive agrees to prosecute such contest to
a determination before any administrative tribunal, in a court of initial
jurisdiction and in one or more appellate courts, as the Company shall
determine; provided, however, that if the Company directs the Executive to pay
such claim and sue for a refund, the Company shall advance the amount of such
payment to the Executive, on an interest-free basis and shall indemnify and
11
<PAGE>
hold the Executive harmless, on an after-tax basis, from any Excise Tax or
income tax (including interest or penalties with respect thereto) imposed with
respect to such advance or with respect to any imputed income with respect to
such advance; and further provided that any extension of the statute of
limitations relating to payment of taxes for the taxable year of the Executive
with respect to which such contested amount is claimed to be due is limited
solely to such contested amount. Furthermore, the Company's control of the
contest shall be limited to issues with respect to which a Gross-Up Payment
would be payable hereunder and the Executive shall be entitled to settle or
contest, as the case may be, any other issue raised by the Internal Revenue
Service or any other taxing authority.
(d) If, after the receipt by the Executive of an amount advanced by the
Company pursuant to Section 9(c), the Executive becomes entitled to receive any
refund with respect to such claim, the Executive shall (subject to the Company's
complying with the requirements of Section 9(c)) promptly pay to the Company the
amount of such refund (together with any interest paid or credited thereon after
taxes applicable thereto). If, after the receipt by the Executive of an amount
advanced by the Company pursuant to Section 9(c), a determination is made that
the Executive shall not be entitled to any refund with respect to such claim and
the Company does not notify the Executive in writing of its intent to contest
such denial of refund prior to the expiration of 30 days after such
determination, then such advance shall be forgiven and shall not be required to
be repaid and the amount of such advance shall offset, to the extent thereof,
the amount of Gross-Up Payment required to be paid.
10. Confidential Information. The Executive shall hold in a fiduciary
------------------------
capacity for the benefit of the Company all secret or confidential information,
knowledge or data relating to the Company or any of its affiliated companies,
and their respective businesses, which shall have been obtained by the Executive
during the Executive's employment by the Company or any of its affiliated
companies and which shall not be or become public knowledge (other than by acts
by the Executive or representatives of the Executive in violation of this
Agreement). After termination of the Executive's employment with the Company,
the Executive shall not, without the prior written consent of the Company or as
may otherwise be required by law or legal process, communicate or divulge any
such information, knowledge or data to anyone other than the Company and those
designated by it. In no event shall an asserted violation of the provisions of
this Section 10 constitute a basis for deferring or withholding any amounts
otherwise payable to the Executive under this Agreement.
11. Successors. (a) This Agreement is personal to the Executive and
----------
without the prior written consent of the Company shall not be assignable by the
Executive otherwise than by will or the laws of descent and distribution. This
Agreement shall inure to the benefit of and be enforceable by the Executive's
legal representatives.
(b) This Agreement shall inure to the benefit of and be binding upon the
Company and its successors and assigns.
(c) The Company will require any successor (whether direct or indirect,
by purchase, merger, consolidation or otherwise) to all or substantially all of
the business and/or assets of the Company to assume expressly and agree to
perform this Agreement in the same manner and to the same extent that the
Company would be required to perform it if no such succession had taken place.
As used in this Agreement, "Company" shall mean the Company as hereinbefore
defined and any successor to its
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<PAGE>
business and/or assets as aforesaid which assumes and agrees to perform this
Agreement by operation of law, or otherwise.
12. Miscellaneous. (a) This Agreement shall be governed by and
-------------
construed in accordance with the laws of the State of California, without
reference to principles of conflict of laws and to the extent not preempted by
the laws of the United States of America. The captions of this Agreement are
not part of the provisions hereof and shall have no force or effect.
(b) All notices and other communications hereunder shall be in writing
and shall be given by hand delivery to the other party or by registered or
certified mail, return receipt requested, postage prepaid, addressed as follows:
If to the Executive: To his last known address in the Company's records.
-------------------
All such notices and communications shall be deemed to have been received on the
earlier of the date of receipt or the third business day after the date of
mailing thereof.
If to the Company: To the Bank at:
-----------------
Glendale Federal Bank,
Federal Savings Bank
401 North Brand Boulevard
Glendale, California 91203
Attention: General Counsel
or to such other address as either party shall have furnished to the other in
writing in accordance herewith. Notice and communications shall be effective
when actually received by the addressee.
(c) The invalidity or unenforceability of any provision of this Agreement
shall not affect the validity or enforceability of any other provision of this
Agreement.
(d) The Company may withhold from any amounts payable under this
Agreement such Federal, state, local or foreign taxes as shall be required to be
withheld pursuant to any applicable law or regulation.
(e) The Executive's or the Company's failure to insist upon strict
compliance with any provision of this Agreement or the failure to assert any
right the Executive or the Company may have hereunder, including, without
limitation, the right of the Executive to terminate employment for Good Reason
pursuant to Section 5(c)(i)-(v) of this Agreement, shall not be deemed to be a
waiver of such provision or right or any other provision or right of this
Agreement.
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(f) The Executive and the Company acknowledge that, except as may
otherwise be provided under any other written agreement between the Executive
and the Company, the employment of the Executive by the Company is "at will"
and, subject to Section l(a) hereof, prior to the Effective Date, the
Executive's employment and/or this Agreement may be terminated by either the
Executive or the Company at any time with or without cause prior to the
Effective Date, in which case the Executive shall have no further rights under
this Agreement. From and after the Effective Date this Agreement shall
supersede any other agreement between the parties with respect to the subject
matter hereof.
