<PAGE>
As filed with the Securities and Exchange Commission on May 29, 1997
Registration No. 333-
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SECURITIES AND EXCHANGE COMMISSION
WASHINGTON, D.C. 20549
FORM S-3
REGISTRATION STATEMENT
UNDER
THE SECURITIES ACT OF 1933
GOLDEN STATE BANCORP INC.
(Exact name of registrant as specified in its charter)
<TABLE>
<S> <C> <C>
Delaware 6712 To Be Applied for
(State or other jurisdiction of (Primary Standard Industrial (I.R.S. Employer
incorporation or organization) Classification Code Number) Identification No.)
</TABLE>
414 North Central Avenue
Glendale, California 91203
(818) 500-2000
(Address, including zip code, and telephone number, including area code, of
registrant's principal executive offices)
JOHN E. HAYNES
Golden State Bancorp Inc.
414 North Central Avenue
Glendale, California 91203
(818) 500-2175
(Name, address, including zip code, and telephone number, including area code,
of agent for service)
COPY TO:
JAMES R. WALTHER, ESQ.
Mayer, Brown & Platt
350 South Grand Avenue
Los Angeles, California 90071-1503
(213) 229-9597
APPROXIMATE DATE OF COMMENCEMENT OF PROPOSED SALE TO THE PUBLIC: Upon
consummation of the Reorganization described herein.
If the only securities being registered on this Form are being offered pursuant
to dividend or interest reinvestment plans, please check the following box. [_]
If any of the securities being registered on this Form are to be offered on a
delayed or continuous basis pursuant to Rule 415 under the Securities Act of
1933, other than securities offered only in connection with dividend or interest
reinvestment plans, check the following box. [X]
If this Form is filed to register additional securities for an offering pursuant
to Rule 462(b) under the Securities Act, please check the following box and list
the Securities Act registration statement number of the earlier effective
registration statement for the same offering. [_]
If this Form is a post-effective amendment filed pursuant to Rule 562(c) under
the Securities Act, check the following box and list the Securities Act
registration statement number of the earlier effective registration statement
for the same offering. [_]
If delivery of the prospectus is expected to be made pursuant to Rule 434,
please check the following box. [_]
CALCULATION OF REGISTRATION FEE
<TABLE>
<CAPTION>
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Proposed maximum Proposed maximum
Title of each class of Amount to be offering price aggregate Amount of
securities to be registered registered(1) per unit offering price registration
fee
<S> <C> <C> <C> <C>
Common Stock, $1.00 par value 10,863,093 Not applicable $264,081,791 $80,025
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</TABLE>
(1) Represents the maximum number of shares of Common Stock issuable, after
consummation of the Reorganization involving Glendale Federal Bank, Federal
Savings Bank ("Glendale Federal") described herein, upon exercise of the
Seven-Year Warrants and conversion of the GLENFED Debentures described
herein. In addition, in accordance with Rule 416 under the Securities Act
of 1933, an indeterminate number of shares of Common Stock that may be
issued as a result of the anti-dilution provisions of such securities are
hereby registered.
(2) Estimated solely for the purpose of computing the registration fee in
accordance with Rule 457(c) and 457(f) under the Securities Act of 1933 on
the basis of the average of the high and low prices on The New York Stock
Exchange on May 27, 1997, of the shares of Common Stock, $1.00 par value,
of Glendale Federal into which Common Stock of the Registrant is to be
converted pursuant to the Reorganization described herein.
<PAGE>
PROSPECTUS
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10,863,093 SHARES
GOLDEN STATE BANCORP INC.
COMMON STOCK
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This Prospectus relates to the shares of the common stock, par value $1.00
per share (the "Company Common Stock"), of Golden State Bancorp Inc. (the
"Company") that, pursuant to the holding company formation transaction (the
"Reorganization") of Glendale Federal Bank, Federal Savings Bank ("Glendale
Federal") described herein, have become issuable upon (i) the exercise from time
to time of the common stock purchase warrants (the "Seven-Year Warrants")
originally issued by Glendale Federal pursuant to the Warrant Agreement, dated
as of August 15, 1993, between the Bank and Chemical Trust Company of
California, by the holders thereof and (ii) the conversion from time to time of
the 7 3/4% Convertible Subordinated Debentures due 2001 (the "GLENFED
Debentures") originally issued by GLENFED, Inc., the former holding company for
Glendale Federal, pursuant to the Indenture, dated as of March 15, 1986, between
GLENFED, Inc. and Manufacturers Hanover Trust Company, as Trustee.
The Seven-Year Warrants entitle the holders thereof to purchase Company
Common Stock at an exercise price of $12.00 per share, subject to possible
adjustment in certain circumstances. The Seven-Year Warrants will expire, to
the extent not theretofore exercised, on August 28, 2000, and may not be
exercised after that date.
The GLENFED Debentures are convertible into Company Common Stock at the
option of the holders thereof at a conversion price of $706.25, or 1.416 shares
of Company Common Stock for each $1,000 of principal amount thereof. Such
conversion privilege may be exercised at any time prior to the maturity of the
GLENFED Debentures on March 15, 2001.
The Company Common Stock is listed on the New York Stock Exchange and the
Pacific Exchange under the trading symbol "GSB".
The Company was incorporated under Delaware law by Glendale Federal for the
purpose of becoming the holding company of Glendale Federal pursuant to the
Reorganization described herein. Upon completion of the Reorganization, the
Seven-Year Warrants became exercisable for, and the GLENFED Debentures became
convertible into, Company Common Stock, rather than common stock of Glendale
Federal, in accordance with their respective original terms, without adjustment.
This Prospectus does not cover any resales of Company Common Stock received
upon exercise of the Seven-Year Warrants or conversion of the GLENFED
Debentures. No person is authorized to make any use of this Prospectus in
connection with any such resale or in connection with any other transaction or
the offer or sale of any other securities.
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THESE SECURITIES HAVE NOT BEEN APPROVED OR DISAPPROVED BY THE SECURITIES
AND EXCHANGE COMMISSION NOR HAS THE COMMISSION PASSED UPON THE ACCURACY OR
ADEQUACY OF THIS PROSPECTUS. ANY REPRESENTATION TO THE CONTRARY IS A CRIMINAL
OFFENSE.
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THE SHARES OF COMPANY COMMON STOCK REFERRED TO HEREIN ARE NOT DEPOSITS AND
ARE NOT INSURED BY THE FEDERAL DEPOSIT INSURANCE CORPORATION OR ANY OTHER
GOVERNMENT AGENCY.
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The date of this Prospectus is July __, 1997.
<PAGE>
AVAILABLE INFORMATION
The Company and Glendale Federal are subject to the informational
requirements of the Securities Exchange Act of 1934, as amended (the "Exchange
Act"), and in accordance therewith file reports and other information with the
Securities and Exchange Commission (the "SEC") and the Office of Thrift
Supervision (the "OTS"), respectively. Such reports and other information filed
by the Company may be inspected and copied at prescribed rates at the public
reference facilities maintained by the SEC at Room 1024, Judiciary Plaza, 450
Fifth Street, N.W., Washington, D.C. 20549 and at the SEC's regional offices at
The Citicorp Center, 500 West Madison Street, Suite 1400, Chicago, Illinois
60661, and Seven World Trade Center, Thirteenth Floor, New York, New York 10048.
Copies of such material can also be obtained by mail from the Public Reference
Section of the SEC, 450 Fifth Street, N.W., Washington, D.C. 20549 at prescribed
rates. The SEC also maintains a site accessible to the public by computer on
the World Wide Web, at http//www.sec.gov, which site contains registration
statements, reports, proxy and information statements and other information
regarding registrants that file electronically with the SEC, including the
Company. Such reports and other information filed by Glendale Federal may be
inspected and copied at the public reference facilities maintained by the OTS at
1700 G Street, N.W., Washington, D.C. 20552, or at the OTS Western Region
Office, One Montgomery Street, San Francisco, California 94120.
Glendale Federal's Common Stock was traded on the New York Stock Exchange
(the "NYSE") and the Pacific Exchange prior to the completion of the
Reorganization described herein, and the Common Stock of the Company, as
Glendale Federal's successor pursuant to such Reorganization, is now traded on
such exchanges. Reports and other information concerning Glendale Federal and
the Company may also be inspected at the NYSE located at 11 Wall Street,
New York, New York 10006 and at the Pacific Exchange located at 301 Pine Street,
San Francisco, California 94104.
The Company has filed a Registration Statement with the SEC on Form S-3
(including the exhibits and any amendments thereto, the "Registration
Statement") covering the shares of Company Common Stock issuable upon exercise
of the Seven-Year Warrants and conversion of the GLENFED Debentures referred to
herein. This Prospectus does not contain all of the information set forth in
the Registration Statement, certain parts of which are omitted from this
Prospectus as permitted by the rules and regulations of the SEC. For further
information with respect to the Company and the securities offered hereby,
reference is made to the Registration Statement. Statements contained in this
Prospectus as to the contents of any contract or other document referred to are
not necessarily complete, and in each instance reference is made to the copy of
such contract or other document filed or incorporated by reference as an exhibit
to the Registration Statement, each such statement being qualified in all
respects by such reference. The Registration Statement may be inspected and
copied at prescribed rates at the above-described offices of the SEC, by mail as
described above or through the SEC Web site described above. In addition, the
Company will promptly provide copies of these documents without charge upon
receipt of a written or oral request made to Glendale Federal at 700 North Brand
Boulevard, Glendale, California 91203, Attention: Corporate Relations, telephone
(818) 500-2723, facsimile (818) 409-3296.
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NO PERSON HAS BEEN AUTHORIZED TO GIVE ANY INFORMATION OR TO MAKE ANY
REPRESENTATION NOT CONTAINED IN THIS PROSPECTUS AND, IF GIVEN OR MADE, SUCH
INFORMATION OR REPRESENTATION MUST NOT BE RELIED UPON AS HAVING BEEN AUTHORIZED
BY THE COMPANY OR GLENDALE FEDERAL. NEITHER THE DELIVERY HEREOF NOR ANY
DISTRIBUTION OF SECURITIES MADE HEREUNDER SHALL, UNDER ANY CIRCUMSTANCES, CREATE
AN IMPLICATION THAT THERE HAS BEEN NO CHANGE IN THE AFFAIRS OF THE COMPANY OR
GLENDALE FEDERAL SINCE THE DATE HEREOF OR THAT THE INFORMATION IN THIS
PROSPECTUS IS CORRECT AS OF ANY TIME SUBSEQUENT TO THE DATE HEREOF.
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<PAGE>
INCORPORATION BY REFERENCE
The Company, as the successor to Glendale Federal, hereby incorporates by
reference the following documents filed by Glendale Federal pursuant to the
Exchange Act with the OTS under OTS Docket No. 3088 (each of which documents is
filed as an exhibit to the Registration Statement):
(a) Annual Report on Form 10-K for the fiscal year ended June 30,
1996;
(b) Current Reports on Form 10-Q for the fiscal quarters ended
September 30, and December 31, 1996 and for the fiscal quarter
ended March 31, 1997;
(c) Proxy Statement, dated September 20, 1996, for Annual Meeting of
Shareholders held on October 22, 1996; and
(d) Proxy Statement, dated June __, 1997, for Glendale Federal
Special Meeting of Shareholders relating to the Reorganization to
be held on July 23, 1997.
All documents filed by Glendale Federal pursuant to Sections 13(a), 13(c),
14 or 15(d) of the Exchange Act and Section 563d.1 of the rules and regulations
of the OTS and all documents filed by the Company pursuant to Sections 13(a),
13(c), 14 or 15(d) of the Exchange Act, subsequent to the date of this
Prospectus and prior to the termination of the effectiveness of the Registration
Statement, shall be deemed to be incorporated herein by this reference and to be
a part hereof from the respective dates of filing thereof. Any statement
contained in an incorporated document shall be deemed to be modified or
superseded for purposes of this Prospectus to the extent that a statement
contained herein or in any other such subsequently filed incorporated document
modifies or supersedes such statement. Any such statement so modified or
superseded shall not be deemed, except as so modified or superseded, to
constitute a part of this Prospectus.
This Prospectus incorporates documents by reference which are not presented
herein or delivered therewith. These documents are available upon request made
to the Company at 700 North Brand Boulevard, Glendale, California 91203,
Attention: Corporate Relations, by telephone at (818) 500-2723 or by facsimile
at (818) 409-3296. In addition, the documents incorporated herein by reference
that are filed by Glendale Federal may be inspected without charge at the public
reference facilities of the OTS referred to under "Available Information" above
and copies of such documents may be obtained from the OTS at prescribed rates.
The documents incorporated herein by reference that are filed by the Company may
be inspected and copied or obtained by mail from the public reference facilities
and the World Wide Web site maintained by the SEC referred to under "Available
Information" above.
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<PAGE>
THE COMPANY
Golden State Bancorp Inc. (the "Company") was incorporated under Delaware
law on May 30, 1997 by Glendale Federal Bank, Federal Savings Bank ("Glendale
Federal") for the purpose of becoming the holding company for Glendale Federal
pursuant to the holding company formation transaction (the "Reorganization")
described herein. Upon completion of the Reorganization, Glendale Federal became
a wholly owned savings bank subsidiary of the Company. The Company conducted no
business prior to the completion of the Reorganization.
Glendale Federal is a federally chartered savings bank and is one of the
largest savings institutions in the United States, with total assets of $15.4
billion at March 31, 1997. Glendale Federal's business consists primarily of
attracting deposits from the general public and using such deposits, together
with the proceeds of borrowings and its stockholder's equity, to originate and
purchase loans, including residential real estate loans as well as business and
consumer banking loans and other products. Glendale Federal is headquartered in
Glendale, California and, at the date hereof, operated 165 banking offices and
25 loan offices located throughout the State of California.
USE OF PROCEEDS
The net proceeds received by the Company from sales of Company Common Stock
to holders of the Seven-Year Warrants upon exercise thereof will be used by the
Company for its general corporate purposes. The Company will not receive any
proceeds upon the conversion of GLENFED Debentures.
THE REORGANIZATION
The Company will become the holding company for Glendale Federal pursuant
to an Agreement and Plan of Reorganization (the "Reorganization Agreement"),
dated as of May 28, 1997, entered into among Glendale Federal, the Company and
Glendale Interim Federal Savings Bank ("Interim"). Interim was chartered as an
interim (nonoperating) federal savings bank for the sole purpose of effecting
the Reorganization through the merger of Interim with and into Glendale Federal
(the "Merger"), with Glendale Federal being the surviving institution.
At the Effective Time of the Merger, the following stock exchanges and
issuances took place automatically, by operation of law, the Reorganization
Agreement and the original terms of the respective securities referred to below:
(i) all outstanding shares of common stock, par value $1.00 per share, of
Glendale Federal (the "Glendale Federal Common Stock") not held by a subsidiary
of Glendale Federal, were exchanged on a one-for-one basis for shares of Company
Common Stock; (ii) the warrants to purchase shares of Glendale Federal Common
Stock previously issued by Glendale Federal pursuant to the Warrant Agreement by
and between Glendale Federal and Chemical Trust Company of California, dated as
of February 23, 1993 (the "Five-Year Warrants"), became exercisable, in
accordance with their terms and without the necessity of any exchange by the
holders thereof, solely to receive the number of shares of Company Common Stock
that equals the number of shares of Glendale Federal Common Stock for which the
Five-Year Warrants were exercisable immediately prior to the Effective Time;
(iii) the Seven-Year Warrants became exercisable, in accordance with their terms
and without the necessity of any exchange by the holders thereof, solely to
purchase the number of shares of Company Common Stock that equals the number of
shares of Glendale Federal Common Stock for which the Seven-Year Warrants were
exercisable immediately prior to the Effective Time; (iv) the shares of
Noncumulative Preferred Stock, Series E, par value $1.00 per share, of Glendale
Federal were exchanged on a one-for-one basis for shares of Noncumulative
Convertible Preferred Stock, Series A, par value $1.00 per share, of the Company
(the "Company Preferred Stock"), having substantially the same rights,
preferences, privileges and other terms as the Glendale Federal Preferred Stock;
(v) the shares of common stock of Interim outstanding were exchanged for shares
of Glendale Federal Common Stock and shares of a new series of Noncumulative
Preferred Stock, Series 1997-A, par value $1.00 per share, having substantially
the same rights, preferences, privileges and other terms as the Glendale Federal
Preferred Stock; and (vi) the GLENFED Debentures became convertible, in
accordance with their terms and without the necessity of any exchange by the
holders thereof solely into Company Common Stock. Stock options granted under
Glendale Federal's existing stock option plan for employees and directors also
became exercisable solely for Holding Company Common Stock. The shares of
Company Common Stock initially held by Glendale Federal were canceled in the
Merger.
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<PAGE>
EFFECT ON SEVEN-YEAR WARRANTS AND GLENFED DEBENTURES
Effective as of the Effective Time of the Reorganization (i) the Seven-Year
Warrants entitle the holders thereof solely to purchase the number of shares of
Company Common Stock that equals the number of shares of Glendale Federal Common
Stock for which the Seven-Year Warrants were exercisable immediately prior to
the Effective Time, and on the same terms and conditions and at the same
exercise price, and (ii) the Company assumed all of Glendale Federal's
obligations with respect to the Seven-Year Warrants.
New warrant certificates will not be issued in exchange for the
certificates representing the Seven-Year Warrants that were outstanding
immediately prior to the Effective Time. Chase Mellon Shareholder Services,
L.L.C., 400 South Hope Street, 4th Floor, Los Angeles, California 90071 was the
principal Transfer Agent and Registrar for Glendale Federal's Common Stock and
the Warrant Agent with respect to the Seven-Year Warrants. It will act in the
same capacities for the Company Common Stock and will continue as the Warrant
Agent for the Seven-Year Warrants.
Effective as of the Effective Time of the Reorganization, the GLENFED
Debentures are convertible solely into Company Common Stock, at the same
conversion price at which they were convertible into Glendale Federal Common
Stock immediately prior to the Effective Time, and on the same terms and
conditions. The Company, however, has not assumed any of the payment or other
obligations of the issuer of the GLENFED Debentures. New certificates will not
be issued in exchange for the certificates representing the GLENFED Debentures
that were outstanding immediately prior to the Effective Time.
MARKET FOR COMPANY COMMON STOCK, SEVEN-YEAR WARRANTS
AND GLENFED DEBENTURES
Glendale Federal Common Stock was listed on the New York Stock Exchange and
the Pacific Exchange. The Company Common Stock issued in exchange therefor in
connection with the Reorganization, including Shares issuable thereafter upon
exercise of the Seven-Year Warrants, is also approved for such listing by the
New York Stock Exchange and the Pacific Exchange under the trading symbol of
"GSB". The Seven-Year Warrants will similarly continue to be quoted on the
Nasdaq Small Capitalization Market under the trading symbol "GSBNW."
The GLENFED Debentures are not listed or traded on any exchange or regular
interdealer quotation system of which the Company is aware.
DESCRIPTION OF SEVEN-YEAR WARRANTS
The Seven-Year Warrants were issued under that certain Warrant Agreement,
dated as of August 15, 1993, originally entered into between Glendale Federal
and Chemical Trust Company of California ("Chemical"), as Warrant Agent.
ChaseMellon Shareholder Services, L.L.C. has succeeded to Chemical's position as
such Warrant Agent. Each Seven-Year Warrant entitled the holder thereof to
purchase one share of Glendale Federal Common Stock for a purchase price of
$12.00 per share payable in cash (the "Exercise Price"), subject to adjustment
as described below. At the Effective Time of the Reorganization, each of the
unexercised Seven-Year Warrants then issued and outstanding became, in
accordance with the original terms of the Seven-Year Warrants, automatically by
operation of law and without necessity of any exchange by the holder thereof, a
warrant to purchase the number of shares of Company Common Stock that equals the
number of shares of Glendale Federal Common Stock for which such Seven-Year
Warrant was exercisable immediately prior to the Effective Time, on the same
terms and conditions and at the same exercise price, and the Company assumed all
of Glendale Federal's obligations with respect to such Seven-Year Warrants.
Each Seven-Year Warrant became exercisable on August 21, 1994 and will
expire on August 21, 2000. No adjustment will be made for any cash dividends
paid on shares of Company Common Stock issuable upon exercise of the Seven-Year
Warrants. The Seven-Year Warrants may be exercised only for whole shares of
Company Common Stock.
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<PAGE>
The number of shares of Company Common Stock or other securities issuable
upon exercise of each Seven-Year Warrant and the Exercise Price are subject to
adjustment upon the issuance of a stock dividend to holders of Company Common
Stock, or a combination, subdivision or reclassification of Company Common
Stock. The Exercise Price is subject to adjustment upon the distribution by the
Company to the holders of Company Common Stock generally of certain rights to
subscribe for Company Common Stock at less than current market value, but the
number of shares of Company Common Stock or other securities issuable upon
exercise of each Seven-Year Warrant will not be adjusted proportionately. No
adjustment in the Exercise Price or the number of shares of Company Common Stock
issuable upon the exercise of Seven-Year Warrants of less than 1% will be
required to be made; provided, that any such adjustment not made must be carried
forward and taken into account in any subsequent adjustment determination until
cumulative adjustments reach 1%.
Notwithstanding the foregoing, in case of a consolidation, merger, sale or
conveyance of the property of the Company as an entirety or substantially as an
entirety, the holder of each outstanding Seven-Year Warrant shall continue to
have the right to exercise the Seven-Year Warrant for the kind and amount of
shares and other securities and property (including cash) receivable by a holder
of the number of shares of Company Common Stock for which such Seven-Year
Warrants were exercisable immediately prior thereto.
The Warrant Agreement for the Seven-Year Warrants may be amended or
supplemented without the consent of the registered holders of the Seven-Year
Warrants to effect changes that are not inconsistent with the provisions of the
Seven-Year Warrants and that do not adversely affect the interests of the
holders of Seven-Year Warrants. The Warrant Agreement for the Seven-Year
Warrants may also be amended with the consent of the holders of more than 50% in
number of the Seven-Year Warrants then outstanding; provided, that no such
amendment may modify the terms on which the Seven-Year Warrants are exercisable
or change the percentage of holders of Seven-Year Warrants who must consent to
such amendments.
No holder of Seven-Year Warrants is entitled to vote or receive dividends
or be deemed for any purpose to be a holder of Company Common Stock or any other
securities of the Company that may at any time be issuable upon the exercise of
the Seven-Year Warrants until the Seven-Year Warrants are properly exercised as
provided in the Warrant Agreement.
DESCRIPTION OF GLENFED DEBENTURES
The GLENFED Debentures are subordinated, unsecured obligations of Glendale
Investment Corporation, a wholly owned subsidiary of Glendale Federal, that are
currently outstanding in the aggregate principal amount of $10.5 million, bear
interest at 7.75% per annum, mature on March 15, 2001 and are redeemable at the
option of Glendale Investment Corporation at 100% of their principal amount.
The GLENFED Debentures were originally issued by GLENFED Inc., the former
holding company for Glendale Federal, pursuant to an Indenture, dated as of
March 15, 1986, entered into between GLENFED Inc. and Manufacturers Hanover
Trust Company, as Trustee. ChaseMellon Shareholder Services, L.L.C. has
succeeded to the position of Manufacturers Hanover Trust Company as such
Trustee. The GLENFED Debentures became obligations solely of Glendale
Investment Corporation as a result of the merger of GLENFED Inc. with and into
Glendale Investment Corporation in connection with the recapitalization of
Glendale Federal completed in August 1993.
Immediately prior to the Effective Time of the Reorganization described
herein, the GLENFED Debentures were convertible into shares of Glendale Federal
Common Stock at the conversion price of $706.25 per share, or 1.416 shares of
Glendale Federal Common Stock for each $1,000 of principal amount thereof. Upon
completion of the Reorganization the GLENFED Debentures became convertible
solely into shares of Company Common Stock at such conversion price and number
of shares per $1,000 principal amount thereof. The conversion price of the
GLENFED Debentures will, in accordance with their original terms, remain subject
to adjustment in certain events relating to the Company.
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<PAGE>
DESCRIPTION OF COMPANY COMMON STOCK
Each share of Company Common Stock has the same relative rights as, and is
identical in all respects with, each other share of Company Common Stock. Each
share of Company Common Stock entitles the holder thereof to one vote on all
matters upon which stockholders have the right to vote, except that stockholders
of the Company are entitled, upon compliance with applicable requirements, to
cumulate their votes in the election of directors. Subject to all of the rights
of the Company Preferred Stock, the holders of Company Common Stock are entitled
to dividends when, as and if declared by the Company's Board of Directors out of
funds legally available therefor.
Holders of shares of Company Common Stock are not entitled to preemptive
rights with respect to any shares which may be issued. The Company Common Stock
is not subject to call or redemption and, upon receipt by the Company of the
full purchase price therefor, each share of Company Common Stock will be fully
paid and non-assessable.
In the event of any liquidation or dissolution of the Company, the holders
of Company Common Stock will be entitled to receive, after payment or provision
for payment of all debts and liabilities of the Company, all assets of the
Company available for distribution, in cash or in kind. The holders of Company
Preferred Stock may have a priority over the holders of Company Common Stock in
the event of liquidation or dissolution.
CERTAIN FEDERAL INCOME TAX CONSEQUENCES
The following general summary of the material United States federal income
tax consequences of the Reorganization to holders of the Seven-Year Warrants and
the GLENFED Debentures, and of certain additional tax consequence resulting from
the sale, disposition, exercise or expiration of the Seven-Year Warrants and
from the conversion (if any) of GLENFED Debentures, is based on the Internal
Revenue Code of 1986, as amended to the date hereof (the "Code"), administrative
pronouncements, judicial decisions and Treasury regulations, all of which are
subject to change, possibly with retroactive effect, which changes could affect
the tax consequences described herein. The summary only applies to persons who
hold Seven-Year Warrants and GLENFED Debentures as capital assets and does not
address tax considerations which may affect the treatment of certain special
status taxpayers such as financial institutions, broker-dealers, life insurance
companies, tax-exempt organizations, investment companies, or foreign taxpayers.
In addition, this summary does not address all of the consequences of ownership
of the Company Common Stock, the Seven-Year Warrants or the GLENFED Debentures.
Holders should be aware that the views expressed herein are not binding on the
Internal Revenue Service ("IRS") and there can be no assurance that the IRS will
not assert contrary positions. No rulings have been sought from the IRS with
respect to the Reorganization or other matters addressed herein and it is not
currently expected that such rulings will be sought.
THE REORGANIZATION
Effect on Certain Holders of Seven-Year Warrants. Following the
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Reorganization of Glendale Federal, the holders of Seven-Year Warrants will be
entitled, pursuant to the original terms of the Seven-Year Warrants, to receive
Company Common Stock rather than Glendale Federal Common Stock upon any exercise
of such Warrants. For U.S. federal income tax purposes, with respect to holders
of Seven-Year Warrants who acquired their Seven-Year Warrants prior to the
Reorganization, this alteration of rights (an "Alteration") will be deemed to
constitute a current taxable exchange of "old" Seven-Year Warrants for "new"
Seven-Year Warrants, if such Alteration constitutes a modification of terms
which results in "new" Seven-Year Warrants that differ materially, either in
kind or extent, from the "old" Seven-Year Warrants.
The law is unclear as to whether an Alteration with respect to the Seven-
Year Warrants would be treated as a taxable exchange and there is no direct
authority addressing the issue. The principles of Treasury regulations which
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<PAGE>
address the circumstances in which an alteration of the terms of a debt
instrument constitutes a taxable exchange may provide some guidance as to
whether the Alteration constitutes a taxable exchange. Although those
regulations could imply that the Alteration would be treated as a taxable
exchange, those regulations specifically, by their terms, do not apply to non-
debt instruments such as the Seven-Year Warrants. Prior precedents involving
executory rights, which may be more relevant than the principles of these debt
modification regulations, suggest that the fruition of executory rights present
in the original terms of instruments like the Seven-Year Warrants may not cause
a taxable exchange. Such argument appears most compelling where, as in the
present case, the right is nonelective as to the holder of the instrument,
arises automatically on account of the occurrence of an independently
significant event outside the control of the holder and results in holders
having immediately after the event substantially the same economic rights (i.e.,
rights to become equity owners of essentially the same economic value). However,
the promulgation of the aforementioned Treasury regulations regarding the
modification of debt instruments raises doubt regarding the extent to which
these precedents continue to constitute authority for the view that the
Alteration does not constitute a taxable exchange. Holders of Seven-Year
Warrants should be aware that the IRS could on that basis (as well as on the
basis of other precedents) assert, and a court could sustain the assertion, that
the Alteration constitutes a taxable exchange.
If a taxable exchange of Seven-Year Warrants were deemed to occur, a holder
of a Seven-Year Warrant who acquired such Seven Year Warrant prior to the time
that the Reorganization became effective (the "Effective Time") would be
required to recognize capital gain or loss at the Effective Time equal to the
difference between the fair market value of the "new" Seven-Year Warrant and the
holder's adjusted tax basis in the corresponding"old" Seven-Year Warrant. If a
holder of a Seven-Year Warrant were required to treat the Alteration as a
taxable exchange, the holder would treat the "new" Seven-Year Warrant as having
a tax basis equal to the fair market value of such "new" Seven-Year Warrant and
as having a holding period beginning at the Effective Time. If the Alteration
were not treated as a taxable exchange, a holder of a Seven-Year Warrant would
incur no federal income tax consequences as a result of the Alteration and would
have the same adjusted tax basis and holding period in a Seven-Year Warrant
following the Alteration as it had immediately before the Alteration.
Holders of Seven-Year Warrants should note that they may avoid the
uncertainties discussed above as to whether the Alteration constitutes a taxable
exchange by exercising their Seven-Year Warrants and receiving Glendale Federal
Common Stock prior to the Reorganization, and then pursuant to the
Reorganization receiving Company Common Stock. In such case, the exercise of a
Seven-Year Warrant and the exchange in the Reorganization of the Glendale
Federal Common Stock received upon such exercise for Company Common Stock would
be tax-free transactions for U.S. federal income tax purposes.
Effect on Certain Holders of GLENFED Debentures. Pursuant to the provisions
-----------------------------------------------
of Treasury regulations (referred to above) addressing the circumstances in
which an alteration of the terms of a debt instrument constitutes a taxable
exchange, a holder of GLENFED Debentures should not incur any federal income tax
consequences as a result of the Reorganization, and accordingly should have the
same adjusted tax basis and holding period in GLENFED Debentures following the
Reorganization as the holder had immediately before the Reorganization.
CERTAIN CONSEQUENCES UNRELATED TO THE REORGANIZATION OF SALE, DISPOSITION,
EXERCISE OR EXPIRATION OF SEVEN-YEAR WARRANTS
In general, upon a sale or other disposition of a Seven-Year Warrant, a
holder will recognize gain or loss measured by the difference between the amount
realized on the sale or other disposition and the holder's tax basis in the
Seven-Year Warrant. In general, such gain or loss will be capital gain or loss
if the Company Common Stock into which the Seven-Year Warrant is exercisable
would be a capital asset in the hands of the holder and will be a long-term
capital gain or loss if the holder's holding period in the Seven-Year Warrant is
greater than one year at the time of the sale or other disposition.
A holder would not recognize gain or loss on the exercise of a Seven-Year
Warrant. A holder's tax basis in the Company Common Stock received on the
exercise of a Seven-Year Warrant would be equal to the sum of (i) the holder's
tax basis in the Seven-Year Warrant exercised and (ii) the exercise price paid.
The holding period of the Company Common Stock received on the exercise of a
Seven-Year Warrant would begin on the date of exercise.
If a holder's Seven-Year Warrant expires without being exercised, the
holder will recognize a loss equal to its tax basis in the expired Seven-Year
Warrant. In general, such loss would be a long-term capital loss if the Company
Common Stock issuable on exercise of the Seven-Year Warrant would be a capital
asset in the hands of the holder.
CERTAIN CONSEQUENCES UNRELATED TO THE REORGANIZATION OF CONVERSION OF GLENFED
DEBENTURES INTO COMPANY COMMON STOCK
Upon the conversion (if any) of GLENFED Debentures into Company Common
Stock, the holder of such GLENFED Debentures would recognize gain or loss
measured by the difference between the fair market value of the Company Common
Stock received on conversion (less the amount, if any, that is properly treated
as a payment of interest) and the holder's tax basis in such GLENFED Debentures.
Such gain or loss would constitute capital gain or loss and would be long-term
capital gain or loss if the holder's holding period in the GLENFED Debentures is
greater than one year at the time of the conversion. Any amount received on the
conversion that is properly treated as interest would be taxable as ordinary
interest income in accordance with the holder's method of accounting. Upon any
such conversion, the holder would take a tax basis in the Company Common Stock
received equal to such fair market value at the time of the conversion, and
would begin its holding period in such Company Common Stock at the time of the
conversion.
EACH HOLDER SHOULD CONSULT HIS, HER OR ITS OWN TAX ADVISORS TO DETERMINE
THE SPECIFIC TAX CONSEQUENCES OF THE REORGANIZATION AND THE OWNERSHIP OF SEVEN
YEAR WARRANTS AND/OR GLENFED DEBENTURES TO SUCH HOLDER.
LEGAL OPINIONS
The legality of the Company Common Stock issuable upon exercise of the
Seven-Year Warrants or conversion of the GLENDALE Debentures has been passed
upon for the Company by Mayer, Brown & Platt, Los Angeles, California.
-8-
<PAGE>
PART II
INFORMATION NOT REQUIRED IN PROSPECTUS
ITEM 20. INDEMNIFICATION OF DIRECTORS AND OFFICERS
Section 545.121 of the Rules and Regulations of the OTS authorizes Glendale
Federal to indemnify its officers, directors and employees in accordance with
certain requirements specified in such rules and regulations and subject to
prior OTS review. The officers and directors of Glendale Federal are covered by
directors' and officers' insurance insuring them against liability they may
incur in their capacities as such, subject to Section 545.121 of the Rules and
Regulations of the OTS.
Article FOURTEENTH of the Company's Certificate of Incorporation and
Article XII of the Company's Bylaws provide for indemnification of the officers
and directors of the Company to the fullest extent permitted by applicable law.
Section 145 of the Delaware General Corporation Law provides, in relevant part,
that a corporation shall have the power to indemnify any person who was or is a
party or is threatened to be made a party to any suit or proceeding because such
person is or was a director, officer, employee or agent of the corporation or is
or was serving, at the request of the corporation, as a director, officer,
employee or agent of another corporation, against all costs actually and
reasonably incurred by him in connection with such suit or proceeding if he
acted in good faith and in a manner he reasonably believed to be in or not
opposed to the best interests of the corporation. Similar indemnity is
permitted to be provided to such persons in connection with an action or suit by
or in right of the corporation, provided such person acted in good faith and in
a manner he believed to be in or not opposed to the best interests of the
corporation, and provided further (unless a court of competent jurisdiction
otherwise determines) that such person shall not have been adjudged liable to
the corporation.
ITEM 21. EXHIBITS AND FINANCIAL STATEMENT SCHEDULES
2.1 Agreement and Plan of Reorganization, dated May 28, 1997, by and among
Golden State Bancorp Inc., Glendale Federal Bank, Federal Savings
Bank and Glendale Interim Federal Savings Bank, a federal savings
bank (in organization).
5.1 Opinion of Mayer, Brown & Platt re Legality.
8.1 Opinion of Mayer, Brown & Platt re Tax Matters (included in Exhibit
5.1).
23.1 Consent of Independent Auditors.
23.2 Consent of Mayer, Brown & Platt (included in Exhibit 5.1).
24.1 Power of Attorney (included on signature page to this Registration
Statement).
99.1 Glendale Federal Annual Report on Form 10-K for the fiscal year ended
June 30, 1996.
99.2 Glendale Federal Quarterly Report on Form 10-Q for the quarter ended
September 30, 1996.
99.3 Glendale Federal Quarterly Report on Form 10-Q for the quarter ended
December 31, 1996.
99.4 Glendale Federal Quarterly Report on Form 10-Q for the quarter ended
March 31, 1997.
99.5 Proxy Statement, dated September 20, 1996, for Glendale Federal Annual
Meeting of Stockholders held on October 22, 1996.
99.6 Proxy Statement, dated June __, 1997, for Glendale Federal Special
Meeting of Stockholders to be held on July 23, 1997.
II-1
<PAGE>
ITEM 22. UNDERTAKINGS
The undersigned registrant hereby undertakes that, for purposes of determining
any liability under the Securities Act, each filing of the registrant's annual
report pursuant to Section 13(a) or 15(d) of the Exchange Act (and, where
applicable, each filing of an employee benefit plan's annual report pursuant to
Section 15(d) of the Exchange Act) that is incorporated by reference in the
registration statement shall be deemed to be a new registration statement
relating to the securities offered therein, and the offering of such securities
at that time shall be deemed to be the initial bona fide offering thereof.
Insofar as indemnification for liabilities arising under the Securities Act
may be permitted to directors, officers and controlling persons of the
registrant pursuant to the foregoing provisions, or otherwise, the registrant
has been advised that in the opinion of the Securities and Exchange Commission
such indemnification is against public policy as expressed in the Securities Act
and is, therefore, unenforceable. In the event that a claim for indemnification
against such liabilities (other than the payment by the registrant of expenses
incurred or paid by a director, officer or controlling person of the registrant
in the successful defense of any action, suit or proceedings) is asserted by
such director, officer or controlling person in connection with the securities
being registered, the registrant will, unless in the opinion of its counsel the
matter has been settled by controlling precedent, submit to a court of
appropriate jurisdiction the question whether such indemnification by it is
against public policy as expressed in the Securities Act and will be governed by
the final adjudication of such issue.
The undersigned registrant hereby undertakes:
(1) Prior to any public reoffering of the securities registered
hereunder through use of a prospectus which is a part of this registration
statement, by any person or party who is deemed to be an underwriter within
the meaning of Rule 145(c), the issuer undertakes that such reoffering
prospectus will contain the information called for by the applicable
registration form with respect to reoffering by persons who may be deemed
underwriters, in addition to the information called for by the other Items
of the applicable form; and
(2) Every prospectus (i) that is filed pursuant to paragraph (1)
immediately preceding, or (ii) that purports to meet the requirements of
section 10(a)(3) of the Securities Act, and is used in connection with an
offering of securities subject to Rule 415, will be filed as a part of an
amendment to the registration statement and will not be used until such
amendment is effective, and that, for purposes of determining any liability
under the Securities Act, each such post-effective amendment shall be
deemed to be a new registration statement relating to the securities
offered therein, and the offering of such securities at that time shall be
deemed to be the initial bona fide offering thereof.
The undersigned registrant hereby undertakes:
(1) To file, during any period in which offers or sales are being
made, a post-effective amendment to this registration statement;
(i) To include any prospectus required by Section 10(a)(3) of
the Securities Act of 1933;
(ii) To reflect in the prospectus any facts or events arising
after the effective date of the registration statement (or the most
recent post-effective amendment thereof) which, individually or in the
aggregate, represent a fundamental change in the information set forth
in the registration statement. Notwithstanding the foregoing, any
increase or decrease in volume of securities offered (if the total
dollar value of securities offered would not exceed that which was
registered) and any deviation from the low or high end of the
estimated maximum offering may be reflected in the form of prospectus
filed with the Commission pursuant to Rule 424(b) if, in the
aggregate, the changes in volume and price represent no more than 20
percent change in the maximum aggregate offering price set forth in
the "Calculation of Registration Fee" table in the effective
registration statement.
II-2
<PAGE>
(iii) To include any material information with respect to the
plan of distribution not previously disclosed in the registration
statement or any material change to such information in the
registration statement.
(2) That, for the purpose of determining any liability under the
Securities Act of 1933, each such post-effective amendment shall be deemed
to be a new registration statement relating to the securities offered
therein, and the offering of such securities at that time shall be deemed
to be the initial bona fide offering thereof.
The undersigned registrant hereby undertakes to respond to requests for
information that is incorporated by reference into the prospectus pursuant to
Items 4, 10(b), 11, or 13 of this form, within one business day of receipt of
such request, and to send the incorporated documents by first class mail or
other equally prompt means. This includes information contained in documents
filed subsequent to the effective date of the registration statement through the
date of responding to the request.
The undersigned registrant hereby undertakes to supply by means of a post-
effective amendment all information concerning a transaction, and the company
being acquired involved therein, that was not the subject of and included in the
registration statement when it became effective.
II-3
<PAGE>
SIGNATURES
Pursuant to the requirements of the Securities Act of 1933, as amended, the
Registrant, Golden State Bancorp Inc., a Delaware corporation, has duly caused
this registration statement to be signed on its behalf by the undersigned,
thereunto duly authorized, in the City of Glendale, State of California, on the
28th day of May, 1997.
GOLDEN STATE BANCORP INC.
by GLENDALE FEDERAL BANK, FEDERAL SAVINGS BANK,
as Incorporator
By: /s/ Stephen J. Trafton
---------------------------------------------
Stephen J. Trafton
Chairman of the Board, Chief Executive
Officer and President
POWER OF ATTORNEY
Each person whose signature appears below constitutes and appoints Stephen
J. Trafton, Richard A. Fink and John E. Haynes, or any of them, as such person's
true and lawful attorneys-in-fact and agents, each with full power of
substitution and resubstitution, to sign any or all amendments (including post-
effective amendments to this Registration Statement), and to file the same, with
all exhibits thereto, and other documents in connection therewith, with the
Securities and Exchange Commission.
Pursuant to the requirements of the Securities Act of 1933, as amended,
this registration statement has been signed by the following persons in the
capacities and on the dates indicated.
Signature Title Date
--------- ----- ----
/s/ Stephen J. Trafton Chairman of the Board, May 28, 1997
- ------------------------ Chief Executive Officer,
Stephen J. Trafton President, and Director
/s/ John E. Haynes Executive Vice President and May 28, 1997
- ------------------------ Chief Financial Officer
John E. Haynes
/s/ Gregory L. Hendry Senior Vice President and May 28, 1997
- ------------------------ Chief Accounting Officer
Gregory L. Hendry
Director May 28, 1997
- ------------------------
Diane C. Creel
/s/ Richard H. Daniel Director May 28, 1997
- ------------------------
Richard H. Daniel
May 28, 1997
/s/ Brian P. Dempsey Director
- ------------------------
Brian P. Dempsey
May 28, 1997
/s/ Richard A. Fink Senior Executive Vice President,
- ------------------------ Chief Credit Officer,
Richard A. Fink and Director
/s/ John F. King Director May 28, 1997
- ---------------------
John F. King
<PAGE>
Signature Title Date
--------- ----- ----
/s/ John F. Kooken May 28, 1997
- ------------------------ Director
John F. Kooken
May 28, 1997
- ------------------------ Director
Orin S. Kramer
/s/ Gilbert R. Vasquez May 28, 1997
- ------------------------ Director
Gilbert R. Vasquez
<PAGE>
INDEX TO EXHIBITS
Sequentially
Exhibit Numbered
Number Description Page
- ------- ----------- -------------
2.1 Agreement and Plan of Reorganization, dated May 28,
1997, by and among Golden State Bancorp Inc.,
Glendale Federal Bank, Federal Savings Bank and
Glendale Interim Federal Savings Bank, FSB (in
organization).
5.1 Opinion of Mayer, Brown & Platt re Legality.
8.1 Opinion of Mayer, Brown & Platt re Tax Matters
(included in Exhibit 5.1).
23.1 Consent of Independent Auditors.
23.2 Consent of Mayer, Brown & Platt (included in
Exhibit 5.1).
24.1 Power of Attorney (included on signature page to
this Registration Statement).
99.1 Glendale Federal Annual Report on Form 10-K for
the fiscal year ended June 30, 1996.
99.2 Glendale Federal Quarterly Report on Form 10-Q for
the quarter ended September 30, 1996.
99.3 Glendale Federal Quarterly Report on Form 10-Q
dated December 31, 1996.
99.4 Glendale Federal Quarterly Report on Form 10-Q for
the quarter ended March 31, 1997.
99.5 Proxy Statement, dated September 20, 1996, for
Glendale Federal Annual Meeting of Stockholders
held on October 22, 1996.
99.6 Proxy Statement, dated June __, 1997, for Glendale
Federal Special Meeting of Stockholders to be held
on July 23, 1997.
<PAGE>
EXHIBIT 2.1
AGREEMENT AND PLAN OF REORGANIZATION
This Agreement and Plan of Reorganization ("Reorganization Agreement"),
dated as of May 28, 1997, is entered into by and among GLENDALE FEDERAL BANK,
FEDERAL SAVINGS BANK (the "Bank"), GOLDEN STATE BANCORP INC., a Delaware
----
corporation (the "Holding Company"), and GLENDALE INTERIM FEDERAL SAVINGS BANK,
---------------
an interim federal savings bank which is being formed for the sole purpose of
consummating the reorganization provided for herein ("Interim"), on the basis of
-------
the following facts:
A. The parties hereto desire to adopt and enter into this Reorganization
Agreement in order to set forth the terms and conditions of the reorganization
transactions (the "Reorganization") pursuant to which the Holding Company will
become the holding company for the Bank.
B. The principal results of the Reorganization provided for herein will
be that, commencing as of the Effective Time (as defined in Article V below),
---------
the issued and outstanding shares of common stock and preferred stock of the
Bank will be held, directly or indirectly, by the Holding Company, holders of
the issued and outstanding shares of common stock of the Bank (the "Bank Common
-----------
Stock") will become the holders of the common stock of the Holding Company (the
- -----
"Holding Company Common Stock") and the holders of the issued and outstanding
----------------------------
shares of Noncumulative Preferred Stock, Series E, par value $1.00 per share, of
the Bank (the "Bank Preferred Stock") will become the holders of Noncumulative
--------------------
Convertible Preferred Stock, Series A, par value $1.00 per share, of the Holding
Company (the "Holding Company Preferred Stock") having rights, preferences,
-------------------------------
privileges and other terms substantially identical to those of the Bank
Preferred Stock.
C. The Reorganization provided for in this Reorganization Agreement is
intended to constitute a tax-free exchange of the type described in Section 351
of the Internal Revenue Code of 1986, as amended.
THEREFORE, the parties hereto agree as follows:
ARTICLE I
MERGER AND CONSOLIDATION OF INTERIM
INTO AND WITH THE BANK AND RELATED MATTERS
1.1. THE MERGER. At the Effective Time, Interim shall be merged (the
"Merger") into the Bank and the separate existence of Interim shall thereupon
------
cease. At the Effective Time, all assets and property (including, but not
limited to, real, personal and mixed property, tangible and intangible property,
choses in action, rights and credits) then owned by the Bank or Interim, or
<PAGE>
which would inure to either of them, shall immediately, by operation of law and
without necessity of any conveyance, transfer or further action, become the
property of the Bank. Commencing as of the Effective Time and continuing
thereafter, the Bank shall be deemed to be a continuation of both the Bank and
Interim, and the Bank shall succeed to the rights and obligations of Interim and
the duties and liabilities connected therewith.
1.2. CONTINUED EXISTENCE OF THE BANK. Following the Merger, the Bank shall
continue unaffected and unimpaired by the Merger, with all the rights,
privileges, immunities and powers, and subject to all the duties and
liabilities, of a corporation organized under the laws of the United States with
a federal stock savings bank charter issued by the Office of Thrift Supervision
(the "OTS"). The Charter and Bylaws of the Bank, as in effect immediately prior
---
to the Merger, shall continue in full force and effect following the Merger
until altered, amended or repealed; provided, however, that following the
-------- -------
Effective Time (i) the Bank's Charter will no longer authorize the issuance of
the Bank Preferred Stock, (ii) the Bank's Charter will instead authorize the
issuance of the new series of preferred stock provided for in Section 2.1.6.
--------------
hereof having rights, preferences and privileges substantially identical to
those of the Bank Preferred Stock and (iii) all previously adopted Supplementary
Charter Sections relating to series of preferred stock other than that referred
to in Section 2.1.6 hereof shall be deemed canceled and eliminated from the
-------------
Bank's Charter. It is the parties' intention that there be continuity of
management and of the operation of the Bank's business. The Bank's name shall
not be changed by reason of the Merger.
1.3. FURTHER ASSURANCES. The Bank and Interim each agree that at any time,
or from time to time, as and when requested by the Bank or by its successors or
assigns, Interim shall execute and deliver, or cause to be executed and
delivered, in its name by its last acting officers or by the corresponding
officers of the Bank (Interim hereby authorizing such officers so to act in its
name), all such conveyances, assignments, transfers, deeds and other
instruments, and will take or cause to be taken all such further or other action
as the Bank or its successors or assigns may deem necessary or desirable in
order to carry out the vesting, perfection, confirmation, assignment, devolution
or other transfer of the interests, property, privileges, powers, immunities,
franchises and other rights referred to in this Article I, or otherwise to carry
---------
out the intents and purposes of this Reorganization Agreement.
ARTICLE II
CONVERSION OF STOCK AND RELATED MATTERS
2.1. TERMS AND CONDITIONS OF THE MERGER. The terms and conditions of the
Merger, including, but not limited to, the mode of carrying the Merger into
effect and the manner and basis of converting the outstanding common and
preferred stock of the Bank into the common stock and preferred stock of the
Holding Company, and the effect of the Merger on outstanding warrants and
options of the Bank, shall be as follows:
-2-
<PAGE>
2.1.1. HOLDING COMPANY COMMON STOCK HELD BY THE BANK. At the Effective
Time, all of the shares of the Holding Company Common held by the Bank
immediately prior to the Effective Time shall be canceled and shall no
longer be deemed to be issued or outstanding for any purpose.
2.1.2. BANK COMMON STOCK. At the Effective Time, each share of Bank
Common Stock issued and outstanding immediately prior to the Effective
Time, other than any such shares held by the Bank as treasury shares and
any such shares held by a subsidiary of the Bank, shall automatically, by
operation of law, be converted into and shall become one share of fully
paid non-assessable Holding Company Common Stock. Any shares of Bank Common
Stock held by the Bank as treasury shares shall be canceled and shall no
longer be deemed to be issued or outstanding for any purpose, and all
shares of Bank Common Stock held by any subsidiary of the Bank shall remain
outstanding as Bank Common Stock without any change in the number of such
shares or in the rights of the holder thereof.
2.1.3. BANK PREFERRED STOCK. At the Effective Time, each share of Bank
Preferred Stock that is issued and outstanding immediately prior to the
Effective Time shall automatically, by operation of law, be converted into
and shall become one share of fully paid non-assessable Holding Company
Preferred Stock having the rights, preferences, privileges and other terms
set forth in the form of Certificate of Designation of the Holding Company
attached as Exhibit A hereto.
---------
2.1.4. FIVE-YEAR WARRANTS. At the Effective Time, each of the
unexercised, issued and outstanding warrants to acquire shares of Bank
Common Stock issued by the Bank pursuant to that certain Warrant Agreement
dated as of February 23, 1993, originally entered into between the Bank and
Chemical Trust Company of California ("Chemical"), (the "Five-Year
-------- ---------
Warrants") shall automatically by operation of law and their original
--------
terms, and without necessity of any exchange or other action by the holders
thereof, become exercisable for the number of shares of Holding Company
Common Stock that equals the number of shares of Bank Common Stock for
which such warrant was exercisable immediately prior to the Effective Time.
2.1.5. SEVEN-YEAR WARRANTS. At the Effective Time, each of the
unexercised, issued and outstanding warrants to purchase shares of Bank
Common Stock issued by the Bank pursuant to that certain Warrant Agreement,
dated as of August 15, 1993, originally entered into between the Bank and
Chemical, (the "Seven-Year Warrants"), shall automatically by operation of
-------------------
law and their original terms, and without necessity of any exchange or
other action by the holders thereof, become exercisable for the number of
shares of Holding Company Common Stock that equals the number of shares of
Bank Common Stock for which such warrant was exercisable immediately prior
thereto and on the same terms and conditions and at the same exercise
price.
-3-
<PAGE>
2.1.6. INTERIM COMMON STOCK. At the Effective Time, the shares of the
common stock, par value $1.00 per share, of Interim issued and outstanding
immediately prior to the Effective Time shall automatically by operation of
law be converted into and shall become (i) the number of shares of Bank
Common Stock that equals, in the aggregate, the number of shares of Bank
Common Stock issued and outstanding immediately prior to the Reorganization
that were not held by a subsidiary of the Bank, plus (ii) the number of
shares of the Noncumulative Preferred Stock, Series 1997-A, par value $1.00
per share, of the Bank (the "Bank Series 1997-A Preferred Stock") equal, in
----------------------------------
the aggregate, to the number of shares of Bank Preferred Stock issued and
outstanding immediately prior to the Effective Time, so that, from and
after the Effective Time, all of the issued and outstanding shares of Bank
Common Stock (other than shares of Bank Common Stock held by a subsidiary
of the Bank) and Bank Series 1997-A Preferred Stock shall be held by the
Holding Company. The Bank Series 1997-A Preferred Stock shall have the
rights, preferences and other terms set forth in the form of Supplementary
Charter Section of the Bank attached as Exhibit B hereto.
---------
2.1.7. STOCK OPTION PLAN. At the Effective Time, each option to
purchase shares of Bank Common Stock theretofore granted under the
Glendale Federal 1993 Stock Option and Long-Term Performance Incentive
Plan, as from time to time amended (the "Plan"), shall, to the extent not
----
theretofore exercised, automatically by operation of law become an option
to purchase a number of shares of Holding Company Common Stock equal to the
number of shares of Bank Common Stock for which such option was exercisable
immediately prior to the Effective Time, on the same terms and conditions
and at the same option exercise price as theretofore provided in the option
to which such new option relates, and the Holding Company shall assume all
of the Bank's obligations with respect to the Plan and each such new
option. The name of the Plan shall thereupon be changed to the "Golden
State Bancorp Inc. Stock Option and Long-Term Performance Incentive Plan".
2.1.8. RESERVATION OR ISSUANCE OF STOCK. At the Effective Time, the
Board of Directors of the Holding Company shall be deemed to have reserved
and authorized the issuance of the number of shares of Holding Company
Common Stock required, and such shares shall automatically be so reserved
and authorized, for issuance upon the exercise or conversion of the Five-
Year Warrants, the Seven-Year Bank Warrants, the Plan and the options
referred to in Section 2.1.7. hereof, the Holding Company Preferred Stock,
the 7-3/4% Convertible Subordinated Debentures due 2001 (the "GLENFED
Debentures") originally issued by GLENFED, Inc., the former holding company
for the Bank, pursuant to the Indenture, dated as of March 15, 1986,
between GLENFED, Inc. and Manufacturers Hanover Trust Company, as Trustee,
and for any other purpose, equal to the number of shares of Bank Common
Stock that the Bank had reserved and authorized the issuance of for such
respective purposes immediately prior to the Effective Time.
-4-
<PAGE>
2.1.9. EVIDENCE OF OWNERSHIP. From and after the Effective Time, each
holder of an outstanding certificate or certificates which theretofore
represented shares of Bank Common Stock or Bank Preferred Stock shall, upon
surrender of the same to an exchange agent to be selected by the Bank, or
to any other person then acting as transfer agent or exchange agent for the
Holding Company Common Stock and the Holding Company Preferred Stock, be
entitled to receive, in exchange therefor, a certificate or certificates
representing the number of shares of Holding Company Common Stock or
Holding Company Preferred Stock, as the case may be, into which the shares
theretofore represented by the certificate or certificates so surrendered
shall have been converted in accordance with this Article II. Until so
----------
surrendered, each such outstanding certificate or certificates which, prior
to the Effective Time, represented a number of shares of Bank Common Stock
or Bank Preferred Stock shall be deemed for all corporate purposes to
evidence the ownership of the same number of shares of Holding Company
Common Stock or Holding Company Preferred Stock, as the case may be.
2.1.10. FULL SATISFACTION. All shares of Holding Company Common Stock
and Holding Company Preferred Stock into which shares of Bank Common Stock
and Bank Preferred Stock shall have been converted, respectively, pursuant
to this Article II shall be deemed to have been issued in full satisfaction
----------
of all rights pertaining to such converted shares.
2.1.11. SOLE RIGHTS, ETC. At the Effective Time, the holders of
certificates formerly representing Bank Common Stock or Bank Preferred
Stock outstanding at the Effective Time shall cease to have any rights with
respect to such Bank Common Stock or Bank Preferred Stock, and their sole
rights from and after the Effective Time shall be with respect to, or
through their ownership of, Holding Company Common Stock or Holding Company
Preferred Stock into which their shares of Bank Common Stock or Bank
Preferred Stock shall have been converted by the Merger.
ARTICLE III
CONDITIONS
3.1. The obligations of the Bank, the Holding Company and Interim to effect
the Merger and otherwise consummate the Reorganization transactions provided for
herein shall be subject to the satisfaction of the following conditions at or
prior to the Effective Time:
3.1.1. BOARD APPROVAL. At or prior to the Effective Time, the
respective Boards of Directors of the Bank, the Holding Company and Interim
shall each have duly authorized this Reorganization Agreement, and such
authorizations shall not have been revoked at or prior to the Effective
Time.
3.1.2. STOCKHOLDER APPROVAL. To the extent required by applicable law
and regulations, (i) the holders of Bank Common Stock shall have approved
this
-5-
<PAGE>
Reorganization Agreement at a duly called meeting of stockholders of the
Bank and the holders of two-thirds or more of the Bank Preferred Stock then
outstanding shall have approved this Reorganization Agreement at such a
meeting or by action of such holders without a meeting, (ii) the
stockholders of the Holding Company and Interim shall each have duly
approved this Agreement, and (iii) none of such approvals shall have been
revoked at or prior to the Effective Time.
3.1.3. REGISTRATION. If in the opinion of legal counsel for the
Holding Company such registration is required, the shares of Holding
Company Common Stock and Holding Company Preferred Stock to be issued
pursuant to the Merger and the shares of Holding Company Common Stock
issuable in connection with the exercise or conversion of the Five-Year
Warrants, the Seven-Year Warrants, options granted under the Plan, the
GLENFED Debentures or any other securities at the time exercisable for or
convertible into Holding Company Common Stock shall have been duly
registered pursuant to Section 5 of the Securities Act of 1933, as amended,
and such registration shall not be suspended or revoked at the Effective
Time. Further, to the extent required in the opinion of legal counsel for
the Holding Company, the Holding Company shall have complied with all
applicable state securities laws relating to all of such issuances of
Holding Company Common Stock and Holding Company Preferred Stock, the Five-
Year Warrants and the Seven-Year Warrants.
3.1.4. APPROVALS; CONSENTS. Any and all approvals or consents from the
OTS and any other governmental agency having jurisdiction, and any other
third parties that are, in the opinion of legal counsel for the Bank,
required for the lawful consummation of the Merger and the issuance and
delivery of Holding Company Common Stock and Holding Company Preferred
Stock as contemplated by this Reorganization Agreement shall have been
obtained and shall not have been revoked.
3.1.5. TAX STATUS. The Bank shall have received an opinion from legal
counsel for the Bank acceptable in form and substance to the Bank, with
respect to the matters set forth in Exhibit C hereto.
---------
ARTICLE IV
TERMINATION; EXPENSES
4.1. TERMINATION. This Reorganization Agreement may be terminated at any
time prior to the Effective Time, notwithstanding any shareholder approval
theretofore obtained, for any reason whatsoever, at the election of any of the
Bank, the Holding Company or Interim.
4.2. NO FURTHER LIABILITY. In the event of the termination of this
Reorganization Agreement pursuant to this Article IV, this Reorganization
----------
Agreement shall be void and of no further force or effect, and there shall be no
further liability or obligation of any nature by reason
-6-
<PAGE>
of this Agreement or the termination hereof on the part of any of the parties
hereto or their respective directors, officers, employees, agents, advisors or
stockholders.
4.3. COSTS AND EXPENSES. Each party shall pay all costs and expenses
incurred by it in connection with this Reorganization Agreement and the
transactions contemplated hereunder.
ARTICLE V
EFFECTIVE TIME OF MERGER
Upon the satisfaction or waiver in accordance with the provisions of this
Reorganization Agreement of each of the conditions set forth in Article III
-----------
hereof, the parties hereto shall execute, and shall cause to be appropriately
filed, Articles of Combination and such certificates and further documents as
shall be required by the OTS, and shall cause to be filed with such other
federal or state regulatory agencies all such certificates and other documents
as may be required in the opinion of legal counsel for the Bank or the Holding
Company under applicable laws, rules and regulations. Upon approval by the OTS
and endorsement of such Articles of Combination by the Office of the Secretary
of the OTS, the Merger and the other transactions contemplated by this
Reorganization Agreement shall become effective. The "Effective Time" for all
--------------
purposes hereunder shall be the time at which such endorsement is made by the
Office of the Secretary of the OTS.
ARTICLE VI
MISCELLANEOUS
6.1. WAIVER; AMENDMENT. Any of the terms or conditions of this
Reorganization Agreement which may legally be waived may be waived at any time
by any party hereto which is, or the stockholders of which are, entitled to the
benefit thereof, or any of such terms or conditions may be amended or modified
in whole or in part at any time, to the extent authorized by applicable law,
rules, and regulations, by an agreement in writing, executed in the same manner
as this Reorganization Agreement.
6.2. HEADINGS. The section and other headings contained in this
Reorganization Agreement are for reference purposes only and shall not be deemed
to be part of this Reorganization Agreement.
6.3. EXECUTION BY THE HOLDING COMPANY AND INTERIM. As of the date hereof,
Holding Company and Interim have not been incorporated and therefore do not have
the legal capacity to execute this Reorganization Agreement. The Bank shall
cause the Holding Company and Interim to execute this Reorganization Agreement
promptly following their incorporation.
6.4. DIRECTORS. A list of the directors of the Bank, their addresses, and
terms of office is attached hereto as Exhibit D and is incorporated herein.
---------
-7-
<PAGE>
6.5. OFFICES. A list of the locations of the offices of the Bank is
attached hereto as Exhibit E and is incorporated herein.
---------
IN WITNESS WHEREOF, the Bank, Interim and the Holding Company have caused
this Agreement to be executed by their duly authorized officers as of the day
and year first written above.
GLENDALE FEDERAL BANK, FEDERAL
SAVINGS BANK
By_____________________________________________
Stephen J. Trafton
Chairman of the Board, President and Chief
Executive Officer
GOLDEN STATE BANCORP INC.
By_____________________________________________
Chairman of the Board, President and Chief
Executive Officer
GLENDALE INTERIM FEDERAL SAVINGS
BANK (IN ORGANIZATION)
By_____________________________________________
President and Chief
Executive Officer
-8-
<PAGE>
EXHIBIT A
CERTIFICATE OF DESIGNATION
OF
GOLDEN STATE BANCORP INC.
FOR
NONCUMULATIVE CONVERTIBLE PREFERRED STOCK,
SERIES A
GOLDEN STATE BANCORP INC., a corporation organized and existing under the
General Corporation Law of the State of Delaware (the "Company"), in accordance
-------
with the provisions of Section 151(g) thereof,
HEREBY CERTIFIES:
That pursuant to the authority conferred upon the Board of Directors by the
Certificate of Incorporation, the Board of Directors on [May 28], 1997 duly
adopted the following resolution creating a series of preferred stock to be
designated "Noncumulative Convertible Preferred Stock, Series A" and to consist
of 5,000,000 shares:
WHEREAS, the Certificate of Incorporation of the Company provides that the
Company shall have authority to issue up to 50,000,000 shares of preferred
stock; and
WHEREAS, the Certificate of Incorporation of the Company provides that the
Board of Directors is authorized to fix by resolution the designations and the
powers, preferences and relative, participating, optional or other special
rights and qualifications, limitations or restrictions thereof, including
without limitation the voting rights, the dividend rate and preference,
redemption rights and liquidation preference, of any series of shares of
preferred stock, to fix the number of shares constituting any such series and to
increase or decrease the number of shares of any such series; and
WHEREAS, the Series A Preferred Stock referred to and provided for herein
is to be issued in exchange for outstanding shares of the Noncumulative
Preferred Stock, Series E (the "Glendale Federal Series E Preferred Stock")
-----------------------------------------
heretofore issued by Glendale Federal Bank, Federal Savings Bank ("Glendale"),
--------
which exchange is to be effected in connection with the reorganization
transaction (the "Reorganization") pursuant to which the Company is to become
--------------
the sole stockholder of and holding company for Glendale;
<PAGE>
NOW, THEREFORE, BE IT RESOLVED, that the designation, powers, preferences
and relative, participating, optional and other special rights of the
Noncumulative Convertible Preferred Stock, Series A, and such qualifications,
limitations and restrictions thereof, are as set forth below:
I. 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
Convertible Preferred Stock, Series A" (the "Series A Preferred Stock"). The
------------------------
authorized number of shares of Series A Preferred Stock shall be 5,000,000.
Each share of Series 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 A Preferred Stock shall be superior and prior in rank to
all classes of common stock of the Company (collectively, the "Common Stock")
------------
and to all other classes and series of equity securities of the Company now or
hereafter authorized, issued or outstanding other than the Series A Preferred
Stock and any other class or series of equity securities of the Company that is
expressly designated as ranking on a parity with (the "Parity Stock") or senior
------------
to (the "Senior Stock") the Series A Preferred Stock as to either or both of
------------
dividend rights and rights upon liquidation, winding up or dissolution of the
Company. The Series A Preferred Stock shall be junior to all creditors of the
Company. The Common Stock and all other classes and series of equity securities
of the Company 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.
The number of shares of Series 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 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 A Preferred Stock, or upon the conversion of any outstanding
securities issued by the Company that are convertible into shares of Series A
Preferred Stock.
II. Dividends.
---------
A. Payment of Dividends. Holders of shares of Series A Preferred
--------------------
Stock shall be entitled to receive, when, as and if declared by the board of
2
<PAGE>
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 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 A Preferred Stock of record whose names appear on the
stock books of the Company 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 A Preferred Stock first shall be issued and outstanding and shall end
on and include the last day of such Dividend Period, it being hereby intended
that such First Dividend Period shall permit the payment of dividends on the
Series A Preferred Stock in the amount sufficient to equal the full dividend in
respect of such Dividend Period that would be paid in respect of the Glendale
Federal Series E Preferred Stock in exchange for which the Series A Preferred
Stock is to be issued if the Series E Preferred Stock had remained outstanding
throughout such Dividend Period, but no more than such amount shall be paid in
the aggregate in respect of such Dividend Period on the Glendale Federal Series
E Preferred Stock and the Series A Preferred Stock taken together.
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 A
-----------------------
Preferred Stock to receive dividends shall be noncumulative. Accordingly, if
the board 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 A Preferred Stock shall have no right to receive a dividend in respect
of such Dividend Period, and the Company 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.
3
<PAGE>
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 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 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 A Preferred Stock and any other equity security ranking on a
parity with the Series A Preferred Stock as to dividends, dividends declared
upon shares of Series 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 A Preferred Stock and such other equity security had dividends been
paid thereon in full.
The Company 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
Company, 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 Company shall have paid full
dividends on the Series A Preferred Stock in respect of the four most recent
Dividend Periods (or such lesser number of Dividend Periods as shares of Series
A Preferred Stock have been outstanding), or funds have been paid over to the
dividend disbursing agent of the Company for payment of such dividends (or set
apart for such purpose if the Company then has no separate dividend disbursing
agent), and (ii) the Company has declared a cash dividend on the Series 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
Company for the payment of such cash dividend for such current Dividend Period
(or set apart for such purpose if the Company then has no separate dividend
disbursing agent).
No dividend shall be paid or set aside for holders of Series 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
Company, if any, ranking prior to the Series A Preferred Stock as to dividends
for such Dividend Period.
III Redemption.
----------
A. General. The shares of Series 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 Company may, at its option, redeem the shares
of Series A Preferred Stock at any time or from time to time, in whole or in
part, upon notice as provided in paragraph III.B. below, by resolution of the
board of
4
<PAGE>
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 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 A Preferred Stock shall not have the option or right to compel the
Company to redeem any shares of Series A Preferred Stock.
If less than all of the outstanding shares of Series A Preferred Stock
are to be redeemed, the Company shall select the shares that are to be redeemed
pro rata, by lot or by a substantially equivalent method. On and after the date
selected for redemption, dividends shall cease to accrue on the shares of Series
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 A Preferred Stock
as provided in paragraph IV.B. below relating to shares of Series A Preferred
Stock that are to be redeemed shall be received by the Company, and the
certificates representing such shares shall be surrendered to the Company, 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 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 A Preferred Stock to be
redeemed at his or her address as the same shall appear on the stock books of
the Company. If less than all of the shares of Series 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
5
<PAGE>
necessary for such redemption shall have been set aside by the Company separate
and apart from its other funds in trust for the account of the holders of the
shares of Series 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 A Preferred Stock so
called for redemption shall not have been surrendered for cancellation, the
shares of Series 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 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
Company) of the certificates for such shares of Series A Preferred Stock.
In the event that holders of shares of Series 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 Company 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 Company for payment of the redemption price
thereof, but without interest from the date of redemption.
C. Status of Shares Redeemed. Shares of Series A Preferred Stock
-------------------------
redeemed, purchased or otherwise acquired for value by the Company shall, after
such acquisition, have the status of authorized and unissued shares of preferred
stock and may be reissued by the Company at any time as shares of any series of
preferred stock other than as shares of Series A Preferred Stock.
IV. Conversion.
----------
A. General. Holders of Series A Preferred Stock shall be entitled
-------
to convert any or all of their shares of Series A Preferred Stock into fully
paid and nonassessable shares of Common Stock. Shares of Series A Preferred
Stock may initially be converted into shares of Common Stock at a conversion
price per share of Common Stock (the "Conversion Price") initially as set forth
----------------
in subparagraph 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 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 A Preferred Stock. If the calculation of the
number of shares of Common Stock issuable upon such conversion in accordance
with the preceding sentence
6
<PAGE>
results in a fraction, an amount shall be paid by the Company in cash to the
holder of the shares of Series 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 IV.C. hereof) as of the date of
conversion.
B. Surrender of Certificates. Each conversion of shares of Series A
-------------------------
Preferred Stock shall be effected by the surrender of the certificate
representing the shares of Series A Preferred Stock to be converted at the
office of the Company or trust company appointed by the Company 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 Company in a notice to
the registered holders of shares of Series A Preferred Stock), together with any
required stock transfer tax stamps and a written notice by the holder of such
Series 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 Company 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 Company 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 A Preferred Stock represented by a certificate are to be
converted by a holder, upon such conversion the Company shall issue and deliver,
or cause to be issued and delivered, to the holder a certificate or certificates
for the shares of Series A Preferred Stock not so converted. If the Company
calls for the redemption of any shares of Series 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 III.B., unless the Company 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 Company shall, at any time or from time to
time while any shares of Series A Preferred Stock are outstanding, (i) declare
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 Company, the Conversion
Price
7
<PAGE>
in effect immediately prior to such action shall be adjusted so that the
holder of any shares of Series A Preferred Stock thereafter surrendered for
conversion shall be entitled to receive the number and kind of shares of capital
stock of the Company that such holder would have owned immediately following,
and as a result of, such action had such shares of Series 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 A Preferred Stock thereafter surrendered for conversion shall become
entitled to receive shares of two or more classes of capital stock of the
Company, 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 Company shall, at any time or from time to
time while any shares of the Series 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.
(4) In the event that the Company shall, at any time or from time to
time while any shares of the Series A Preferred Stock are outstanding, issue to
holders of shares of Common Stock as a dividend or distribution, including
8
<PAGE>
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 Company 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 Company shall, at any time or from time to time
while any shares of the Series 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 Company or any subsidiary of the
Company 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 Company in respect of such issuance, sale or
exchange of shares of Common Stock (including any amount received by the Company
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 Company, such adjustment to become effective immediately
prior to the opening of business on the day immediately following the date of
such issuance.
(6) For all purposes relating to the Series A Preferred Stock: the
"Current Market Price" of a security on any day shall mean the average of the
- ---------------------
9
<PAGE>
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 Company for such purposes (other than the
Company or any affiliate thereof); 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 or obligated by law to close.
(7) Whenever the Conversion Price is adjusted as provided herein, the
Company shall (i) compute the adjusted Conversion Price and cause to be prepared
a certificate signed by the chief financial or accounting officer of the Company
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 A Preferred Stock, and
(iii) notify the registered holders of the Series A Preferred Stock of such
adjustment and the adjusted Conversion Price.
(8) Notwithstanding the provisions of this paragraph IV.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 IV.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 IV.C., the
Company shall not be required to make any adjustment to the Conversion Price for
the issuance of any shares of Common Stock pursuant to any plan providing for
the reinvestment of dividends or interest payable on securities of the Company
and the investment of additional optional accounts in shares of Common Stock
under such plan. The Company may make such adjustments in the Conversion Price,
in addition to those required by this paragraph IV.C., as it considers to be
advisable in
10
<PAGE>
order to avoid or diminish any income tax to holders of the Series A Preferred
Stock resulting from any dividend or distribution or other reason. The Company
shall have the power to resolve any ambiguity or correct any error in this
paragraph IV.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 A Preferred Stock shall be assumed by and shall
become preferred stock of any successor or resulting entity (including the
Company 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 A Preferred Stock had immediately
prior to such transaction, except that after such transaction each share of
Series 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 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 Company shall
enter into any agreement providing for any such transaction, then the Company
shall as soon as practicable thereafter give notice of such agreement and the
material terms thereof to each holder of Series A Preferred Stock.
E. Reserved Shares. The Company 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 A Preferred Stock from time to
time as such shares of Series A Preferred Stock are presented for conversion.
The Company shall take all action necessary so that all shares of Common Stock
that may be issued upon conversion of shares of Series 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.
F. Repayment of Certain Dividends to the Company. Any funds that at
---------------------------------------------
any time shall have been deposited by the Company or on its behalf with a paying
or disbursing agent for the purpose of paying dividends on any shares of Series
A Preferred Stock which shall not be required for such purpose because of the
conversion of such shares of Series A Preferred Stock shall forthwith after such
conversion be repaid to the Company by such paying or disbursing agent.
11
<PAGE>
V. Liquidation Preference.
----------------------
A. Liquidating Distributions. In the event of any liquidation,
-------------------------
dissolution or winding up of the Company, whether voluntary or involuntary, the
holders of shares of Series A Preferred Stock shall be entitled to receive for
each share thereof, out of the assets of the Company 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 Company'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 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 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 V.A., the holders of shares
of Series A Preferred Stock will not be entitled to any further participation in
any liquidation distribution of assets by the Company. All distributions made
in respect of Series A Preferred Stock in connection with such a liquidation,
dissolution or winding up of the Company 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 Company with or into any other
person, nor the sale of all or substantially all of the assets of the Company,
shall be deemed to be a liquidation, dissolution or winding up of the Company
for purposes of this paragraph V.
VI. Voting Rights.
-------------
A. General. The holders of Series 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 VI.
B. Right to Elect Directors. If dividends on the shares of Series A
------------------------
Preferred Stock shall not have been paid for six Dividend Periods the authorized
number of directors of the Company shall thereupon be increased by two. Subject
12
<PAGE>
to compliance with any requirement for regulatory approval of (or non-objection
to) persons serving as directors, the holders of shares of Series 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 A Preferred Stock have been conferred and are
irrevocable, shall have the exclusive right to elect the two additional
directors at the Company's next annual meeting of shareholders and at each
subsequent annual meeting until dividends have been paid or declared on the
Series 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 Article Six of the Certificate of
Incorporation of the Company. 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 A Preferred Stock for four consecutive Dividend
Periods.
C. Certain Voting Rights. So long as any shares of Series A
---------------------
Preferred Stock are outstanding, the Company shall not (1) without the consent
or vote of the holders of at least two-thirds of the outstanding shares of
Series A Preferred Stock, voting separately as a class, (a) amend, alter, or
repeal or otherwise change any provision of the Certificate of Incorporation of
the Company or this Section of the Certificate of Designation if such amendment,
alteration, repeal or change would materially and adversely affect the rights,
preferences, powers or privileges of the Series A Preferred Stock, or (b)
authorize, create, issue or increase the authorized or issued amount of any
class or series of any equity securities of the Company, or any warrants,
options or other rights convertible or exchangeable into any class or series of
any equity securities of the Company, ranking prior to the Series A Preferred
Stock, either as to dividend rights or rights on liquidation, dissolution or
winding up of the Company; or (2) without the consent or vote of the holders of
at least fifty percent of the outstanding shares of Series A Preferred Stock,
voting separately as a class, incur any Indebtedness which is senior in right of
payment to the Series A Preferred Stock. For purposes of this paragraph VI.C.,
"Indebtedness" shall mean (i) indebtedness for money borrowed, (ii) indebtedness
evidenced by notes, debentures, bonds or other securities, and (iii) any
renewals, deferrals, increases or extensions of indebtedness of the kinds
described in the preceding clauses (i) and (ii), but shall not include any of
the foregoing types of indebtedness incurred by a subsidiary of the Company, or
the proceeds of which are to be applied to redeem or repurchase all then
outstanding shares of Series A Preferred Stock.
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 Company, or a merger,
consolidation, reorganization or other business combination in which the Company
is not the surviving or successor entity, or an amendment that increases the
number of authorized shares of Series A Preferred Stock or substitutes the
surviving entity in
13
<PAGE>
a merger or consolidation for the Company, shall not be deemed to be a material
and adverse change requiring a vote of the holders of shares of Series A
Preferred Stock pursuant to this paragraph VI.C.
VII No Sinking Fund.
---------------
No sinking fund shall be established for the retirement or redemption
of shares of Series A Preferred Stock.
VII Preemptive Rights.
-----------------
No holder of shares of Series A Preferred Stock shall have any
preemptive rights in respect of any shares of the Company that may be issued.
IX. No Other Rights.
---------------
The shares of Series A Preferred Stock shall not have any powers,
designations, preferences or relative, participating, optional and other special
rights except as set forth in the Certificate of Incorporation, including this
Certificate of Designation or as otherwise required by law.
X. Compliance with Applicable Law.
------------------------------
Payments by the Company to holders of Series A Preferred Stock in
respect of dividends or the redemption of shares of Series A Preferred Stock
shall be subject to any restrictions and limitations placed on capital
distributions by the Company under applicable law and regulations.
14
<PAGE>
IN WITNESS WHEREOF, Golden State Bancorp Inc. has caused this Certificate
of Designation to be duly executed by Stephen J. Trafton, its Chairman of the
Board, Chief Executive Officer and President, and attested to by James R. Eller,
Jr. its Secretary, as of [May 28], 1997.
GOLDEN STATE BANCORP INC.
By _______________________________
Stephen J. Trafton
Chairman of the Board, Chief Executive
Officer and President
Attest:
______________________________
James R. Eller, Jr., Secretary
15
<PAGE>
EXHIBIT B
SUPPLEMENTARY CHARTER SECTION
TO
SECTION 5(C) OF THE FEDERAL STOCK CHARTER
OF
GLENDALE FEDERAL BANK, FEDERAL SAVINGS BANK
Dated: [May 28], 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 a 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 or 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 holders 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.
6. Voting Rights.
-------------
-11-
<PAGE>
(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 in a merger or consolidation for the savings bank, shall
not be deemed to be a material
-12-
<PAGE>
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.
-13-
<PAGE>
EXHIBIT C
The Bank shall have received an opinion from its legal counsel to the
effect that for Federal and California Income Tax purposes:
(1) The formation of Interim and its merger with and into the Bank
will be disregarded and the transaction will be treated as an exchange
governed by the provisions of Section 351 of the Internal Revenue Code of
1986, as amended, of Bank Common Stock and Bank Preferred Stock for Holding
Company Common Stock and Holding Company Preferred Stock, respectively.
(2) No income, gain or loss will be recognized by the stockholders of
the Bank upon the exchange pursuant to the Merger of their Bank Common
Stock for Holding Company Common Stock, or of the Bank Preferred Stock for
Holding Company Preferred Stock, respectively.
(3) No income, gain or loss will be recognized by the Holding Company
upon its receipt of Bank Common Stock or Bank Series 1997-A Preferred Stock
pursuant to the Merger.
(4) The aggregate basis of Holding Company Common Stock and Holding
Company Preferred Stock received by each stockholder of the Bank in the
Merger pursuant to the Agreement will be the same as the aggregate basis of
the Bank Common Stock or Bank Preferred Stock, as the case may be, for
which such stock is received; if, however, a stockholder holds both Bank
Common Stock and Bank Preferred Stock immediately prior to the Merger and
receives Holding Company Common Stock and Holding Company Preferred Stock
in the Merger, then the stockholder's aggregate tax basis in such Bank
Common Stock and Bank Preferred Stock will be allocated between the Holding
Company Common Stock and Holding Company Preferred Stock received in
proportion to the fair market values of each.
(5) The holding period of the Holding Company Common Stock and the
Holding Company Preferred Stock received by each stockholder of the Bank in
the Merger will include the holding period of the Bank Common Stock or Bank
Preferred Stock, respectively, for which such stock is received, provided
that such stockholder held such Bank Common Stock or Bank Preferred Stock
as a capital asset on the date of the Merger.