(g) All prior agreements between the parties relating to this Agreement
are incorporated in this Agreement which constitutes the final expression of
intent of the parties. The terms of this Agreement may not be contradicted by
evidence of any prior agreement or contemporaneous oral agreement. No extrinsic
evidence whatsoever may be introduced in any judicial or arbitration
proceedings, if any, involving this Agreement. This Agreement may not be
modified except in writing signed by an authorized officer of Glendale Federal
and by the Executive.
IN WITNESS WHEREOF, the Executive has hereunto set the Executive's
hand and, pursuant to the authorization from its Board of Directors, the Company
has caused these presents to be executed in its name on its behalf, all as of
the day and year first above written.
ATTEST: GLENDALE FEDERAL BANK,
FEDERAL SAVINGS BANK
/s/ James R. Eller, Jr. By: /s/ Diane C. Creel
- - -------------------------------- ----------------------------------
Secretary Diane C. Creel, Chairperson
James R. Eller, Jr. Officer Compensation and
Personnel Committee
WITNESS: EXECUTIVE:
/s/ Sharon K. Winston /s/ Stephen J. Trafton
- - -------------------------------- ----------------------------------
Sharon K. Winston Stephen J. Trafton
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EXHIBIT 10.9
EMPLOYMENT AGREEMENT
--------------------
AGREEMENT by and between GLENDALE FEDERAL BANK, FEDERAL SAVINGS BANK (the
"Company"), and _________________ (the "Executive"), dated as of the __________
day of ____________________,1997.
The Board of Directors of the Company (the "Board"), has determined that it
is in the best interests of the Company and its shareholders to assure that the
Company will have the continued dedication of the Executive, notwithstanding the
possibility, threat or occurrence of a Change of Control (as defined below). The
Board believes it is imperative to diminish the inevitable distraction of the
Executive by virtue of the personal uncertainties and risks created by a pending
or threatened Change of Control and to encourage the Executive's full attention
and dedication to the Company currently and in the event of any threatened or
pending Change of Control, and to provide the Executive with compensation and
benefits arrangements upon a Change of Control which ensure that the
compensation and benefits expectations of the Executive will be satisfied and
which are competitive with those of other corporations. Therefore, in order to
accomplish these objectives, the Board has caused the Company to enter into this
Agreement.
NOW, THEREFORE, IT IS HEREBY AGREED AS FOLLOWS:
1. Certain Definitions. (a) The "Effective Date" shall mean the first
-------------------
date during the Change of Control Period (as defined in Section l(b)) on which a
Change of Control (as defined in Section 2) occurs. Anything in this Agreement
to the contrary notwithstanding, if a Change of Control occurs and if the
Executive's employment with the Company is terminated prior to the date on which
the Change of Control occurs, and if it is reasonably demonstrated by the
Executive that such termination of employment (i) was at the request of a third
party who has taken steps reasonably calculated to effect a Change of Control or
(ii) otherwise arose in connection with or anticipation of a Change of Control,
then for all purposes of this Agreement the "Effective Date" shall mean the date
immediately prior to the date of such termination of employment.
(b) The "Change of Control Period" shall mean the period commencing on the
date hereof and ending on the third anniversary of the date hereof; provided,
however, that commencing on the date one year after the date hereof, and on each
annual anniversary of such date (such date and each annual anniversary thereof
shall be hereinafter referred to as the "Renewal Date"), unless previously
terminated, the Change of Control Period shall be automatically extended so as
to terminate three years from such Renewal Date, unless at least 60 days prior
to the Renewal Date the Company shall give notice to the Executive that the
Change of Control Period shall not be so extended.
2. Change of Control. For purposes of this Section 2, "Company" shall
-----------------
include within its definition Glendale Federal Bank, Federal Savings Bank, and
its holding company, Golden State Bancorp Inc. (the "Holding Company"). For the
purpose of this Agreement, a "Change of Control" shall mean:
(a) The acquisition by any individual, entity or group (within the meaning
of Section 13(d)(3) or 14(d)(2) of the Securities Exchange Act of 1934, as
amended (the "Exchange Act")) (a "Person") of beneficial ownership (within the
meaning of Rule 13d-3 promulgated under the Exchange Act) of 20% or
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<PAGE>
more of either (i) the then outstanding shares of common stock of the Company
(the "Outstanding Company Common Stock") or (ii) the combined voting power of
the then outstanding voting securities of the Company entitled to vote generally
in the election of directors (the "Outstanding Company Voting Securities");
provided, however, that for purposes of this subsection (a), the following
acquisitions shall not constitute a Change of Control: (i) any acquisition of
its shares directly from the Company, (ii) any acquisition by the Company, (iii)
any acquisition by any employee benefit plan (or related trust) sponsored or
maintained by the Company or any corporation controlled by the Company or (iv)
any acquisition by any corporation pursuant to a transaction which complies with
clauses (i), (ii) and (iii) of subsection (c) of this Section 2; or
(b) Individuals who, as of the date hereof, constitute the Board (the
"Incumbent Board") cease for any reason to constitute at least a majority of the
Board; provided, however, that any individual becoming a director subsequent to
the date hereof whose election, or nomination for election by the Company's
shareholders, was approved by a vote of at least a majority of the directors
then comprising the Incumbent Board shall be considered as though such
individual were a member of the Incumbent Board, but excluding, for this
purpose, any such individual whose initial assumption of office occurs as a
result of an actual or threatened election contest with respect to the election
or removal of directors or other actual or threatened solicitation of proxies or
consents by or on behalf of a Person other than the Board; or
(c) Consummation of a reorganization, merger or consolidation or sale or
other disposition of all or substantially all of the assets of the Company (a
"Business Combination"), in each case, unless, following such Business
Combination, (i) all or substantially all of the individuals and entities who
were the beneficial owners, respectively, of the Outstanding Company Common
Stock and Outstanding Company Voting Securities immediately prior to such
Business Combination beneficially own, directly or indirectly, more than 50% of,
respectively, the then outstanding shares of common stock and the combined
voting power of the then outstanding voting securities entitled to vote
generally in the election of directors, as the case may be, of the corporation
resulting from such Business Combination (including, without limitation, a
corporation which as a result of such transaction owns the Company or all or
substantially all of the Company's assets either directly or through one or more
subsidiaries) in substantially the same proportions as their ownership,
immediately prior to such Business Combination of the Outstanding Company Common
Stock and Outstanding Company Voting Securities, as the case may be, (ii) no
Person (excluding any corporation resulting from such Business Combination or
any employee benefit plan (or related trust) of the Company or such corporation
resulting from such Business Combination) beneficially owns, directly or
indirectly, 20% or more of, respectively, the then outstanding shares of common
stock of the corporation resulting from such Business Combination or the
combined voting power of the then outstanding voting securities of such
corporation except to the extent that such ownership existed prior to the
Business Combination and (iii) at least a majority of the members of the board
of directors of the corporation resulting from such Business Combination were
members of the Incumbent Board at the time of the execution of the initial
agreement, or of the action of the Board, providing for such Business
Combination; or
(d) Approval by the shareholders of the Company of a complete liquidation
or dissolution of the Company.