<PAGE>
EXHIBIT D
DIRECTORS OF THE BANK
<TABLE>
<CAPTION>
NAME TERM EXPIRES
- ---- ------------
<S> <C>
Diane C. Creel 1998
Richard H. Daniel 1997
Brian P. Dempsey 1999
Richard A. Fink 1998
John F. King 1998
John F. Kooken 1997
Orin S. Kramer 1997
Stephen J. Trafton 1997
Gilbert R. Vasquez 1999
</TABLE>
The address of each of the Directors is 414 N. Central Avenue, Glendale,
California 91203.
<PAGE>
EXHIBIT E
[OMITTED]
<PAGE>
EXHIBIT 5.1
[LETTERHEAD OF MAYER, BROWN & PLATT]
May 29, 1997
Glendale Federal Bank, Federal Savings Bank
414 North Central Avenue
Glendale, CA 91203
Re: Registration Statement on Form S-3
----------------------------------
Ladies and Gentlemen:
We have acted as your counsel in connection with the Registration Statement
on Form S-3 (the "Registration Statement") relating to the registration and
issuance from time to time of up to an aggregate of 10, 863,093 shares of the
common stock, par value $1.00 per share, of Golden State Bancorp Inc. (the
"Common Stock"). Capitalized terms used but not otherwise defined herein shall
have the meanings ascribed to them in the Registration Statement.
In rendering our opinions set forth below, we have examined the proceedings
heretofore taken, and are familiar with the proceedings proposed to be taken, by
you and Golden State Bancorp Inc. in connection with the authorization, issuance
and sale of the Common Stock. In addition, we have reviewed the Registration
Statement and have examined such other documents, certificates, corporate
records, public filings, opinions and instruments as we have deemed necessary or
appropriate for the purpose of rendering this opinion. In such examination we
have assumed the genuineness of all signatures on original documents and the due
authorization, execution and delivery of all documents where due execution and
delivery are requisite to the effectiveness thereof. We have also relied, as to
various matters of fact relevant to the opinions expressed herein, upon
certificates and statements of officers of the Company and upon certificates or
comparable documentation of public officials.
Subject to the proposed additional proceedings being taken as contemplated
in the Registration
<PAGE>
MAYER, BROWN & PLATT
May 27, 1997
Page 2
Statement and as we have discussed with you as your counsel
prior to the issuance of the Common Stock, the effectiveness of the Registration
Statement under the Securities Act of 1933, as amended, and the due execution,
registration and delivery of the certificates evidencing the Common Stock, we
are of the opinion that:
1. The Common Stock to be issued will, when issued and paid for in the
manner contemplated in the Registration Statement and the exhibits thereto,
be legally issued, fully paid and non-assessable; and
2. The statements set forth in the Prospectus forming a part of the
Registration Statement under the caption "Certain Federal Income Tax
Considerations," to the extent that such statements constitute matters
of law or legal conclusions, are accurate in all material respects.
You have informed us that you intend to issue the Common stock from time to
time on a delayed or continuous basis. In this connection, we hereby inform you
that this opinion is limited solely to the application of the laws, rules and
regulations in effect, and our information as to the relevant facts, on the date
hereof. We undertake no obligation to provide any additional opinion in the
event of, or to inform you of, any changes in applicable laws, rules or
regulations or the effect, if any, on our opinions expressed herein of any new
facts of which we may become aware after our delivery of this opinion.
We hereby consent to the use of this opinion as an exhibit to the
Registration Statement, and we further consent to the use of our name under the
caption "Legal Matters" in the Prospectus forming a part of in the Registration
Statement reviewed by us.
Very truly yours,
Mayer, Brown & Platt
lks
<PAGE>
EXHIBIT 23.1
Consent of Independent Auditors
-------------------------------
The Board of Directors
Glendale Federal Bank, Federal Savings Bank:
We consent to the use of our report, incorporated by reference herein, dated
July 23, 1996 on the consolidated financial statements of Glendale Federal Bank,
Federal Savings Bank as of June 30, 1996 and 1995, and for each of the years in
the three-year period ended June 30, 1996.
KPMG Peat Marwick LLP
Los Angeles, California
May 28, 1997
<PAGE>
- -------------------------------------------------------------------------------
- -------------------------------------------------------------------------------
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 (FEE REQUIRED)
FOR THE FISCAL YEAR ENDED JUNE 30, 1996
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. [X]
Aggregate market value of the voting stock held by nonaffiliates of the
registrant as of September 3, 1996: $830,273,213.
Number of shares of Common Stock outstanding as of September 3, 1996:
47,161,877 shares
----------------
DOCUMENTS INCORPORATED BY REFERENCE: Portions of the definitive Proxy
Statement for the Registrant's Annual Meeting of Shareholders to be held on
October 22, 1996 are incorporated by reference into Part III hereof.
- -------------------------------------------------------------------------------
- -------------------------------------------------------------------------------
<PAGE>
GLENDALE FEDERAL BANK
1996 FORM 10-K ANNUAL REPORT
TABLE OF CONTENTS
<TABLE>
<CAPTION>
PAGE
----
PART I
<S> <C> <C>
Item 1. Business........................................................ 1
General........................................................ 1
Operating Strategies........................................... 2
Loans Receivable............................................... 7
Real Estate Acquired in Settlement of Loans.................... 18
Mortgage-Backed Securities..................................... 19
Liquidity and Investments...................................... 22
Deposits....................................................... 23
Borrowings..................................................... 25
Asset and Liability Management................................. 26
Interest Rate Margin........................................... 28
Subsidiaries................................................... 29
Competition.................................................... 30
Employees...................................................... 30
Regulation..................................................... 31
Taxation....................................................... 37
Item 2. Properties...................................................... 37
Item 3. Legal Proceedings............................................... 38
Item 4. Submission of Matters to a Vote of Security Holders............. 39
Item 4a. Executive Officers.............................................. 40
PART II
Item 5. Market for Registrant's Common Equity and Related Stockholder
Matters........................................................ 43
Item 6. Selected Financial Data......................................... 44
Item 7. Management's Discussion and Analysis of Financial Condition and
Results of Operations.......................................... 46
Overview...................................................... 46
Balance Sheet Analysis........................................ 48
Liquidity and Asset and Liability Management.................. 56
Results of Operations......................................... 59
Item 8. Financial Statements and Supplementary Data..................... 66
Item 9. Changes in and Disagreements with Accountants on Accounting and
Financial Disclosure........................................... 66
PART III
Item 10. Directors and Executive Officers of the Registrant.............. 66
Item 11. Executive Compensation.......................................... 66
Item 12. Security Ownership of Certain Beneficial Owners and Management.. 66
Item 13. Certain Relationships and Related Transactions.................. 66
PART IV
Item 14. Exhibits, Financial Statement Schedules and Reports on Form 8-K. 67
Index to Financial Statements................................... 71
</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, 1996 of $14.5 billion. The Bank's
business consists primarily of attracting deposits from the public and
originating and purchasing loans secured by mortgages on residential real
estate. During fiscal 1996, the Bank implemented a strategic initiative to
convert its traditional savings and loan operations to those of a more broad-
based community bank by introducing a new line of community business banking
products and expanding its line of consumer banking products. See "Operating
Strategies", "Real Estate Lending" and "Deposits" below for additional
discussion. The Bank, through certain subsidiaries, also engages in general
insurance and securities brokerage services.
The Bank derives its income primarily from the interest it charges on real
estate and other types of loans and, to a lesser extent, from interest on
securities, fees received in connection with loans and the servicing thereof
and deposits, 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 savings 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.
The Bank was chartered as a federal mutual savings and loan association in
1934 and converted from the mutual to the stock form of organization in 1983.
In May 1989, Glendale Federal amended its charter to change its name to
Glendale Federal Bank, Federal Savings Bank. In September 1993, in an effort
to raise the capital necessary to avoid seizure by the federal government, the
Bank completed a comprehensive recapitalization (the "Recapitalization") which
included, among other things, the merger of the Bank's former holding company,
GLENFED, Inc. ("GLENFED") into a subsidiary of the Bank. See Note 18 of the
Notes to Consolidated Financial Statements for additional discussion regarding
the Recapitalization. During fiscal 1995, the Bank sold its 60-branch
franchise in Florida and sold University Savings Bank ("University Savings"),
its 25-branch subsidiary headquartered in Seattle, Washington. It also
acquired deposits aggregating approximately $1 billion and certain assets in
transactions with two other thrift institutions. See Note 4 of the Notes to
Consolidated Financial Statements for additional discussion of these sale and
acquisition transactions.
On August 28, 1996, the Bank entered into an agreement to acquire OneCentral
Bank ("OneCentral") in a cash transaction valued at $11.4 million. The
agreement is subject to regulatory and other approvals and is expected to
close in early 1997. As of August 25, 1996, OneCentral had $67.5 million in
deposits, over 45% of which were in checking accounts. OneCentral is expected
to convert to a federal savings bank charter with its deposit accounts insured
by the Bank Insurance Fund ("BIF"). In the event that legislation is not
passed resolving the crisis relating to the Savings Association Insurance Fund
("SAIF"), which insures the deposits of Glendale Federal, OneCentral will
provide Glendale Federal with a vehicle for migrating deposits from the SAIF
to the BIF. For discussion of the insurance of deposits by the BIF and the
SAIF and the current related legislation, see "Regulation--Insurance of
Deposit Accounts" below.
Glendale Federal is headquartered in Glendale, California, and at June 30,
1996, operated 150 banking offices and 22 loan offices in California.
1
<PAGE>
OPERATING STRATEGIES
During fiscal 1996, the Bank adopted its strategic initiative 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. This intended transformation reflects management's assessment of the
competitive financial services environment and the significant narrowing of
the savings industry's spread between the yield on single-family residential
mortgages and the cost of term deposits that are 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 community bank concept is expected to reduce the Bank's reliance on
mortgage lending and provide the Bank with a broader, higher yielding asset
base and a lower costing, transaction account 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 strategic initiative to transform
itself from a savings institution to a community banking organization has also
resulted in an increase in general and administrative expenses. These expenses
are expected to stabilize at the levels experienced during the fourth quarter
of fiscal 1996, but may increase in future periods as the Bank expands its
business lines and continues to maintain a higher level of marketing activity.
The targeted benefits of this transformation, increased net interest margin
and increased fee income, are expected to lag the increase in expenditures.
The Bank's mix of products and services includes three separate 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 plans to expand the business banking program by
introducing a middle-market business banking program. The targeted customers
will be businesses with annual sales between $10 million and $150 million with
credit needs of up to $15 million. 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. In fiscal 1997, the Bank intends to further
enhance the Infinity account to include asset management features and to
expand the products and services offered to consumers. Real estate lending is
principally focused on traditional single-family residential loans. Each of
the Bank's lines of business is discussed separately below.
Asset generation from the Bank's new business lines was modest during fiscal
1996, as compared to the growth in transaction-based deposit accounts. This
was due to the fact that the business and consumer lending programs were in
their initial implementation phases in fiscal 1996 and to the competition from
California's existing commercial banks. The Bank's objective by the end of the
next three to five year period is to originate equal amounts of business,
consumer, and real estate loans.
BUSINESS BANKING
In July 1995, the Bank introduced a line of community business banking
products and services. This program focuses on small businesses, primarily
professionals, retailers 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 offers 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 is $1 million.
2
<PAGE>
In fiscal 1997, the Bank plans to introduce a middle-market business banking
program which will focus primarily on businesses with annual sales between $10
million to $75 million, but will also accommodate businesses with annual sales
of up to $150 million. The Bank will offer business checking accounts, zero
balance accounts, sweep capabilities into money market mutual funds, standby
and commercial letters of credit, revolving lines of credit and term loans
with a maximum limit of $15 million. Specific loan terms will be determined
based upon the financial strength of the borrower, the amount of credit
granted, and the type and quality of collateral available.
In contrast to the asset-based 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
implementing the new middle-market business banking program, the Bank is
taking a phased-in approach that will enable management to evaluate the market
acceptance and credit risk of this program.
CONSUMER BANKING
The goal of consumer banking 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. The focus of consumer banking in fiscal
1996, and into fiscal 1997, has been on the Bank's new Infinity account. This
account, patterned after cash management accounts used by many financial
services companies, will allow customers to manage their finances, including
checking, money market, savings, certificates of deposit, borrowings and
investments, through the use of a single statement. The customer will have the
ability to transfer funds to and from checking or money market accounts or
transfer funds to and from a GLENFED Brokerage account for investment in
stocks, bonds or mutual funds.
The Infinity account is expected 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 that has been the traditional source of deposit
funding for thrifts. 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.
REAL ESTATE LENDING
Currently, the Bank's principal lending activity is the purchase or
origination of loans secured by single-family residential real estate. Before
fiscal 1992, the Bank originated significant amounts of income property loans
(loans secured by multi-family residential and non-residential properties),
construction loans, a variety of consumer loan products and commercial loans
on the security of business inventories, receivables and other types of assets
("asset-based" lending) through its commercial finance subsidiaries. Income
property and asset-based lending activities have been discontinued with
lending currently restricted to refinancing existing loans, loans made to
finance the disposition of real estate acquired in settlement of loans ("REO")
or to fulfill existing commitments under lines of credit.
The largest portion of the Bank's loans are made to homeowners on the
security of single-family residences for the purpose of enabling them to
purchase or refinance such property. The Bank's real estate loans are
predominantly "conventional" loans, which means that they are not insured or
guaranteed by any government-associated entity. 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.
3
<PAGE>
The Bank has generally limited the types of loans originated or purchased
for its own portfolio to adjustable-rate mortgage loans ("ARMs") (loans
bearing interest rates that adjust periodically with reference to an index),
call-date loans (short-term, fixed-rate loans, the payments on which do not
fully amortize the initial principal amount of the loans) and loans with rates
that are fixed for up to five years and then convert to adjustable rates for
the remainder of the loan term. In the past, fixed-rate loans were primarily
originated for sale in the secondary market. However, beginning in the fourth
quarter of fiscal 1994 as part of the Bank's business and asset and liability
management strategies, Glendale Federal originated and purchased for its own
portfolio fixed-rate loans which met certain yield and other guidelines. The
Bank may continue to originate and/or purchase such loans for its own
portfolio in fiscal 1997 if the loans meet certain yield and other guidelines.
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 index 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.
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: (1) 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 (2) the risk that "negative amortization" of
principal (that is, addition 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 or, if
they meet certain criteria, can be made without mortgage insurance 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%, 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.
As of June 30, 1996 and 1995, the balances of loans owned by the Bank that
were subject to negative amortization totaled approximately $3.5 billion and
$3.9 billion, respectively, including cumulative negative amortization at such
dates of approximately $1.4 million and $4.7 million, respectively.
Approximately 75% of such loans are secured by multi-family or non-residential
real estate.
4
<PAGE>
Effective in April 1994, Glendale Federal implemented a correspondent
lending program in which the Bank purchased loans originated by unaffiliated
mortgage lenders and brokers. Loans originated by these lenders and brokers
are subject to the same underwriting standards as those used by the Bank in
its own lending and are accepted for purchase by the Bank only after approval
by Glendale Federal's underwriters. The Bank began phasing out this program
during fiscal 1996 and the program has been discontinued for fiscal 1997.
Loans purchased by the Bank under this program totaled $52.8 million, $195.5
million and $12.1 million in fiscal 1996, 1995 and 1994, respectively.
In fiscal 1995, Glendale Federal implemented a wholesale lending program in
which the Bank originates mortgage loans through approved independent mortgage
loan brokers. Loans submitted to the Bank by mortgage loan brokers are
accepted for funding by the Bank only after approval by the Bank's loan
underwriters using the Bank's normal underwriting standards. Loans originated
by the Bank under this program totaled $61.6 million in fiscal 1996 and $8.6
million in fiscal 1995.
Loan applications and related information are forwarded by the branch
personnel or loan agents to a loan processing center where loan processing
personnel complete the underwriting and documentation process and where
lending decisions are made by the Bank's underwriters. The Bank's loan
approval process is intended to assess the applicant's ability to repay the
loan and the underlying security. Loan underwriters analyze the loan
application and the property involved and approve or deny the requested loan
or, depending on the amount of the loan, submit the loan for approval to
designated senior levels of authority. As part of the real estate loan
application process for most of its products, the Bank obtains information
concerning the income, financial condition, employment and credit history of
the applicant while qualified staff appraisers, and in certain circumstances
independent appraisers, inspect and appraise the security property. Appraisals
necessarily entail assumptions and subjective judgments regarding a variety of
matters. Accordingly, qualified appraisal professionals, including those
employed by regulatory authorities, can and do reach different conclusions as
to the value of the same or similar properties. The conclusions as to value
reached in such appraisals are subject to the effects of changes in relevant
real estate markets, the economy in general and other factors beyond the
Bank's control. To assure the quality of its appraisals, the Bank utilizes an
appraisal review process that includes procedures pursuant to which a
substantial portion of the appraisal reports prepared are reviewed for
accuracy of calculations and reasonableness of estimates by an experienced
review appraiser.
For all first trust deed and second trust deed term loans secured by real
estate, the Bank requires title insurance insuring the priority of its lien,
fire and extended coverage casualty insurance, and may also require flood
insurance if appropriate in order to protect the Bank's interest in the
security property. Substantially all fixed-rate loans in the Bank's loan
portfolio contain a "due on sale" clause providing that the Bank may declare
the unpaid principal amount due and payable upon the sale of the property
securing the loan. While the enforceability of due on sale clauses in certain
mortgage instruments has been restricted in some states, including California,
federal law generally pre-empts certain of these state restrictions. Although
the ARMs in the Bank's portfolio contain a "due on sale" clause, an ARM is
generally transferable to a purchaser of the security property if the
purchaser meets the Bank's underwriting standards.
Loan Purchase Activity
The Bank purchases whole single-family residential real estate loans
primarily in the secondary mortgage market to supplement its retail loan
originations. The servicing rights for these whole loans are typically
retained by the seller. The Bank pays a fee to the servicer, generally from
0.25% to 0.50% per year on the unpaid principal balances of the mortgages, as
the mortgage payments are collected by the servicer. The Bank determines the
timing and amount of its whole loan purchases based on available liquidity,
current asset yields and the interest rate risk management policy adopted by
the
5
<PAGE>
Bank. The Bank's investment and underwriting policies governing purchased
loans are the same as the policies for originated single-family residential
loans. Whole loans are purchased by the Bank only after the Bank's loan
underwriting staff performs a review of a representative sample of the loan
pools.
The Bank's portfolio of mortgage loans serviced by other institutions (the
"LSBO Portfolio") is managed separately from the portfolio of loans owned and
serviced by the Bank. To reduce the Bank's loss exposure, Glendale Federal has
implemented procedures designed to monitor and analyze the LSBO Portfolio and
to ensure the servicer's compliance with the servicing agreement. A majority
of the loans in this portfolio were originated during the last three years. At
June 30, 1996, 98% of the LSBO Portfolio was secured by single-family
residential real estate.
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
--------------------------------
1996 1995 1994
---------- ---------- --------
<S> <C> <C> <C>
Adjustable-rate.............................. $2,058,956 $ 371,884 $151,555
Fixed-rate................................... 1,068,635 1,358,107 486,685
Fixed-rate converting to adjustable-rate..... 16,256 20,194 --
---------- ---------- --------
$3,143,847 $1,750,185 $638,240
========== ========== ========
Weighted average rate on portfolio at end
of period................................. 7.37% 7.74% 7.07%
========== ========== ========
<CAPTION>
JUNE 30
--------------------------------
1996 1995 1994
---------- ---------- --------
<S> <C> <C> <C>
California................................... $1,442,451 $ 581,305 $243,417
New York..................................... 233,659 116,303 35,138
New Jersey................................... 137,311 98,215 34,493
Florida...................................... 123,122 112,798 83,062
Other (1).................................... 1,207,304 841,564 242,130
---------- ---------- --------
$3,143,847 $1,750,185 $638,240
========== ========== ========
</TABLE>
- --------
(1) The state with the largest balance in the "Other" category was Illinois
with $101,094 at June 30, 1996; Virginia with $81,814 at June 30, 1995;
and Massachusetts with $29,510 at June 30, 1994.
The loan products purchased by the Bank are determined by management's
assessment of the economic and interest rate environment, among other things.
The yield to the Bank on these purchased portfolios varies from the underlying
rate on the portfolios and includes amortization and accretion of purchase
discounts and premiums. In fiscal 1996, the Bank primarily purchased
adjustable-rate loans due to management's forecast of a rising short-term
interest rate environment. In fiscal 1995 and the second half of fiscal 1994,
management's forecast was for a stable interest rate environment and the
yields on fixed-rate mortgage loans were high enough to justify the purchase
and retention of these loans in the Bank's loan portfolio. The largest
concentration of loans purchased is secured by property in California, but
loan packages purchased also contain a diversified portfolio of loans that are
secured by property in other states.
6
<PAGE>
LOANS RECEIVABLE
LOAN PORTFOLIO COMPOSITION
The following table summarizes the composition of Glendale Federal's loan
portfolio by property type as of the dates indicated (dollars in thousands):
<TABLE>
<CAPTION>
JUNE 30
---------------------------------------------------------------
1996 1995 1994 1993 1992
----------- ----------- ----------- ----------- -----------
<S> <C> <C> <C> <C> <C>
Real estate loans:
Residential loans:
Existing structures:
1-4 units............. $ 7,535,048 $ 6,292,589 $ 5,481,781 $ 5,931,276 $ 6,897,651
5-36 units............ 1,559,097 1,666,032 1,895,203 2,131,565 2,232,788
37 or more units...... 400,415 478,803 556,440 678,308 792,091
Construction:
1-4 units............. 16,794 2,113 35,602 23,834 66,244
5-36 units............ 5,445 7,624 25,574 55,771 100,413
37 or more units...... -- -- 7,748 24,891 28,363
Land loans............. 18,250 36,251 40,888 90,553 135,126
Non-residential loans:
Existing structures... 1,338,975 1,593,839 1,749,988 1,977,828 2,098,915
Construction.......... -- 500 8,870 12,512 42,754
Home equity and
improvement loans..... 28,470 30,468 74,966 100,015 166,772
----------- ----------- ----------- ----------- -----------
Total real estate
loans.............. 10,902,494 10,108,219 9,877,060 11,026,553 12,561,117
----------- ----------- ----------- ----------- -----------
Non-real estate loans:
Consumer auto and
recreational
vehicle loans......... 17,588 24,739 37,855 64,424 121,983
Deposit account loans.. 17,113 17,571 20,383 27,071 32,772
Other consumer loans... 38,457 38,293 48,811 72,864 218,167
----------- ----------- ----------- ----------- -----------
Subtotal consumer
loans.............. 73,158 80,603 107,049 164,359 372,922
Commercial loans....... 10,391 22,844 47,212 84,910 217,366
----------- ----------- ----------- ----------- -----------
Total non-real
estate loans....... 83,549 103,447 154,261 249,269 590,288
----------- ----------- ----------- ----------- -----------
Total gross loans
receivable............. 10,986,043 10,211,666 10,031,321 11,275,822 13,151,405
Unearned discounts (net
of premiums)........... (34,772) (70,038) (50,407) (12,175) (16,443)
Undisbursed loan funds.. (12,160) (4,653) (22,215) (27,724) (48,789)
Deferred loan fees...... (24,446) (28,536) (42,205) (51,102) (63,716)
Allowance for loan loss-
es..................... (186,756) (209,142) (320,714) (334,782) (281,429)
----------- ----------- ----------- ----------- -----------
Loans receivable, net... $10,727,909 $ 9,899,297 $ 9,595,780 $10,850,039 $12,741,028
=========== =========== =========== =========== ===========
Weighted average yield
on
loan portfolio
at end of year......... 7.74% 7.91% 6.87% 7.08% 8.18%
=========== =========== =========== =========== ===========
</TABLE>
7
<PAGE>
The following table sets forth the changes in the composition of the Bank's
loan portfolio for the periods indicated (dollars in thousands):
<TABLE>
<CAPTION>
YEARS ENDED JUNE 30
-------------------------------------------------------------
1996 1995 1994 1993 1992
---------- ---------- ----------- ----------- -----------
<S> <C> <C> <C> <C> <C>
Loans originated(1)..... $ 713,857 $ 805,897 $ 1,747,519 $ 1,565,584 $ 2,331,073
Loans purchased(2)...... 2,107,509 1,549,955 521,357 111,423 91,034
Union Federal loans
acquired(3)............ -- 398,635 -- -- --
(Increase) decrease in
allowance for loan
losses................. 22,386 111,572 14,068 (53,353) (6,236)
Accretion of net
unearned discount(4)... 12,618 8,394 6,464 4,007 12,713
---------- ---------- ----------- ----------- -----------
Total additions..... 2,856,370 2,874,453 2,289,408 1,627,661 2,428,584
---------- ---------- ----------- ----------- -----------
Principal repayments.... 1,430,312 892,977 1,252,503 1,781,121 2,742,953
Loans sold.............. 275,428 156,494 348,838 388,568 1,244,489
University Savings loans
sold................... -- 815,406 -- -- --
Principal reductions due
to
foreclosures........... 186,157 294,822 328,022 387,808 299,147
Loans exchanged for
mortgage-backed
securities............. 145,826 268,436 1,470,844 882,908 1,676,873
Increase (decrease) in
loans in process....... 7,507 (11,073) (5,509) (21,065) (101,273)
Other changes........... (17,472) 153,874 148,969 99,310 253,437
---------- ---------- ----------- ----------- -----------
Total reductions.... 2,027,758 2,570,936 3,543,667 3,518,650 6,115,626
---------- ---------- ----------- ----------- -----------
Net increase (decrease)
in loans............... $ 828,612 $ 303,517 $(1,254,259) $(1,890,989) $(3,687,042)
========== ========== =========== =========== ===========
Weighted average yield
on loans originated
during the year........ 7.90% 8.08% 6.17% 6.93% 8.84%
========== ========== =========== =========== ===========
Weighted average yield
on loans purchased dur-
ing the year........... 6.78% 8.68% 8.69% 8.41% 10.08%
========== ========== =========== =========== ===========
</TABLE>
- --------
(1) Net of refinanced portion of the Bank's loans, which amounted to, in the
years ended June 30: 1996--$153,449; 1995--$61,553; 1994--$390,370; 1993--
$329,263; and 1992--$424,438.
(2) Includes loans purchased under the Bank's correspondent lending program
totaling $52,782, $195,465 and $12,063 in fiscal 1996, 1995 and 1994,
respectively.
(3) For information regarding the Union Federal transaction, see Note 4 of the
Notes to Consolidated Financial Statements. The weighted average yield of
these loans was 7.94%.
(4) Includes accretion of discount and amortization of premium on acquired
loans.
8
<PAGE>
The following table summarizes Glendale Federal's loan originations,
including the refinanced portion of the Bank's loans, for the periods
indicated (in thousands):
<TABLE>
<CAPTION>
YEARS ENDED JUNE 30
--------------------------------------------------
1996 1995 1994 1993 1992
-------- -------- ---------- ---------- ----------
<S> <C> <C> <C> <C> <C>
Fixed........................ $371,611 $152,921 $ 655,341 $ 749,680 $1,459,541
Convertible/fixed............ 243,436 270,693 690,759 -- --
ARM.......................... 164,817 296,380 636,912 1,008,730 865,944
Call-date.................... 43,595 109,322 69,778 40,243 73,276
Construction/tract........... 21,957 19,337 66,279 70,074 128,494
-------- -------- ---------- ---------- ----------
Total real estate.......... 845,416 848,653 2,119,069 1,868,727 2,527,255
Consumer..................... 20,504 18,797 18,820 24,420 220,054
Commercial................... 1,386 -- -- 1,700 8,202
-------- -------- ---------- ---------- ----------
$867,306 $867,450 $2,137,889 $1,894,847 $2,755,511
======== ======== ========== ========== ==========
</TABLE>
As of June 30, 1996, approximately $1.9 billion of fixed-rate loans and $8.9
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, 1996 (in thousands):
<TABLE>
<CAPTION>
REAL ESTATE REAL ESTATE
MORTGAGE CONSTRUCTION CONSUMER COMMERCIAL
LOANS LOANS LOANS LOANS TOTAL
----------- ------------ -------- ---------- -----------
<S> <C> <C> <C> <C> <C>
Due in year 1........... $ 147,578 $13,682 $33,421 $ 5,462 $ 200,143
Due in year 2........... 115,358 8,557 3,610 724 128,249
Due in year 3........... 124,116 -- 3,194 843 128,153
Due after year 3 through
year 5................. 221,052 -- 11,050 876 232,978
Due after year 5 through
year 10................ 772,118 -- 17,546 2,435 792,099
Due after year 10
through year 15........ 282,822 -- 3,929 -- 286,751
Due after year 15....... 9,217,211 -- 408 51 9,217,670
----------- ------- ------- ------- -----------
$10,880,255 $22,239 $73,158 $10,391 $10,986,043
=========== ======= ======= ======= ===========
</TABLE>
Actual repayments may differ from contractual maturities as borrowers
generally have the right to prepay loans.
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
prescribed intervals in an effort to bring the loan to a current status. If a
delinquency is not cured by the use of this procedure, foreclosure proceedings
are typically instituted by the Bank by the ninetieth day of delinquency.
9
<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 % OF TYPE OF % OF TYPE OF
GROSS GROSS GROSS GROSS GROSS
JUNE 30, LOANS JUNE 30, LOANS JUNE 30, LOANS JUNE 30, LOANS JUNE 30, LOANS
1996 RECEIVABLE 1995 RECEIVABLE 1994 RECEIVABLE 1993 RECEIVABLE 1992 RECEIVABLE
-------- ------------ -------- ------------ -------- ------------ -------- ------------ -------- ------------
<S> <C> <C> <C> <C> <C> <C> <C> <C> <C> <C>
Single-family 1-4
units:
31-60 Days...... $ 57,047 0.75% $ 57,979 0.92% $ 44,181 0.79% $ 66,279 1.09% $ 87,016 1.22%
61-90 Days...... 18,416 0.24 26,460 0.42 21,919 0.39 28,054 0.47 31,245 0.44
Over 90 Days.... 119,978 1.59 110,761 1.75 127,556 2.28 169,776 2.80 169,248 2.37
-------- ---- -------- ---- -------- ----- -------- ----- -------- -----
195,441 2.58 195,200 3.09 193,656 3.46 264,109 4.36 287,509 4.03
-------- ---- -------- ---- -------- ----- -------- ----- -------- -----
Multi-family 5-36
units:
31-60 Days...... 9,528 0.61 19,249 1.15 59,663 3.11 50,198 2.29 43,719 1.87
61-90 Days...... 7,601 0.49 11,433 0.68 26,841 1.40 15,377 0.71 9,561 0.41
Over 90 Days.... 25,595 1.63 32,804 1.96 96,920 5.04 91,928 4.20 67,334 2.89
-------- ---- -------- ---- -------- ----- -------- ----- -------- -----
42,724 2.73 63,486 3.79 183,424 9.55 157,503 7.20 120,614 5.17
-------- ---- -------- ---- -------- ----- -------- ----- -------- -----
Multi-family 37
or more units:
31-60 days...... 2,126 0.53 4,079 0.85 14,434 2.56 29,166 4.15 20,052 2.44
61-90 days...... -- -- 3,202 0.67 8,682 1.54 29,822 4.24 21,555 2.63
Over 90 days.... 14,461 3.61 13,371 2.79 66,254 11.74 62,175 8.84 59,523 7.26
-------- ---- -------- ---- -------- ----- -------- ----- -------- -----
16,587 4.14 20,652 4.31 89,370 15.84 121,163 17.23 101,130 12.33
-------- ---- -------- ---- -------- ----- -------- ----- -------- -----
Non-residential:
31-60 Days...... 3,169 0.23 19,789 1.21 31,637 1.76 59,580 2.86 42,824 1.88
61-90 Days...... 2,762 0.20 6,409 0.39 25,767 1.43 10,393 0.50 7,800 0.34
Over 90 Days.... 17,907 1.33 39,588 2.43 152,415 8.47 192,645 9.26 143,618 6.31
-------- ---- -------- ---- -------- ----- -------- ----- -------- -----
23,838 1.76 65,786 4.03 209,819 11.66 262,618 12.62 194,242 8.53
-------- ---- -------- ---- -------- ----- -------- ----- -------- -----
Commercial:
31-60 Days...... 38 0.37 -- -- 952 2.02 1,324 1.56 9,996 4.60
61-90 Days...... -- -- 90 0.39 -- -- -- -- 5,506 2.53
Over 90 Days.... -- -- -- -- 5,025 10.64 5,857 6.90 19,207 8.84
-------- ---- -------- ---- -------- ----- -------- ----- -------- -----
38 0.37 90 0.39 5,977 12.66 7,181 8.46 34,709 15.97
-------- ---- -------- ---- -------- ----- -------- ----- -------- -----
Consumer:
31-60 Days...... 1,081 1.48 2,206 2.74 3,504 3.27 5,172 3.15 12,666 3.40
61-90 Days...... 612 0.84 941 1.17 1,040 0.97 2,245 1.37 4,389 1.17
Over 90 Days.... 1,001 1.36 906 1.12 1,711 1.60 4,477 2.72 11,563 3.10
-------- ---- -------- ---- -------- ----- -------- ----- -------- -----
2,694 3.68 4,053 5.03 6,255 5.84 11,894 7.24 28,618 7.67
-------- ---- -------- ---- -------- ----- -------- ----- -------- -----
Total:
31-60 Days...... 72,989 0.66 103,302 1.01 154,371 1.54 211,719 1.88 216,273 1.64
61-90 Days...... 29,391 0.27 48,535 0.48 84,249 0.84 85,891 0.76 80,056 0.61
Over 90 Days.... 178,942 1.63 197,430 1.93 449,881 4.48 526,858 4.67 470,493 3.58
-------- ---- -------- ---- -------- ----- -------- ----- -------- -----
$281,322 2.56% $349,267 3.42% $688,501 6.86% $824,468 7.31% $766,822 5.83%
======== ==== ======== ==== ======== ===== ======== ===== ======== =====
</TABLE>
10
<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, 1996 and 1995, loans 90 days or less delinquent totaling $13.5
million and $46.8 million, respectively, had been placed on non-accrual
status. Placement of loans on non-accrual status does not necessarily mean 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 1996, 1995
and 1994 had the Bank's non-accrual loans been current in accordance with
their original terms was $16.3 million, $19.1 million and $37.9 million,
respectively. The amount of interest income on these loans that was included
in net earnings in fiscal 1996, 1995 and 1994 was $5.8 million, $5.5 million
and $10.1 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.
The following table shows the Bank's non-accrual loans by property type as
of the dates indicated (in thousands):
<TABLE>
<CAPTION>
JUNE 30
--------------------------------------------
1996 1995 1994 1993 1992
-------- -------- -------- -------- --------
<S> <C> <C> <C> <C> <C>
Single-family 1-4 units............ $119,978 $111,881 $130,554 $177,294 $174,610
Multi-family:
5-36 units....................... 33,123 50,487 112,400 126,501 85,584
37 or more units................. 14,461 21,255 84,937 95,618 76,093
Non-residential.................... 23,860 59,430 172,897 227,874 148,731
-------- -------- -------- -------- --------
Total real estate................ 191,422 243,053 500,788 627,287 485,018
Commercial......................... 22 283 6,044 18,028 51,061
Consumer........................... 1,001 906 1,711 4,477 11,563
-------- -------- -------- -------- --------
$192,445 $244,242 $508,543 $649,792 $547,642
======== ======== ======== ======== ========
</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>
11
<PAGE>
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.
Interest income with respect to these restructured loans would have been
$0.9 million, $3.3 million and $2.4 million in fiscal 1996, 1995 and 1994,
respectively, under their original terms. Actual interest income recognized by
the Bank with respect to these restructured loans was $0.7 million, $2.6 million
and $2.1 million in fiscal 1996, 1995 and 1994, 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.
The following table shows the Bank's restructured loans by property type as
of the dates indicated (in thousands):
<TABLE>
<CAPTION>
JUNE 30
--------------------------------------
1996 1995 1994 1993 1992
------ ------- ------- ------- -------
<S> <C> <C> <C> <C> <C>
Single-family 1-4 units.................. $3,222 $ 4,601 $ -- $ -- $ --
Multi-family:
5-36 units............................. 2,197 10,717 5,338 12,451 --
37 or more units....................... 2,251 7,462 14,456 25,053 20,445
Non-residential.......................... 1,524 15,762 14,424 45,873 52,313
------ ------- ------- ------- -------
$9,194 $38,542 $34,218 $83,377 $72,758
====== ======= ======= ======= =======
</TABLE>
The following table further identifies the Bank's restructured loans by
state and property type as of June 30, 1996 (in thousands):
<TABLE>
<CAPTION>
CALIFORNIA FLORIDA TOTAL
---------- ------- ------
<S> <C> <C> <C>
Single-family 1-4 units............................... $2,950 $272 $3,222
Multi-family:
5-36 units.......................................... 2,197 -- 2,197
37 or more units.................................... 2,251 -- 2,251
Non-residential:
Office buildings.................................... 1,524 -- 1,524
------ ---- ------
$8,922 $272 $9,194
====== ==== ======
</TABLE>
POTENTIAL PROBLEM ASSETS
Impaired Loans
Impaired loans are carried on the Bank's accounting records at either the
present value of expected future cash flows discounted at the loan's effective
interest rate, at the loan's observable market price, or at the fair value of
the collateral securing the loan less selling costs. 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 all single-family loans 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
12
<PAGE>
than $500,000, troubled debt restructurings, and certain performing loans.
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."
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,
servicing 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 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, 1996 and 1995, the recorded investment in loans which have
been identified by the Bank as impaired totaled $158.8 million and $262.7
million, respectively, and the total specific allowance for loan losses
related to such loans was $26.5 million and $19.7 million, respectively. See
Note 7 of the Notes to Consolidated Financial Statements for additional
information regarding impaired loans.
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 a 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 CONCENTRATIONS
Most of the Bank's gross loan portfolio consists of loans with individual
balances of less than $1 million. At June 30, 1996 the Bank's largest borrower
had two loans outstanding totaling $31.0 million, both of which are performing
and are secured by an office building in Northern California. The second
largest borrower at that date had three loans outstanding totaling $21.2
million, all of which are performing and are secured by multi-family
residences. The third largest borrower at that date was an investor in multi-
family housing projects in Southern California with 18 loans outstanding
totaling $18.5 million, of which four loans totaling $3.4 million were non-
performing. The fourth largest borrower at that date had eight performing
loans secured by multi-family residential and non-residential properties with
a balance outstanding totaling $16.8 million. The fifth largest borrower at
that date had one performing loan secured by a shopping center in Southern
California with a balance outstanding of $16.7 million. The Bank had borrowing
relationships exceeding $10 million with each of seven other borrowers at June
30, 1996, all of which loans are performing.
13
<PAGE>
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, non-residential and commercial 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 of any relationship with a single
borrower whose aggregate loan balances exceed $3 million. The Bank maintains
special departments with responsibility for resolving problem loans and
selling foreclosed real estate to facilitate these processes. 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.
CREDIT LOSS EXPERIENCE
Credit losses are inherent in the business of lending. The allowance for
loan losses is established based on management's assessment of trends in the
homogeneous portfolio as well as the results of management's periodic review
of the 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 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 and the Federal Deposit
Insurance Corporation ("FDIC"), as part of their examination process, review
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.
14
<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
----------------------------------------------------
1996 1995 1994 1993 1992
-------- --------- --------- --------- ---------
<S> <C> <C> <C> <C> <C>
Balance at beginning of
period.................. $209,142 $ 320,714 $ 334,782 $ 281,429 $ 275,193
Provision for loan
losses.................. 40,350 66,150 139,726 251,261 314,437
-------- --------- --------- --------- ---------
249,492 386,864 474,508 532,690 589,630
-------- --------- --------- --------- ---------
Charge-offs:
Single-family 1-4
units................. (33,617) (37,194) (43,248) (44,467) (28,534)
Multi-family:
5-36 units............ (13,175) (54,314) (39,743) (24,555) (11,006)
37 or more units...... (7,923) (33,932) (28,149) (22,047) (19,671)
Non-residential........ (14,490) (73,602) (43,675) (86,761) (102,645)
-------- --------- --------- --------- ---------
Total real estate..... (69,205) (199,042) (154,815) (177,830) (161,856)
Commercial............. (974) (2,340) (6,353) (25,415) (115,981)
Consumer............... (2,842) (4,595) (6,904) (21,062) (40,722)
-------- --------- --------- --------- ---------
Total charge-offs.... (73,021) (205,977) (168,072) (224,307) (318,559)
-------- --------- --------- --------- ---------
Recoveries:
Single-family 1-4
units................. 149 334 1,013 2,744 1,986
Multi-family:
5-36 units............ 288 -- 440 93 265
37 or more units...... 231 800 878 1,785 980
Non-residential........ 2,929 9,572 2,339 3,251 2,063
-------- --------- --------- --------- ---------
Total real estate..... 3,597 10,706 4,670 7,873 5,294
Commercial............. 5,590 4,748 6,873 14,034 3,224
Consumer............... 1,098 1,840 2,735 4,492 1,840
-------- --------- --------- --------- ---------
Total recoveries..... 10,285 17,294 14,278 26,399 10,358
-------- --------- --------- --------- ---------
Net charge-offs...... (62,736) (188,683) (153,794) (197,908) (308,201)
-------- --------- --------- --------- ---------
University Savings (1):
Single-family 1-4
units................. -- (2,389) -- -- --
Multi-family:
5-36 units............ -- (1,282) -- -- --
37 or more units...... -- (401) -- -- --
Non-residential........ -- (2,127) -- -- --
-------- --------- --------- --------- ---------
Total real estate.... -- (6,199) -- -- --
Consumer............... -- (190) -- -- --
-------- --------- --------- --------- ---------
Total University
Savings............. -- (6,389) -- -- --
-------- --------- --------- --------- ---------
Union Federal (2):
Single-family 1-4
units................. -- 2,535 -- -- --
Non-residential........ -- 14,815 -- -- --
-------- --------- --------- --------- ---------
Total Union Federal.. -- 17,350 -- -- --
-------- --------- --------- --------- ---------
Balance at end of period. $186,756 $ 209,142 $ 320,714 $ 334,782 $ 281,429
======== ========= ========= ========= =========
</TABLE>
- --------
(1) Represents the reduction of the allowance for loan losses due to the sale
of University Savings.
(2) Represents the allowance for loan losses recorded in connection with the
acceptance of loans receivable as part of the consideration for assuming
the deposit liabilities of Union Federal. For additional information, see
Note 4 of the Notes to Consolidated Financial Statements.
15
<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
------------------------------------------------------------------
1996 1995 1994 1993 1992
----------- ----------- ----------- ----------- -----------
<S> <C> <C> <C> <C> <C>
Single-family 1-4 units:
Average gross loans... $ 6,952,741 $ 5,958,760 $ 5,823,737 $ 6,592,896 $ 8,033,247
Net charge-offs....... 33,468 36,860 42,235 41,723 26,548
Net charge-
offs/average gross
loans................ 0.48% 0.62% 0.73% 0.63% 0.33%
Multi-family 5-36 units:
Average gross loans... 1,619,099 1,797,216 2,054,056 2,260,268 2,449,870
Net charge-offs....... 12,887 54,314 39,303 24,462 10,741
Net charge-
offs/average gross
loans................ 0.80% 3.02% 1.91% 1.08% 0.44%
Multi-family 37 or more
units:
Average gross loans... 439,609 521,496 633,694 761,827 897,678
Net charge-offs....... 7,692 33,132 27,271 20,262 18,691
Net charge-
offs/average gross
loans................ 1.75% 6.35% 4.30% 2.66% 2.08%
Non-residential:
Average gross loans... 1,493,908 1,715,168 1,940,320 2,178,844 2,407,215
Net charge-offs....... 11,561 64,030 41,336 83,510 100,582
Net charge-
offs/average gross
loans................ 0.77% 3.73% 2.13% 3.83% 4.18%
Commercial:
Average gross loans... 16,618 35,028 66,061 151,138 394,010
Net charge-offs
(recoveries)......... (4,616) (2,408) (520) 11,381 112,757
Net charge-offs
(recoveries)/
average gross loans.. (27.78)% (6.87)% (0.79)% 7.53% 28.62%
Consumer:
Average gross loans... 76,880 93,826 135,704 268,641 874,004
Net charge-offs....... 1,744 2,755 4,169 16,570 38,882
Net charge-
offs/average gross
loans................ 2.27% 2.94% 3.07% 6.17% 4.45%
Total:
Average gross loans... $10,598,855 $10,121,494 $10,653,572 $12,213,614 $15,056,024
Net charge-offs....... 62,736 188,683 153,794 197,908 308,201
Net charge-
offs/average gross
loans................ 0.59% 1.86% 1.44% 1.62% 2.05%
</TABLE>
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 and 1995.
16
<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, 1996 JUNE 30, 1995
------------------------------------------ ------------------------------------------
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.............. 69.00% $ 7,580,312 $ 56,833 0.75% 61.94% $ 6,325,170 $ 44,483 0.70%
Multi-family:
5-36 units............. 14.24 1,564,542 48,628 3.11 16.39 1,673,656 41,736 2.49
37 or more units....... 3.65 400,415 26,062 6.51 4.69 478,803 31,569 6.59
Non-residential......... 12.35 1,357,225 47,260 3.48 15.97 1,630,590 83,086 5.10
Commercial.............. 0.09 10,391 4,699 45.22 0.22 22,844 4,176 18.28
Consumer................ 0.67 73,158 3,274 4.48 0.79 80,603 4,092 5.08
------ ----------- -------- ------ ----------- --------
100.00% $10,986,043 $186,756 1.70% 100.00% $10,211,666 $209,142 2.05%
====== =========== ======== ====== =========== ========
<CAPTION>
JUNE 30, 1994 JUNE 30, 1993
------------------------------------------ ------------------------------------------
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.............. 55.75% $ 5,592,349 $ 44,667 0.80% 53.70% $ 6,055,125 $ 51,653 0.85%
Multi-family:
5-36 units............. 19.15 1,920,777 65,878 3.43 19.40 2,187,336 54,107 2.47
37 or more units....... 5.62 564,188 61,867 10.97 6.24 703,199 36,320 5.16
Non-residential......... 17.94 1,799,746 137,775 7.66 18.45 2,080,893 173,913 8.36
Commercial.............. 0.47 47,212 6,052 12.82 0.75 84,910 12,884 15.17
Consumer................ 1.07 107,049 4,475 4.18 1.46 164,359 5,905 3.59
------ ----------- -------- ------ ----------- --------
100.00% $10,031,321 $320,714 3.20% 100.00% $11,275,822 $334,782 2.97%
====== =========== ======== ====== =========== ========
</TABLE>
<TABLE>
<CAPTION>
JUNE 30, 1992
------------------------------------------
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.............. 54.22% $ 7,130,667 $ 44,569 0.63%
Multi-family:
5-36 units.......................... 17.74 2,333,201 7,912 0.34
37 or more units.................... 6.24 820,454 24,575 3.00
Non-residential...................... 17.31 2,276,795 133,844 5.88
Commercial........................... 1.65 217,366 43,903 20.20
Consumer............................. 2.84 372,922 26,626 7.14
------ ----------- --------
100.00% $13,151,405 $281,429 2.14%
====== =========== ========
</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.
17
<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, 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%
=========== ======== ======== ========
<CAPTION>
PERCENT OF
GROSS PERCENT OF NPAS TO PERCENT
LOAN NON- ALLOWANCE TO GROSS LOAN OF
PORTFOLIO ACCRUAL NON-ACCRUAL PORTFOLIO ALLOWANCE
JUNE 30, 1995 BALANCE ALLOWANCE LOANS LOANS NPAS(1) BALANCE TO NPAS
------------- ----------- --------- -------- ------------ -------- ---------- ---------
<S> <C> <C> <C> <C> <C> <C> <C>
Single-family 1-4 units. $ 6,325,170 $ 44,483 $111,881 39.76% $149,197 2.36% 29.81%
Multi-family:
5-36 units............. 1,673,656 41,736 50,487 82.67 68,618 4.10 60.82
37 or more units....... 478,803 31,569 21,255 148.53 26,971 5.63 117.05
Non-residential......... 1,630,590 83,086 59,430 139.80 109,454 6.71 75.91
Commercial.............. 22,844 4,176 283 N/A 283 1.24 N/A
Consumer................ 80,603 4,092 906 451.66 999 1.24 409.61
----------- -------- -------- --------
$10,211,666 $209,142 $244,242 85.63% $355,522 3.48% 58.83%
=========== ======== ======== ========
</TABLE>
- --------
(1) Comprised of non-accrual loans and REO.
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, 1996.
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 $943 million of its mortgage loans at June 30, 1996,
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 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.
18
<PAGE>
The following table shows the Bank's REO and other repossessed assets, net
of specific valuation allowances, by property type as of the dates indicated
(in thousands):
<TABLE>
<CAPTION>
JUNE 30
--------------------------------------------
1996 1995 1994 1993 1992
-------- -------- -------- -------- --------
<S> <C> <C> <C> <C> <C>
Single-family 1-4 units............ $ 39,693 $ 37,316 $ 43,231 $ 53,853 $ 54,516
Multi-family:
5-36 units....................... 11,668 18,131 27,180 23,803 20,567
37 or more units................. 4,827 5,716 2,792 18,423 39,831
Non-residential.................... 25,893 50,024 79,089 108,565 88,908
-------- -------- -------- -------- --------
Total real estate................ 82,081 111,187 152,292 204,644 203,822
Other repossessed assets........... 123 93 127 414 2,910
-------- -------- -------- -------- --------
$ 82,204 $111,280 $152,419 $205,058 $206,732
======== ======== ======== ======== ========
</TABLE>
The following table further identifies the Bank's REO and other repossessed
assets 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
Other repossessed assets...................... 123 -- -- 123
------- ------- ------ -------
$61,786 $19,343 $1,075 $82,204
======= ======= ====== =======
</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 8 of the Notes to Consolidated Financial
Statements for additional discussion regarding REO activity for fiscal 1996.
MORTGAGE-BACKED SECURITIES
The Bank has purchased 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 purchases and to replace
loan portfolio run-off. Such purchases decreased significantly during fiscal
1996 and 1995 as the Bank used its excess liquidity to purchase whole loans in
the secondary market and to reduce borrowings. The Bank's primary choice of
securities for this purpose has been highly-rated mortgage pass-through
securities issued by private parties that are backed by pools of adjustable-
rate, single-family mortgage loans. The Bank's portfolio of mortgage-backed
securities at June 30, 1996 and 1995 included $961 million and $1.5 billion of
such securities, respectively.
The Bank acquires mortgage pass-through securities that are issued or
guaranteed by certain agencies including the Government National Mortgage
Association ("GNMA"), the Federal National Mortgage Association ("FNMA") and
the Federal Home Loan Mortgage Corporation ("FHLMC").
19
<PAGE>
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. During fiscal 1994, the
Bank securitized a substantial volume of single-family loans with FNMA and
FHLMC to enhance the loans' liquidity in anticipation of funding the sale of
its Florida franchise. These agency related securities totaled $1.2 billion at
June 30, 1996 and 1995.
During fiscal 1994 and 1993, the Bank purchased collateralized mortgage
obligations ("CMOs"). These securities were backed by pools of whole, fixed-
rate, single-family mortgage loans and were purchased because the yields
offered at that time on these securities were higher than other available
alternatives and because of their short expected duration. The Bank limited
its purchase of CMOs primarily to first tranche securities with expected
durations of two to three years that were AAA-rated and that met the criteria
of the Federal Financial Institutions Examination Council in order not to be
considered "high-risk mortgage securities" at the time of purchase. These CMOs
totaled $1.9 billion at June 30, 1995.
During fiscal 1996, the Bank sold $1.7 billion of CMO investments. 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 Statement of Financial
Accounting Standards No. 115, "Accounting for Certain Investments in Debt and
Equity Securities" ("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, 1996, the market value of CMOs and pass-through
securities classified as available for sale totaled $58 million and $712
million, respectively. In accordance with SFAS 115, the Bank recorded an
unrealized loss in its stockholders' equity accounts at June 30, 1996 of $11.4
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.
Further adjustments to the unrealized loss amount will be made in future
periods to reflect changes in the market value of the available for sale
portfolio. The realignment of the Bank's mortgage-backed securities portfolio
and the Bank's use of the CMO sale proceeds 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. Further information with respect to mortgage-backed securities is
provided in Notes 1 and 6 of the Notes to Consolidated Financial Statements.
20
<PAGE>
The following table summarizes the composition of Glendale Federal's
mortgage-backed securities portfolio by security type as of the dates indicated
(dollars in thousands):
<TABLE>
<CAPTION>
JUNE 30
----------------------------------------------------------
1996 1995 1994 1993 1992
---------- ---------- ---------- ---------- ----------
<S> <C> <C> <C> <C> <C>
FHLMC................... $ 298,232 $ 329,242 $ 210,014 $ 432,921 $ 237,383
GNMA.................... 386,871 326,865 417,013 189,733 1,167,605
FNMA.................... 489,947 579,518 665,670 259,146 210,548
---------- ---------- ---------- ---------- ----------
Subtotal............... 1,175,050 1,235,625 1,292,697 881,800 1,615,536
Highly rated pass-
through
securities............. 961,367 1,499,337 1,900,613 1,143,934 524,903
Highly rated CMOs....... 58,357 1,878,117 2,037,867 1,885,899 383,462
Subordinations.......... 25,855 31,909 36,720 49,265 66,460
CMO residuals........... 277 4,760 7,043 16,050 20,906
---------- ---------- ---------- ---------- ----------
Total gross mortgage-
backed
securities............. 2,220,906 4,649,748 5,274,940 3,976,948 2,611,267
Unrealized gain (loss)
on mortgage-backed se-
curities
available for sale..... (16,076) 53 (4,765) -- --
Valuation allowance to
mark
mortgage-backed securi-
ties
to market value........ -- -- -- -- (12,016)
Unamortized premiums.... 39,001 77,333 96,978 71,117 7,358
Deferred loan origina-
tion fees.............. (3,041) (3,677) (3,374) (3,321) (1,909)
---------- ---------- ---------- ---------- ----------
Mortgage-backed securi-
ties, net.............. $2,240,790 $4,723,457 $5,363,779 $4,044,744 $2,604,700
========== ========== ========== ========== ==========
Weighted average yield
on
mortgage-backed securi-
ties portfolio at end
of period.............. 6.26% 6.30% 5.28% 5.88% 7.49%
========== ========== ========== ========== ==========
</TABLE>
21
<PAGE>
The following table sets forth the changes in the composition of the Bank's
mortgage-backed securities portfolio for the periods indicated (in thousands):
<TABLE>
<CAPTION>
YEARS ENDED JUNE 30
----------------------------------------------------------
1996 1995 1994 1993 1992
----------- --------- ---------- ---------- ----------
<S> <C> <C> <C> <C> <C>
Mortgage-backed securi-
ties
purchased.............. $ 115,595 $ 958 $3,524,460 $3,002,959 $3,271,592
Loans exchanged for
mortgage-
backed securities...... 145,826 268,436 1,470,844 882,908 1,676,873
Union Federal mortgage-
backed
securities acquired(2). -- 23,963 -- -- --
----------- --------- ---------- ---------- ----------
Total additions....... 261,421 293,357 4,995,304 3,885,867 4,948,465
----------- --------- ---------- ---------- ----------
Mortgage-backed securi-
ties sold(1)........... 1,838,289 12,099 1,223,167 1,762,649 3,679,003
Principal repayments.... 851,974 711,881 2,474,146 750,032 299,812
Amortization of unearned
premium................ 20,810 19,786 58,316 25,658 4,317
Other changes........... 33,015 3,214 (79,360) (92,516) 11,322
University Savings mort-
gage-backed securities
sold(2)................ -- 186,699 -- -- --
----------- --------- ---------- ---------- ----------
Total reductions...... 2,744,088 933,679 3,676,269 2,445,823 3,994,454
----------- --------- ---------- ---------- ----------
Net increase (decrease)
in mortgage-backed
securities............. $(2,482,667) $(640,322) $1,319,035 $1,440,044 $ 954,011
=========== ========= ========== ========== ==========
</TABLE>
- --------
(1) Includes loans originated by the Bank and converted to mortgage-backed
securities.
(2) For information regarding the Union Federal and University Savings
transactions, see Note 4 of the Notes to Consolidated Financial
Statements.
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 criteria selected by the OTS
Director. See "Regulation" below. The Bank's qualified regulatory liquidity
percentage of 5.4% and 5.2% for the months of June 1996 and 1995,
respectively, exceeded the regulatory requirement applicable during each of
those months.
22
<PAGE>
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
----------------------------------------------
1996 1995 1994 1993 1992
-------- -------- -------- ---------- --------
<S> <C> <C> <C> <C> <C>
Federal funds sold.............. $ 33,000 $ 16,000 $ 45,961 $ 267,767 $ 72,370
Securities purchased under
resale agreements.............. 375,000 280,000 270,000 575,000 80,000
Whole loans purchased under
resale agreements.............. 25,000 -- -- -- --
-------- -------- -------- ---------- --------
433,000 296,000 315,961 842,767 152,370
Cash and amounts due from banks. 153,608 139,697 164,576 217,689 297,681
-------- -------- -------- ---------- --------
$586,608 $435,697 $480,537 $1,060,456 $450,051
======== ======== ======== ========== ========
The following table summarizes Glendale Federal's other debt securities by
type at the dates indicated (in thousands):
<CAPTION>
JUNE 30
----------------------------------------------
1996 1995 1994 1993 1992
-------- -------- -------- ---------- --------
<S> <C> <C> <C> <C> <C>
Certificates of deposit......... $ 10,786 $ 10,059 $ 13,716 $ 24,779 $ 3,116
U.S. Government and Federal
agency obligations............. 8,086 17,354 148,056 402,440 48,659
Other debt securities........... 5 14,913 1,995 2,712 7,201
FHLB Deposits................... -- -- 1,668 92,486 135,663
Mortgage-backed collateralized
notes.......................... -- -- 605 1,308 2,057
-------- -------- -------- ---------- --------
$ 18,877 $ 42,326 $166,040 $ 523,725 $196,696
======== ======== ======== ========== ========
</TABLE>
Shown below are the carrying values, market values and weighted average
rates of other debt securities at June 30, 1996, with related remaining terms
to maturity (dollars in thousands):
<TABLE>
<CAPTION>
WEIGHTED
CARRYING MARKET AVERAGE
VALUE VALUE RATE
-------- ------- --------
<S> <C> <C> <C>
Certificates of deposit maturing within 1 year........ $10,786 $10,786 5.36%
U.S. Government and Federal agency obligations
maturing within 1 year............................... 8,086 8,086 4.80%
Other securities:
Maturing after 10 years............................. 5 49 --
------- -------
$18,877 $18,921 5.12%
======= =======
Maturity Totals:
Maturing within 1 year.............................. $18,872 $18,872 5.12%
Maturing after 10 years............................. 5 49 --
------- -------
$18,877 $18,921 5.12%
======= =======
</TABLE>
DEPOSITS
The Bank's deposits are obtained primarily in California, where its branch
offices are located. The Bank attracts daily access 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 offers a variety of customer
deposit accounts including passbook accounts, checking accounts and money
market savings 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
23
<PAGE>
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 relating to the Bank's deposit
flows during the periods indicated (in thousands):
<TABLE>
<CAPTION>
YEARS ENDED JUNE 30
--------------------------------------------------------------
1996 1995 1994 1993 1992
---------- ----------- ----------- ----------- -----------
<S> <C> <C> <C> <C> <C>
Total deposits at
beginning of year...... $8,734,880 $10,919,806 $11,615,529 $13,720,874 $15,864,815
Interest credited....... 432,992 398,861 423,132 539,541 834,598
Net retail deposits
increase (decrease).... (373,516) 634,613 (1,079,132) (2,592,591) (2,785,848)
Net brokered deposits
decrease............... (70,380) (26,196) (39,723) (52,295) (192,691)
Sale of Florida
franchise.............. -- (3,281,049) -- -- --
Sale of University
Savings................ -- (918,126) -- -- --
Purchase of Independence
One deposits........... -- 194,146 -- -- --
Purchase of Union
Federal deposits....... -- 812,825 -- -- --
---------- ----------- ----------- ----------- -----------
Total net decrease in
deposits............... (10,904) (2,184,926) (695,723) (2,105,345) (2,143,941)
---------- ----------- ----------- ----------- -----------
Total deposits at end of
year................... $8,723,976 $ 8,734,880 $10,919,806 $11,615,529 $13,720,874
========== =========== =========== =========== ===========
</TABLE>
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
-------------------------------------------------------------
1996 1995 1994 1993 1992
---------- ---------- ----------- ----------- -----------
<S> <C> <C> <C> <C> <C>
Daily access accounts:
Checking/NOW accounts. $ 778,980 $ 661,853 $ 850,112 $ 816,536 $ 719,898
Passbook accounts..... 492,777 551,905 1,236,446 1,422,005 1,122,207
Money-market
checking/savings..... 1,719,319 1,272,012 1,038,944 796,666 1,963,717
---------- ---------- ----------- ----------- -----------
Total daily access
accounts........... 2,991,076 2,485,770 3,125,502 3,035,207 3,805,822
---------- ---------- ----------- ----------- -----------
Certificate accounts
with original
maturities of:
6 months and under.... 955,203 870,733 1,426,838 1,336,028 2,973,040
Over 6 months to 18
months............... 2,797,297 2,758,070 3,428,317 4,362,533 3,375,802
Over 18 months to 30
months............... 961,912 1,345,524 1,288,984 1,183,939 1,215,895
Over 30 months........ 770,786 737,891 1,088,872 1,059,738 1,123,013
Jumbo certificates.... 247,702 536,892 561,293 638,084 1,227,302
---------- ---------- ----------- ----------- -----------
Total certificate
accounts........... 5,732,900 6,249,110 7,794,304 8,580,322 9,915,052
---------- ---------- ----------- ----------- -----------
$8,723,976 $8,734,880 $10,919,806 $11,615,529 $13,720,874
========== ========== =========== =========== ===========
Weighted average
interest rate on
deposits at end of
year................... 4.62% 5.13% 3.94% 4.34% 4.78%
========== ========== =========== =========== ===========
</TABLE>
24
<PAGE>
The following table sets forth information regarding the remaining
contractual maturities of deposits as of June 30, 1996 (dollars in thousands):
<TABLE>
<CAPTION>
WEIGHTED
AVERAGE TOTAL 3 MONTHS 4-6 7-12 13-24 25-36 OVER 36
RATE BALANCE OR LESS MONTHS MONTHS MONTHS MONTHS MONTHS
-------- ---------- ---------- ---------- ---------- -------- -------- --------
<S> <C> <C> <C> <C> <C> <C> <C> <C>
Checking/NOW accounts... 0.56% $ 778,980 $ 778,980 $ -- $ -- $ -- $ -- $ --
Passbook accounts....... 2.15 492,777 492,777 -- -- -- -- --
Money-market
checking/savings....... 4.37 1,719,319 1,719,319 -- -- -- -- --
Certificate accounts:
5.00% and lower........ 4.79 1,790,616 667,388 438,151 494,552 162,512 19,549 8,464
5.01%-6.00%............ 5.48 3,085,829 823,716 1,042,111 366,153 609,311 191,206 53,332
6.01%-7.00%............ 6.43 638,282 213,507 115,728 162,263 41,183 63,425 42,176
7.01%-8.00%............ 7.28 182,292 86,820 33,660 29,816 7,610 3,878 20,508
8.01%-9.00%............ 8.23 2,396 155 382 357 701 801 --
9.01%-10.00%........... 9.45 259 10 6 -- 119 124 --
10.01% and over........ 11.55 33,226 -- 1,257 31,969 -- -- --
---------- ---------- ---------- ---------- -------- -------- --------
Total certificate
accounts............. 5.46% 5,732,900 1,791,596 1,631,295 1,085,110 821,436 278,983 124,480
---------- ---------- ---------- ---------- -------- -------- --------
4.62% $8,723,976 $4,782,672 $1,631,295 $1,085,110 $821,436 $278,983 $124,480
========== ========== ========== ========== ======== ======== ========
</TABLE>
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 12 of the Notes to Consolidated Financial
Statements.
BORROWINGS
The Federal Home Loan Bank 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 ("FHLB") 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, 1996. The Bank had borrowings outstanding
from the FHLB at June 30, 1996 and 1995 of $3.8 billion and $3.5 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.
The Bank also enters into sales of securities under "reverse repurchase
agreements" with securities dealers and the FHLB. Reverse repurchase
agreements consist of sales of securities to securities dealers with a
commitment by the Bank to repurchase such securities for a predetermined
25
<PAGE>
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.
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.
The following table summarizes Glendale Federal's consolidated borrowings by
type at the dates indicated (dollars in thousands):
<TABLE>
<CAPTION>
JUNE 30
----------------------------------------------------------
1996 1995 1994 1993 1992
---------- ---------- ---------- ---------- ----------
<S> <C> <C> <C> <C> <C>
Securities sold under
agreements to
repurchase............. $ 758,050 $2,695,176 $2,306,274 $3,064,995 $ 579,069
Borrowings from FHLB.... 3,838,000 3,495,000 2,443,428 2,192,272 2,228,295
Subordinated debentures. 10,506 14,227 14,280 63,363 96,556
Notes payable........... 93 1,177 1,440 98 33,331
Collateralized notes.... -- 13,479 81,170 78,510 130,908
Subordinated capital
notes.................. -- -- -- -- 105,000
Bank notes, revolving
lines of credit and
other short-term
borrowings............. -- -- -- -- 16,876
---------- ---------- ---------- ---------- ----------
$4,606,649 $6,219,059 $4,846,592 $5,399,238 $3,190,035
========== ========== ========== ========== ==========
Weighted average
interest rate on total
borrowings at end of
period................. 5.87% 6.18% 4.65% 4.11% 6.16%
========== ========== ========== ========== ==========
</TABLE>
ASSET AND LIABILITY MANAGEMENT
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. At June 30, 1996 and 1995, Glendale
Federal's interest-earning assets exceeded its interest-bearing liabilities by
$646 million and $567 million, respectively.
26
<PAGE>
The following table sets forth the maturity and rate sensitivity of Glendale
Federal's interest-earning assets and interest-bearing liabilities as of June
30, 1996. "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 1-5 6-10 OVER 10
BALANCE TOTAL 1 YEAR YEARS YEARS YEARS
------- ----- ------- ------- ----- -------
(DOLLARS IN MILLIONS)
<S> <C> <C> <C> <C> <C> <C>
Interest-earning Assets(1):
Loans receivable:
Single-family 1-4
units(2)(3)................ $ 7,580 54.2% $ 5,516 $ 1,230 $424 $410
Multi-family and non-resi-
dential(2)(3).............. 3,310 23.7 3,037 119 78 76
Other(3).................... 84 0.6 57 25 2 --
Mortgage-backed securi-
ties(2)(3)................... 2,205 15.8 1,749 357 57 42
Investment securities(4)...... 452 3.2 452 -- -- --
Other assets(5)............... 346 2.5 193 -- -- 153
------- ----- ------- ------- ---- ----
Total interest-earning as-
sets..................... 13,977 100.0% 11,004 1,731 561 681
===== ------- ------- ---- ----
Non-interest-earning assets.... 480
-------
Total assets................... $14,457
=======
Interest-bearing Liabilities:
Deposits:
Checking/NOW accounts(6).... 779 5.8% 133 339 186 121
Passbook accounts(6)........ 493 3.7 69 192 123 109
Money-market accounts(6).... 1,719 12.9 550 919 214 36
Certificate accounts(4)..... 5,733 43.0 4,508 1,224 1 --
Borrowings:
FHLB(4)..................... 3,838 28.8 1,938 1,900 -- --
Other(4).................... 769 5.8 758 11 -- --
------- ----- ------- ------- ---- ----
Total interest-bearing liabili-
ties.......................... 13,331 100.0% 7,956 4,585 524 266
===== ------- ------- ---- ----
Non-interest-bearing liabili-
ties.......................... 168
-------
Total liabilities.............. 13,499
Stockholders' equity........... 958
-------
Total liabilities and stock-
holders' equity............... $14,457
=======
Maturity GAP................... 3,048 (2,854) 37 415
Impact of interest rate
swaps(7)...................... -- -- -- --
------- ------- ---- ----
Adjusted GAP................... $ 3,048 $(2,854) $ 37 $415
Cumulative GAP................. $ 3,048 $ 194 $231 $646
As % of total assets........... 21.1% 1.3% 1.6% 4.5%
June 30, 1995 Cumulative GAP... $ 97 $ (90) $128 $567
As % of total assets........... 0.6% (0.5)% 0.8% 3.5%
</TABLE>
- --------
(1) Asset balances are net of loans in process.
(2) ARM loans are predominantly included in the "within 1 year" category, 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 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 have been applied to these deposits.
(7) There is no impact for interest rate swaps because they mature within one
year.
27
<PAGE>
INTEREST RATE MARGIN
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 income earned and expense recorded
thereon and the resulting average yield-cost ratios (dollars in thousands):
<TABLE>
<CAPTION>
YEAR ENDED JUNE 30, 1996 YEAR ENDED JUNE 30, 1995 YEAR ENDED JUNE 30, 1994
------------------------------ ------------------------------ ----------------------------
AVERAGE AVERAGE AVERAGE AVERAGE AVERAGE 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 Assets:
Loans receivable,
net(2)................ $10,268,121 $ 803,432 7.82% $ 9,713,502 $ 721,003 7.42% $10,179,997 $684,143 6.72%
Mortgage-backed
securities, net....... 3,423,747 216,812 6.33 5,070,658 303,587 5.99 5,404,315 255,525 4.73
----------- ---------- ----------- ---------- ----------- --------
Total loans and
mortgage-backed
securities........... 13,691,868 1,020,244 7.45 14,784,160 1,024,590 6.93 15,584,312 939,668 6.03
Federal funds sold and
securities purchased
under resale
agreements............ 674,159 39,347 5.84 668,984 38,142 5.70 792,419 27,871 3.52
U.S. Government and
other investment
securities(3)......... 208,057 20,444 9.83 279,097 23,926 8.57 345,554 22,406 6.48
----------- ---------- ----------- ---------- ----------- --------
Total investments..... 882,216 59,791 6.78 948,081 62,068 6.55 1,137,973 50,277 4.42
----------- ---------- ----------- ---------- ----------- --------
Total interest-earning
assets............... 14,574,084 1,080,035 7.41 15,732,241 1,086,658 6.91 16,722,285 989,945 5.92
----------- ---------- ----------- ---------- ----------- --------
All other assets........ 578,912 717,954 867,870
----------- ----------- -----------
Total assets.......... $15,152,996 $16,450,195 $17,590,155
=========== =========== ===========
Interest-bearing
Liabilities:
Deposits--daily
access(4)............. $ 2,746,615 $ 84,928 3.09 $ 2,658,959 $ 69,132 2.60 $ 3,062,088 $ 63,381 2.07
Deposits--certificates. 6,085,586 348,906 5.73 6,698,055 343,762 5.13 8,134,281 390,093 4.80
----------- ---------- ----------- ---------- ----------- --------
Total deposits........ 8,832,201 433,834 4.91 9,357,014 412,894 4.41 11,196,369 453,474 4.05
Securities sold under
agreements to
repurchase and other
short-term borrowings. 1,869,194 108,839 5.82 2,927,313 165,681 5.66 3,050,780 111,089 3.64
Borrowings from FHLB... 3,332,272 202,258 6.07 3,034,373 180,558 5.95 2,195,406 104,094 4.74
Other borrowings....... 43,784 2,039 4.66 104,529 9,806 9.38 101,775 10,007 9.83
----------- ---------- ----------- ---------- ----------- --------
Total borrowings...... 5,245,250 313,136 5.97 6,066,215 356,045 5.87 5,347,961 225,190 4.21
----------- ---------- ----------- ---------- ----------- --------
Total interest-bearing
liabilities.......... 14,077,451 746,970 5.31 15,423,229 768,939 4.99 16,544,330 678,664 4.10
----------- ---------- ----------- ---------- ----------- --------
All other liabilities... 130,297 118,641 105,698
Stockholders' equity.... 945,248 908,325 940,127
----------- ----------- -----------
Total liabilities and
stockholders' equity. $15,152,996 $16,450,195 $17,590,155
=========== =========== ===========
Difference between
average interest-
earning assets and
interest-bearing
liabilities............ $ 496,633 $ 309,012 $ 177,955
=========== =========== ===========
Yield-cost spread....... $ 333,065 2.10% $ 317,719 1.92% $311,281 1.82%
========== ========== ========
Effective net spread(5). 2.29% 2.02% 1.86%
</TABLE>
- -------
(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) Includes investment in capital stock of FHLB.
(4) Daily access includes average balances and weighted average costs of
passbook deposits for the years ended June 30, 1996, 1995 and 1994 of
$520,129 and 2.19%, $824,067 and 2.25%, and $1,377,191 and 2.43%,
respectively. Daily access also includes average balances and weighted
average costs of interest-bearing demand deposits, which include money
market accounts, for the years ended June 30, 1996, 1995 and 1994 of
$1,910,682 and 3.85%, $1,612,899 and 3.14%, and $1,503,901 and 1.99%,
respectively.
(5) The effective net spread for a period is net interest income divided by
average interest-earning assets.
28
<PAGE>
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
------------------
1996 1995 1994
---- ----- -----
<S> <C> <C> <C>
Weighted average rate:
Loans receivable, net.................................... 7.74% 7.91% 6.87%
Mortgage-backed securities, net.......................... 6.26 6.30 5.28
Total loans and mortgage-backed securities............. 7.49 7.40 6.31
Federal funds sold and securities purchased under resale
agreements.............................................. 5.69 6.43 4.64
U.S. Government and other investment securities.......... 9.58 9.05 6.87
Total investments...................................... 6.99 7.58 5.75
Total loans, mortgage-backed securities and invest-
ments................................................. 7.46 7.40 6.29
Weighted average rate:
Deposits--daily access................................... 3.02 3.06 2.12
Deposits--certificates................................... 5.46 5.95 4.67
Total deposits......................................... 4.62 5.13 3.94
Securities sold under agreements to repurchase and other
short-term borrowings................................... 5.50 6.15 4.25
Borrowings from FHLB..................................... 5.94 6.18 4.76
Other borrowings......................................... 7.76 10.63 11.26
Total borrowings....................................... 5.87 6.18 4.65
Total deposits and borrowings.......................... 5.05 5.57 4.16
Interest rate spread....................................... 2.41% 1.83% 2.13%
Adjusted interest rate spread.............................. 2.59% 1.98% 2.17%
</TABLE>
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.
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, 1996 the Bank's permissible
investment limit was $790.5 million and the Bank's aggregate investment for
regulatory purposes related to this limitation was $305.2 million.
The Bank has been actively disposing of, through liquidation or phase-out of
operations, most of its subsidiary activities including real estate
development and commercial (asset-based) lending. 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 $8.7 million and
$4.4 million, respectively, for fiscal 1996 and had
29
<PAGE>
total assets of $8.9 million at June 30, 1996. GIS provides general insurance
agency services. GIS recorded total revenues and pre-tax earnings of $4.4
million and $1.0 million, respectively, for fiscal 1996 and had total assets
of $1.5 million at June 30, 1996. While these subsidiaries conduct their
activities separate 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.
OTS regulations authorize federally chartered savings institutions to engage
in real estate activities through subsidiaries but not through direct
investment by an institution itself. FIRREA, however, required that following
a five-year phase-in period that expired on June 30, 1994, an institution's
aggregate investment in and loans to subsidiaries engaged in real estate
development must be excluded from the institution's regulatory capital. Under
regulations promulgated by the OTS, the Bank was granted an extension of this
phase-in schedule through June 30, 1996. Accordingly, Glendale Federal is
phasing-out its investments in these subsidiaries. The Bank's investments in
and extensions of credit to its real estate development subsidiaries totaled
$4.7 million and $1.2 million as of June 30, 1996 and 1995, respectively.
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 savings deposits comes from other savings institutions,
commercial banks, 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.
In addition to interest rate competition, the principal methods used by the
Bank to attract retail deposits include 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 real estate loans comes principally from other savings
institutions, commercial banks, mortgage banking companies 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, 1996, Glendale Federal had a total of 2,455 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 stable with a work force which maintains an overall commitment to the
mission and strategic goals of the Bank.
30
<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 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.
The descriptions of the statutes and regulations that are applicable to
Glendale Federal and its subsidiaries 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 its subsidiaries.
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 ACQUISITIONS AND CHANGES IN CONTROL
Applicable federal law and regulations require the prior approval of the OTS
for acquisitions of control of savings institutions and savings and loan
holding companies. Control is conclusively presumed to exist for this purpose
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.
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 unless it is deemed to be "in need of more than
normal supervision", in which case OTS approval of the distribution may be
31
<PAGE>
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.
Glendale Federal does not expect to pay cash dividends on its common stock
in the foreseeable future and the Bank does not expect to make other capital
distributions, other than preferred stock dividends, under its current
organizational structure. However, future circumstances could arise which
might result in a capital distribution by the Bank.
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 June 30, 1996, Glendale Federal was in
compliance with this requirement with an investment in FHLB stock of $192.8
million. Institutions not satisfying certain "qualified thrift lender"
requirements are subject to limitations on their ability to borrow from their
FHLB. See "Qualified Thrift Lender Test", below.
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
(currently 5%) 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. 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 1996 were 5.41% and 4.87%, respectively.
INSURANCE OF DEPOSIT ACCOUNTS
The FDIC administers two separate deposit insurance funds. The Bank
Insurance Fund (the "BIF") is the insurance fund responsible for insuring the
deposits of commercial banks and other institutions the deposits of which were
insured by the FDIC prior to the enactment of FIRREA. The Savings Association
Insurance Fund (the "SAIF") is the insurance fund responsible for insuring the
deposits of institutions the deposits of which were formerly insured by the
Federal Savings and Loan Insurance Corporation. 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 0.23% to
0.31%. The Bank's premium assessment rate for the first half of fiscal 1997
will be $0.26 per $100 of deposits.
32
<PAGE>
The FDIC is authorized to increase deposit insurance premiums payable by
institutions of either fund if it determines that such increases are
appropriate to maintain the reserves of that fund or to pay the costs of
administration of the FDIC. Under current law, the FDIC is required to attain
and thereafter maintain the reserves of both the BIF and SAIF to 1.25% of
insured deposits. The BIF has reached the required reserve level, whereas the
SAIF reserves are well below the required level. As a result, BIF deposit
insurance premiums range from 0 cents (subject to a statutory minimum of
$2,000 in annual assessments) to 27 cents per $100 of deposits. The premium
assessment rate differential between BIF and SAIF creates a significant
competitive disadvantage for SAIF-insured institutions.
The FDIC's reduction of BIF premiums has precipitated a broad public debate
on the subject of deposit insurance reform. Congress proposed, as part of the
budget reconciliation bill submitted to and vetoed by the President in
December 1995, a one-time, special assessment on all savings institutions to
recapitalize the SAIF. The proposal would have required SAIF-insured
institutions to pay a one-time special assessment on January 1, 1996
(estimated to be approximately $0.80 for every $100 in deposits held as of
March 31, 1995, or approximately $47 million as applied to Glendale Federal on
an after-tax basis) and would have provided for a pro rata sharing by all
federally insured institutions of the obligation, now borne entirely by SAIF-
insured institutions, to pay the interest on bonds issued by a specially
created government entity ("FICO"), the proceeds of which were applied toward
resolution of the thrift industry crisis in the 1980s. Efforts to include such
provisions in subsequent legislation have thus far failed. It is anticipated
that Congress will take up the BIF/SAIF legislation upon its return from the
August recess. The FDIC now estimates that the one-time assessment needed to
bring the SAIF to 1.25% of insured deposits is expected to be 68 basis points
or $0.68 for every $100 in deposits. It is estimated that the reduced
assessment rate would result in a lower assessment for the Bank; however, the
amount of the assessment cannot be determined until final resolution by
Congress and the FDIC. The significant disparity in deposit insurance premium
costs between BIF- and SAIF-member institutions has resulted in efforts by
some SAIF-insured institutions to shift customer deposits to affiliated BIF-
insured institutions or to take other actions that would have the effect of
reducing the deposit base on which the SAIF's deposit insurance premium
revenue depends. Continuation of this situation for any extended period of
time would seriously jeopardize the financial viability of the SAIF and
thereby adversely affect its member institutions, and could also result in
default in the payment of interest on the FICO bonds. The proposal described
above represents only one of many different proposals for resolution of the
BIF/SAIF premium disparity and recapitalization of the SAIF. Some of the other
proposals contemplate elimination of the separate thrift charter and merger of
the thrift and commercial banking industries. Management cannot predict
whether or in what form any legislative resolution of these issues may be
enacted or the impact thereof on the business of the Bank but believes that
failure to resolve the problem will adversely affect SAIF-member institutions,
including the Bank.
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.
33
<PAGE>
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"), purchased credit card relationships, and
certain grandfathered core deposit intangibles) must generally be deducted
from core capital. 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.