2
<PAGE>
3. Employment Period. The Company hereby agrees to continue the Executive
-----------------
in its employ, and the Executive hereby agrees to remain in the employ of the
Company subject to the terms and conditions of this Agreement, for the period
commencing on the Effective Date and continuing for thirty (30) months following
the Effective Date (the "Employment Period").
4. Terms of Employment.
-------------------
(a) Position and Duties.
------------ ------
(i) During the Employment Period, (A) the Executive's position
(including status, offices, titles and reporting requirements), authority,
duties and responsibilities with the Company and the Holding Company shall be at
least commensurate in all material respects with the most significant of those
held, exercised and assigned at any time during the 120-day period immediately
preceding the Effective Date and (B) the Executive's services shall be performed
at the location where the Executive was employed immediately preceding the
Effective Date or any office or location less than 35 miles from such location.
(ii) During the Employment Period, and excluding any periods of
vacation and sick leave to which the Executive is entitled, the Executive agrees
to devote reasonable attention and time during normal business hours to the
business and affairs of the Company and, to the extent necessary to discharge
the responsibilities assigned to the Executive hereunder, to use the Executive's
reasonable best efforts to perform faithfully and efficiently such
responsibilities. During the Employment Period it shall not be a violation of
this Agreement for the Executive to (A) serve on corporate, civic or charitable
boards or committees, (B) deliver lectures, fulfill speaking engagements or
teach at educational institutions and (C) manage personal investments, so long
as such activities do not significantly interfere with the performance of the
Executive's responsibilities as an employee of the Company in accordance with
this Agreement. It is expressly understood and agreed that to the extent that
any such activities have been conducted by the Executive prior to the Effective
Date, the continued conduct of such activities (or the conduct of activities
similar in nature and scope thereto) subsequent to the Effective Date shall not
thereafter be deemed to interfere with the performance of the Executive's
responsibilities to the Company.
(b) Compensation.
------------
(i) Base Salary. During the Employment Period, the Executive shall
-----------
receive an annual base salary ("Annual Base Salary"), which shall be paid at a
monthly rate, at least equal to twelve times the highest monthly base salary
paid or payable, including any base salary which has been earned but deferred,
to the Executive by the Company and its affiliated companies in respect of the
twelve-month period immediately preceding the month in which the Effective Date
occurs. During the Employment Period, the Annual Base Salary shall be reviewed
no more than 12 months after the last salary increase awarded to the Executive
prior to the Effective Date and thereafter at least annually. Any increase in
Annual Base Salary shall not serve to limit or reduce any other obligation to
the Executive under this Agreement. Annual Base Salary shall not be reduced
after any such increase and the term Annual Base Salary as utilized in this
Agreement shall refer to Annual Base Salary as so increased. As used in this
3
<PAGE>
Agreement, the term "affiliated companies" shall include any company controlled
by, controlling or under common control with the Company.
(ii) Annual Target Bonus. In addition to Annual Base Salary, the
-------------------
Executive shall be awarded, for each fiscal year ending during the Employment
Period, an annual bonus (the "Annual Target Bonus") in cash at least equal to
the Executive's highest bonus under the Company's [Executive Incentive Plans],
or any comparable bonus under any predecessor or successor plan, for the last
three full fiscal years prior to the Effective Date (annualized in the event
that the Executive was not employed by the Company for the whole of such fiscal
year) (the "Recent Annual Target Bonus"). Each such Annual Target Bonus shall be
paid no later than the end of the third month of the fiscal year next following
the fiscal year for which the Annual Target Bonus is awarded, unless the
Executive shall elect to defer the receipt of such Annual Target Bonus.
(iii) Incentive, Savings and Retirement Plans. During the Employment
---------------------------------------
Period, the Executive shall be entitled to participate in all incentive, savings
and retirement plans, practices, policies and programs applicable generally to
other peer executives of the Company and its affiliated companies, but in no
event shall such plans, practices, policies and programs provide the Executive
with incentive opportunities (measured with respect to both regular and special
incentive opportunities, to the extent, if any, that such distinction is
applicable), savings opportunities and retirement benefit opportunities, in each
case, less favorable, in the aggregate, than the most favorable of those
provided by the Company and its affiliated companies for the Executive under
such plans, practices, policies and programs as in effect at any time during the
120-day period immediately preceding the Effective Date or if more favorable to
the Executive, those provided generally at any time after the Effective Date to
other peer executives of the Company and its affiliated companies.