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 multi-family residential
property loans meeting certain criteria, qualify for the 50% risk-weighting.
The book value of each asset is multiplied by the 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
34
<PAGE>
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 at an earlier date than was previously the case.
The OTS regulations implementing the PCA provisions of FDICIA define the
five capital categories as follows: (i) an institution is "well capitalized"
if it has a total risk-based capital ratio of 10.00% or greater, has a Tier 1
risk-based capital ratio (Tier 1 capital to total assets) of 6.00% or greater,
has a core capital ratio of 5.00% or greater and is not subject to any written
capital order or directive to meet a specific capital level or any capital
measure; (ii) an institution is "adequately capitalized" if it has a total
risk-based capital ratio of 8.00% or greater, has a Tier 1 risk-based capital
ratio of 4.00% or greater and has a core capital ratio of 4.00% or greater
(3.00% for certain highly rated institutions); (iii) an institution is
"undercapitalized" if it has a total risk-based capital ratio of less than
8.00% or has either a Tier 1 risk-based or a core capital ratio that is less
than 4.00%; (iv) an institution is "significantly undercapitalized" if it has
a total risk-based capital ratio that is less than 6.00%, or has either a Tier
1 risk-based or a core capital ratio that is less than 3.00%; and (v) an
institution is "critically undercapitalized" if its "tangible equity" (defined
in the prompt corrective action regulations to mean core capital plus
cumulative perpetual preferred stock) is equal to or less than 2.00% of its
total assets. 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, 1996, the Bank's regulatory capital ratios were significantly
above the 5.00% core capital, 6.00% Tier 1 risk-based capital and 10.00% 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 17 of the
Notes to Consolidated Financial Statements for further information regarding
the Bank's regulatory capital ratios.
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, 1996, the maximum amount which Glendale
Federal could have loaned to any one borrower (and related entities) was
$160.5 million. At that date, the largest balance of loans which Glendale
Federal had outstanding to any one borrower and related entities was $31.0
million.
QUALIFIED THRIFT LENDER TEST
Under the qualified thrift lender ("QTL") test provisions of applicable
Federal law, savings institutions must maintain at least 65% of its portfolio
assets in qualified thrift investments on a
35
<PAGE>
specified monthly average basis. In general, qualified thrift investments
include loans, securities and other investments that are related to housing
or, 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: (1)
limitations on new investments and activities; (2) imposition of branching
restrictions; (3) loss of FHLB borrowing privileges; and (4) limitations on
the payments 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 BHCA.
Glendale Federal's qualified thrift investments comprised 88.7% of its
portfolio assets as of June 30, 1996.
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 an examination conducted in 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 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.
36
<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 repeals the reserve method
of accounting for bad debts for savings institutions effective for taxable
years beginning after 1995 and provides for recapture of a portion of the
reserves existing at the close of the last taxable year beginning before
January 1, 1996. See Note 14 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 will be 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 is a variable
rate tax, computed under a formula which results in a rate higher than the
rate applicable to non-financial corporations because it reflects an amount
"in lieu" of local personal property and business license taxes paid by such
corporations (but not generally paid by banks or financial corporations such
as Glendale Federal). For 1993 and 1994, the rates were 11.107% and 11.470%,
respectively. For 1995 and 1996, the rate is set at 11.3%. For 1997, the rate
will be 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.
Glendale Federal's tax returns have been audited by the Internal Revenue
Service through December 31, 1988, and by the California Franchise Tax Board
("CFTB") through December 31, 1990.
For additional information regarding taxation, see Note 14 of the Notes to
Consolidated Financial Statements.
ITEM 2. PROPERTIES
At June 30, 1996, Glendale Federal's business was conducted through the
Bank's 150 banking offices and 22 loan offices in California. The executive
offices of the Bank are located at 414 North Central Avenue, Glendale,
California. The Bank owns its executive offices and 83 of its banking offices,
37
<PAGE>
as well as 6 other properties in which service centers and other facilities
are located, and leases the premises for 67 of its banking offices, as well as
21 other properties in which service centers and other facilities are located.
The net book value of all offices at June 30, 1996 was $79.7 million and
included $11.6 million of leasehold improvements. Expirations of leases for
facilities range from September 1996 to April 2034. During fiscal 1996, the
Bank sold its former headquarters facility for approximately $30 million and
recorded a pre-tax loss on the sale of $2.5 million. See Notes 4 and 10 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 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 U.S. 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 U.S. 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. On August
1, 1996, the Claims Court scheduled January 13, 1997 as the starting date for
the trial to determine damages. Management believes that the Bank will be able
to establish damages in an amount in excess of $1.5 billion.
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., 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.
38
<PAGE>
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. The defendants are now
conducting a vigorous defense to the claims asserted.
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 defendants are now conducting a vigorous defense to
the claims asserted.
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
None.
39
<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.
<TABLE>
<CAPTION>
NAME AGE POSITION(S) HELD
---- --- ----------------
<S> <C> <C>
James W. Bean, Jr. 49 Senior Vice President and Chief Auditor
Vincent L. Beatty 36 Executive Vice President and Director,
Loan Sales/Operations/Corporate Development
William J. Birch 48 Executive Vice President and Manager,
Retail Banking
James R. Eller, Jr. 49 Corporate Counsel and Secretary
Howard C. Everakes 45 Executive Vice President and General
Counsel
Richard A. Fink 56 Senior Executive Vice President and
Chief Credit Officer and Director
John E. Haynes 51 Executive Vice President, Chief Financial
Officer
Gregory L. Hendry 36 Senior Vice President and Chief Accounting
Officer
Terry D. Hess 49 Executive Vice President and Director,
Community Business Banking
Jeffrey D. Misakian 37 Senior Vice President and Director,
Corporate Relations
Kathryn D. Snyder 39 Executive Vice President and Treasurer
Stephen J. Trafton 50 Chairman of the Board, Chief Executive
Officer and President
Robert R. Trujillo 45 Executive Vice President and Director,
Franchise Management and Marketing
Sharon K. Winston 44 Senior Vice President and Director,
Corporate Human Resources
</TABLE>
James W. Bean, Jr. has been Senior Vice President and Chief Auditor since
1991. From 1990 to 1991, Mr. Bean was Senior Vice President and Corporate
Controller.
Vincent L. Beatty has been Executive Vice President and Director, Loan
Sales/Operations/ Corporate Development, of Glendale Federal since February
1996. 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; and Executive Vice President and Director, Bank
and Lending Operations, in January 1995.
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.
40
<PAGE>
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 as 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.
John E. Haynes has been Executive Vice President and Chief Financial Officer
of Glendale Federal since April 1992 and was Chief Information Officer from
January 1995 until August 1996. From March 1990 until June 1991 he was Senior
Vice President and Manager, Reporting and Forecasting. In June 1991, he was
appointed Senior Vice President and Corporate Controller and in September 1991
he was promoted to Senior Vice President and Chief Accounting Officer. He
served as Chief Accounting Officer until March 1993.
Gregory L. Hendry has been Senior Vice President and Chief Accounting
Officer since March 1993. From March 1990 until February 1991, he was Vice
President and Manager, Product Profitability, Cost Analysis and Budgets. From
February 1991 until March 1993 he was Vice President and Manager, Technical
Accounting.
Terry D. Hess has been Executive Vice President and Director, Community
Business Banking, of Glendale Federal since July 1995. Mr. Hess became
Executive Vice President and Manager of the Special Asset Department of
Glendale Federal in December 1990. Mr. Hess was Chief Credit Officer of
Glendale Federal from June 1991 until July 1995.
Jeffrey D. Misakian has been Senior Vice President and Director, Corporate
Relations, of Glendale Federal since August 1994. Mr. Misakian was Senior Vice
President and Director, Investor Relations and Financial Reporting, from March
1993 until August 1994. From September 1990 until March 1993 Mr. Misakian was
Vice President and Manager, Financial Reporting.
Kathryn D. Snyder has been Executive Vice President and Treasurer of
Glendale Federal since February 1996. From October 1990 until January 1991,
she was Senior Vice President and Manager of Budgeting and Financial Planning.
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 Bank since April 1992. Mr. Trafton joined
Glendale Federal in July 1990 as Senior Executive Vice President and Chief
Financial Officer and served as such 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 and Marketing, since February 1996. From 1989 until July 1992 he
was Senior Vice President and Manager, Branch Development/Promotion and Market
Research. From July 1992 until December 1992
41
<PAGE>
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; and from October
1994 until February 1996 he was Executive Vice President and Director,
Franchise Management.
Sharon K. Winston has been Senior Vice President and Director, Corporate
Human Resources since August 1994. From 1987 until she joined Glendale Federal
in May 1991 Ms. Winston was Human Resources Manager of Navcom Defense
Manufacturing. From May 1991 until November 1991 she was an Assistant Vice
President. 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.
42
<PAGE>
PART II
ITEM 5. MARKET FOR REGISTRANT'S COMMON EQUITY AND RELATED STOCKHOLDER
MATTERS
PRICE RANGE OF THE REGISTRANT'S COMMON STOCK
The Bank's common stock is listed on the New York Stock Exchange ("NYSE")
under the symbol "GLN" and is also listed on the Pacific Stock Exchange
("PSE"). 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, 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
Year Ended June 30, 1995
First Quarter........................................... $13 1/2 $10 3/8
Second Quarter.......................................... 11 3/4 7 3/8
Third Quarter........................................... 10 7/8 8 3/4
Fourth Quarter.......................................... 14 10
</TABLE>
At the close of business on September 3, 1996, the Bank's common stock price
was $17 5/8.
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 18 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 September 3, 1996, 47,161,877 shares of Bank common stock were
outstanding and held by approximately 8,665 holders of record.
43
<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 18 of the
Notes to Consolidated Financial Statements for discussion of acquisitions and
dispositions in fiscal 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
------------------------------------------------------------
1996 1995 1994 1993 1992
---------- ---------- --------- ---------- -----------
<S> <C> <C> <C> <C> <C>
Interest income......... $1,080,035 $1,086,658 $ 989,945 $1,134,310 $ 1,641,764
Interest expense........ (746,970) (768,939) (678,664) (774,997) (1,137,917)
---------- ---------- --------- ---------- -----------
Net interest income be-
fore provision for loan
losses................. 333,065 317,719 311,281 359,313 503,847
Provision for loan loss-
es..................... (40,350) (66,150) (139,726) (251,261) (314,437)
---------- ---------- --------- ---------- -----------
Net interest income..... 292,715 251,569 171,555 108,052 189,410
Other income:
Fee income............ 69,977 69,311 60,513 58,051 74,709
Gain (loss) on sale of
loans, net........... (690) 146 665 3,147 24,129
Gain (loss) on sale of
mortgage-backed secu-
rities, net.......... (34,222) (11,725) 1,099 29,258 76,710
Gain on sale of bank-
ing operations....... -- 73,713 -- -- --
Other income (loss),
net.................. (707) 3,001 (1,936) (3,461) (22,081)
---------- ---------- --------- ---------- -----------
Total other income.. 34,358 134,446 60,341 86,995 153,467
Other expenses:
Compensation and em-
ployee benefits...... (101,502) (105,218) (126,037) (123,388) (125,674)
Occupancy expense,
net.................. (29,698) (31,433) (37,691) (39,535) (41,402)
Regulatory insurance.. (27,491) (29,077) (38,233) (34,881) (38,299)
Advertising and promo-
tion................. (24,798) (18,855) (16,285) (11,078) (7,968)
Furniture, fixtures
and equipment........ (11,605) (14,559) (24,793) (29,585) (31,804)
Stationery, supplies
and postage.......... (10,158) (9,065) (11,174) (11,221) (12,553)
Other general and ad-
ministrative ex-
penses............... (43,612) (35,634) (37,753) (31,965) (33,506)
---------- ---------- --------- ---------- -----------
Total general and
administrative ex-
penses............. (248,864) (243,841) (291,966) (281,653) (291,206)
Operations of real
estate held for sale
or investment........ (1,242) 31 (2,690) (31,488) (105,689)
Operations of real
estate acquired in
settlement of loans.. (8,426) (15,034) (24,089) (44,367) (55,967)
Amortization of
goodwill and other
intangible assets.... (5,147) (1,724) (9,764) (16,028) (17,131)
---------- ---------- --------- ---------- -----------
Total other ex-
penses............. (263,679) (260,568) (328,509) (373,536) (469,993)
---------- ---------- --------- ---------- -----------
Write-off of assets held
for Florida disposi-
tion................... -- -- (136,209) -- --
Income tax (provision)
benefit................ (21,342) (52,146) 10,171 39,299 6,210
Extraordinary items,
net.................... -- 1,755 14,092 58,344 --
---------- ---------- --------- ---------- -----------
Net earnings (loss)... 42,052 75,056 (208,559) (80,846) (120,906)
Dividends declared on
preferred stock........ (16,156) (17,668) (13,759) -- --
Premium on exchange of
Series E preferred
stock for common stock. (9,443) -- -- -- --
---------- ---------- --------- ---------- -----------
Earnings (loss) avail-
able for common share-
holders................ $ 16,453 $ 57,388 $(222,318) $ (80,846) $ (120,906)
========== ========== ========= ========== ===========
Earnings (loss) per
share:
Primary:
Earnings (loss) be-
fore extraordinary
items............... $ 0.36 $ 1.28 $ (6.48) N/A N/A
Net earnings (loss).. 0.36 1.32 (6.10) N/A N/A
Fully diluted:
Earnings (loss) be-
fore extraordinary
items............... 0.35 1.16 (6.48) N/A N/A
Net earnings (loss).. 0.35 1.19 (6.10) N/A N/A
Return on average as-
sets................... 0.28% 0.46% (1.20)% (0.45)% (0.61)%
Return on average equi-
ty..................... 4.43 8.25 (27.11) (11.86) (15.83)
Average equity to aver-
age assets............. 6.23 5.54 4.43 3.81 3.88
Efficiency ratio (1).... 61.75 63.00 78.53 67.48 50.33
Number of full service
customer facilities.... 150 148 217 215 214
</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.
44
<PAGE>
ITEM 6. SELECTED FINANCIAL DATA (CONTINUED)
GLENDALE FEDERAL BANK AND SUBSIDIARIES
CONSOLIDATED FIVE YEAR SUMMARY OF FINANCIAL CONDITION
(IN THOUSANDS)
<TABLE>
<CAPTION>
JUNE 30
-----------------------------------------------------------
1996 1995 1994 1993 1992
----------- ----------- ----------- ----------- -----------
ASSETS
<S> <C> <C> <C> <C> <C>
Cash and amounts due
from banks............. $ 153,608 $ 139,697 $ 164,576 $ 217,689 $ 297,681
Federal funds sold and
securities purchased
under resale
agreements............. 433,000 296,000 315,961 842,767 152,370
Other debt securities... 18,877 42,326 166,040 523,725 196,696
Loans receivable, net... 10,727,909 9,899,297 9,595,780 10,850,039 12,741,028
Mortgage-backed
securities, net........ 2,240,790 4,723,457 5,363,779 4,044,744 2,604,700
Real estate held for
sale or investment..... 12,072 13,303 16,995 48,040 133,509
Real estate acquired in
settlement of loans.... 78,249 105,730 146,835 194,187 201,819
Investment in capital
stock of Federal Home
Loan Bank, at cost..... 192,842 185,799 139,678 126,390 138,540
Goodwill and other in-
tangible assets........ 59,216 63,538 47,781 385,754 401,782
Assets held for Florida
disposition, net....... -- -- 257,363 -- --
Other assets............ 540,001 575,099 588,243 675,498 1,031,495
----------- ----------- ----------- ----------- -----------
$14,456,564 $16,044,246 $16,803,031 $17,908,833 $17,899,620
=========== =========== =========== =========== ===========
<CAPTION>
LIABILITIES AND
STOCKHOLDERS' EQUITY
<S> <C> <C> <C> <C> <C>
Deposits................ $ 8,723,976 $ 8,734,880 $10,919,806 $11,615,529 $13,720,874
Securities sold under
agreements to repur-
chase.................. 758,050 2,695,176 2,306,274 3,064,995 579,069
Borrowings from the
FHLB................... 3,838,000 3,495,000 2,443,428 2,192,272 2,228,295
Other borrowings........ 10,599 28,883 96,890 141,971 382,671
Other liabilities....... 168,488 148,460 158,419 233,779 285,196
Stockholders' equity.... 957,451 941,847 878,214 660,287 703,515
----------- ----------- ----------- ----------- -----------
$14,456,564 $16,044,246 $16,803,031 $17,908,833 $17,899,620
=========== =========== =========== =========== ===========
</TABLE>
45
<PAGE>
ITEM 7. MANAGEMENT'S DISCUSSION AND ANALYSIS OF FINANCIAL CONDITION AND
RESULTS OF OPERATIONS
OVERVIEW
EARNINGS PERFORMANCE
The Bank recorded net earnings of $42.1 million in fiscal 1996, compared to
net earnings of $75.1 million in fiscal 1995 and a net loss of $208.6 million
in fiscal 1994. The primary and fully diluted earnings per share amounts for
fiscal 1996 were $0.36 and $0.35, respectively, compared to $1.32 and $1.19,
respectively, for fiscal 1995, and a primary and fully diluted loss per share
of $6.10 for fiscal 1994.
Excluding premium adjustments on the exchange of certain of its
Noncumulative Preferred Stock, Series E (the "Series E Preferred Stock") to
common stock and the other non-recurring items noted below, earnings would
have been $63.5 million, or $0.97 per fully diluted share, for the fiscal year
ended June 30, 1996. On the same basis, earnings in fiscal 1995 would have
been $41.3 million, or $0.57 per fully diluted share, compared to a net loss
of $96.6 million, or $3.03 per fully diluted share, in fiscal 1994.
Net earnings for fiscal 1996 include an after-tax loss of $19.7 million 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 the
current period is an after-tax loss of $1.7 million on the sale of the Bank's
former headquarters facility.
During fiscal 1996, the Bank entered into separately negotiated agreements
with certain holders of its Series E Preferred Stock providing, in the
aggregate, for exchanges of 2.2 million shares of the Series E Preferred Stock
for 5.9 million shares 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, the excess of the fair value of Glendale Federal common
stock transferred by the Bank to the holders of the Series E Preferred Stock
over the fair value of Glendale Federal common stock issuable pursuant to the
original conversion terms, has been subtracted from net earnings to arrive at
the earnings available to common shareholders in the calculation of earnings
per share. The Bank has made additional exchanges of Glendale Federal common
stock for Series E Preferred Stock since June 30, 1996 and may enter into
further exchange agreements in the future.
Included in net earnings for fiscal 1995 is a gain of $29.7 million (net of
income tax expense of $21.0 million) resulting from the sale of University
Savings, a gain of $2.3 million (net of income tax expense of $20.7 million)
resulting from the sale of the Bank's Florida franchise and an extraordinary
net gain of $1.8 million resulting from University Savings' early
extinguishment of $42.1 million of borrowings from the FHLB.
Included in the net loss for fiscal 1994 was a write-off of goodwill and
other assets associated with the sale of the Bank's Florida franchise totaling
$136.2 million, an extraordinary net gain of $14.1 million resulting from the
exchange of $49.1 million of GLENFED's convertible subordinated debentures for
common stock of the Bank in connection with the Recapitalization, and tax
benefits of $10.2 million.
The improvement in earnings, exclusive of the non-recurring items noted
above, in fiscal 1996, compared to fiscal 1995, reflects higher net interest
income before provision for loan losses, lower credit-related costs and an
increase in other fees and service charges, partially offset by reduced loan
46
<PAGE>
servicing income and an increase in general and administrative expenses. The
change in earnings in fiscal 1995 compared to the loss recorded in fiscal
1994, exclusive of the non-recurring items noted above, was primarily due to a
lower provision for loan losses, an increase in fee income and a reduction in
both general and administrative expenses and goodwill amortization. See
"Results of Operations" for a further discussion of factors affecting the
Bank's earnings performance.
The Bank's interest rate spread was 2.41% at June 30, 1996, as compared with
1.83% and 2.13% at June 30, 1995 and 1994, respectively. The rise in overall
interest rates during calendar 1994 significantly increased the cost of retail
deposits and borrowings, adversely impacting the Bank's cost of funds and its
interest rate spread. The funding of the sale of the Bank's Florida operations
in December 1994, resulted in a significant increase in the amount of short-
term borrowings, which had a weighted average interest rate higher than the
weighted average interest rate of the deposits sold. As a result, the Bank's
interest rate spread was 1.50% at December 31, 1994. The Bank's interest rate
spread improved in the second half of fiscal 1995 as higher costing short-term
borrowings were replaced with cash proceeds and lower costing deposits
obtained in the Union Federal and Independence One acquisitions described in
Note 4 of the Notes to Consolidated Financial Statements, which resulted in a
decrease in the Bank's cost of funds. The Bank's interest rate spread
continued to improve in fiscal 1996 due to further declines in the Bank's cost
of funds and an increase in the yield on 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.
The Bank continues to experience growth in its new business lines, which
were introduced early in fiscal 1996. During the year, the number of checking
accounts increased by 52,000, and the dollar balances of checking accounts
increased by 18%. As anticipated, asset generation from the Bank's new
business lines has been modest during fiscal 1996, as compared to the growth
in transaction-based deposit accounts. This was due to the fact that the new
business lending programs were in their initial implementation phases in
fiscal 1996 and to competition from other lenders in these business lines. See
the loan origination table below under "Balance Sheet Analysis--Loans
Receivable" for additional information.
Implementation of the Bank's strategic decision to transform itself from a
savings institution to a community banking organization has resulted in an
increase in general and administrative expenses. These expenses are expected
to stabilize at the levels experienced during the fourth quarter of fiscal
1996, but may increase in future periods as the Bank expands its business
lines and continues to maintain a higher level of marketing activity. The
targeted benefits sought from this transformation--increased net interest
margin resulting from investment in business and consumer loans with higher
yields than single-family mortgage loans, greater amounts of lower costing
demand deposit accounts and increased fee income--are expected to lag the
increase in expenditures.
The ability of the Bank to achieve its planned transformation into a
community banking organization and realize its intended benefits, is subject
to an increasingly intense level of competition from California's existing
commercial banks, particularly the state's two largest banks. In addition, the
level of interest-earning assets has decreased, primarily as a result of the
sale of the CMO portfolio. This will adversely impact the level of net
interest income until such time as the Bank can reinvest the proceeds through
the origination or purchase of interest-earning assets. The Bank's ability to
sustain the earnings growth experienced over the past seven quarters and its
ability to successfully complete its transformation to a commercial bank will
be impacted by the above factors.
47
<PAGE>
SALE OF CMO INVESTMENT PORTFOLIO
During fiscal 1996, the Bank sold $1.7 billion of its fixed-rate CMO
investments (the "CMO Sale"). The Bank's decision to sell most of its CMO
portfolio was part of a strategic realignment of the Bank's mortgage-backed
securities portfolio in which $2.8 billion of mortgage-backed securities were
reclassified from "held to maturity" to "available for sale" during the
quarter ended December 31, 1995, in compliance with 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 Bank recorded a pre-tax loss of $28.2 million on the CMO Sale during
fiscal 1996. As of June 30, 1996, the market value of CMOs and pass-through
securities classified as available for sale totaled $58 million and $712
million, respectively. In accordance with SFAS 115, the Bank recorded an
unrealized loss in its stockholders' equity at June 30, 1996 of $11.4 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. Further
adjustments to the unrealized loss amount will be made in future periods to
reflect changes in the market value of the available for sale 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, 1996, the Bank's tangible book value was $16.11 per common
share, or $14.18 per common share on a fully diluted basis. At June 30, 1995,
the Bank's tangible book value was $16.63 per common share, or $14.03 per
common share on a fully diluted basis. The Bank's core capital, risk-based
capital and Tier 1 risk-based capital ratios at June 30, 1996 were 6.29%,
11.93% and 10.79%, respectively, placing the Bank in the "well-capitalized"
category as defined by federal regulations, which require 5% core, 10% risk-
based capital and 6% Tier 1 risk-based capital to qualify for that
designation. At June 30, 1995, the Bank's core capital, and risk-based capital
and Tier 1 risk-based capital ratios were 5.44%, 11.15% and 10.02%,
respectively.
The Bank's capital ratios could decrease in future periods due to, among
other things, deposit insurance reform, acquisition activity and balance sheet
growth.
BALANCE SHEET ANALYSIS
Consolidated assets of the Bank totaled $14.5 billion at June 30, 1996,
compared to $16.0 billion at June 30, 1995. Asset size and composition have
been determined principally by seeking to balance regulatory capital
requirements, liquidity, yield and risk. Loans and mortgage-backed securities
decreased by a combined $1.7 billion in fiscal 1996, primarily due to the CMO
Sale, principal payments on loans and mortgage-backed securities totaling $2.3
billion and the sale in August 1995, of $176 million of non-performing and
classified real estate loans and REO (the "August 1995 Loan Sale"). These
decreases were partially offset by loan purchases and originations during the
fiscal year totaling $2.1 billion and $867 million, respectively.
Proceeds from both the August 1995 Loan Sale and the CMO Sale, together with
principal payments on loans and mortgage-backed securities, were used in part
to reduce total borrowings by $1.6 billion during fiscal 1996. It is the
Bank's intention to increase consolidated assets by approximately $1 billion
to $2 billion during fiscal 1997 primarily through the purchase of single-
family residential loans in the secondary market. However, such growth is
dependent upon a number of factors, such as the availability of loans and the
interest rate and economic environment. If such conditions are not favorable,
the Bank may be unable to purchase or originate sufficient assets to meet this
growth objective, and may experience further decreases in total assets due to
loan repayments and prepayments.
48
<PAGE>
CASH AND SHORT-TERM INVESTMENT SECURITIES
Cash and short-term investment securities increased from their June 30, 1995
level by $150.9 million, to $586.6 million at June 30, 1996, principally due
to the CMO Sale during fiscal 1996 as well as principal payments on loans.
MORTGAGE-BACKED AND OTHER DEBT SECURITIES
Mortgage-backed securities held to maturity decreased by $3.4 billion in
fiscal 1996 to $1.4 billion at June 30, 1996, primarily due to the previously
discussed reclassification of $2.8 billion of mortgage-backed securities from
"held to maturity" to "available for sale" as well as principal payments
received on mortgage-backed securities of $496.0 million.
Mortgage-backed securities available for sale increased by $882.5 million in
fiscal 1996 to $884.6 million at June 30, 1996, primarily due to the $2.8
billion reclassification noted above, partially offset by the CMO Sale and
principal payments received on mortgage-backed securities of $356.0 million.
Other debt securities held to maturity decreased by $23.4 million in fiscal
1996 to $18.9 million at June 30, 1996, primarily due to maturities of $29.1
million, partially offset by purchases of $9.8 million.
LOANS RECEIVABLE
Loans receivable held for investment increased by $953.5 million in fiscal
1996 to $10.7 billion at June 30, 1996. The increase was primarily due to
loans originated for investment, net of refinances, of $449.6 million and
loans purchased for investment totaling $2.1 billion, partially offset by
principal payments of $1.4 billion and loans transferred to REO of $186.2
million. The loans purchased include $2.0 billion of single-family
residential, adjustable-rate mortgage loans purchased in the secondary market
to replace asset sales and run-off, resulting primarily from the CMO Sale and
principal payments.
Loans receivable held for sale decreased by $124.9 million in fiscal 1996 to
$33.3 million at June 30, 1996, primarily due to completion of the August 1995
Loan Sale, securitization of loans for mortgage-backed securities in the
amount of $145.8 million, and other loan sales totaling $116.3 million.
Partially offsetting these decreases was $264.2 million in fixed-rate loans
originated for resale in the secondary mortgage market and transfers of loans
from the held for investment category totaling $19.3 million.
As of June 30, 1996, commitments of the Bank to purchase and originate loans
totaled $307.4 million and $43.9 million, respectively. At that date,
commitments of the Bank to sell loans totaled $380,000 and commitments of the
Bank to sell mortgage-backed securities, comprised of fixed-rate loans
originated and securitized by the Bank, totaled $17.5 million.
49
<PAGE>
Loan originations by property type (including the refinanced portion of the
Bank's loans) and loans purchased under the Bank's correspondent lending
program and in the secondary market are summarized as follows (dollars in
millions):
<TABLE>
<CAPTION>
YEARS ENDED JUNE 30
-----------------------------------------------------
1996 1995 1994
----------------- ----------------- -----------------
AMOUNT % OF TOTAL AMOUNT % OF TOTAL AMOUNT % OF TOTAL
------ ---------- ------ ---------- ------ ----------
<S> <C> <C> <C> <C> <C> <C>
Originations:
Permanent Loans:
Single-family 1-4 units. $ 778 26.4% $ 691 29.5% $1,847 70.9%
Multi-family 5-36 units. 26 0.9 65 2.8 83 3.2
Multi-family 37 or more
units.................. 6 0.2 24 1.1 38 1.5
Non-residential......... 13 0.4 42 1.8 70 2.7
Land.................... 1 -- 7 0.3 18 0.7
Construction Loans:
Single-family 1-4 units. 16 0.6 12 0.5 36 1.4
Multi-family 5-36 units. 5 0.2 7 0.3 15 0.6
Multi-family 37 or more
units.................. -- -- -- -- 2 --
Non-residential......... -- -- -- -- 10 0.4
Commercial loans......... 1 -- -- -- -- --
Consumer loans........... 21 0.7 19 0.8 19 0.7
------ ----- ------ ----- ------ -----
Total Originations....... 867 29.4 867 37.1 2,138 82.1
Purchases:
Secondary market (1-4
units)................. 2,024 68.8 1,278 54.6 454 17.4
Correspondent lending
(1-4 units)............ 53 1.8 195 8.3 12 0.5
------ ----- ------ ----- ------ -----
$2,944 100.0% $2,340 100.0% $2,604 100.0%
====== ===== ====== ===== ====== =====
</TABLE>
Loan originations for fiscal 1996 remained unchanged compared to fiscal
1995, which included originations for the first six months of that year
related to the Bank's former Washington and Florida operations. 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.
Loan originations for fiscal 1995 declined as compared to fiscal 1994 due
primarily to the sales of University Savings and the Bank's Florida franchise,
to the significant increase in mortgage interest rates, which resulted in a
sharp decline in refinancing activity, to a decline in home purchase activity
in California and to the decision by the Bank not to compete for the deeply
discounted, negatively amortizing COFI-based loan made by many of the Bank's
competitors. The COFI-based loan was the dominant loan product in the
California markets during most of 1994 and 1995. The Bank's decision not to
make these loans was based on management's belief that origination of these
loans would adversely affect net interest income for an extended period.
Loans originated by University Savings and the Florida franchise totaled
$132 million and $18 million in fiscal 1995, respectively, and $329 million
and $299 million in fiscal 1994, respectively.
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") properties or to refinance maturing loans. The
single-family residential and multi-family residential construction loans
originated in the current fiscal year are part of the construction lending
program that was reintroduced in the first quarter of fiscal 1996. This
program has been terminated for fiscal 1997.
The Bank has purchased whole loans in the secondary market primarily to
supplement its retail loan originations and to replace asset sales and run-
off. During the fourth quarter of fiscal 1994, the
50
<PAGE>
Bank purchased $454 million of fixed-rate, single-family residential whole
loans in the secondary market. In fiscal 1995, the Bank purchased fixed-rate
whole loans totaling $904 million and adjustable-rate whole loans totaling
$374 million. In fiscal 1996, the Bank purchased $2.0 billion of single-family
residential, adjustable-rate mortgage loans, primarily to replace $1.7 billion
of fixed-rate CMOs sold by the Bank and to replace loan run-off resulting from
principal payments that exceeded the rate of the Bank's loan originations.
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
-------------------------------
1996 1995
--------------- ---------------
% OF % OF
DOLLAR TOTAL DOLLAR TOTAL
AMOUNT ASSETS AMOUNT ASSETS
-------- ------ -------- ------
<S> <C> <C> <C> <C>
Non-accrual loans............................... $192,445 1.33% $244,242 1.52%
REO and other assets............................ 82,204 0.57 111,280 0.70
-------- ---- -------- ----
Total NPAs...................................... $274,649 1.90% $355,522 2.22%
======== ==== ======== ====
Restructured loans.............................. $ 9,194 0.06% $ 38,542 0.24%
======== ==== ======== ====
</TABLE>
51
<PAGE>
The following table summarizes NPA and restructured loan activity in fiscal
1996 (in thousands):
<TABLE>
<CAPTION>
JUNE 30, PAYOFFS/ JUNE 30,
1995 FORE- WRITE- SALES/ 1996
BALANCE ADDITIONS CLOSURES DOWNS OTHER BALANCE
-------- --------- --------- -------- --------- --------
<S> <C> <C> <C> <C> <C> <C>
Non-Accrual Loans:
Single-family 1-4
units................. $111,881 $255,464 $(122,565) $ -- $(124,802) $119,978
Multi-family 5-36
units................. 50,487 76,367 (34,697) (2,963) (56,071) 33,123
Multi-family 37 or
more units............ 21,255 23,060 (12,031) (2,055) (15,768) 14,461
Non-residential........ 59,430 37,406 (14,822) (6,571) (51,583) 23,860
Commercial............. 283 -- -- -- (261) 22
Consumer............... 906 958 -- -- (863) 1,001
-------- -------- --------- -------- --------- --------
Total................ $244,242 $393,255 $(184,115) $(11,589) $(249,348) $192,445
======== ======== ========= ======== ========= ========
REO and Other Assets:
Single-family 1-4
units................. $ 37,316 $ 16,603 $ 84,585 $ (7,242) $ (91,569) $ 39,693
Multi-family 5-36
units................. 18,131 1,100 30,063 (2,066) (35,560) 11,668
Multi-family 37 or
more units............ 5,716 -- 10,169 (641) (10,417) 4,827
Non-residential........ 50,024 2,190 13,969 (2,334) (37,956) 25,893
Consumer............... 93 -- -- -- 30 123
-------- -------- --------- -------- --------- --------
Total................ $111,280 $ 19,893 $ 138,786 $(12,283) $(175,472) $ 82,204
======== ======== ========= ======== ========= ========
Total NPAs:
Single-family 1-4
units................. $149,197 $272,067 $ (37,980) $ (7,242) $(216,371) $159,671
Multi-family 5-36
units................. 68,618 77,467 (4,634) (5,029) (91,631) 44,791
Multi-family 37 or
more units............ 26,971 23,060 (1,862) (2,696) (26,185) 19,288
Non-residential........ 109,454 39,596 (853) (8,905) (89,539) 49,753
Commercial............. 283 -- -- -- (261) 22
Consumer............... 999 958 -- -- (833) 1,124
-------- -------- --------- -------- --------- --------
Total................ $355,522 $413,148 $ (45,329) $(23,872) $(424,820) $274,649
======== ======== ========= ======== ========= ========
Restructured Loans:
Single-family 1-4
units................. $ 4,601 $ 2,575 $ -- $ -- $ (3,954) $ 3,222
Multi-family 5-36
units................. 10,717 320 -- -- (8,840) 2,197
Multi-family 37 or
more units............ 7,462 -- -- -- (5,211) 2,251
Non-residential........ 15,762 1,535 -- -- (15,773) 1,524
-------- -------- --------- -------- --------- --------
Total................ $ 38,542 $ 4,430 $ -- $ -- $ (33,778) $ 9,194
======== ======== ========= ======== ========= ========
</TABLE>
The $80.9 million decrease in NPAs in fiscal 1996 reflects the August 1995
Loan Sale which resulted in a $34 million reduction in NPAs and the continuing
sales of REO through the Bank's regular problem asset workout process. REO
reductions due to sales and write-downs exceeded REO additions and
foreclosures during the current fiscal year, resulting in a net reduction of
$29.1 million in REO and other assets. The sale of one property in July 1995
accounted for $10.7 million of this net reduction in REO.
For the fiscal year ended June 30, 1996, 66% of NPA additions were loans and
REO that were secured by single-family residences, compared to 34% last year.
NPAs in the multi-family residential and non-residential portfolios declined
by $31.5 million and $59.7 million, to $64.1 million and $49.8 million,
respectively, in fiscal 1996. These declines were partially offset by an
increase in NPAs in the single-family residential portfolio during the same
period, from $149.2 million, or 42% of total NPAs, to $159.7 million, or 58%
of total NPAs. During the current fiscal year, NPAs in the multi-family
residential and non-residential portfolios, as a percentage of total NPAs,
declined from 27% and 31%, respectively, at June 30, 1995, to 23% and 18%,
respectively, at June 30, 1996.
The $29.3 million decrease in restructured loans in fiscal 1996 was
primarily due to the August 1995 Loan Sale, which resulted in a $15 million
reduction in restructured loans, and to $20.7 million of restructured loans
being transferred to performing status, partially offset by $5.6 million of
new restructured loans transferred from non-accrual status.
52
<PAGE>
Total delinquent loans decreased by $67.9 million in fiscal 1996 to $281.3
million at June 30, 1996. This decrease was attributable to the multi-family
residential and non-residential portfolios which declined by $24.8 million and
$41.9 million, to $59.3 million and $23.8 million, respectively, during the
year, primarily due to the August 1995 Loan Sale and an improving California
economy. Delinquent loans in the single-family portfolio were $195.4 million
at June 30, 1996 and remained unchanged compared to the balance at June 30,
1995. Single-family delinquent loans increased as a percentage of total
delinquent loans from 56% at June 30, 1995 to 69% at June 30, 1996. See Item
1. "Business--Loans Receivable--Delinquencies" for a five-year trend of
delinquent loans.
If the recent economic improvements in the Bank's principal market areas do
not continue or if California experiences 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.
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 as 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
and assumptions 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. In addition, 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, 1996 and 1995 by property type (dollars
in thousands):
<TABLE>
<CAPTION>
JUNE 30, 1996 JUNE 30, 1995
------------------------------- -------------------------------
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. $ 56,833 $ 7,580,312 0.75% $ 44,483 $ 6,325,170 0.70%
Multi-family:
5-36 units............ 48,628 1,564,542 3.11 41,736 1,673,656 2.49
37 or more units...... 26,062 400,415 6.51 31,569 478,803 6.59
Non-residential......... 47,260 1,357,225 3.48 83,086 1,630,590 5.10
Commercial.............. 4,699 10,391 45.22 4,176 22,844 18.28
Consumer................ 3,274 73,158 4.48 4,092 80,603 5.08
-------- ----------- -------- -----------
$186,756 $10,986,043 1.70% $209,142 $10,211,666 2.05%
======== =========== ======== ===========
</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.
Specific valuation allowances of $26.5 million and $19.7 million have been
established for impaired loans, which totaled $158.8 million and $262.7
million at June 30, 1996 and June 30, 1995, respectively, and are included in
the allowance for loan losses. The decrease in impaired loans during
53
<PAGE>
fiscal 1996 is primarily due to the August 1995 Loan Sale. 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, 1996 and 1995 totaled $106.5 million and $91.8 million, respectively.
Those impaired loans without related specific valuation allowances at June 30,
1996 and 1995 totaled $52.3 million and $170.9 million, respectively.
The allowance for loan losses declined by $22.4 million, to $186.8 million,
in fiscal 1996. The decrease in the allowance during this period reflects
improving NPA and delinquency trends in the multi-family and non-residential
loan portfolios, a reduced number of high-risk, large, and multiple loan
borrower relationships, an overall improvement in the multi-family residential
and non-residential loan portfolios and a reduced level of charge-offs.
Although single-family NPAs and delinquent loans have increased as a
percentage of total NPAs and total delinquent loans, respectively, during
fiscal 1996, such loans have a lower historical loss experience than those
secured by multi-family and non-residential properties, and generally result
in lower charge-offs. The Bank would, therefore, require proportionally lower
levels of allowance for loan losses. The ratios of allowance to non-accrual
loans and total gross loans at June 30, 1996 were 97.0% and 1.7%,
respectively, compared to 85.6% and 2.0%, respectively, at June 30, 1995.