(iv) Welfare Benefit Plans. During the Employment Period, the
---------------------
Executive and/or the Executive's family, as the case may be, shall be eligible
for participation in and shall receive all benefits under welfare benefit plans,
practices, policies and programs provided by the Company and its affiliated
companies (including, without limitation, medical, prescription, dental,
disability, employee life, group life, accidental death and travel accident
insurance plans and programs) to the extent applicable generally to other peer
executives of the Company and its affiliated companies, but in no event shall
such plans, practices, policies and programs provide the Executive with benefits
which are less favorable, in the aggregate, than the most favorable of such
plans, practices, policies and programs in effect for the Executive at any time
during the 120-day period immediately preceding the Effective Date or, if more
favorable to the Executive, those provided generally at any time after the
Effective Date to other peer executives of the Company and its affiliated
companies.
(v) Expenses. During the Employment Period, the Executive shall be
--------
entitled to receive prompt reimbursement for all reasonable expenses incurred by
the Executive in accordance with the most favorable policies, practices and
procedures of the Company and its affiliated companies in effect for the
Executive at any time during the 120-day period immediately preceding the
Effective Date or, if more favorable to the Executive, as in effect generally at
any time thereafter with respect to other peer executives of the Company and its
affiliated companies.
4
<PAGE>
(vi) Fringe Benefits. During the Employment Period, the Executive
---------------
shall be entitled to fringe benefits, including, without limitation, tax and
financial planning services, payment of club dues, and, if applicable, use of an
automobile and payment of related expenses, in accordance with the most
favorable plans, practices, programs and policies of the Company and its
affiliated companies in effect for the Executive at any time during the 120-day
period immediately preceding the Effective Date or, if more favorable to the
Executive, as in effect generally at any time thereafter with respect to other
peer executives of the Company and its affiliated companies.
(vii) Office and Support Staff. During the Employment Period, the
------------------------
Executive shall be entitled to an office or offices of a size and with
furnishings and other appointments, and to exclusive personal secretarial and
other assistance, at least equal to the most favorable of the foregoing provided
to the Executive by the Company and its affiliated companies at any time during
the 120-day period immediately preceding the Effective Date or, if more
favorable to the Executive, as provided generally at any time thereafter with
respect to other peer executives of the Company and its affiliated companies.
(viii) Vacation. During the Employment Period, the Executive shall be
--------
entitled to paid vacation in accordance with the most favorable plans, policies,
programs and practices of the Company and its affiliated companies as in effect
for the Executive at any time during the 120-day period immediately preceding
the Effective Date or, if more favorable to the Executive, as in effect
generally at any time thereafter with respect to other peer executives of the
Company and its affiliated companies.
5. Termination of Employment. (a) Death or Disability. The Executive's
------------------------- -------------------
employment shall terminate automatically upon the Executive's death during the
Employment Period. If the Company determines in good faith that the Disability
of the Executive has occurred during the Employment Period (pursuant to the
definition of Disability set forth below), it may give to the Executive written
notice in accordance with Section 12(b) of this Agreement of its intention to
terminate the Executive's employment. In such event, the Executive's employment
with the Company shall terminate effective on the 30th day after receipt of such
notice by the Executive (the "Disability Effective Date"), provided that, within
the 30 days after such receipt, the Executive shall not have returned to full-
time performance of the Executive's duties. For purposes of this Agreement,
"Disability" shall mean the absence of the Executive from the Executive's duties
with the Company on a full-time basis for 180 consecutive business days as a
result of incapacity due to mental or physical illness which is determined to be
total and permanent by a physician selected by the Company or its insurers and
acceptable to the Executive or the Executive's legal representative.
(b) Cause. The Company may terminate the Executive's employment during the
-----
Employment Period for Cause. For purposes of this Agreement, "Cause" shall mean:
(i) the willful and continued failure of the Executive to perform
substantially the Executive's duties with the Company or one of its affiliates
(other than any such failure resulting from incapacity due to physical or mental
illness), after a written demand for substantial performance is delivered to the
Executive by the Board or the Chief Executive Officer of the Company which
specifically identifies the
5
<PAGE>
manner in which the Board or Chief Executive Officer believes that the Executive
has not substantially performed the Executive's duties, or
(ii) the willful engaging by the Executive in illegal conduct or gross
misconduct which is materially and demonstrably injurious to the Company.
For purposes of this provision, no act or failure to act, on the part of the
Executive, shall be considered "willful" unless it is done, or omitted to be
done, by the Executive in bad faith or without reasonable belief that the
Executive's action or omission was in the best interests of the Company. Any
act, or failure to act, based upon authority given pursuant to a resolution duly
adopted by the Board or upon the instructions of the Chief Executive Officer or
a senior officer of the Company or based upon the advice of counsel for the
Company shall be conclusively presumed to be done, or omitted to be done, by the
Executive in good faith and in the best interests of the Company. The cessation
of employment of the Executive shall not be deemed to be for Cause unless and
until there shall have been delivered to the Executive a copy of a resolution
duly adopted by the affirmative vote of not less than three-quarters of the
entire membership of the Board at a meeting of the Board called and held for
such purpose (after reasonable notice is provided to the Executive and the
Executive is given an opportunity, together with counsel, to be heard before the
Board), finding that, in the good faith opinion of the Board, the Executive is
guilty of the conduct described in subparagraph (i) or (ii) above, and
specifying the particulars thereof in detail.
(c) Good Reason. The Executive's employment may be terminated by the
-----------
Executive for Good Reason. For purposes of this Agreement, "Good Reason" shall
mean:
(i) the assignment to the Executive of any duties inconsistent in any
respect with the Executive's position (including status, offices, titles and
reporting requirements), authority, duties or responsibilities as contemplated
by Section 4(a) of this Agreement, or any other action by the Company or the
Holding Company which results in a diminution in such position, authority,
duties or responsibilities, excluding for this purpose an isolated,
insubstantial and inadvertent action not taken in bad faith and which is
remedied by the Company promptly after receipt of notice thereof given by the
Executive;
(ii) any failure by the Company to comply with any of the provisions of
Section 4(b) of this Agreement, other than an isolated, insubstantial and
inadvertent failure not occurring in bad faith and which is remedied by the
Company promptly after receipt of notice thereof given by the Executive;
(iii) the Company's requiring the Executive to be based at any office or
location other than as provided in Section 4(a)(i)(B) hereof or the Company's
requiring the Executive to travel on Company business to a substantially greater
extent than required immediately prior to the Effective Date;
(iv) any purported termination by the Company of the Executive's
employment otherwise than as expressly permitted by this Agreement; or
(v) any failure by the Company to comply with and satisfy Section ll(c) of
this Agreement.
6
<PAGE>
For purposes of this Section 5(c), any good faith determination of "Good Reason"
made by the Executive shall be conclusive. Anything in this Agreement to the
contrary notwithstanding, a termination by the Executive for any reason during
the 30-day period immediately following the first anniversary of the Effective
Date shall be deemed to be a termination for Good Reason for all purposes of
this Agreement.
(d) Notice of Termination. Any termination by the Company for Cause, or by
---------------------
the Executive for Good Reason, shall be communicated by Notice of Termination to
the other party hereto given in accordance with Section 12(b) of this Agreement.
For purposes of this Agreement, a "Notice of Termination" means a written notice
which (i) indicates the specific termination provision in this Agreement relied
upon, (ii) to the extent applicable, sets forth in reasonable detail the facts
and circumstances claimed to provide a basis for termination of the Executive's
employment under the provision so indicated and (iii) if the Date of Termination
(as defined below) is other than the date of receipt of such notice, specifies
the termination date (which date shall be not more than thirty days after the
giving of such notice). The failure by the Executive or the Company to set forth
in the Notice of Termination any fact or circumstance which contributes to a
showing of Good Reason or Cause shall not waive any right of the Executive or
the Company, respectively, hereunder or preclude the Executive or the Company,
respectively, from asserting such fact or circumstance in enforcing the
Executive's or the Company's rights hereunder.
(e) Date of Termination. "Date of Termination" means (i) if the Executive's
-------------------
employment is terminated by the Company for Cause, or by the Executive for Good
Reason, the date of receipt of the Notice of Termination or any later date
specified therein, as the case may be, (ii) if the Executive's employment is
terminated by the Company other than for Cause or Disability, the Date of
Termination shall be the date on which the Company notifies the Executive of
such termination and (iii) if the Executive's employment is terminated by reason
of death or Disability, the Date of Termination shall be the date of death of
the Executive or the Disability Effective Date, as the case may be.
6. Obligations of the Company upon Termination. (a) Good Reason; Other
------------------------------------------- ------------------
Than for Cause, Death or Disability. If, during the Employment Period, the
- - -----------------------------------
Company shall terminate the Executive's employment other than for Cause or
Disability or the Executive shall terminate employment for Good Reason:
(i) the Company shall pay to the Executive in a lump sum in cash
within 30 days after the Date of Termination the aggregate of the following
amounts:
A. the sum of (1) the Executive's Annual Base Salary through the Date of
Termination to the extent not theretofore paid, (2) the product of (x) the
Recent Annual Target Bonus and (y) a fraction, the numerator of which is the
number of days in the current fiscal year through the Date of Termination, and
the denominator of which is 365 and (3) any compensation previously deferred by
the Executive (together with any accrued interest or earnings thereon) and any
accrued vacation pay, in each case to the extent not theretofore paid (the sum
of the amounts described in clauses (1), (2), and (3) shall be hereinafter
referred to as the "Accrued Obligations"); and
7
<PAGE>
B. the amount equal to the product of (1) two and one-half (2.5) and (2)
the sum of (x) the Executive's Annual Base Salary and (y) the Recent Annual
Target Bonus; and
C. an amount equal to the excess of (a) the actuarial equivalent of the
benefit under the Company's qualified defined benefit retirement plan (the
"Retirement Plan") (utilizing actuarial assumptions no less favorable to the
Executive than those in effect under the Company's Retirement Plan immediately
prior to the Effective Date), and any excess or supplemental retirement plan in
which the Executive participates (together, the "SERP") which the Executive
would receive if the Executive's employment continued for three years after the
Date of Termination assuming for this purpose that all accrued benefits are
fully vested, and, assuming that the Executive's compensation in each of the
three years is that required by Section 4(b)(i) and Section 4(b)(ii), over (b)
the actuarial equivalent of the Executive's actual benefit (paid or payable), if
any, under the Retirement Plan and the SERP as of the Date of Termination;
(ii) for 30 months after the Executive's Date of Termination, or such
longer period as may be provided by the terms of the appropriate plan, program,
practice or policy, the Company shall continue benefits to the Executive and/or
the Executive's family at least equal to those which would have been provided to
them in accordance with the plans, programs, practices and policies described in
Section 4(b)(iv) of this Agreement if the Executive's employment had not been
terminated or, if more favorable to the Executive, as in effect generally at any
time thereafter with respect to other peer executives of the Company and its
affiliated companies and their families, provided, however, that if the
Executive becomes reemployed with another employer and is eligible to receive
medical or other welfare benefits under another employer provided plan, the
medical and other welfare benefits described herein shall be secondary to those
provided under such other plan during such applicable period of eligibility. For
purposes of determining eligibility (but not the time of commencement of
benefits) of the Executive for retiree benefits pursuant to such plans,
practices, programs and policies, the Executive shall be considered to have
remained employed until 30 months after the Date of Termination and to have
retired on the last day of such period;
(iii) the Company shall, at its sole expense as incurred, provide the
Executive with outplacement services the scope and provider of which shall be
selected by the Executive in his sole discretion;
(iv) to the extent not theretofore paid or provided, the Company shall
timely pay or provide to the Executive any other amounts or benefits required to
be paid or provided or which the Executive is eligible to receive under any
plan, program, policy or practice or contract or agreement of the Company and
its affiliated companies (such other amounts and benefits shall be hereinafter
referred to as the "Other Benefits"); and
(v) all stock awards shall immediately vest.