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, CHARGE- JUNE 30,
1995 ADDITIONS 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>
A summary of activity in the allowance for loan losses by property type
during fiscal 1995 is as follows (in thousands):
<TABLE>
<CAPTION>
BALANCE BALANCE
JUNE 30, CHARGE- UNION UNIVERSITY JUNE 30,
1994 ADDITIONS OFFS RECOVERIES FEDERAL SAVINGS 1995
-------- --------- --------- ---------- ------- ---------- --------
<S> <C> <C> <C> <C> <C> <C> <C>
Single-family 1-4 units. $ 44,667 $36,530 $ (37,194) $ 334 $ 2,535 $(2,389) $ 44,483
Multi-family:
5-36 units............ 65,878 31,454 (54,314) -- -- (1,282) 41,736
37 or more units...... 61,867 3,235 (33,932) 800 -- (401) 31,569
Non-residential......... 137,775 (3,347) (73,602) 9,572 14,815 (2,127) 83,086
Commercial.............. 6,052 (4,284) (2,340) 4,748 -- -- 4,176
Consumer................ 4,475 2,562 (4,595) 1,840 -- (190) 4,092
-------- ------- --------- ------- ------- ------- --------
$320,714 $66,150 $(205,977) $17,294 $17,350 $(6,389) $209,142
======== ======= ========= ======= ======= ======= ========
</TABLE>
Additions to the allowance for loan losses declined by $25.8 million, to
$40.4 million, in fiscal 1996 compared to last year, reflecting management's
assessment that there is a decreased risk of loss inherent in the loan
portfolio, as evidenced by lower charge-offs and decreases in NPAs and
delinquent multi-family residential and non-residential loans. These factors
were partially offset,
54
<PAGE>
however, by increases in single-family 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.
Charge-offs declined by $133.0 million, to $73.0 million, in fiscal 1996
compared to last year. 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 $17.1 million and $20.3 million on such loans, respectively, related
to the August 1995 Loan Sale.
Recoveries in fiscal 1995 include the net recovery of $9.4 million realized
on the foreclosure and sale of a hotel located in the San Francisco airport
area which was, at the time of sale, the Bank's largest non-performing asset.
Included in the allowance for loan losses activity for fiscal 1995 is the
reduction of University Savings' allowance for loan losses, which totaled $6.4
million as of the January 6, 1995 effective date of the sale of University
Savings, and the establishment of an allowance for loan losses related to the
loans purchased in the Union Federal transaction.
If the recent economic improvements in the Bank's principal market areas do
not continue, the Bank's real estate portfolios 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 continues to emphasize the attraction of retail deposits,
especially low-cost demand deposit accounts. The Bank's ratio of deposits to
borrowings was 65%/35% at June 30, 1996 compared to a ratio of 58%/42% at June
30, 1995. The improvement in the ratio during fiscal 1996 reflects the paydown
of certain of the Bank's borrowings with proceeds from both the August 1995
Loan Sale and the CMO Sale and principal payments on loans and mortgage-backed
securities. The Bank expects to continue to replace borrowings with retail
deposits over time through a combination of retail sales efforts and
acquisitions of deposits.
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. In fiscal 1996, the Bank's total deposits decreased by
$11.0 million, to $8.7 billion at June 30, 1996.
Glendale Federal's deposit composition at June 30, 1996 and 1995 was as
follows (dollars in millions):
<TABLE>
<CAPTION>
JUNE 30
---------------------------
1996 1995
------------- -------------
% OF % OF
BALANCE TOTAL BALANCE TOTAL
------- ----- ------- -----
<S> <C> <C> <C> <C>
Checking/NOW accounts... $ 779 9% $ 662 8%
Passbook accounts....... 493 5 552 6
Money market
checking/savings....... 1,719 20 1,272 15
------ --- ------ ---
Total daily access...... 2,991 34 2,486 29
Short-term certificates
(1 year or less)....... 3,047 35 2,886 33
Long-term certificates
(over 1 year).......... 2,438 28 2,826 32
Branch and business de-
velopment jumbo certif-
icates................. 190 2 409 5
------ --- ------ ---
Total retail deposits... 8,666 99 8,607 99
Brokered certificates of
deposit................ 58 1 128 1
------ --- ------ ---
Total................... $8,724 100% $8,735 100%
====== === ====== ===
</TABLE>
55
<PAGE>
The $505 million increase in daily access deposits during fiscal 1996 was
primarily due to net inflows of $447 million and $117 million in money market
accounts and checking accounts, respectively, partially offset by net outflows
of $59 million in savings accounts. The overall increase in daily access
deposits and short-term certificate accounts during fiscal 1996 reflects the
Bank's aggressive branch marketing efforts and advertising campaign instituted
throughout California, as well as the maturation of long-term certificates of
deposit and the reinvestment of these funds in short-term certificate accounts
due to depositors' uncertainty as to the future direction of interest rates.
BORROWINGS
Total borrowings decreased by $1.6 billion during fiscal 1996, to $4.6
billion at June 30, 1996. Securities sold under agreements to repurchase
decreased by $1.9 billion, to $758 million, and FHLB borrowings increased by
$343 million during fiscal 1996, to $3.8 billion at June 30, 1996, as loan and
CMO Sale proceeds, and, to a lesser extent, principal payments on loans and
mortgage-backed securities were used to pay down such borrowings. During
fiscal 1996, the Bank extended $2.0 billion of FHLB borrowings into the two-
to five-year maturity range. Total borrowings as of June 30, 1996 included
$2.1 billion of borrowings due within one year. See "Liquidity and Asset and
Liability Management--Asset and Liability Management" below for additional
discussion of the lengthening of the Bank's borrowings structure.
STOCKHOLDERS' EQUITY
Stockholders' equity increased by $15.6 million during fiscal 1996, to
$957.5 million at June 30, 1996, primarily due to net earnings of $42.1
million, partially offset by the net unrealized loss of $11.4 million recorded
on the portfolio of mortgage-backed securities available for sale and
dividends declared of $16.2 million on the Bank's Series E Preferred Stock.
During fiscal 1996, the Bank issued 5.9 million shares of common stock in
exchange for 2.2 million shares of the Bank's Series E Preferred Stock. See
Note 18 of the Notes to Consolidated Financial Statements for additional
discussion 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 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, 1996, these available sources totaled
approximately $3.0 billion and consisted primarily of the repurchase agreement
markets.
During fiscal 1996, the Bank experienced a net cash inflow from investing
activities of $1.6 billion, consisting primarily of proceeds received from the
CMO Sale, principal payments on loans and mortgage-backed securities and
proceeds from the August 1995 Loan Sale, partially offset by loans purchased
and originated for investment. In addition, the Bank experienced positive cash
flows from operating activities during the period of $171.1 million. The
Bank's financing activities during the period resulted in a net cash outflow
of $1.6 billion, consisting principally of a net decrease in borrowings.
56
<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, 1996.
The following table is a summary of Glendale Federal's one-year GAP at the
dates indicated (dollars in millions):
<TABLE>
<CAPTION>
JUNE 30
----------------
1996 1995
------- -------
<S> <C> <C>
Interest-earning assets maturing or repricing within one
year........................................................ $11,004 $10,658
Interest-bearing liabilities maturing or repricing within one
year........................................................ 7,956 10,761
------- -------
One-year maturity GAP........................................ 3,048 (103)
Impact of interest rate swaps................................ -- 200
------- -------
Adjusted one-year GAP........................................ $ 3,048 $ 97
======= =======
Adjusted GAP as a percent of total assets.................... 21.1% 0.6%
======= =======
</TABLE>
The increase in the one-year GAP in fiscal 1996 was primarily due to a $2.8
billion decrease in liabilities maturing within one year, resulting from the
extension of $2.0 billion of FHLB borrowings into the two to five year
maturity range, the extension of $500 million of maturing certificates of
deposit into maturities greater than one year and the repayment of short-term
borrowings. These factors were partially offset by $850 million of two-year
fixed-rate FHLB borrowings and approximately $750 million of two-year and
five-year certificates of deposit entering their final year prior to maturity
during the period. The increase in the one-year GAP was also attributable to
an increase in assets maturing or repricing within one year, primarily due to
the purchase of $2.0 billion of adjustable-rate mortgage loans in the
secondary market in fiscal 1996, partially offset by the impact of the CMO
Sale.
The Bank remains subject to possible interest rate spread compression, which
would adversely impact the Bank's net interest income, if interest rates
resume the trend of increases experienced during most of calendar 1994 and
early 1995. The amount of that compression would depend upon the frequency and
severity of such interest rate fluctuations. This adverse impact would be
attributable to the lag in the repricing of the indices to which the
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. Management has
mitigated the effect of such an increase through the extension of liabilities
discussed above. See "Results of Operations--Net Interest Income" for a
discussion of the adverse impact on the Bank's net interest income from the
rise in interest rates during 1994, the Florida franchise sale and the sale of
University Savings.
57
<PAGE>
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 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 total gross loan and mortgage-backed
securities portfolios (before adjustment for the unrealized gain (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, 1996
----------------------------------
MORTGAGE- PERCENT
BACKED OF
LOANS SECURITIES TOTAL TOTAL
------- ---------- ------- -------
<S> <C> <C> <C> <C>
Adjustable:
6-month Treasury Bills.................... $ 428 $ 433 $ 861 7%
1-Year Treasury Bills..................... 3,568 982 4,550 34
11th District Cost of Funds............... 3,936 154 4,090 31
Prime..................................... 63 12 75 1
Other..................................... 212 154 366 3
------- ------ ------- ---
8,207 1,735 9,942 76
Fixed for 3-5 Years Converting to Adjust-
able....................................... 782 259 1,041 8
Fixed:
Loans receivable.......................... 1,997 -- 1,997 15
Collateralized mortgage obligations....... -- 58 58 --
Other mortgage-backed securities.......... -- 169 169 1
------- ------ ------- ---
1,997 227 2,224 16
------- ------ ------- ---
Total....................................... $10,986 $2,221 $13,207 100%
======= ====== ======= ===
<CAPTION>
JUNE 30, 1995
----------------------------------
MORTGAGE- PERCENT
BACKED OF
LOANS SECURITIES TOTAL TOTAL
------- ---------- ------- -------
<S> <C> <C> <C> <C>
Adjustable:
6-month Treasury Bills.................... $ 456 $ 518 $ 974 6%
1-Year Treasury Bills..................... 2,212 1,322 3,534 24
11th District Cost of Funds............... 4,373 185 4,558 31
Prime..................................... 74 20 94 1
Other..................................... 198 239 437 3
------- ------ ------- ---
7,313 2,284 9,597 65
Fixed for 3-5 Years Converting to Adjust-
able....................................... 581 279 860 6
Fixed:
Loans receivable.......................... 2,318 -- 2,318 16
Collateralized mortgage obligations....... -- 1,878 1,878 12
Other mortgage-backed securities.......... -- 209 209 1
------- ------ ------- ---
2,318 2,087 4,405 29
------- ------ ------- ---
Total....................................... $10,212 $4,650 $14,862 100%
======= ====== ======= ===
</TABLE>
58
<PAGE>
RESULTS OF OPERATIONS
NET INTEREST INCOME
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 an increase in the amount
by which average interest-earning assets exceeded average interest-bearing
liabilities, 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 reflects the sale of $1.7
billion of lower yielding fixed-rate CMOs in the second and third quarters of
fiscal 1996 and the purchase of higher yielding whole 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. On the liability side, higher
costing borrowings incurred to fund the sale of the Bank's Florida operations
were replaced in part with lower costing deposits obtained through branch
acquisitions at the end of the fourth quarter of fiscal 1995 and were further
reduced with proceeds from the CMO Sale in fiscal 1996. In addition,
approximately $500 million of higher costing certificates of deposit matured
during the year and were replaced with lower costing daily access accounts.
Yields on loans and mortgage-backed securities increased by 52 basis points,
to 7.45%, in fiscal 1996, compared to fiscal 1995. The changes were primarily
due to the aforementioned sales of lower yielding CMOs during fiscal 1996 and
the purchase of higher yielding loans during fiscal 1996 and 1995. The
declining level of NPAs also had a positive impact on net interest income as
the Bank was able to reinvest the proceeds from liquidation of these assets
into interest-earning assets. The average balance of NPAs in fiscal 1996 and
1995 was $302.3 million and $472.5 million, respectively. The impact of non-
accrual assets on the yield on loans and mortgage-backed securities was a
decrease of 12 basis points in fiscal 1996 and a decrease of 14 basis points
in fiscal 1995.
The yield on the investment portfolio increased by 23 basis points, to
6.78%, in the current year, compared to last year, primarily due to a year-
over-year increase in short-term interest rates.
The Bank's cost of funds increased by 32 basis points, to 5.31%, in fiscal
1996, compared to fiscal 1995. This was primarily due to the level of interest
rates, on average, remaining higher during fiscal 1996 compared to the prior
year, despite the lowering of the federal funds rate as discussed below.
Contributing to the increase was the significant change in the composition,
cost and maturity of interest-bearing liabilities as a result of the sales of
the Bank's Florida and Washington operations. These factors were partially
offset by the acquisition of approximately $1 billion of retail deposits in
the fourth quarter of fiscal 1995 and the paydown of borrowings utilizing
excess liquidity and proceeds from the CMO Sale.
The excess of average interest-earning assets over average interest-bearing
liabilities grew by $188 million, to $497 million, for fiscal 1996, compared
to last year, and was primarily attributable to the sale of the Bank's Florida
operations in December 1994 and the resulting decrease of $3.3 billion in
deposits, partially offset by a decrease of $3.0 billion in interest-earning
assets.
Average interest-earning assets decreased by $1.2 billion, to $14.6 billion,
in fiscal 1996, compared to last year, while average interest-bearing
liabilities decreased by $1.3 billion, to $14.1 billion, for the same period.
The decrease in average interest-earning assets was primarily attributable to
the mortgage-backed securities portfolio, which declined due to the CMO Sale
in the current fiscal year, and to principal payments. Average balances of
mortgage-backed securities decreased by $1.6 billion, to
59
<PAGE>
$3.4 billion, in fiscal 1996, compared to last year. The decrease in average
mortgage-backed securities was partially offset by an increase in the average
balance of the loan portfolio of $555 million, to $10.3 billion, in fiscal
1996, compared to fiscal 1995. The increase in the loan portfolio was
primarily attributable to purchases in the secondary market totaling $2.0
billion.
The decrease in average interest-bearing liabilities in fiscal 1996,
compared to fiscal 1995, was primarily due to the decrease in deposits related
to the sales of the Bank's Florida and Washington operations, partially offset
by an increase in deposits related to purchases of deposit liabilities from
Independence One and Union Federal. Contributing to the decrease in average
interest-bearing liabilities was the paydown of securities sold under
agreements to repurchase. Partially offsetting the decreases in average
deposits and securities sold under agreements to repurchase was an increase in
FHLB borrowings attributable to funding the sale of the Bank's Florida
operations and accomplishing the Bank's strategy of lengthening liabilities
through longer term, two to five year FHLB borrowings. Average deposits and
securities sold under agreements to repurchase decreased by $1.6 billion, to
$10.7 billion, in fiscal 1996, compared to last year, while average FHLB
borrowings increased by $298 million, to $3.3 billion, in the current year
over the prior 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 pays fixed interest rates and receives variable interest rates
under its swap contracts. The impact of swaps for the year ended June 30, 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, 1996, the Bank had $200 million in notional
principal amount of swaps maturing in April 1997, compared to the $307 million
in notional amount of swaps outstanding at June 30, 1995. Swaps with an
aggregate notional principal amount totaling $107 million matured during
fiscal 1996.
During fiscal 1996, the Federal Reserve Board lowered the federal funds rate
by a total of 0.75%, to 5.25%. The impact of this reduction has been a
decrease in 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 will be experienced in
yields for these assets more slowly than in the cost of the Bank's short-term
borrowings. In the current interest rate environment, the Bank would expect
its interest rate spread not to change significantly. However, future
increases in short-term interest rates could result in interest rate spread
compression. The amount of that compression would depend upon the timing and
magnitude of such interest rate movements.
During fiscal 1995, net interest income before provision for loan losses
increased by $6.4 million, to $317.7 million, compared to fiscal 1994. The
increase in fiscal 1995 was principally due to an increase in the yield-cost
spread during the first half of the fiscal year, partially offset by the
effect on the Bank's cost of funds of a generally rising interest rate
environment and the sales of the Florida franchise and University Savings. The
yield-cost spread increased by 10 basis points, to 1.92%, in fiscal 1995
compared to fiscal 1994 due to an increase of 99 basis points, to 6.91%, in
the yield on interest-earning assets, partially offset by an increase of 89
basis points, to 4.99%, in the cost of funds. Net interest income of
University Savings in fiscal 1995 and 1994 was $18.0 million (prior to its
sale in that year) and $34.2 million, respectively.
Yields on loans and mortgage-backed securities increased by 90 basis points,
to 6.93%, in fiscal 1995 compared to fiscal 1994. The change was primarily due
to the significant increase in interest rates in fiscal 1995 and the resulting
upward adjustments in the interest rate indices to which the Bank's
adjustable-rate loans and mortgage-backed securities are tied and the purchase
of higher yielding, fixed-rate and adjustable-rate whole loans. Because
management believed that the yields
60
<PAGE>
available on fixed-rate mortgage loans were high enough to justify some
lengthening of the maturity structure of its assets, the Bank purchased $1.3
billion of predominantly fixed-rate loans in the secondary market in fiscal
1995, earning estimated yields ranging from 7.62% to 9.45% and averaging
8.89%. In fiscal 1994, the Bank operated in a declining interest rate
environment and experienced substantial prepayments of higher yielding loans
and mortgage-backed securities. The funds received from these prepayments were
reinvested in loans and mortgage-backed securities bearing interest at rates
lower than those investments which prepaid.
The declining level of NPAs also had a positive impact on net interest
income as the Bank was able to reinvest the proceeds from liquidation of these
assets into interest-earning assets. The average balance of NPAs in fiscal
1995 and 1994 was $472.5 million and $833.5 million, respectively. The impact
of non-accrual assets on the yield on loans and mortgage-backed securities was
a decrease of 14 basis points in fiscal 1995 and a decrease of 28 basis points
in fiscal 1994.
Yields on the investment portfolio increased by 213 basis points, to 6.55%,
in fiscal 1995 as compared to fiscal 1994, primarily due to the increase in
short-term interest rates and to an increase in the dividend rate on FHLB
stock in the current year compared to the prior year.
The Bank's cost of funds increased during fiscal 1995 due to the rise in
interest rates and the resulting increases in rates on the Bank's short-term
liabilities, the lengthening of the maturities of both retail deposits and
FHLB advances and the significant change in the composition of interest-
bearing liabilities resulting from the Florida franchise sale. The cost of
deposits increased by 36 basis points, to 4.41%, in fiscal 1995 compared to
fiscal 1994. The cost of borrowings increased by 166 basis points, to 5.87%,
in fiscal 1995 compared to fiscal 1994. However, as interest rates began to
stabilize during the fourth quarter of fiscal 1995, the repricing of the
Bank's earning adjustable-rate assets began to outpace upward movement in the
Bank's cost of funds. Also during the second half of fiscal 1995, borrowings
obtained to fund the sale of the Florida franchise were reduced by nearly $1.6
billion, principally through the addition of lower-cost deposits obtained in
two deposit purchase transactions.
During the declining interest rate environment that existed during fiscal
1994, swaps had a negative impact on the Bank's net interest margin by
increasing the Bank's effective cost of funds by 13 basis points.
61
<PAGE>
The table in Item 1. "Business--Interest Rate Margin" depicts the average
balances of interest-earning assets and interest-bearing liabilities, the
income earned and expense recorded thereon and the resulting yield-cost
spread. The following rate/volume analysis depicts the increase (decrease) in
net interest income attributable to interest rate fluctuations (change in rate
multiplied by prior period average balance) and volume fluctuations (change in
average balance multiplied by prior period rate) when compared to the prior
year (in thousands):
<TABLE>
<CAPTION>
YEARS ENDED JUNE 30
----------------------------------------------------------
1996 VERSUS 1995 1995 VERSUS 1994
CHANGES DUE TO CHANGES DUE TO
---------------------------- ----------------------------
VOLUME RATE TOTAL VOLUME RATE TOTAL
--------- ------- -------- -------- -------- --------
<S> <C> <C> <C> <C> <C> <C>
Interest income:
Loans receivable, net.. $ 42,399 $40,030 $ 82,429 $(32,279) $ 69,139 $ 36,860
Mortgage-backed secu-
rities, net........... (103,216) 16,441 (86,775) (16,580) 64,642 48,062
--------- ------- -------- -------- -------- --------
Total loans and mort-
gage-backed securi-
ties................ (60,817) 56,471 (4,346) (48,859) 133,781 84,922
Federal funds sold and
securities purchased
under resale agree-
ments................. 290 915 1,205 (4,877) 15,148 10,271
U.S. Government and
other investment
securities............ (6,676) 3,194 (3,482) (4,826) 6,346 1,520
--------- ------- -------- -------- -------- --------
Total investments.... (6,386) 4,109 (2,277) (9,703) 21,494 11,791
--------- ------- -------- -------- -------- --------
Total interest in-
come................ (67,203) 60,580 (6,623) (58,562) 155,275 96,713
Interest expense:
Deposits--daily ac-
cess.................. 2,351 13,445 15,796 (9,068) 14,819 5,751
Deposits--certifi-
cates................. (33,105) 38,249 5,144 (71,986) 25,655 (46,331)
--------- ------- -------- -------- -------- --------
Total deposits....... (30,754) 51,694 20,940 (81,054) 40,474 (40,580)
Securities sold under
agreements to repur-
chase
and other short-term
borrowings............ (61,430) 4,588 (56,842) (4,665) 59,257 54,592
Borrowings from FHLB... 18,002 3,698 21,700 45,842 30,622 76,464
Other borrowings....... (4,163) (3,604) (7,767) 266 (467) (201)
--------- ------- -------- -------- -------- --------
Total borrowings..... (47,591) 4,682 (42,909) 41,443 89,412 130,855
--------- ------- -------- -------- -------- --------
Total interest ex-
pense............... (78,345) 56,376 (21,969) (39,611) 129,886 90,275
--------- ------- -------- -------- -------- --------
Net interest income..... $ 11,142 $ 4,204 $ 15,346 $(18,951) $ 25,389 $ 6,438
========= ======= ======== ======== ======== ========
</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.
PROVISION FOR LOAN LOSSES
Provisions for loan losses totaled $40.4 million, $66.2 million and $139.7
million in fiscal 1996, 1995 and 1994, respectively. The reduction in the
provision was primarily due to declining NPAs and delinquent loans in the
multi-family residential and non-residential portfolios, lower overall charge-
offs and management's assessment that there is a decreased risk of loss
inherent in these portfolios. NPAs at June 30, 1996 totaled $274.6 million,
which represents a 23% decline from the $355.5 million of NPAs recorded at
June 30, 1995 and a 58% decline from the $661.0 million recorded at June 30,
1994. The allowance for loan losses is determined based on 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".
LOAN SERVICING INCOME, NET
Loan servicing income, net, decreased by $6.3 million, 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
62
<PAGE>
Bank's servicing assets. In the September 1995 quarter, an adjustment totaling
$3.7 million was made to purchased mortgage servicing rights due to an
increase in prepayment expectations. In the same quarter, an adjustment of
$2.2 million was made to the carrying value of the Bank's capitalized
servicing fees receivable due to changes in the underlying assumptions
relating to that asset. If prepayment expectations increase from the levels as
of June 30, 1996, further adjustments to the value of the Bank's servicing
assets may be necessary depending upon the frequency and magnitude of such
increases. During fiscal 1996, the Bank purchased servicing rights relating to
$3.7 billion of loans for $50.8 million.
Loan servicing income, net, increased by $13.0 million, to $30.5 million, in
fiscal 1995, compared to fiscal 1994. This increase was due to reduced levels
of amortization of the Bank's capitalized servicing fees receivable in fiscal
1995 compared to fiscal 1994 resulting from a reduced level of loan
prepayments. The increase in loan servicing income was also attributable to
increased servicing fees earned, partially offset by increased amortization,
related to the Bank's purchases of $2.2 billion of loan servicing rights in
the fourth quarter of fiscal 1994 and $2.8 billion of loan servicing rights
purchased in fiscal 1995.
The Bank's portfolio of loans serviced for others totaled $14.1 billion at
June 30, 1996, and included $1.9 billion of loans sub-serviced by a third
party which will be transferred to the Bank's principal loan servicing system
in the first quarter of fiscal 1997. Loans serviced for others at June 30,
1995 and 1994 totaled $11.7 billion and $7.8 billion, respectively.
OTHER FEES AND SERVICE CHARGES
Other fees and service charges increased by $6.9 million, 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.
Other fees and service charges decreased by $4.2 million, to $38.9 million,
in fiscal 1995 compared to fiscal 1994 due primarily to the decrease in
customer accounts held by the Bank's brokerage subsidiary resulting from the
sale of the Bank's Florida franchise and to an overall decrease in brokerage
activity.
GAIN (LOSS) ON SALE OF LOANS AND MORTGAGE-BACKED SECURITIES, NET
Loss on sale of loans and mortgage-backed securities in fiscal 1996 was
$34.9 million and reflects primarily 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 loans and mortgage-backed securities in fiscal 1995 was
$11.6 million and consisted primarily of provisions for loss related to loans
sold in prior years subject to recourse obligations and fees for recourse
removal transactions. Loans and mortgage-backed securities sales resulted in a
net gain of $1.8 million in fiscal 1994. The net gain was primarily due to a
$19.6 million gain on the sale of $783 million of mortgage-backed securities
which were sold as part of the funding strategy for the Florida franchise
sale, offset by $19.2 million in provision for losses on loans sold with
recourse obligations and fees for recourse removal transactions.
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
63
<PAGE>
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. The
Florida franchise sale gain does not reflect a provision for market value
adjustment on the sale of the Florida banking offices of approximately $136
million that was recorded in fiscal 1994.
GENERAL AND ADMINISTRATIVE EXPENSES
General and administrative expenses increased by $5.0 million, to $248.9
million, in fiscal 1996 compared to fiscal 1995. The increase reflects 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 current year 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. General and
administrative expenses are expected to stabilize at the levels experienced
during the fourth quarter of fiscal 1996, but may increase in future periods
as the Bank expands its business lines and continues to maintain a higher
level of marketing activity. Management expects that the new business lines
will result in additional fee income, higher yielding loans and lower costing
deposits, but these benefits are expected to lag the increase in expenditures.
General and administrative expenses decreased by $48.1 million, to $243.8
million, in fiscal 1995 compared to fiscal 1994. The decrease reflects the
sales of University Savings and the Bank's Florida operations, as well as the
Bank's efforts to reduce general and administrative expenses through
outsourcing of functions and further consolidation of back-office operations,
partially offset by an increase in advertising and promotion expense incurred
to support the Bank's lending and deposit products. University Savings
incurred $6.6 million and $13.6 million of general and administrative expenses
during fiscal 1995 and 1994, respectively.
OPERATIONS OF REO
Operations of REO resulted in losses of $8.4 million, $15.0 million and
$24.1 million in fiscal 1996, 1995 and 1994, respectively. 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
current period 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 loans and REO mentioned earlier. 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 current
period 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. Losses in fiscal
1994 were primarily due to $26.4 million in provisions to adjust the REO
portfolio to current market value, and $18.0 million in operating expenses,
offset by gains realized on the sale of REO properties (after market valuation
adjustments) of $20.0 million.
The decline in losses for the current year, compared to the prior year,
reflects a decrease in the level of new REOs and a shift in the composition of
the inventory from multi-family residential and non-residential properties to
smaller balance single-family residential properties. Total REO decreased by
$27.5 million, to $78.2 million as of June 30, 1996, compared to $105.7
million at June 30, 1995, while the percentage of single-family residential
properties to total REO increased to 48% as of June 30, 1996, compared to 34%
at June 30, 1995. Foreclosures of single-family residences represented 61% of
the total dollar amount of foreclosures for fiscal 1996, compared to 31% for
fiscal 1995.
64
<PAGE>
AMORTIZATION OF GOODWILL AND OTHER INTANGIBLE ASSETS
Amortization of goodwill totaled $5.1 million, $1.7 million and $9.8 million
in fiscal 1996, 1995 and 1994, respectively. The current year increase, as
compared to the prior year, reflects the amortization of the premium recorded
in the 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. The decrease in fiscal 1995,
compared to fiscal 1994, reflects the sales of University Savings and the
Bank's Florida franchise in fiscal 1995, the write-off of $136.2 million of
goodwill and other assets associated with the Florida franchise in fiscal 1994
and the concurrent reclassification of the remaining $192 million of
unamortized Florida goodwill as "held for sale" in the Bank's Consolidated
Statement of Financial Condition.
INCOME TAX PROVISION (BENEFIT)
The Bank recorded income tax provisions before extraordinary items of $21.3
million and $52.1 million in fiscal 1996 and 1995, respectively, and an income
tax benefit before extraordinary items of $10.2 million in fiscal 1994. The
effective tax rates in those fiscal years were 33.7%, 41.6% and (4.4%),
respectively. Changes in the effective rates are discussed in Note 14 of the
Notes to Consolidated Financial Statements.
The extraordinary items recorded in fiscal 1994 permitted the Bank to
recognize tax benefits on a portion of its previously unbenefited book net
operating loss carryover from 1993. In accordance with Statement of Financial
Accounting Standards No. 109, "Accounting for Income Taxes" ("SFAS 109"), the
tax benefit of $10.2 million from this source was recognized in loss before
extraordinary items in fiscal 1994. 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.
As of June 30, 1996, the Bank had no net operating loss carryforwards and
had utilized nearly all of its alternative minimum tax credit carryforwards to
reduce its deferred tax liability. As a result, earnings for fiscal 1997 are
expected to be taxable at the combined federal and state statutory rate of
42%.
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.
Extraordinary items, net for fiscal 1994 consisted of a $14.1 million gain
(net of income taxes of $9.6 million) resulting from the exchange of $49.1
million of GLENFED's convertible subordinated debentures for common stock of
the Bank in the Recapitalization.
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,
65
<PAGE>
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 71 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 Glendale Federal's definitive Proxy Statement filed with the
OTS pursuant to Regulation 14A for use in connection with Glendale Federal's
Annual Meeting of Shareholders to be held on October 22, 1996 ("Proxy
Statement") appearing under the caption "Election of Directors" is
incorporated herein by reference.
ITEM 11. EXECUTIVE COMPENSATION
That portion of Glendale Federal'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 Glendale Federal's Proxy Statement appearing under the
caption "Beneficial Ownership of Glendale Federal's Securities" is
incorporated herein by reference.
ITEM 13. CERTAIN RELATIONSHIPS AND RELATED TRANSACTIONS
That portion of Glendale Federal's Proxy Statement appearing under the
caption "Executive Compensation and Other Information--Certain Relationships
and Related Transactions" is incorporated herein by reference.
66
<PAGE>
PART IV
ITEM 14. EXHIBITS, FINANCIAL STATEMENT SCHEDULES AND REPORTS ON FORM 8-K
<TABLE>
<CAPTION>
EXHIBIT
NUMBER
-------
<C> <S>
3.1(b) Amended and Restated Charter of the Bank. (3.1)
3.2(c) Amended and Restated Bylaws of the Bank. (3.2)
4.1(b) Section 5 of the Amended and Restated Charter of the Bank. (Included
in Exhibit 3.1)
4.3(b) Supplementary Charter Section to Section 5(C) of the Amended and
Restated Charter of the Bank dated August 23, 1993, regarding
Noncumulative Preferred Stock, Series E. (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)
4.9(a) Indenture dated as of March 15, 1986 between GLENFED and
Manufacturers Hanover Trust Company, with respect to $75,000,000 in
aggregate principal amount of 7.75% Convertible Subordinated
Debentures Due 2001 ("Indenture"). (4.2)
4.10(b) First Supplemental Indenture dated as of August 26, 1993 among
GLENFED, the Bank, Glendale Investment Corporation and Chemical Bank
to Indenture. (4.10)
10.3(c) Amended and Restated 1993 Stock Option and Long-Term Performance
Incentive Plan. (10.3)
10.4 Sheltered Pay Plan.
10.6 Board of Directors Retirement Plan, as amended.
10.7 Employment Agreement entered into by Glendale Federal with Stephen
J. Trafton, as
amended.
10.8(d) Form of severance agreement. Executed agreements are with Vincent L.
Beatty,
William J. Birch, Howard C. Everakes, Richard A. Fink, John E.
Haynes, Terry D. Hess, Kathryn D. Snyder and Robert R. Trujillo.
(10.8)
11.1 Statement Regarding Computation of Per Share Earnings (Loss).
22.1 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, 1993
under the Exhibit Numbers indicated.
(c) Exhibit previously filed with Glendale Federal 10-K, dated June 30, 1994
under the Exhibit Numbers indicated.
(d) Exhibit previously filed with Glendale Federal 10-K, dated June 30, 1995
under the Exhibit Number indicated.
67
<PAGE>
FINANCIAL STATEMENTS AND SCHEDULES
See Index to Financial Statements on page 71, 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, 1996
None
68
<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 13, 1996
By: /s/ Stephen J. Trafton
-------------------------------
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>
<CAPTION>
<S> <C>
/s/ Stephen J. Trafton
- ----------------------------- Date: September 13, 1996
Stephen J. Trafton
Chairman of The Board, Chief
Executive Officer and President
(Principal Executive Officer)
/s/ John E. Haynes
- ----------------------------- Date: September 13, 1996
John E. Haynes
Executive Vice President and
Chief Financial Officer
(Principal Financial Officer)
/s/ Gregory L. Hendry
- ----------------------------- Date: September 13, 1996
Gregory L. Hendry
Senior Vice President and
Chief Accounting Officer
(Principal Accounting Officer)
/s/ Dean R. Bailey
- ------------------------------ Date: September 13, 1996
Dean R. Bailey, Director
/s/ Diane C. Creel
- ------------------------------ Date: September 13, 1996
Diane C. Creel, Director
- ------------------------------
Richard H. Daniel, Director
/s/ Brian P. Dempsey
- ------------------------------- Date: September 13, 1996
Brian P. Dempsey, Director
/s/ Richard A. Fink
- ------------------------------- Date: September 13, 1996
Richard A. Fink, Director
/s/ John F. King
- ------------------------------- Date: September 13, 1996
John F. King, Director
</TABLE>
69
<PAGE>
<TABLE>
<CAPTION>
<S> <C>
/s/ John F. Kooken
- ------------------------------- Date: September 13, 1996
John F. Kooken, Director
- -------------------------------
Orin S. Kramer, Director
/s/ Gilbert R. Vasquez
- -------------------------------- Date: September 13, 1996
Gilbert R. Vasquez, Director
/s/ E. Gex Williams, Jr.
- -------------------------------- Date: September 13, 1996
E. Gex Williams, Jr., Director
</TABLE>
70
<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, 1996 and
1995................................................................... F-3
Consolidated Statements of Operations for years ended June 30, 1996,
1995 and 1994.......................................................... F-4
Consolidated Statements of Changes in Stockholders' Equity for years
ended June 30, 1996, 1995 and 1994..................................... F-5
Consolidated Statements of Cash Flows for years ended June 30, 1996,
1995 and 1994.......................................................... F-6
Notes to Consolidated Financial Statements.............................. F-8
</TABLE>
71
<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 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 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, 1996, 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 July 23, 1996
- ------------------------------- ----------------
Stephen J. Trafton Date
Chairman of the Board,
Chief Executive Officer and President
/s/ John E. Haynes July 23, 1996
- ------------------------------- ----------------
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, 1996 and 1995, 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, 1996. 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, 1996 and
1995 and the results of their operations and their cash flows for each of the
years in the three-year period ended June 30, 1996 in conformity with
generally accepted accounting principles.
KPMG Peat Marwick LLP
Los Angeles, California
July 23, 1996
F-2
<PAGE>
GLENDALE FEDERAL BANK AND SUBSIDIARIES
CONSOLIDATED STATEMENTS OF FINANCIAL CONDITION
(DOLLARS IN THOUSANDS EXCEPT SHARE DATA)
<TABLE>
<CAPTION>
JUNE 30
------------------------
1996 1995
----------- -----------
<S> <C> <C>
ASSETS
Cash and amounts due from banks...................... $ 153,608 $ 139,697
Federal funds sold and securities purchased under re-
sale agreements..................................... 433,000 296,000
Other debt securities held to maturity, at amortized
cost (fair value: $18,921 in 1996 and $42,406 in
1995)............................................... 18,877 42,326
Mortgage-backed securities held to maturity, net
(fair value: $1,351,344 in 1996 and $4,632,615 in
1995)............................................... 1,356,235 4,721,407
Mortgage-backed securities available for sale, at
fair value.......................................... 884,555 2,050
Loans receivable, net of allowance for loan losses of
$186,756 in 1996 and $209,142 in 1995............... 10,694,594 9,741,096
Loans held for sale, at lower of cost or market...... 33,315 158,201
Real estate held for sale or investment.............. 12,072 13,303
Real estate acquired in settlement of loans.......... 78,249 105,730
Interest receivable.................................. 89,237 96,395
Investment in capital stock of Federal Home Loan
Bank, at cost....................................... 192,842 185,799
Premises and equipment, at cost, less accumulated de-
preciation.......................................... 126,368 163,116
Mortgage servicing rights............................ 93,970 55,962
Capitalized servicing fees receivable................ 33,429 43,160
Goodwill and other intangible assets, less accumu-
lated amortization ($16,580 in 1996 and $11,433 in
1995)............................................... 59,216 63,538
Other assets......................................... 196,997 216,466
----------- -----------
$14,456,564 $16,044,246
=========== ===========
LIABILITIES AND STOCKHOLDERS' EQUITY
LIABILITIES:
Deposits............................................. $ 8,723,976 $ 8,734,880
Securities sold under agreements to repurchase....... 758,050 2,695,176
Borrowings from the Federal Home Loan Bank........... 3,838,000 3,495,000
Other borrowings..................................... 10,599 28,883
Other liabilities and accrued expenses............... 131,224 121,844
Income taxes payable................................. 37,264 26,616
----------- -----------
Total liabilities................................. 13,499,113 15,102,399
----------- -----------
STOCKHOLDERS' EQUITY:
Preferred stock, Series E, $1.00 par value per share
and $25.00 liquidation preference per share
(8,050,000 shares authorized; 5,823,882 shares
issued and outstanding at June 30,1996; 8,050,000
shares issued and outstanding at June 30, 1995)..... 5,824 8,050
Common stock, $1.00 par value per share (100,000,000
shares authorized; 46,729,698 shares issued and out-
standing at June 30, 1996; 40,719,718 shares issued
and outstanding at June 30, 1995)................... 46,730 40,720
Additional paid-in capital........................... 790,724 793,372
Net unrealized holding gain (loss) on mortgage-backed
and other debt securities available for sale........ (11,391) 37
Retained earnings--substantially restricted.......... 125,564 99,668
----------- -----------
Total stockholders' equity........................ 957,451 941,847
----------- -----------
$14,456,564 $16,044,246
=========== ===========
</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
---------------------------------
1996 1995 1994
---------- ---------- ---------
<S> <C> <C> <C>
Interest income:
Loans receivable.......................... $ 803,432 $ 721,003 $ 684,143
Mortgage-backed securities................ 216,812 303,587 255,525
Investments............................... 59,791 62,068 50,277
---------- ---------- ---------
Total interest income.................... 1,080,035 1,086,658 989,945
Interest expense:
Deposits.................................. 433,834 412,894 453,474
Short-term borrowings..................... 108,839 165,681 111,089
Other borrowings.......................... 204,297 190,364 114,101
---------- ---------- ---------
Total interest expense................... 746,970 768,939 678,664
---------- ---------- ---------
Net interest income before provision for
loan losses............................. 333,065 317,719 311,281
Provision for loan losses................... 40,350 66,150 139,726
---------- ---------- ---------
Net interest income...................... 292,715 251,569 171,555
Other income:
Loan servicing income, net................ 24,208 30,460 17,491
Other fees and service charges............ 45,769 38,851 43,022
Gain (loss) on sale of loans and mortgage-
backed securities, net................... (34,912) (11,579) 1,764
Gain on sale of banking operations........ -- 73,713 --
Other income (loss), net.................. (707) 3,001 (1,936)
---------- ---------- ---------
Total other income....................... 34,358 134,446 60,341
Other expenses:
Compensation and employee benefits........ 101,502 105,218 126,037
Occupancy expense, net.................... 29,698 31,433 37,691
Regulatory insurance...................... 27,491 29,077 38,233
Advertising and promotion................. 24,798 18,855 16,285
Furniture, fixtures and equipment......... 11,605 14,559 24,793
Stationery, supplies and postage.......... 10,158 9,065 11,174
Other general and administrative expenses. 43,612 35,634 37,753
---------- ---------- ---------
Total general and administrative ex-
penses.................................. 248,864 243,841 291,966
Operations of real estate held for sale or
investment............................... 1,242 (31) 2,690
Operations of real estate acquired in set-
tlement of loans......................... 8,426 15,034 24,089
Amortization of goodwill and other intan-
gible assets............................. 5,147 1,724 9,764
Write-off of assets held for Florida dis-
position................................. -- -- 136,209
---------- ---------- ---------
Total other expenses..................... 263,679 260,568 464,718
---------- ---------- ---------
Earnings (loss) before income tax provision
(benefit) and extraordinary items.......... 63,394 125,447 (232,822)
Income tax provision (benefit).............. 21,342 52,146 (10,171)
---------- ---------- ---------
Earnings (loss) before extraordinary items.. 42,052 73,301 (222,651)
Extraordinary items, net.................... -- 1,755 14,092
---------- ---------- ---------
Net earnings (loss)..................... 42,052 75,056 (208,559)
Dividends declared on preferred stock....... 16,156 17,668 13,759
Premium on exchange of Series E Preferred
Stock for common stock..................... 9,443 -- --
---------- ---------- ---------
Earnings (loss) available for common share-
holders.................................... $ 16,453 $ 57,388 $(222,318)
========== ========== =========
Earnings (loss) per share:
Primary:
Earnings (loss) before extraordinary
items................................... $ 0.36 $ 1.28 $ (6.48)
Net earnings (loss)...................... $ 0.36 $ 1.32 $ (6.10)
Fully diluted:
Earnings (loss) before extraordinary
items................................... $ 0.35 $ 1.16 $ (6.48)
Net earnings (loss)...................... $ 0.35 $ 1.19 $ (6.10)
</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>
PREFERRED STOCK PREFERRED STOCK PREFERRED STOCK
SERIES B AND C SERIES D SERIES E COMMON STOCK ADDITIONAL
--------------------- ------------------- ------------------- ------------------ PAID-IN
SHARES AMOUNT SHARES AMOUNT SHARES AMOUNT SHARES AMOUNT CAPITAL
----------- -------- ---------- ------- ---------- ------- ---------- ------- ----------
<S> <C> <C> <C> <C> <C> <C> <C> <C> <C>
Balance, June
30, 1993........ 13,844,183 $ 13,844 -- $ -- -- $ -- 1,366,092 $ 1,366 $380,479
Issuance of Se-
ries D Preferred
Stock for
Series B and C
Preferred Stock. (13,844,183) (13,844) 8,889,350 8,889 -- -- -- -- 2,254
Issuance of Se-
ries E Preferred
Stock........... -- -- -- -- 8,050,000 8,050 -- -- 182,770
Issuance of com-
mon stock of the
Bank............ -- -- -- -- -- -- 27,902,511 27,903 207,386
Issuance of
common stock of
the Bank in
exchange for
GLENFED
debentures...... -- -- -- -- -- -- 2,505,259 2,505 20,042
Conversion of
Series D Pre-
ferred Stock
into common
stock........... -- -- (5,961,697) (5,961) -- -- 5,961,697 5,961 --
Net unrealized
holding loss on
debt securities
available for
sale............ -- -- -- -- -- -- -- -- --
Stock options
exercised....... -- -- -- -- -- -- 1,875 2 15
Dividends de-
clared on pre-
ferred stock
($0.069 per
share, Series D
and $1.677 per
share, Series
E).............. -- -- -- -- -- -- -- -- --
Net loss........
----------- -------- ---------- ------- ---------- ------- ---------- ------- --------
Balance, June
30, 1994........ -- -- 2,927,653 2,928 8,050,000 8,050 37,737,434 37,737 792,946
Conversion of
Series D Pre-
ferred Stock
into common
stock........... -- -- (2,927,653) (2,928) -- -- 2,927,653 2,928 --
Net unrealized
holding gain on
debt securities
available for
sale............ -- -- -- -- -- -- -- -- --
Stock options
exercised....... 52,500 53 426
5-year warrants
exercised....... -- -- -- -- -- -- 2,131 2 --
Dividends de-
clared on pre-
ferred stock
($0.022 per
share, Series D
and $2.188 per
share, Series
E).............. -- -- -- -- -- -- -- -- --
Net earnings.... -- -- -- -- -- -- -- -- --
----------- -------- ---------- ------- ---------- ------- ---------- ------- --------
Balance, June
30, 1995........ -- -- -- -- 8,050,000 8,050 40,719,718 40,720 793,372
Exchange of Se-
ries E Preferred
Stock for common
stock........... -- -- -- -- (2,226,118) (2,226) 5,901,771 5,902 (3,676)
Net unrealized
holding loss on
debt securities
available for
sale............ -- -- -- -- -- -- -- -- --
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)...... -- -- -- -- -- -- -- -- --
Net earnings.... -- -- -- -- -- -- -- -- --
----------- -------- ---------- ------- ---------- ------- ---------- ------- --------
Balance, June
30, 1996........ -- $ -- -- $ -- 5,823,882 $ 5,824 46,729,698 $46,730 $790,724
=========== ======== ========== ======= ========== ======= ========== ======= ========
<CAPTION>
NET UNREALIZED
HOLDING GAIN
(LOSS) ON
MORTGAGE-BACKED
AND OTHER TOTAL
DEBT SECURITIES RETAINED STOCKHOLDERS'
AVAILABLE FOR SALE EARNINGS* EQUITY
------------------ ---------- -------------
<S> <C> <C> <C>
Balance, June
30, 1993........ $ -- $ 264,598 $ 660,287
Issuance of Se-
ries D Preferred
Stock for
Series B and C
Preferred Stock. -- -- (2,701)
Issuance of Se-
ries E Preferred
Stock........... -- -- 190,820
Issuance of com-
mon stock of the
Bank............ -- -- 235,289
Issuance of
common stock of
the Bank in
exchange for
GLENFED
debentures...... -- -- 22,547
Conversion of
Series D Pre-
ferred Stock
into common
stock........... -- -- --
Net unrealized
holding loss on
debt securities
available for
sale............ (5,727) -- (5,727)
Stock options
exercised....... -- -- 17
Dividends de-
clared on pre-
ferred stock
($0.069 per
share, Series D
and $1.677 per
share, Series
E).............. -- (13,759) (13,759)
Net loss........ (208,559) (208,559)
------------------ ---------- -------------
Balance, June
30, 1994........ (5,727) 42,280 878,214
Conversion of
Series D Pre-
ferred Stock
into common
stock........... -- -- --
Net unrealized
holding gain on
debt securities
available for
sale............ 5,764 -- 5,764
Stock options
exercised....... -- -- 479
5-year warrants
exercised....... -- -- 2
Dividends de-
clared on pre-
ferred stock
($0.022 per
share, Series D
and $2.188 per
share, Series
E).............. -- (17,668) (17,668)
Net earnings.... -- 75,056 75,056
------------------ ---------- -------------
Balance, June
30, 1995........ 37 99,668 941,847
Exchange of Se-
ries E Preferred
Stock for common
stock........... -- -- --
Net unrealized
holding loss on
debt securities
available for
sale............ (11,428) -- (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) (16,156)
Net earnings.... -- 42,052 42,052
------------------ ---------- -------------
Balance, June
30, 1996........ $(11,391) $ 125,564 $ 957,451
================== ========== =============
</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
-------------------------------------
1996 1995 1994
----------- ----------- -----------
<S> <C> <C> <C>
CASH FLOWS FROM OPERATING ACTIVITIES:
Net earnings (loss).................... $ 42,052 $ 75,056 $ (208,559)
Adjustments to reconcile net earnings
(loss) to net cash provided by operat-
ing activities:
Amortization of discounts and premi-
ums, net............................. 8,054 13,709 55,412
Amortization of deferred loan fees.... (5,546) (9,740) (13,108)
Provision for loan losses............. 40,350 66,150 139,726
(Gain) loss on sale of loans and mort-
gage-backed securities, net.......... 34,912 11,579 (1,764)
Gain on sale of University Savings
Bank................................. -- (50,713) --
Gain on sale of Florida banking opera-
tions................................ -- (23,000) --
Depreciation and amortization......... 38,674 35,998 47,651
Provision for losses on real estate... 11,610 16,323 28,777
Gain on sale of real estate........... (10,880) (10,310) (20,040)
Amortization of goodwill and other in-
tangible assets...................... 5,147 1,724 9,764
Write-off of assets held for Florida
disposition.......................... -- -- 136,209
Provision for deferred income taxes... 19,132 23,873 6,294
Extraordinary items, net.............. -- (1,755) (14,092)
Net change in loans and mortgage-
backed securities originated or pur-
chased for resale.................... (2,649) (10,232) 54,225
(Increase) decrease in interest re-
ceivable............................. 7,158 (11,324) 6,585
FHLB stock dividend received.......... (9,612) (8,259) (5,671)
(Increase) decrease in other assets... 20,298 (6,881) (17,710)
Decrease in other liabilities......... (3,341) (41,332) (84,125)
Other items, net...................... (24,286) 7,613 29,973
----------- ----------- -----------
Total adjustments..................... 129,021 3,423 358,106
----------- ----------- -----------
Net cash provided by operating activi-
ties.................................. 171,073 78,479 149,547
----------- ----------- -----------
CASH FLOWS FROM INVESTING ACTIVITIES:
Net decrease in other debt securities
with original maturities of 3 months
or less............................... 4,241 7,583 458,056
Proceeds from sale of Florida banking
operations............................ -- 243,005 --
Proceeds from sale of University Sav-
ings Bank............................. -- 205,147 --
Purchase of other debt securities held
to maturity........................... (9,800) (20,607) (69,592)
Proceeds from maturities of other debt
securities held to maturity........... 29,145 14,685 27,492
Purchase of other debt securities
available for sale.................... -- -- (68,918)
Proceeds from maturities of other debt
securities available for sale......... -- 21,000 10,000
Purchase of mortgage-backed securities
held to maturity...................... (2,982) (1,286) (3,514,038)
Principal payments on mortgage-backed
securities held to maturity........... 495,999 697,046 2,411,437
Proceeds from sale of mortgage-backed
securities held to maturity........... -- -- 771,595
Purchase of mortgage-backed securities
available for sale.................... (113,218) -- (94,600)
Principal payments on mortgage-backed
securities available for sale......... 355,975 14,835 62,709
Proceeds from sale of mortgage-backed
securities available for sale......... 1,671,934 -- 52,030
Loans originated (net of refinances)
for investment........................ (364,471) (631,545) (1,041,996)
Loans purchased for investment......... (2,107,509) (1,549,955) (521,357)
Net change in undisbursed loan funds... 7,507 (11,073) (5,509)
Principal payments on loans held for
investment............................ 1,428,501 892,846 1,251,881
Proceeds from sale of loans held for
investment............................ 159,079 143,943 244,460
Cash invested in real estate........... (16,115) (22,046) (44,337)
Cash received from real estate invest-
ments and sale of real estate acquired
in settlement of loans................ 108,482 174,004 170,229
Purchase of FHLB stock................. (17,187) (52,603) (15,733)
Redemption of FHLB stock............... 19,756 2,882 8,116
Net (increase) decrease in premises and
equipment............................. 20,559 52,251 (20,712)
Purchase of mortgage servicing rights.. (50,836) (51,537) (11,330)
Premiums paid on deposits purchased.... -- (11,297) --
----------- ----------- -----------
Net cash provided by investing activi-
ties.................................. 1,619,060 117,278 59,883
----------- ----------- -----------
</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
-------------------------------------
1996 1995 1994
----------- ----------- -----------
<S> <C> <C> <C>
CASH FLOWS FROM FINANCING ACTIVITIES:
Net decrease in deposits................ (10,904) (1,730,040) (695,723)
Net change in short-term borrowings with
original maturities of 3 months or
less................................... (1,937,126) 1,710,120 (1,664,817)
Proceeds from funding of securities sold
under agreements to repurchase......... -- 815,902 1,794,861
Repayment of securities sold under
agreements to repurchase............... -- (2,013,340) (971,783)
Proceeds from fundings of FHLB advances. 2,988,000 2,300,000 2,274,100
Repayments of FHLB advances............. (2,645,000) (1,197,000) (1,940,000)
Sale of FHLB advances................... -- (39,057) --
Repayment of other borrowings........... (18,284) (69,917) --
Proceeds from issuance of Series E Pre-
ferred Stock........................... -- -- 201,250
Proceeds from issuance of Common Stock.. 1,136 481 250,025
Payment of dividends on preferred stock. (17,044) (17,746) (9,279)
Payment of offering costs............... -- -- (27,983)
----------- ----------- -----------
Net cash used by financing activities... (1,639,222) (240,597) (789,349)
----------- ----------- -----------
Net increase (decrease) in cash and cash
equivalents............................ 150,911 (44,840) (579,919)
Cash and cash equivalents at beginning
of year................................ 435,697 480,537 1,060,456
----------- ----------- -----------
Cash and cash equivalents at end of
year................................... $ 586,608 $ 435,697 $ 480,537
=========== =========== ===========
</TABLE>
See accompanying Notes to Consolidated Financial Statements
F-7
<PAGE>
GLENDALE FEDERAL BANK AND SUBSIDIARIES
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
JUNE 30, 1996, 1995 AND 1994
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") which, before August 26, 1993, was a subsidiary of GLENFED, Inc.
("GLENFED"), a savings and loan holding company. 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 agency services and
discount securities brokerage. 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, 1996. Certain
reclassifications have been made to prior years' consolidated financial
statements to conform to the June 30, 1996 presentation.
RISKS AND UNCERTAINTIES
In the normal course of its business, the Bank encounters two significant
types of risk: economic and regulatory. There are three main components of
economic risk: interest rate risk, credit risk and market risk. The Bank is
subject to interest rate risk to the degree that its interest-bearing
liabilities mature or reprice at different speeds, or on different bases, than
its interest-earning assets. Credit risk is the risk of default on the Bank's
loan portfolio that results from 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, purchased mortgage servicing rights, and
capitalized servicing fees receivable.
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.
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, certificates of deposit 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, 1996 and 1995, the required reserves
totaled $60,944,000 and $45,862,000, respectively. Actual reserves totaled
$63,491,000 and $47,012,000 at June 30, 1996 and 1995, respectively.
F-8
<PAGE>
GLENDALE FEDERAL BANK AND SUBSIDIARIES
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS--(CONTINUED)
JUNE 30, 1996, 1995 AND 1994
INVESTMENTS IN DEBT SECURITIES
The Bank's investment in debt securities principally consists 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 adopted Statement of Financial Accounting
Standards No. 115, "Accounting for Certain Investments in Debt and Equity
Securities" ("SFAS 115") as of July 1, 1993. In accordance with SFAS 115, the
Bank classifies its investment in debt 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, 1996 or
1995.
In November 1995, the Financial Accounting Standards Board (the "FASB")
issued a Special Report as an aid in understanding and implementing SFAS 115.
The Special Report included guidance that caused the Bank to reassess the
appropriateness of the classifications of all securities held and account for
any resulting reclassifications at fair value in accordance with SFAS 115.
During the second quarter of fiscal 1996, the Bank, in accordance with the
Special Report, reclassified $2.8 billion of mortgage-backed securities from
held to maturity to available for sale. See Note 6--Mortgage-Backed Securities
for additional information.
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 premiums or the accretion of any related 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 loans and
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 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.
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 had previously designated substantially all originations of
fixed-rate residential 1-4 unit loans as being held for sale. The Bank also
originates and/or purchases fixed-rate loans for its own portfolio, which are
designated as such at the time of origination or purchase based on a specific
identification method, that meet certain yield and other guidelines. Fixed-
rate 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 and mortgage-backed
securities, net" in the Consolidated Statement of Operations. Realized gains
and losses from the sale of loans receivable are computed under the specific
identification method.
F-9
<PAGE>
GLENDALE FEDERAL BANK AND SUBSIDIARIES
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS--(CONTINUED)
JUNE 30, 1996, 1995 AND 1994
GAINS AND LOSSES FROM SALE OF LOANS
The Bank sells whole 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 and
the portion retained on the date such loans were acquired or, if that is not
determinable, 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 the present value of the
difference between the yield on the loans and the yield to be paid to the
buyer, reduced by the normal servicing fees applicable to comparable servicing
arrangements, over the estimated remaining lives of those loans using market
prepayment and discount rate assumptions. The resulting deferred discount or
premium ("capitalized servicing fees receivable") is amortized as an addition
to or deduction from loan servicing income using the interest method, adjusted
for actual prepayments. The Bank periodically reviews the remaining premium to
ensure that it does not exceed the present value of the estimated future
servicing fees, using estimates of prepayments based on trends in actual
prepayment experience. In the event that actual prepayments exceed the
assumptions used in determining the gain or loss, the deferred premium is
adjusted through a charge to loan servicing income.
If loans are sold with recourse, the estimated liability under the recourse
provision is provided for in the computation of the gain or loss. The amount
of recourse liability recorded by the Bank was $14.2 million and $12.8 million
at June 30, 1996 and 1995, respectively. Such amounts were included in "Other
liabilities and accrued expenses" on the Consolidated Statements of Financial
Condition.
ALLOWANCE FOR LOAN LOSSES
The allowance for loan losses is maintained at an amount management deems
adequate to cover estimated losses. The allowance for loan losses is
established based on management's assessment of trends in the homogeneous
portfolio as well as the results of management's periodic review of the loans
in the non-homogeneous portfolio. 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, 1996 and 1995, the
allowance for loan losses is adequate based on information currently available
to it. If recent improvements in the economies of the Bank's principal market
areas do not continue, the Bank's loan portfolios could be adversely impacted
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.
F-10
<PAGE>
GLENDALE FEDERAL BANK AND SUBSIDIARIES
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS--(CONTINUED)
JUNE 30, 1996, 1995 AND 1994
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 collect all amounts due according to the contractual terms of the
loan agreement on a timely basis. The Bank's impaired loans include loans
identified as impaired through review of the non-homogeneous portfolio and
troubled debt restructurings. Specific valuation allowances are established
for impaired loans at the difference between the loan amount and the fair
value of collateral less estimated selling costs. 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, 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 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.
F-11
<PAGE>
GLENDALE FEDERAL BANK AND SUBSIDIARIES
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS--(CONTINUED)
JUNE 30, 1996, 1995 AND 1994
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. Accretion of discounts and
amortization of premiums and deferred origination fees and costs is
discontinued when loans are placed on non-accrual status.
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 Rights ("MSR"). MSR is amortized in proportion to, and over the
period the servicing rights generate net servicing fee income. The Bank
periodically updates the assumptions underlying future net servicing fee
income estimates and re-evaluates the present value of the servicing asset. If
the revised assumptions reflect a reduction in the asset's value, the asset is
written down through a charge to expense, which is included in "Loan servicing
income, net" in the Consolidated Statements of Operations.
ACCOUNTING FOR REAL ESTATE
Real estate acquired in settlement of loans ("REO") is recorded at the lower
of fair value or the recorded investment in the loan at the time of
foreclosure generally as determined by recent appraisals. 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. Joint ventures and
partnership investments are carried on the equity method of accounting.
Acquisition, development and construction loans are included in REI when the
risk characteristics of such loans are substantially similar to ownership of
real estate.
Changes in estimated selling and disposal costs, declines in fair values,
and net gains or losses on disposal of REO and REI are charged to operations
as incurred.
Gains on real estate sales financed by the Bank are recognized only when the
transactions meet the down-payment and continuing investment criteria of
Statement of Financial Accounting Standards No. 66, "Accounting for Sales of
Real Estate." Losses are recognized when identified.
PREMISES AND EQUIPMENT AND DEPRECIATION
Maintenance and repairs on premises and equipment are charged to expense as
incurred. Renewals and material improvements are capitalized. 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.
F-12
<PAGE>
GLENDALE FEDERAL BANK AND SUBSIDIARIES
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS--(CONTINUED)
JUNE 30, 1996, 1995 AND 1994
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.
GOODWILL AND OTHER INTANGIBLE ASSETS
With the exception of the merger with Guarantee Financial Corporation of
California, which was accounted for as a pooling-of-interests, the Bank's
acquisitions since 1981 have been accounted for under the purchase method of
accounting. Assets acquired and liabilities assumed in each acquisition 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, adjusted for actual prepayments. At June 30, 1996, goodwill totaled
$19.8 million and had a weighted average remaining life of 26 years.
In fiscal 1995, the Bank completed its acquisition of $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. At June 30, 1996,
these intangible assets totaled $39.4 million with a remaining life of nine
years.
Periodically, the Bank evaluates the recoverability of its deposit purchase
premium assets based upon the rate of attrition of deposit relationships
acquired. Goodwill is evaluated for impairment on the basis of the estimated
undiscounted cash flows of the acquired franchise.
DERIVATIVE FINANCIAL INSTRUMENTS
The Bank uses various strategies to minimize interest rate risk, including
interest rate futures contracts. 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 Bank also uses interest rate
exchange agreements ("swaps") to reduce the interest rate fluctuation risk
related to certain assets and liabilities. 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 in the Consolidated
Statements of Operations. The Bank does not hold any derivative financial
instruments for trading purposes.
F-13
<PAGE>
GLENDALE FEDERAL BANK AND SUBSIDIARIES
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS--(CONTINUED)
JUNE 30, 1996, 1995 AND 1994
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, and the obligations
to repurchase securities sold are reflected as liabilities in the Consolidated
Statements of Financial Condition. The dollar amount of securities underlying
the agreements remains in the asset accounts.
CURRENT ACCOUNTING PRONOUNCEMENTS
In March 1995, the FASB issued Statement of Financial Accounting Standards
No. 121, "Accounting for the Impairment of Long-Lived Assets and for Long-
Lived Assets to Be Disposed Of" ("SFAS 121"). This statement establishes
accounting standards for the recognition of impairment of long-lived assets,
certain identifiable intangibles, and goodwill related to those assets to be
held and used and for long-lived assets and certain identifiable intangibles
to be disposed of.
Under SFAS 121, an entity shall review for impairment its long-lived assets
and certain identifiable intangibles to be held and used whenever events or
changes in circumstances indicate that the carrying amount of an asset may not
be recoverable. In performing this review, the entity shall estimate the
future cash flows expected to result from the use of the asset and its
eventual disposition. If the sum of the expected future cash flows
(undiscounted and without interest charges) is less than the carrying amount
of the asset, an impairment loss is recognized, measured as the amount by
which the carrying amount of the asset exceeds the fair value of the asset, as
a component of income from continuing operations before income taxes.
SFAS 121 is effective for financial statements issued for fiscal years
beginning after December 15, 1995 and is required to be adopted prospectively.
Long-lived assets and identifiable intangibles held by the Bank consists of
premises and equipment, REO, REI and goodwill. Given the Bank's current
accounting policies for recording and measuring its long-lived assets and
identifiable intangibles as discussed previously, this standard, which was
adopted by the Bank as of July 1, 1996, is not expected to have a material
impact on the Bank's operations or financial position.
In May 1995, the FASB issued Statement of Financial Accounting Standards No.
122, "Accounting for Mortgage Servicing Rights" ("SFAS 122"). This statement
amends Statement of Financial Accounting Standards No. 65, "Accounting for
Certain Mortgage Banking Activities" ("SFAS 65"), to require that an
institution engaged in mortgage banking activities recognize as separate
assets, rights to service mortgage loans for others, however those servicing
rights are acquired. Under SFAS 122, an institution that acquires mortgage
servicing rights through either the purchase or origination of mortgage loans
and the sale or securitization of those loans with servicing rights retained
is required to allocate the total cost of the mortgage loans to the mortgage
servicing rights and the loans (without the mortgage servicing rights) based
on their relative fair values, if it is practicable to estimate those fair
values, and to capitalize the amount attributed to the mortgage servicing
rights in the Statement of Financial Condition.
SFAS 122 also requires that an institution engaged in mortgage banking
activities assess its capitalized mortgage servicing rights for impairment
based on the fair value of those rights. Impairment is to be recognized
through a valuation allowance.
SFAS 122 is effective for financial statements issued for fiscal years
beginning after December 15, 1995 and is required to be adopted prospectively
to transactions in which an institution sells or
F-14
<PAGE>
GLENDALE FEDERAL BANK AND SUBSIDIARIES
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS--(CONTINUED)
JUNE 30, 1996, 1995 AND 1994
securitizes mortgage loans with servicing rights retained and to impairment
evaluations of all amounts capitalized as mortgage servicing rights, including
those purchased before the adoption of SFAS 122. This standard, which was
adopted by the Bank as of July 1, 1996, is not expected to have a material
impact on the Bank's operations or financial position. SFAS 122 will be
superseded by Statement of Financial Accounting Standards No. 125, "Accounting
for Transfers and Servicing of Financial Assets and Extinguishment of
Liabilities" ("SFAS 125"), described below, effective January 1, 1997.
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 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 anticipates electing to
continue to measure compensation cost related to employee stock purchase
options using APB 25, and will provide pro forma disclosures as required in
the 1997 financial statements.
In June 1996, the FASB issued SFAS 125 which establishes 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 extinguished. 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 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
F-15
<PAGE>
GLENDALE FEDERAL BANK AND SUBSIDIARIES
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS--(CONTINUED)
JUNE 30, 1996, 1995 AND 1994
classified as trading securities, or in shareholders' equity as unrealized
holding gains or losses, net of the related tax effect, if 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. The Bank enters into many transactions
covered by SFAS 125, including securitization and sales of loans with
servicing rights retained, sales of securities under agreements to repurchase,
collateralized borrowings from the Federal Home Loan Bank and others.
Implementation of SFAS 125 will require the Bank to transfer its capitalized
servicing fees receivable as available for sale interest-only strips. The Bank
does not anticipate a material impact, other than the transfer of capitalized
servicing fees receivable to available for sale, on transactions covered by
SFAS 125.
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
securities purchased under resale agreements".
Supplemental disclosure of cash flow information is as follows (in
thousands):
<TABLE>
<CAPTION>
YEARS ENDED JUNE 30
--------------------------------------
1996 1995 1994
---------- -------- ----------
<S> <C> <C> <C>
Cash paid for:
Interest...................................................... $ 738,407 $777,914 $ 687,993
Income taxes.................................................. 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 foreclosures............. 186,157 294,822 328,022
Loans exchanged for mortgage-backed securities................ 145,826 268,436 1,470,844
Loans made to facilitate the sale of real estate
held for investment and real estate acquired
in settlement of loans....................................... 85,157 139,522 234,546
Net transfers of loans from held for investment
to held for sale............................................. 19,932 263,334 (26,660)
Exchange of GLENFED debentures for common
stock of the bank............................................ -- -- 49,065
Issuance of common stock of the Bank in
exchange for GLENFED debentures.............................. -- -- 22,547
Issuance of Series D preferred stock upon reclassification
of Series B and C preferred stock............................ -- -- 34,892
Conversion of Series D preferred stock into
common stock................................................. -- 2,928 5,961
Exchange of Series E preferred stock for common stock......... 2,226 -- --
Issuance of common stock in exchange for Series E
preferred stock.............................................. 5,902 -- --
Transfer of mortgage-backed and other debt
securities to available for sale............................. 2,818,831 -- 1,013,306
</TABLE>
During fiscal 1996, 1995 and 1994, the Bank received income tax refunds of
$6,630,000, $323,000 and $346,000, respectively.
F-16
<PAGE>
GLENDALE FEDERAL BANK AND SUBSIDIARIES
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS--(CONTINUED)
JUNE 30, 1996, 1995 AND 1994
NOTE 3: NET EARNINGS (LOSS) PER SHARE INFORMATION
For the purpose of calculating net earnings (loss) per share, the Bank used
the following numbers of shares for the periods presented (in thousands):
<TABLE>
<CAPTION>
YEARS ENDED JUNE 30
--------------------
1996 1995 1994
------ ------ ------
<S> <C> <C> <C>
Primary net earnings (loss) per share................... 47,593 46,038 36,469
Fully diluted net earnings (loss) per share............. 47,593 65,389 36,469
</TABLE>
No adjustments were made to the weighted average number of common shares
outstanding at June 30, 1994 for primary or fully-diluted calculations as
their effect would be anti-dilutive. The weighted average number of common
shares outstanding for fiscal 1996, 1995 and 1994, excludes 200,686 shares
held by a subsidiary of the Bank. Such shares are eliminated in consolidation.
NOTE 4: ACQUISITIONS AND DISPOSITIONS
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 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.
On January 6, 1995, the Bank sold University Savings to First Interstate
Bank of Washington N.A. ("First Interstate") 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.
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 also added three bank offices to the Bank's franchise network.
F-17
<PAGE>
GLENDALE FEDERAL BANK AND SUBSIDIARIES
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS--(CONTINUED)
JUNE 30, 1996, 1995 AND 1994
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 as part of the consideration for assuming Union Federal's
deposit liabilities certain of Union Federal's assets including 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 premiums paid by the Bank, 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.
NOTE 5: SHORT-TERM HIGHLY LIQUID INVESTMENTS AND OTHER DEBT SECURITIES
Federal funds sold and securities and whole loans purchased under resale
agreements at the dates indicated are summarized below at cost, which
approximates market (in thousands):
<TABLE>
<CAPTION>
JUNE 30
-----------------
1996 1995
-------- --------
<S> <C> <C>
Federal funds sold..................................... $ 33,000 $ 16,000
Securities purchased under resale agreements........... 375,000 280,000
Whole loans purchased under resale agreements.......... 25,000 --
-------- --------
$433,000 $296,000
======== ========
</TABLE>
The following table further summarizes information with respect to
securities purchased under resale agreements at June 30, 1996 (in thousands):
<TABLE>
<CAPTION>
JUNE 30,
1996
--------
<S> <C>
Balance at year end............................................. $375,000
Average amount outstanding during the year...................... 559,202
Maximum amount outstanding at any month-end..................... 641,000
</TABLE>
Amounts outstanding with individual brokers at June 30, 1996 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>
CS First Boston............................. $150,072 3 days $153,001
======== ========
Morgan Stanley.............................. $100,047 3 days $100,000
======== ========
</TABLE>
Securities purchased under resale agreements are collateralized by certain
mortgage-backed securities at June 30, 1996 and 1995. At June 30, 1996 and
1995, the Bank held only securities purchased under agreements to resell
identical securities. The securities underlying the agreements are held in the
custodial accounts of a third party trustee for the Bank until the maturities
of the agreements.
F-18
<PAGE>
GLENDALE FEDERAL BANK AND SUBSIDIARIES
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS--(CONTINUED)
JUNE 30, 1996, 1995 AND 1994
The following tables summarize the Bank's other debt securities held to
maturity with related remaining maturity data as of the dates indicated (in
thousands):
<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. Treasury securities:
Maturing within 1 year............. $ 8,086 $-- $-- $ 8,086
------- ---- ---- -------
Other securities:
Maturing within 1 year............. 10,786 -- -- 10,786
Maturing after 10 years............ 5 44 -- 49
------- ---- ---- -------
10,791 44 -- 10,835
------- ---- ---- -------
$18,877 $ 44 $-- $18,921
======= ==== ==== =======
</TABLE>
<TABLE>
<CAPTION>
JUNE 30, 1995
---------------------------------------
GROSS GROSS
AMORTIZED UNREALIZED UNREALIZED FAIR
COST GAINS LOSSES VALUE
--------- ---------- ---------- -------
<S> <C> <C> <C> <C>
Held to maturity:
U.S. Treasury securities:
Maturing within 1 year............. $17,354 $-- $ (2) $17,352
------- ---- ---- -------
Other securities:
Maturing within 1 year............. 24,967 -- (2) 24,965
Maturing after 10 years............ 5 84 -- 89
------- ---- ---- -------
24,972 84 (2) 25,054
------- ---- ---- -------
$42,326 $ 84 $ (4) $42,406
======= ==== ==== =======
</TABLE>
Fair values at June 30, 1996 and 1995 were based upon quotations for similar
or identical securities.
The weighted average interest rate on federal funds sold, securities
purchased under resale agreements and other debt securities was 7.62% and
9.25% at June 30, 1996 and 1995, respectively. Accrued interest receivable on
these securities was $302,000 and $248,000 at June 30, 1996 and 1995,
respectively, and is included in "Interest receivable" in the accompanying
Consolidated Statements of Financial Condition.
There were no sales of other debt securities held to maturity or other debt
securities available for sale during fiscal 1996, 1995 or 1994.
Other debt securities include net discounts amounting to $148,000 at June
30, 1995.
There were no other debt securities pledged as collateral for securities
sold under agreements to repurchase and various other borrowings at June 30,
1996 and 1995.
F-19
<PAGE>
GLENDALE FEDERAL BANK AND SUBSIDIARIES
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS--(CONTINUED)
JUNE 30, 1996, 1995 AND 1994
NOTE 6: MORTGAGE-BACKED SECURITIES
The following tables summarize the Bank's mortgage-backed securities held to
maturity and available for sale as of the dates indicated (in thousands):
<TABLE>
<CAPTION>
JUNE 30, 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
AA-rated 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:
AA-rated pass-through securities. $ 728,438 $ 292 $(16,447) $ 712,283
AAA-rated collateralized mortgage
obligations..................... 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>
<TABLE>
<CAPTION>
JUNE 30, 1995
--------------------------------------------
GROSS GROSS
AMORTIZED UNREALIZED UNREALIZED
COST GAINS LOSSES FAIR VALUE
---------- ---------- ---------- ----------
<S> <C> <C> <C> <C>
Held to maturity:
AAA-rated collateralized mortgage
obligations..................... $1,900,169 $ -- $(58,439) $1,841,730
AA-rated pass-through securities. 1,539,129 4,060 (31,095) 1,512,094
FNMA............................. 580,044 9,365 (4,609) 584,800
GNMA............................. 337,944 595 (6,685) 331,854
FHLMC............................ 327,481 3,389 (668) 330,202
Residual collateralized mortgage
obligations..................... 4,095 747 (599) 4,243
Other............................ 32,545 56 (4,909) 27,692
---------- ------- --------- ----------
$4,721,407 $18,212 $(107,004) $4,632,615
========== ======= ========= ==========
Available for sale:
GNMA............................. $ 1,805 $ 50 $ -- $ 1,855
FHLMC............................ 160 3 -- 163
FNMA............................. 32 -- -- 32
---------- ------- --------- ----------
$ 1,997 $ 53 $ -- $ 2,050
========== ======= ========= ==========
</TABLE>
F-20
<PAGE>
GLENDALE FEDERAL BANK AND SUBSIDIARIES
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS--(CONTINUED)
JUNE 30, 1996, 1995 AND 1994
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, 1996, CMOs totaling $58.2 million were classified
as available for sale. In accordance with SFAS 115, the Bank recorded in its
stockholders' equity accounts an unrealized loss at June 30, 1996 of $11.4
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, 1996 and
1995 were net of unamortized premiums of $39,001,000, and $77,333,000,
respectively, and deferred loan origination fees, net of deferred loan
origination costs, on securitized loans of the Bank of $3,041,000 and
$3,677,000 at June 30, 1996 and 1995, respectively.
The weighted average interest rates of mortgage-backed securities were 6.26%
and 6.30% at June 30, 1996 and 1995, respectively. Interest receivable related
to mortgage-backed securities outstanding at June 30, 1996 and 1995 totaled
$15,146,800 and $26,449,000, respectively. The Bank uses mortgage-backed
securities as collateral for various borrowings. At June 30, 1996 and 1995,
$784 million and $2.9 billion, 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
--------------------------------
1996 1995 1994
---------- -------- ----------
<S> <C> <C> <C>
Proceeds from sales..................... $1,816,876 $ 12,006 $1,244,049
========== ======== ==========
Gross realized gains.................... $ 7,821 $ 151 $ 30,169
Gross realized losses................... (42,043) (11,876) (29,070)
---------- -------- ----------
Net gain (loss)......................... $ (34,222) $(11,725) $ 1,099
========== ======== ==========
</TABLE>
In fiscal 1994, the Bank sold mortgage-backed securities that were
designated as held to maturity. The circumstance leading to the decision to
sell these held-to-maturity securities was a major disposition of operations
in the form of the Florida franchise sale. The sale agreement called for the
Bank to deliver cash in an amount that, together with the value of the banking
offices and related furniture and equipment, equaled the deposit liabilities
less the agreed upon purchase price.
F-21
<PAGE>
GLENDALE FEDERAL BANK AND SUBSIDIARIES
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS--(CONTINUED)
JUNE 30, 1996, 1995 AND 1994
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
----------------------------
1996 1995 1994
-------- -------- --------
<S> <C> <C> <C>
Cash gain (loss)............................ $(29,095) $ (93) $ 22,231
Deferred fees recognized on sale............ 1,402 142 5,760
Recourse provision and fees................. (6,568) (11,679) (23,714)
Other items................................. 39 (95) (3,178)
-------- -------- --------
$(34,222) $(11,725) $ 1,099
======== ======== ========
</TABLE>
See Note 7--"Loans Receivable" for a discussion of loans sold with recourse.
NOTE 7: LOANS RECEIVABLE
COMPOSITION
Loans receivable held for investment at the dates indicated are summarized
as follows (in thousands):
<TABLE>
<CAPTION>
JUNE 30
------------------------
1996 1995
----------- -----------
<S> <C> <C>
Residential loans:
Existing structures:
1-4 units........................................... $ 7,501,733 $ 6,284,092
5-36 units.......................................... 1,559,097 1,626,696
37 or more units.................................... 400,415 455,783
Construction:
1-4 units........................................... 16,794 2,113
5-36 units.......................................... 5,445 7,624
Land loans............................................ 18,250 36,251
Non-residential loans:
Existing structures................................. 1,338,975 1,506,491
Construction........................................ -- 500
Home equity and improvement loans..................... 28,470 30,468
----------- -----------
Total real estate loans............................ 10,869,179 9,950,018
Commercial loans...................................... 10,391 22,844
Consumer auto and recreational vehicle loans.......... 17,588 24,739
Other consumer loans (secured)........................ 33,782 38,264
Other consumer loans (unsecured)...................... 21,788 17,600
----------- -----------
Total gross loans.................................. 10,952,728 10,053,465
Less:
Unearned discounts on loans purchased............... (34,772) (70,038)
Undisbursed loan funds.............................. (12,160) (4,653)
Deferred loan fees.................................. (24,446) (28,536)
Allowance for loan losses........................... (186,756) (209,142)
----------- -----------
Loans receivable, net.............................. $10,694,594 $ 9,741,096
=========== ===========
</TABLE>
F-22
<PAGE>
GLENDALE FEDERAL BANK AND SUBSIDIARIES
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS--(CONTINUED)
JUNE 30, 1996, 1995 AND 1994
The Bank had residential real estate loans held for sale totaling $33.3
million as of June 30, 1996. As of June 30, 1995, the Bank had loans held for
sale totaling $158.2 million, consisting primarily of $83.9 million of non-
residential real estate loans and $62.4 million of multi-family residential
loans related to the August 1995 sale of $176 million of non-performing and
classified real estate loans and REO.
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 7.74% and 7.91% at June 30, 1996 and 1995,
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
0.15% and 0.18% at June 30, 1996 and 1995, respectively. Interest receivable
on loans receivable (including interest on loans classified as held for sale)
was $70,539,000 and $67,361,000 at June 30, 1996 and 1995, 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 $4.4 billion and $4.0 billion at June 30, 1996 and 1995,
respectively.
CREDIT RISK AND CONCENTRATION
A summary of activity in the allowance for loan losses during fiscal 1996,
1995 and 1994 is as follows (dollars in thousands):
<TABLE>
<CAPTION>
REAL ESTATE CONSUMER COMMERCIAL
LOANS LOANS LOANS TOTAL
----------- -------- ---------- ---------
<S> <C> <C> <C> <C>
Balance--June 30, 1993.............. $ 315,993 $ 5,905 $12,884 $ 334,782
Provision for loan losses........... 144,339 2,739 (7,352) 139,726
Charge-offs......................... (154,815) (6,904) (6,353) (168,072)
Recoveries.......................... 4,670 2,735 6,873 14,278
--------- ------- ------- ---------
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
========= ======= ======= =========
Percent of type of gross loans re-
ceivable........................... 1.64% 4.48% 45.22% 1.70%
========= ======= ======= =========
</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
F-23
<PAGE>
GLENDALE FEDERAL BANK AND SUBSIDIARIES
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS--(CONTINUED)
JUNE 30, 1996, 1995 AND 1994
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 fiscal 1994 charge-offs of $168.1 million are charge-offs of
$21.1 million and $19.0 million on loans secured by multi-family residential
properties and non-residential properties, respectively, related to the $244
million sale of non-performing and under-performing loans.
Net charge-offs represented 0.59%, 1.86% and 1.44% of average gross loans
receivable for fiscal 1996, 1995, and 1994, respectively.