(b) Death. If the Executive's employment is terminated by reason of the
-----
Executive's death during the Employment Period, this Agreement shall terminate
without further obligations to the Executive's legal representatives under this
Agreement, other than for payment of Accrued Obligations and the timely payment
or provision of Other Benefits. Accrued Obligations shall be paid to the
8
<PAGE>
Executive's estate or beneficiary, as applicable, in a lump sum in cash within
30 days of the Date of Termination. With respect to the provision of Other
Benefits, the term Other Benefits as utilized in this Section 6(b) shall
include, without limitation, and the Executive's estate and/or beneficiaries
shall be entitled to receive, benefits at least equal to the most favorable
benefits provided by the Company and affiliated companies to the estates and
beneficiaries of peer executives of the Company and such affiliated companies
under such plans, programs, practices and policies relating to death benefits,
if any, as in effect with respect to other peer executives and their
beneficiaries at any time during the 120-day period immediately preceding the
Effective Date or, if more favorable to the Executive's estate and/or the
Executive's beneficiaries, as in effect on the date of the Executive's death
with respect to other peer executives of the Company and its affiliated
companies and their beneficiaries.
(c) Disability. If the Executive's employment is terminated by reason of
----------
the Executive's Disability during the Employment Period, this Agreement shall
terminate without further obligations to the Executive, other than for payment
of Accrued Obligations and the timely payment or provision of Other Benefits.
Accrued Obligations shall be paid to the Executive in a lump sum in cash within
30 days of the Date of Termination. With respect to the provision of Other
Benefits, the term Other Benefits as utilized in this Section 6 (c) shall
include, and the Executive shall be entitled after the Disability Effective Date
to receive, disability and other benefits at least equal to the most favorable
of those generally provided by the Company and its affiliated companies to
disabled executives and/or their families in accordance with such plans,
programs, practices and policies relating to disability, if any, as in effect
generally with respect to other peer executives and their families at any time
during the 120-day period immediately preceding the Effective Date or, if more
favorable to the Executive and/or the Executive's family, as in effect at any
time thereafter generally with respect to other peer executives of the Company
and its affiliated companies and their families.
(d) Cause; Other than for Good Reason. If the Executive's employment
---------------------------------
shall be terminated for Cause during the Employment Period, this Agreement shall
terminate without further obligations to the Executive other than the obligation
to pay to the Executive (x) his Annual Base Salary through the Date of
Termination, (y) the amount of any compensation previously deferred by the
Executive, and (z) Other Benefits, in each case to the extent theretofore
unpaid. If the Executive voluntarily terminates employment during the Employment
Period, excluding a termination for Good Reason, this Agreement shall terminate
without further obligations to the Executive, other than for Accrued Obligations
and the timely payment or provision of Other Benefits. In such case, all Accrued
Obligations shall be paid to the Executive in a lump sum in cash within 30 days
of the Date of Termination.
7. Non-exclusivity of Rights. Nothing in this Agreement shall
-------------------------
prevent or limit the Executive's continuing or future participation in any plan,
program, policy or practice provided by the Company or any of its affiliated
companies and for which the Executive may qualify, nor, subject to Section
12(f), shall anything herein limit or otherwise affect such rights as the
Executive may have under any contract or agreement with the Company or any of
its affiliated companies. Amounts which are vested benefits or which the
Executive is otherwise entitled to receive under any plan, policy, practice or
program of or any contract or agreement with the Company or any of its
affiliated companies at or
9
<PAGE>
subsequent to the Date of Termination shall be payable in accordance with such
plan, policy, practice or program or contract or agreement except as explicitly
modified by this Agreement.
8. Full Settlement. The Company's obligation to make the payments
---------------
provided for in this Agreement and otherwise to perform its obligations
hereunder shall not be affected by any set-off, counterclaim, recoupment,
defense or other claim, right or action which the Company may have against the
Executive or others. In no event shall the Executive be obligated to seek other
employment or take any other action by way of mitigation of the amounts payable
to the Executive under any of the provisions of this Agreement and such amounts
shall not be reduced whether or not the Executive obtains other employment. The
Company agrees to pay as incurred, to the full extent permitted by law, all
legal fees and expenses which the Executive may reasonably incur as a result of
any contest (regardless of the outcome thereof) by the Company, the Executive or
others of the validity or enforceability of, or liability under, any provision
of this Agreement or any guarantee of performance thereof (including as a result
of any contest by the Executive about the amount of any payment pursuant to this
Agreement), plus in each case interest on any delayed payment at the applicable
Federal rate provided for in Section 7872(f)(2)(A) of the Internal Revenue Code
of 1986, as amended (the "Code").
9. Confidential Information. The Executive shall hold in a fiduciary
------------------------
capacity for the benefit of the Company all secret or confidential information,
knowledge or data relating to the Company or any of its affiliated companies,
and their respective businesses, which shall have been obtained by the Executive
during the Executive's employment by the Company or any of its affiliated
companies and which shall not be or become public knowledge (other than by acts
by the Executive or representatives of the Executive in violation of this
Agreement). After termination of the Executive's employment with the Company,
the Executive shall not, without the prior written consent of the Company or as
may otherwise be required by law or legal process, communicate or divulge any
such information, knowledge or data to anyone other than the Company and those
designated by it. In no event shall an asserted violation of the provisions of
this Section 10 constitute a basis for deferring or withholding any amounts
otherwise payable to the Executive under this Agreement.
10. Successors. (a) This Agreement is personal to the Executive and
----------
without the prior written consent of the Company shall not be assignable by the
Executive otherwise than by will or the laws of descent and distribution. This
Agreement shall inure to the benefit of and be enforceable by the Executive's
legal representatives.
(b) This Agreement shall inure to the benefit of and be binding upon
the Company and its successors and assigns.
(c) The Company will require any successor (whether direct or
indirect, by purchase, merger, consolidation or otherwise) to all or
substantially all of the business and/or assets of the Company to assume
expressly and agree to perform this Agreement in the same manner and to the same
extent that the Company would be required to perform it if no such succession
had taken place. As used in this Agreement, "Company" shall mean the Company as
hereinbefore defined and any successor to its
10
<PAGE>
business and/or assets as aforesaid which assumes and agrees to perform this
Agreement by operation of law, or otherwise.
11. Miscellaneous. (a) This Agreement shall be governed by and
-------------
construed in accordance with the laws of the State of California, without
reference to principles of conflict of laws and to the extent not preempted by
the laws of the United States of America. The captions of this Agreement are not
part of the provisions hereof and shall have no force or effect.
(b) All notices and other communications hereunder shall be in
writing and shall be given by hand delivery to the other party or by registered
or certified mail, return receipt requested, postage prepaid, addressed as
follows:
If to the Executive: To him or her at the last known address in the
-------------------
Company's records. All such notices and communications shall be deemed to have
been received on the earlier of the date of receipt or the third business day
after the date of mailing thereof.
If to the Company: To the Bank at:
-----------------
Glendale Federal Bank,
Federal Savings Bank
401 North Brand Boulevard
Glendale, California 91203
Attention: General Counsel
or to such other address as either party shall have furnished to the other in
writing in accordance herewith. Notice and communications shall be effective
when actually received by the addressee.
(c) The invalidity or unenforceability of any provision of this
Agreement shall not affect the validity or enforceability of any other provision
of this Agreement.
(d) The Company may withhold from any amounts payable under this
Agreement such Federal, state, local or foreign taxes as shall be required to be
withheld pursuant to any applicable law or regulation.
(e) The Executive's or the Company's failure to insist upon strict
compliance with any provision of this Agreement or the failure to assert any
right the Executive or the Company may have hereunder, including, without
limitation, the right of the Executive to terminate employment for Good Reason
pursuant to Section 5(c)(i)-(v) of this Agreement, shall not be deemed to be a
waiver of such provision or right or any other provision or right of this
Agreement.
11
<PAGE>
(f) The Executive and the Company acknowledge that, except as may
otherwise be provided under any other written agreement between the Executive
and the Company, the employment of the Executive by the Company is "at will"
and, subject to Section l(a) hereof, prior to the Effective Date, the
Executive's employment and/or this Agreement may be terminated by either the
Executive or the Company at any time with or without cause prior to the
Effective Date, in which case the Executive shall have no further rights under
this Agreement. From and after the Effective Date this Agreement shall supersede
any other agreement between the parties with respect to the subject matter
hereof.
(g) All prior agreements between the parties relating to this
Agreement are incorporated in this Agreement which constitutes the final
expression of intent of the parties. The terms of this Agreement may not be
contradicted by evidence of any prior agreement or contemporaneous oral
agreement. No extrinsic evidence whatsoever may be introduced in any judicial or
arbitration proceedings, if any, involving this Agreement. This Agreement may
not be modified except in writing signed by an authorized officer of Glendale
Federal and by the Executive.
IN WITNESS WHEREOF, the Executive has hereunto set the
Executive's hand and, pursuant to the authorization from its Board of Directors,
the Company has caused these presents to be executed in its name on its behalf,
all as of the day and year first above written.
GLENDALE FEDERAL BANK,
FEDERAL SAVINGS BANK
By:
----------------------------------
Stephen J. Trafton
President
"Executive"
----------------------------------
Name: _______________________________
Address: _______________________________
_______________________________
12
<PAGE>
EXHIBIT 11.1
GLENDALE FEDERAL BANK AND SUBSIDIARIES
STATEMENT REGARDING COMPUTATION OF PER SHARE EARNINGS
(IN THOUSANDS, EXCEPT PER SHARE DATA)
<TABLE>
<CAPTION>
YEARS ENDED JUNE 30
--------------------------------
PRIMARY EARNINGS PER SHARE 1997 1996 1995
-------- -------- --------
<S> <C> <C> <C>
COMPUTATION FOR STATEMENT OF OPERATIONS
Net earnings per statement of operations used in
primary earnings per share computation:
Earnings before extraordinary item.......................................... $ 50,423 $ 42,052 $ 73,301
Dividends on Preferred Stock................................................ (10,841) (16,156) (17,609)
Premium on conversion of Series E Preferred Stock........................... (4,173) (9,443) -
Interest on borrowings and investments, net of tax effect, on application
of assumed proceeds from exercise of warrants and options in excess
of 20% limitation (a)..................................................... - 871 3,178
-------- -------- --------
35,409 17,324 58,870
Extraordinary item, net..................................................... - - 1,755
-------- -------- --------
Net earnings, as adjusted................................................... $ 35,409 $ 17,324 $ 60,625
======== ======== ========
Weighted average number of shares outstanding used in
primary earnings per share computation:
Weighted average number of shares........................................... 49,095 42,185 40,243
Shares issuable from assumed conversion of Series D Preferred Stock......... - - 445
Net shares issuable from assumed exercise of warrants and options, as
determined by the application of the Modified Treasury Stock Method....... 6,934 5,408 5,350
-------- -------- --------
56,029 47,593 46,038
======== ======== ========
Primary earnings per share (b):
Earnings before extraordinary item.......................................... $ 0.63 $ 0.36 $ 1.28
Extraordinary item, net..................................................... - - 0.04
-------- -------- --------
Net earnings................................................................ $ 0.63 $ 0.36 $ 1.32
======== ======== ========
</TABLE>
<PAGE>
GLENDALE FEDERAL BANK AND SUBSIDIARIES
STATEMENT REGARDING COMPUTATION OF PER SHARE EARNINGS - CONTINUED
(IN THOUSANDS, EXCEPT PER SHARE DATA)
<TABLE>
<CAPTION>
YEARS ENDED JUNE 30
--------------------------------
FULLY DILUTED EARNINGS PER SHARE 1997 1996 1995
-------- -------- --------
<S> <C> <C> <C>
COMPUTATION FOR STATEMENT OF OPERATIONS
Net earnings per statement of operations used in
fully diluted earnings per share computation:
Earnings before extraordinary item......................................... $ 50,423 $ 42,052 $ 73,301
Dividends on Preferred Stock............................................... (10,841) (16,156) -
Premium on conversion of Series E Preferred Stock.......................... (4,173) (9,443) -
Interest on borrowings and investments, net of tax effect, on application
of assumed proceeds from exercise of warrants and options in excess
of 20% limitation (a).................................................... - 195 2,572
-------- -------- --------
35,409 16,648 75,873
Extraordinary item, net.................................................... - - 1,755
-------- -------- --------
Net earnings, as adjusted.................................................. $ 35,409 $ 16,648 $ 77,628
======== ======== ========
Weighted average number of shares outstanding used in
fully diluted earnings per share computation:
Weighted average number of shares.......................................... 49,095 42,185 40,243
Shares issuable from assumed conversion of Series E Preferred Stock........ - - 19,351
Shares issuable from assumed conversion of Series D Preferred Stock........ - - 445
Net shares issuable from assumed exercise of warrants and options, as
determined by the application of the Modified Treasury Stock Method...... 8,429 5,408 5,350
-------- -------- --------
57,524 47,593 65,389
======== ======== ========
Fully diluted earnings per share (b):
Earnings before extraordinary item......................................... $ 0.62 $ 0.35 $ 1.16
Extraordinary item, net.................................................... - - 0.03
-------- -------- --------
Net earnings............................................................... $ 0.62 $ 0.35 $ 1.19
======== ======== ========
ADDITIONAL FULLY DILUTED EARNINGS PER SHARE COMPUTATION (c)
Earnings before extraordinary item, as per
fully diluted computation above:.............................................. $ 35,409 $ 16,648 $ 75,873
Dividends on Series E Preferred Stock...................................... 10,841 16,156 -
Interest on convertible subordinated debentures, net of tax effect (a)..... 468 576 589
-------- -------- --------
Earnings before extraordinary item, as adjusted............................ 46,718 33,380 76,462
Extraordinary item, net.................................................... - - 1,755
-------- -------- --------
Net earnings, as adjusted.................................................. $ 46,718 $ 33,380 $ 78,217
======== ======== ========
Weighted average number of shares outstanding,
as per fully diluted computation above........................................ 57,524 47,593 65,389
Shares issuable from assumed conversion of Series E Preferred Stock........ 12,098 18,482 -
Shares issuable from assumed exercise of convertible subordinated debentures 15 15 15
-------- -------- --------
Weighted average number of shares outstanding, as adjusted................. 69,637 66,090 65,404
======== ======== ========
Fully diluted earnings per share, as adjusted (c)
Earnings before extraordinary item......................................... $ 0.67 $ 0.51 $ 1.17
Extraordinary item, net.................................................... - - 0.03
-------- -------- --------
Net earnings (c)........................................................... $ 0.67 $ 0.51 $ 1.20
======== ======== ========
</TABLE>
- - -----
(a) Adjustments to earnings before extraordinary item have been shown net of tax
effects which were calculated at the Bank's effective tax rates.
(b) These figures agree with the related amounts in the statement of operations.
(c) This calculation is submitted in accordance with Regulation S-K item
601(b)(11) although it is contrary to paragraph 40 of APB Opinion No. 15
because it produces an anti-dilutive effect.
<PAGE>
EXHIBIT 23.1
CONSENT OF INDEPENDENT AUDITORS
The Board of Directors
Glendale Federal Bank, Federal Savings Bank:
We consent to the incorporation by reference in the registration statement
(No. 333-28037) on Form S-3 of Golden State Bancorp Inc. of our report dated
July 23, 1997, except for Note 24 of notes to the consolidated financial
statements which is as of August 18, 1997, with respect to the consolidated
financial statements of Glendale Federal Bank, Federal Savings Bank and
subsidiaries as of June 30, 1997 and 1996, and the related consolidated
statements of operations, changes in stockholders' equity and cash flows for
each of the years in the three-year period ended June 30, 1997, which report
appears in the June 30, 1997 annual report on Form 10-K of Glendale Federal
Bank, Federal Savings Bank.
KPMG PEAT MARWICK LLP
Los Angeles, California
September 23, 1997