The following is a summary of non-accrual loans, troubled debt
restructurings and other impaired loans (in thousands):
<TABLE>
<CAPTION>
JUNE 30
--------------------------
1996 1995 1994
-------- -------- --------
<S> <C> <C> <C>
Non-accrual loans................................... $192,445 $244,242 $508,543
Troubled debt restructurings........................ 9,194 38,542 34,218
Recorded investment in other impaired loans......... 70,289 83,137 141,431
-------- -------- --------
$271,928 $365,921 $684,192
======== ======== ========
</TABLE>
At June 30, 1996 and 1995, impaired loans and the related specific loan loss
allowances were as follows (in thousands):
<TABLE>
<CAPTION>
JUNE 30
---------------------------------------------------------------
1996 1995
------------------------------- -------------------------------
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................ $ 42,575 $11,344 $ 31,231 $ 42,054 $10,706 $ 31,348
Without specific
allowances........... 36,782 -- 36,782 98,930 -- 98,930
-------- ------- -------- -------- ------- --------
79,357 11,344 68,013 140,984 10,706 130,278
-------- ------- -------- -------- ------- --------
TDRs:
Without specific
allowances........... 9,194 -- 9,194 38,542 -- 38,542
-------- ------- -------- -------- ------- --------
Other impaired loans:
With specific allow-
ances................ 63,987 15,118 48,869 49,747 8,958 40,789
Without specific
allowances........... 6,302 -- 6,302 33,390 -- 33,390
-------- ------- -------- -------- ------- --------
70,289 15,118 55,171 83,137 8,958 74,179
-------- ------- -------- -------- ------- --------
$158,840 $26,462 $132,378 $262,663 $19,664 $242,999
======== ======= ======== ======== ======= ========
</TABLE>
Other impaired loans without specific allowances totaling $6.3 million and
$33.4 million as of June 30, 1996 and 1995, respectively, in the table above,
include loans for which a portion of the loan balance has been charged-off.
F-24
<PAGE>
GLENDALE FEDERAL BANK AND SUBSIDIARIES
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS--(CONTINUED)
JUNE 30, 1996, 1995 AND 1994
The average net recorded investment in impaired loans for the years ended
June 30, 1996, 1995 and 1994 was $175 million, $353 million and $694 million,
respectively. Interest income of $7.8 million, $11.0 million and $15.5 million
for fiscal 1996, 1995 and 1994, respectively, was recognized on impaired loans
during the period of impairment.
Loans in non-accrual status as of June 30, 1996, 1995 and 1994 had interest
due but not recognized of approximately $10.5 million, $13.6 million and $27.8
million, respectively. The amount of interest income on these loans that was
included in net earnings in fiscal 1996, 1995 and 1994 was $5.8 million, $5.5
million and $10.1 million, respectively. Net interest forgone related to
troubled debt restructurings totaled $0.2 million, $0.7 million and $0.3
million in 1996, 1995 and 1994, respectively. Interest income recorded on
troubled debt restructurings for fiscal 1996, 1995 and 1994 was $0.7 million,
$2.6 million and $2.1 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 summarizes the Bank's non-accrual and restructured loans
by state as of the dates indicated (dollars in thousands):
<TABLE>
<CAPTION>
JUNE 30, 1996 JUNE 30, 1995
-------------------------- ---------------------------
NON-ACCRUAL RESTRUCTURED NON-ACCRUAL RESTRUCTURED
------------ ------------ ------------ -------------
AMOUNT % AMOUNT % AMOUNT % AMOUNT %
-------- --- ------------ -------- --- -------- ----
<S> <C> <C> <C> <C> <C> <C> <C> <C>
California............ $169,565 88% $ 8,922 97% $226,422 93% $ 37,081 96%
Florida............... 15,153 8 272 3 14,205 6 1,461 4
Other................. 7,727 4 -- -- 3,615 1 -- --
-------- --- ------- ---- -------- --- -------- ----
$192,445 100% $ 9,194 100% $244,242 100% $ 38,542 100%
======== === ======= ==== ======== === ======== ====
</TABLE>
At June 30, 1996 and 1995, outstanding commitments to originate loans
receivable totaled $44 million and $40 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 in order 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 1996 or 1995.
The Bank had recourse obligations for approximately $1.3 billion of loans sold
with recourse at June 30, 1996 for which the Bank is contingently liable for
up to $636 million in future losses. The Bank's estimate of its liability
under these obligations was $14.2 million and $12.8 million at June 30, 1996
and 1995, respectively, and is included in "Other liabilities and accrued
expenses" in the accompanying Consolidated Statements of Financial Condition.
F-25
<PAGE>
GLENDALE FEDERAL BANK AND SUBSIDIARIES
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS--(CONTINUED)
JUNE 30, 1996, 1995 AND 1994
A summary of the balance of loans sold with recourse at the dates indicated
is as follows (in thousands):
<TABLE>
<CAPTION>
JUNE 30
---------------------
1996 1995
---------- ----------
<S> <C> <C>
Loans with original loan-to-value ("LTV") ratios
less than or equal to 80%........................ $ 781,943 $ 359,949
Loans with original LTV ratios greater than 80%:
With Private Mortgage Insurance ("PMI")......... 106,191 36,466
Without PMI..................................... 83,698 35,072
---------- ----------
971,832 431,487
Recourse reduction transactions................... 285,848 1,053,889
---------- ----------
$1,257,680 $1,485,376
========== ==========
Recorded liability for recourse................... $ 14,238 $ 12,773
========== ==========
</TABLE>
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.
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, 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
F-26
<PAGE>
GLENDALE FEDERAL BANK AND SUBSIDIARIES
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS--(CONTINUED)
JUNE 30, 1996, 1995 AND 1994
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
---------------------------------------
1996 1995
------------------- -------------------
AMOUNT PERCENT AMOUNT PERCENT
----------- ------- ----------- -------
<S> <C> <C> <C> <C>
Loans with LTV ratio less than or equal
to 80%................................ $ 9,196,477 85% $ 8,497,613 85%
Loans with LTV ratio greater than 80%:
With PMI............................. 694,365 6 601,912 6
Without PMI.......................... 957,255 9 954,745 9
----------- --- ----------- ---
$10,848,097 100% $10,054,270 100%
=========== === =========== ===
</TABLE>
NOTE 8: REAL ESTATE ACQUIRED IN SETTLEMENT OF LOANS, NET
A summary of REO, net of specific valuation allowances, by property type is
as follows (in thousands):
<TABLE>
<CAPTION>
JUNE 30
-----------------
1996 1995
------- --------
<S> <C> <C>
Single-family............................................. $39,693 $ 37,316
Multi-family.............................................. 16,495 23,847
Non-residential........................................... 10,835 34,237
Land...................................................... 15,058 15,787
------- --------
82,081 111,187
General allowance......................................... (3,832) (5,457)
------- --------
$78,249 $105,730
======= ========
</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
----------------------------
1996 1995 1994
-------- -------- --------
<S> <C> <C> <C>
Beginning balance.............................. $ 30,719 $ 35,227 $ 55,715
Provision for losses........................... 12,110 16,846 26,421
Charge-offs.................................... (16,141) (21,354) (46,909)
-------- -------- --------
Ending balance................................. $ 26,688 $ 30,719 $ 35,227
======== ======== ========
</TABLE>
F-27
<PAGE>
GLENDALE FEDERAL BANK AND SUBSIDIARIES
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS--(CONTINUED)
JUNE 30, 1996, 1995 AND 1994
The following table summarizes the Bank's concentration of REO by state
(dollars in thousands):
<TABLE>
<CAPTION>
JUNE 30, 1996 JUNE 30, 1995
--------------- ----------------
AMOUNT PERCENT AMOUNT PERCENT
------- ------- -------- -------
<S> <C> <C> <C> <C>
California.................................. $61,663 75% $ 79,776 72%
Florida..................................... 19,343 24 20,092 18
Other....................................... 1,075 1 11,319 10
------- --- -------- ---
$82,081 100% $111,187 100%
======= === ======== ===
</TABLE>
Operations of REO are summarized as follows (in thousands):
<TABLE>
<CAPTION>
YEARS ENDED JUNE 30
----------------------------
1996 1995 1994
-------- -------- --------
<S> <C> <C> <C>
Gain on sale of REO............................ $ 10,880 $ 12,376 $ 20,048
Provision for losses........................... (12,110) (16,846) (26,421)
Net operating expenses......................... (7,196) (10,564) (17,716)
-------- -------- --------
$ (8,426) $(15,034) $(24,089)
======== ======== ========
</TABLE>
NOTE 9: INVESTMENT IN CAPITAL STOCK OF FEDERAL HOME LOAN BANK ("FHLB")
The Bank's investment in capital stock of FHLB, at cost, totaled
$192,842,000 and $185,799,000 at June 30, 1996 and 1995, respectively. The
Bank earned 5.4%, 5.3% and 4.6% from dividends received during fiscal 1996,
1995 and 1994, respectively. Dividends receivable on FHLB stock totaled
$2,498,300 and $2,072,300 at June 30, 1996 and 1995, 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 10: PREMISES AND EQUIPMENT
Premises and equipment at the dates indicated are summarized as follows (in
thousands):
<TABLE>
<CAPTION>
JUNE 30
--------------------
1996 1995
--------- ---------
<S> <C> <C>
Buildings and leasehold improvements................... $ 155,227 $ 206,330
Furniture, fixtures and equipment...................... 88,205 101,924
Land................................................... 22,171 24,170
--------- ---------
265,603 332,424
Less accumulated depreciation and amortization......... (139,235) (169,308)
--------- ---------
$ 126,368 $ 163,116
========= =========
</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.
F-28
<PAGE>
GLENDALE FEDERAL BANK AND SUBSIDIARIES
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS--(CONTINUED)
JUNE 30, 1996, 1995 AND 1994
Operating expenses include provisions for depreciation and amortization of
$15,755,000, $16,854,000 and $21,669,000 for fiscal 1996, 1995 and 1994,
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 1996, 1995 and 1994 was $15,140,000, $20,126,000, and
$24,738,000, respectively. Minimum future lease payments on building and
equipment leases at June 30, 1996, were as follows (in thousands):
<TABLE>
<S> <C>
Due in one year...................................................... $14,589
Due in two years..................................................... 10,779
Due in three years................................................... 8,885
Due in four years.................................................... 7,645
Due in five years.................................................... 5,917
Due thereafter....................................................... 50,160
-------
$97,975
=======
</TABLE>
NOTE 11: MORTGAGE SERVICING ASSETS
The Bank's portfolio of loans serviced for others totaled $14.1 billion at
June 30, 1996 and included $1.9 billion of loans sub-serviced by a third party
which will be transferred to the Bank's principal loan servicing system in the
first quarter of fiscal 1997. Loans serviced for others at June 30, 1995 and
1994 totaled $11.7 billion and $7.8 billion, respectively.
MORTGAGE SERVICING RIGHTS
The following table summarizes the activity in mortgage servicing rights for
the periods indicated (in thousands):
<TABLE>
<CAPTION>
YEARS ENDED JUNE 30
--------------------------
1996 1995 1994
-------- ------- -------
<S> <C> <C> <C>
Beginning balance................................... $ 55,962 $14,394 $ 5,757
Purchases........................................... 50,836 51,537 11,330
Amortization........................................ (12,828) (7,966) (2,693)
Decrease due to sale of University Savings.......... -- (2,003) --
-------- ------- -------
Ending balance...................................... $ 93,970 $55,962 $14,394
======== ======= =======
</TABLE>
Periodically, the Bank evaluates the recoverability of purchased mortgage
servicing rights based on the projected value of future net servicing income.
Future prepayment rates are estimated based on current interest rates and
various portfolio characteristics, including loan type, interest rate, and
market prepayment estimates. If the estimated recovery is lower than the
current amount of purchased mortgage servicing rights, a reduction to
purchased mortgage servicing rights is charged to loan servicing income.
CAPITALIZED SERVICING FEES RECEIVABLE
Capitalized servicing fees receivable are amortized using the interest
method adjusted for prepayment expectations and experience. The decrease in
amortization in fiscal 1995 reflects a decrease in prepayment activity
experienced by the Bank in fiscal 1995.
F-29
<PAGE>
GLENDALE FEDERAL BANK AND SUBSIDIARIES
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS--(CONTINUED)
JUNE 30, 1996, 1995 AND 1994
The following table summarizes the activity in capitalized servicing fees
receivable for the periods indicated (in thousands):
<TABLE>
<CAPTION>
YEARS ENDED JUNE 30
---------------------------
1996 1995 1994
------- -------- --------
<S> <C> <C> <C>
Beginning balance................................. $43,160 $ 54,325 $ 77,460
Additions from sales of loans and mortgage-
backed securities.............................. -- -- 2,022
Amortization.................................... (9,731) (11,165) (25,157)
------- -------- --------
Ending balance.................................... $33,429 $ 43,160 $ 54,325
======= ======== ========
</TABLE>
Periodically, the Bank evaluates the recoverability of capitalized servicing
fees receivable based on the present value of the difference between its
retained servicing spread and the normal servicing fee rate applicable to
comparable servicing arrangements. In the event the estimated recovery is
lower than the current amount of capitalized servicing fees receivable, a
reduction to capitalized servicing fees receivable is charged to loan
servicing income.
NOTE 12: DEPOSITS
Deposits at the dates indicated are summarized as follows (dollars in
thousands):
<TABLE>
<CAPTION>
JUNE 30
---------------------------------------------------------
1996 1995
---------------------------- ----------------------------
WEIGHTED PERCENT WEIGHTED PERCENT
AVERAGE OF TOTAL AVERAGE OF TOTAL
RATE AMOUNT DEPOSITS RATE AMOUNT DEPOSITS
-------- ---------- -------- -------- ---------- --------
<S> <C> <C> <C> <C> <C> <C>
Checking/NOW accounts... 0.56% $ 778,980 8.9% 0.67% $ 661,853 7.6%
Passbook accounts....... 2.15 492,777 5.7 2.23 551,905 6.3
Money market
checking/savings....... 4.37 1,719,319 19.7 4.64 1,272,012 14.6
Certificate accounts:
5.00% and lower........ 4.79 1,790,616 20.5 4.54 1,097,791 12.6
5.01%--6.00%........... 5.48 3,085,829 35.4 5.62 2,439,085 27.9
6.01%--7.00%........... 6.43 638,282 7.3 6.68 2,297,924 26.3
7.01%--8.00%........... 7.28 182,292 2.1 7.31 364,838 4.2
8.01%--9.00%........... 8.23 2,396 0.0 8.49 6,834 0.1
9.01%--10.00%.......... 9.45 259 0.0 9.50 919 0.0
10.01%--11.00%......... 0.00 -- 0.0 10.60 12,119 0.1
11.01% and over........ 11.55 33,226 0.4 11.55 29,600 0.3
---------- ----- ---------- -----
Total certificate ac-
counts............... 5.46 5,732,900 65.7 5.95 6,249,110 71.5
---------- ----- ---------- -----
4.62% $8,723,976 100.0% 5.13% $8,734,880 100.0%
========== ===== ========== =====
</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.The cost of interest rate swaps which adjust
the rate on deposits is reflected in the weighted average interest rate.
F-30
<PAGE>
GLENDALE FEDERAL BANK AND SUBSIDIARIES
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS--(CONTINUED)
JUNE 30, 1996, 1995 AND 1994
Included in deposits are $57,426,000 and $127,806,000 of brokered
certificates of deposit at June 30, 1996 and 1995, respectively.
Accrued interest payable on deposits at June 30, 1996 and 1995 was
$3,092,000 and $6,707,000, 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, 1996 are as
follows (in thousands):
<TABLE>
<S> <C>
No stated maturity.................................................. $2,991,076
Maturing within one year:
1st quarter....................................................... 1,791,596
2nd quarter....................................................... 1,631,295
3rd quarter....................................................... 587,423
4th quarter....................................................... 497,687
Maturing within two years........................................... 821,436
Maturing within three years......................................... 278,983
Maturing within four years.......................................... 74,759
Maturing within five years.......................................... 48,263
Maturing thereafter................................................. 1,458
----------
$8,723,976
==========
</TABLE>
Deposits of $100,000 or more included in the above tables had the following
remaining maturities at June 30, 1996 (in thousands):
<TABLE>
<S> <C>
3 months and under.................................................. $1,001,634
Over 3 months to 6 months........................................... 313,192
Over 6 months to 12 months.......................................... 193,026
Over 12 months...................................................... 213,166
----------
$1,721,018
==========
</TABLE>
Interest expense on deposits by type is summarized as follows (in
thousands):
<TABLE>
<CAPTION>
YEARS ENDED JUNE 30
--------------------------
1996 1995 1994
-------- -------- --------
<S> <C> <C> <C>
Checking/NOW accounts............................... $ 4,115 $ 5,867 $ 9,371
Passbook accounts................................... 11,381 18,525 33,499
Money market checking and savings................... 69,432 44,740 20,511
Certificate accounts................................ 348,906 343,762 390,093
-------- -------- --------
$433,834 $412,894 $453,474
======== ======== ========
</TABLE>
At June 30, 1996 and 1995, the Bank had approximately $76,524,000 and
$47,753,000, respectively, of its real estate loans and mortgage-backed
securities pledged as collateral for certain public deposits.
F-31
<PAGE>
GLENDALE FEDERAL BANK AND SUBSIDIARIES
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS--(CONTINUED)
JUNE 30, 1996, 1995 AND 1994
NOTE 13: BORROWINGS
SECURITIES SOLD UNDER AGREEMENTS TO REPURCHASE
Securities sold under agreements to repurchase are summarized as follows
(dollars in thousands):
<TABLE>
<CAPTION>
YEARS ENDED JUNE 30
----------------------------------
1996 1995 1994
---------- ---------- ----------
<S> <C> <C> <C>
Balance at year end........................ $ 758,050 $2,695,176 $2,306,274
Average amount outstanding during the year. 1,869,194 2,927,313 3,038,734
Maximum amount outstanding at any month-
end....................................... 2,987,948 4,172,953 3,709,650
Weighted average interest rate during the
year...................................... 5.82% 5.66% 3.63%
Weighted average interest rate on year-end
balances.................................. 5.50% 6.15% 4.25%
</TABLE>
The Bank incurred interest expense on securities sold under agreements to
repurchase of $109 million, $166 million, and $111 million for fiscal 1996,
1995 and 1994, respectively.
Mortgage-backed securities were sold under agreements to repurchase at June
30, 1996 and are contractually due July 1996. 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.
Amounts outstanding with individual brokers at June 30, 1996 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. ........................ $415,326 6 days $420,894
Nomura Securities International, Inc........ 255,953 17 days 262,753
</TABLE>
Securities sold under agreements to repurchase are collateralized as follows
(in thousands):
<TABLE>
<CAPTION>
JUNE 30
---------------------------------------------
1996 1995
----------------------- ---------------------
BOOK VALUE BOOK VALUE
INCLUDING INCLUDING
ACCRUED ACCRUED MARKET
INTEREST MARKET VALUE INTEREST VALUE
---------- ------------ ---------- ----------
<S> <C> <C> <C> <C>
Mortgage-backed securities; book
value
includes accrued interest of
$5,827 in 1996
and $15,434 in 1995............ $790,086 $772,755 $2,895,878 $2,831,174
</TABLE>
FEDERAL HOME LOAN BANK
The Bank has a line of credit with the Federal Home Loan Bank ("FHLB") of
San Francisco in the amount of $5,650,000,000 and $5,651,603,000 at June 30,
1996 and 1995, respectively. All advances under this FHLB line of credit are
collateralized with mortgages and FHLB stock.
F-32
<PAGE>
GLENDALE FEDERAL BANK AND SUBSIDIARIES
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS--(CONTINUED)
JUNE 30, 1996, 1995 AND 1994
FHLB advances are summarized as follows (dollars in thousands):
<TABLE>
<CAPTION>
WEIGHTED WEIGHTED
BALANCE AT AVERAGE BALANCE AT AVERAGE
JUNE 30, 1996 RATE JUNE 30, 1995 RATE
------------- -------- ------------- --------
<S> <C> <C> <C> <C>
Fixed-rate, fixed-term............ $3,250,000 6.03% $2,095,000 6.12%
Variable-rate, fixed-term......... 588,000 5.46 1,400,000 6.35
---------- ----------
$3,838,000 5.94% $3,495,000 6.18%
========== ==========
</TABLE>
The Bank incurred interest expense on FHLB advances of $202 million, $181
million, and $104 million for fiscal 1996, 1995, and 1994, respectively.
These advances are secured by the investment in stock of the FHLB totaling
$192.8 million and $185.8 million at June 30, 1996 and 1995, respectively, as
well as certain mortgage loans and mortgage-backed and other debt securities
aggregating $4.3 billion and $3.9 billion at June 30, 1996 and 1995,
respectively.
The maturities of FHLB advances with corresponding weighted average interest
rates at June 30, 1996 are as follows (dollars in thousands):
<TABLE>
<CAPTION>
WEIGHTED
AVERAGE
AMOUNT RATE
---------- --------
<S> <C> <C>
Maturing in one year................................... $1,350,000 6.43%
Maturing in two years.................................. 1,088,000 5.63
Maturing in three years................................ 500,000 5.64
Maturing in five years................................. 900,000 5.77
----------
$3,838,000 5.94%
==========
</TABLE>
At June 30, 1996, interest rates, both fixed and variable, ranged from 5.37%
to 8.08%. At June 30, 1995, the range was 4.21% to 11.18%.
OTHER BORROWINGS
Other borrowings are summarized as follows (dollars in thousands):
<TABLE>
<CAPTION>
JUNE 30
---------------
1996 1995
------- -------
<S> <C> <C>
Convertible subordinated debentures due March 2001 with inter-
est at 7.75%................................................. $10,506 $10,856
Notes payable with weighted average interest rates of 8.75%
and 12.75% at June 30, 1996 and 1995, respectively........... 93 1,177
Collateralized notes; weighted average interest rate of
11.61%....................................................... -- 13,479
Subordinated notes with interest at 14.88%.................... -- 3,371
------- -------
$10,599 $28,883
======= =======
</TABLE>
F-33
<PAGE>
GLENDALE FEDERAL BANK AND SUBSIDIARIES
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS--(CONTINUED)
JUNE 30, 1996, 1995 AND 1994
Convertible Subordinated Debentures
In March 1986, 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, 1996 and 1995 were
$10,506,000 and $10,856,000, respectively. 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.
Collateralized Notes
The Bank received proceeds of $41,798,000 from the issuance of Swiss bonds
during fiscal 1986 yielding 11.61%. The Swiss bonds were collateralized by
real estate whole loans, mortgage-backed securities and marketable securities.
Due to redemptions in previous years, the outstanding balance of the Swiss
bonds at June 30, 1995 totaled $13,479,000. The bonds matured and were repaid
in full on August 25, 1995.
Subordinated Notes
During 1985, the Bank issued $57,500,000 in 14.88% capital notes due 1997
(less unamortized discount of $250,000). In prior years, the Bank had
purchased $21,850,000 of the notes in the open market. In fiscal 1993, the
Bank completed an exchange offer with holders of 90.6% of the subordinated
notes then outstanding for 12% non-cumulative perpetual preferred stock. The
Bank recorded a gain on this extinguishment. See Note 20 "Extraordinary items,
net" for additional information. The outstanding balance of the notes at June
30, 1995 was $3,371,000. Original terms of the notes required a mandatory
redemption payment on the remaining notes equal to 25% of the original face
amount plus accrued interest which was due on August 15, 1995. These notes
were paid in full in September 1995.
The Bank incurred interest expense on other borrowings of $2 million, $10
million and $10 million for fiscal 1996, 1995 and 1994, respectively.
There was no collateral pledged for other borrowings at June 30, 1996. The
total amount of collateral pledged for other borrowings, consisting of real
estate loans, mortgage-backed securities and marketable securities, was
$40,711,000 at June 30, 1995. The amount pledged at June 30, 1995 included
$14,907,000 of commercial paper placed with a broker in anticipation of the
payoff of principal and interest on the Swiss bonds mentioned above.
The aggregate contractual maturities for other borrowings at June 30, 1996
are as follows (in thousands):
<TABLE>
<S> <C>
Maturing in five years............................................ $10,506
Maturing thereafter............................................... 93
-------
$10,599
=======
</TABLE>
F-34
<PAGE>
GLENDALE FEDERAL BANK AND SUBSIDIARIES
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS--(CONTINUED)
JUNE 30, 1996, 1995 AND 1994
NOTE 14: INCOME TAXES
The following is a summary of the income tax provision (benefit) (in
thousands):
<TABLE>
<CAPTION>
YEARS ENDED JUNE 30
------------------------
1996 1995 1994
------- ------- --------
<S> <C> <C> <C>
Current taxes:
Federal............................................ $ 2,210 $28,273 $(16,465)
------- ------- --------
Deferred taxes:
Federal............................................ 12,755 13,285 6,294
State.............................................. 6,377 10,588 --
------- ------- --------
19,132 23,873 6,294
------- ------- --------
Income tax provision (benefit) before extraordinary
items............................................... 21,342 52,146 (10,171)
Income tax expense on extraordinary items............ -- 1,289 9,598
------- ------- --------
$21,342 $53,435 $ (573)
======= ======= ========
</TABLE>
The following is a summary of the income tax liability (in thousands):
<TABLE>
<CAPTION>
JUNE 30
---------------
1996 1995
------- -------
<S> <C> <C>
Current taxes.............................................. $ 6,352 $10,135
Deferred taxes............................................. 30,912 16,481
------- -------
$37,264 $26,616
======= =======
</TABLE>
A reconciliation from the statutory Federal income tax provision (benefit)
rate to the consolidated effective income tax provision (benefit) rate follows:
<TABLE>
<CAPTION>
YEARS ENDED JUNE
30
-------------------
1996 1995 1994
----- ----- -----
<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 ef-
fect.................................................. 6.6 5.6 --
Amortization of goodwill............................... 0.4 0.5 21.9
Valuation allowance on deferred tax assets............. (12.5) (60.6) 8.7
Excess of book over tax basis of assets sold........... -- 54.3 --
Other.................................................. 4.2 6.8 --
----- ----- -----
Consolidated effective income tax rate................... 33.7% 41.6% (4.4)%
===== ===== =====
</TABLE>
F-35
<PAGE>
GLENDALE FEDERAL BANK AND SUBSIDIARIES
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS--(CONTINUED)
JUNE 30, 1996, 1995 AND 1994
The components of the net deferred tax liability are as follows (in
thousands):
<TABLE>
<CAPTION>
JUNE 30
------------------
1996 1995
-------- --------
<S> <C> <C>
Deferred tax liabilities:
Loan fees.............................................. $ 51,765 $ 42,361
Income recognized for tax purposes on the cash basis... 3,331 4,871
Capitalized interest................................... 2,249 1,555
Gains on sales of real estate.......................... 369 381
Settlement of pension obligations...................... 7,890 5,372
FHLB stock dividends................................... 28,485 26,674
Gains on sales of loans................................ 8,298 15,024
Depreciation........................................... 405 1,960
Other.................................................. 4,173 12,976
-------- --------
Gross deferred tax liabilities........................... 106,965 111,174
-------- --------
Deferred tax assets:
State franchise tax.................................... 6,058 3,535
Net operating loss and tax credit carryovers........... 17,556 16,475
Provision for losses on real estate.................... 5,225 4,386
Provision for losses on loans.......................... 27,545 55,888
Accretion of discount on notes......................... 1,602 1,771
Earnings from partnerships and joint ventures.......... 995 3,746
Net unrealized holding loss............................ 4,685 --
Other.................................................. 12,488 16,913
-------- --------
Gross deferred tax assets................................ 76,154 102,714
Valuation allowance...................................... (101) (8,021)
-------- --------
Net deferred tax assets.................................. 76,053 94,693
-------- --------
Net deferred tax liability............................... $ 30,912 $ 16,481
======== ========
</TABLE>
Prior to March 10, 1993, the Bank filed a consolidated federal income tax
return with GLENFED. Under the tax sharing policy then in effect, the Bank
computed the income tax provision for itself and its subsidiaries and paid
taxes as if they were filing a consolidated return separate and apart from
GLENFED. On March 10, 1993, the Bank issued new preferred stock in exchange
for outstanding subordinated debentures and capital notes. The issuance of
this stock made the Bank ineligible to file a consolidated Federal income tax
return with GLENFED. Therefore, for the periods subsequent to that date, the
Bank has computed its federal income tax provision on the basis of the tax
return it actually files with the Internal Revenue Service. The Bank and its
subsidiaries continued to file a combined California Franchise Tax return with
GLENFED through August 26, 1993, but computed their tax provisions as if they
were filing separately.
On August 26, 1993, GLENFED was merged into a subsidiary of the Bank, which
is a member of the Bank group filing a federal consolidated income tax return
and a combined California Franchise Tax return. Therefore, for periods
subsequent to the merger, the Bank has computed its tax provisions and has
paid taxes on the basis of those returns. The intercompany liability or
receivable between the Bank and each of its subsidiaries, including the
subsidiary into which GLENFED was merged, continues to be computed as if each
subsidiary were filing a separate tax return.
F-36
<PAGE>
GLENDALE FEDERAL BANK AND SUBSIDIARIES
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS--(CONTINUED)
JUNE 30, 1996, 1995 AND 1994
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 repeals the reserve method
of accounting for bad debts for savings institutions effective for taxable
years beginning after 1995. The Bank, therefore, will be required to use the
specific charge-off method on its 1996 and subsequent federal income tax
returns. The Bank will be required to recapture its "applicable excess
reserves", which are its federal tax bad debt reserves in excess of the base
year reserve amount described in the following paragraph. The Bank will
include one-sixth of its applicable excess reserves in taxable income in each
year from 1996 through 2001. As of December 31, 1995, the Bank had
approximately $68 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, 1996 and 1995, the amount of those reserves was approximately $150
million and $158 million, respectively. The amount of the unrecognized
deferred tax liability at June 30, 1996 and 1995 was approximately $53 million
and $55 million, respectively. 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 has protested the proposed taxes and believes
there will not be a material adverse impact on the Bank's consolidated
financial position.
NOTE 15: FINANCIAL INSTRUMENTS
RISK MANAGEMENT
The Bank does not hold or issue financial instruments for trading purposes.
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
F-37
<PAGE>
GLENDALE FEDERAL BANK AND SUBSIDIARIES
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS--(CONTINUED)
JUNE 30, 1996, 1995 AND 1994
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 interest rate swaps totaling $200
million and $307 million at June 30, 1996 and 1995, respectively, which
constituted the Bank's only involvement in these agreements. The Bank's
exposure to credit loss in the event of nonperformance by the other party to
the agreement is mitigated by the Bank's credit policies in making the
agreement.
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 and $21.3 million of mortgage-backed securities was given for
certain agreements as of June 30, 1996 and 1995, respectively.
The following tables present the Bank's interest rate exchange agreements at
June 30, 1996 and 1995 (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
<CAPTION>
JUNE 30, 1995
-----------------------------------------------------
NOTIONAL WEIGHTED AVERAGE
TYPE AMOUNT INTEREST RATE TERMS TO MATURITY
---- --------- ---------------- -------------------------
<S> <C> <C> <C>
Paid--Fixed.............. $(215,000) 7.52% July 1995 to April 1997
Received--Variable....... 215,000 6.28
Paid--Variable........... (92,000) 6.35 August 1995 to March 1996
Received--Fixed.......... 92,000 9.65
</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, 1996 and 1995, the Bank had no futures positions outstanding.
At June 30, 1996 and 1995, $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
$6,555,000 and $6,855,000 at June 30, 1996 and 1995, respectively. At June 30,
1996 and 1995 there were no put options outstanding. Net deferred losses on
closed positions totaled $399,000 at June 30, 1995.
FAIR VALUE
Statement of Financial Accounting Standards No. 107, "Disclosures about Fair
Value of Financial Instruments" ("SFAS 107"), requires that the Bank disclose
estimated fair values for its financial instruments. Fair value estimates,
methods, and assumptions are set forth below for the Bank's financial
instruments. The Bank does not hold or issue financial instruments for trading
purposes.
F-38
<PAGE>
GLENDALE FEDERAL BANK AND SUBSIDIARIES
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS--(CONTINUED)
JUNE 30, 1996, 1995 AND 1994
Short-Term Investments and Debt Securities
The carrying amounts for short-term investments approximate fair value
because they mature in 90 days or less and do not present unanticipated credit
concerns. The fair value of longer-term investments and mortgage-backed
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 estimated fair value
of investments and mortgage-backed securities at June 30, 1996 and 1995 (in
thousands):
<TABLE>
<CAPTION>
JUNE 30, 1996 JUNE 30, 1995
--------------------- ---------------------
CARRYING ESTIMATED CARRYING ESTIMATED
AMOUNT FAIR VALUE AMOUNT FAIR VALUE
---------- ---------- ---------- ----------
<S> <C> <C> <C> <C>
Short-term investments............ $ 443,791 $ 446,836 $ 320,972 $ 325,574
U.S. Government and Federal agency
obligations:
Due in one year or less......... $ 8,086 $ 8,086 $ 17,354 $ 17,352
Mortgage-backed securities:
Adjustable...................... $2,006,840 $2,001,375 $2,604,644 $2,573,298
Fixed........................... $ 233,950 $ 234,524 $2,118,813 $2,061,367
</TABLE>
Loans
Fair values are estimated for portfolios of loans with similar financial
characteristics. Loans are segregated by type such as single-family
residential mortgage, multi-family, non-residential, commercial and consumer.
Each loan category is further segmented into fixed and adjustable rate
interest terms and by performing and non-performing categories.
The fair value of performing loans is calculated by discounting cash flows
through their estimated maturity using estimated market discount rates that
reflect the credit and interest rate risk inherent in the loan, adjusted to
reflect differences in servicing costs. The estimate of maturity is based on
market prepayment estimates for each loan classification.
Fair value for non-performing loans is based on estimated cash flows
discounted using a rate commensurate with the risk associated with the
estimated cash flows. Assumptions regarding credit risk, cash flows, and
discount rates are judgmentally determined by using available market
information.
F-39
<PAGE>
GLENDALE FEDERAL BANK AND SUBSIDIARIES
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS--(CONTINUED)
JUNE 30, 1996, 1995 AND 1994
The following table presents information for loans, including loans held for
sale and net of allowance for loan losses as of June 30, 1996 and 1995 (in
thousands):
<TABLE>
<CAPTION>
JUNE 30, 1996 JUNE 30, 1995
------------------------ -----------------------
CARRYING ESTIMATED CARRYING ESTIMATED
AMOUNT FAIR VALUE AMOUNT FAIR VALUE
----------- ----------- ----------- ----------
<S> <C> <C> <C> <C>
Single-family 1-4 units....... $ 7,523,479 $ 7,546,118 $ 6,280,687 $6,310,682
Multi-family:
5-36 units.................. 1,515,914 1,429,324 1,631,920 1,582,738
37 or more units............ 374,353 353,177 447,234 431,469
Non-residential............... 1,309,965 1,246,136 1,547,504 1,499,803
Consumer...................... 69,884 69,562 76,511 77,690
Commercial.................... 5,692 5,687 18,668 18,601
----------- ----------- ----------- ----------
10,799,287 10,650,004 10,002,524 9,920,983
Less unearned discounts,
undisbursed loan funds and
deferred loan fees........... (71,378) -- (103,227) --
----------- ----------- ----------- ----------
$10,727,909 $10,650,004 $ 9,899,297 $9,920,983
=========== =========== =========== ==========
</TABLE>
Deposit Liabilities
Under SFAS 107, the fair value of deposits with no stated maturity, such as
passbook accounts, checking and NOW accounts, and money market
checking/savings accounts, is equal to the amount payable on demand as of June
30, 1996 and 1995. The fair value of certificates of deposit is based on the
discounted value of contractual cash flows using estimated market rates that
reflect certificates of deposit with similar terms and maturities.
The following table presents information for deposit liabilities (in
thousands):
<TABLE>
<CAPTION>
JUNE 30, 1996 JUNE 30, 1995
--------------------- ---------------------
CARRYING ESTIMATED CARRYING ESTIMATED
AMOUNT FAIR VALUE AMOUNT FAIR VALUE
---------- ---------- ---------- ----------
<S> <C> <C> <C> <C>
Checking/NOW accounts............. $ 778,980 $ 778,980 $ 661,853 $ 661,853
Passbook accounts................. 492,777 492,777 551,905 551,905
Money market checking/savings..... 1,719,319 1,719,319 1,272,012 1,272,012
Certificates of deposit with re-
maining maturities:
In six months or less........... 3,422,891 3,422,446 2,614,617 2,620,671
Between six months and one year. 1,085,110 1,083,607 2,191,627 2,195,848
Between one and three years..... 1,100,419 1,091,786 1,282,163 1,291,808
Beyond three years.............. 124,480 122,731 160,703 161,137
---------- ---------- ---------- ----------
$8,723,976 $8,711,646 $8,734,880 $8,755,234
========== ========== ========== ==========
</TABLE>
Borrowings
The estimate of the fair value of the Bank's borrowings was based on the
discounted value of the future cash flows expected to be paid on such
borrowings using estimated market discount rates that reflect borrowings with
similar terms and maturities.
F-40
<PAGE>
GLENDALE FEDERAL BANK AND SUBSIDIARIES
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS--(CONTINUED)
JUNE 30, 1996, 1995 AND 1994
The following table represents the carrying value and estimated fair value
of the Bank's borrowings at June 30, 1996 and 1995 (in thousands):
<TABLE>
<CAPTION>
JUNE 30, 1996 JUNE 30, 1995
--------------------- ---------------------
CARRYING ESTIMATED CARRYING ESTIMATED
AMOUNT FAIR VALUE AMOUNT FAIR VALUE
---------- ---------- ---------- ----------
<S> <C> <C> <C> <C>
Securities sold under agreements to
repurchase........................ $ 758,050 $ 756,995 $2,695,176 $2,684,073
Borrowings from the FHLB........... 3,838,000 3,780,378 3,495,000 3,509,904
Subordinated debt.................. 10,506 11,880 14,227 13,084
Notes payable...................... 93 93 1,177 1,177
Collateralized notes payable....... -- -- 13,479 13,605
---------- ---------- ---------- ----------
$4,606,649 $4,549,346 $6,219,059 $6,221,843
========== ========== ========== ==========
</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, 1996 and 1995 include "Cash and amounts due from
banks", "Interest receivable," "Investment in capital stock of Federal Home
Loan Bank", and accounts payable and accrued expenses.
Interest Rate Swap Agreements
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.
As of June 30, 1996 and 1995, the Bank had entered into interest rate swap
agreements with certain financial institutions having notional principal
amounts totaling $200,000,000 and $307,000,000, respectively. At June 30, 1996
and 1995 the estimated fair value of the interest rate swap agreements was a
net payable of $2,740,000 and a net receivable of $237,000, respectively.
Commitments
As discussed further in Note 16, the Bank had various commitments
outstanding as of June 30, 1996 and 1995 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
F-41
<PAGE>
GLENDALE FEDERAL BANK AND SUBSIDIARIES
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS--(CONTINUED)
JUNE 30, 1996, 1995 AND 1994
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 and goodwill. In addition, the tax ramifications
related to the realization of the unrealized gains and losses can have a
significant effect on fair value estimates and have not been considered in any
of the estimates.
NOTE 16: COMMITMENTS AND CONTINGENT LIABILITIES
In the normal course of business there are outstanding various commitments
and contingent liabilities which are not reflected in the accompanying
consolidated financial statements. Management does not anticipate any material
loss as a result of these transactions. The following is a summary of
commitments and contingent liabilities (in thousands):
<TABLE>
<CAPTION>
JUNE 30
----------------
1996 1995
-------- -------
<S> <C> <C>
Commitments to sell loans and mortgage-backed securities... $ 17,880 $24,288
Standby letters of credit and unused lines of credit
provided
consumers................................................. 134,499 93,100
Commitments to originate loans receivable:
Variable.................................................. 33,962 27,613
Fixed..................................................... 9,939 12,762
Commitments to purchase loans receivable:
Variable.................................................. 135,396 8,242
Fixed..................................................... 172,000 680
</TABLE>
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.
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.
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.
F-42
<PAGE>
GLENDALE FEDERAL BANK AND SUBSIDIARIES
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS--(CONTINUED)
JUNE 30, 1996, 1995 AND 1994
The Bank and certain of its subsidiaries are involved in litigation arising
in the normal course of business. Although the legal responsibility and
financial impact with respect to such litigation cannot presently be
ascertained, the Bank does not anticipate that the final resolution of these
matters will result in the payment of monetary damages that would be material
in relation to the consolidated financial condition or results of operations
of the Bank.
NOTE 17: REGULATORY CAPITAL
FIRREA and the regulations promulgated thereunder established certain
minimum levels of regulatory capital for savings institutions subject to
Office of Thrift Supervision ("OTS") supervision. The Bank must follow
specific capital guidelines stipulated by the OTS which involve quantitative
measures of the Bank's assets, liabilities and certain off-balance sheet
items. An institution that fails to comply with its regulatory capital
requirements must obtain OTS approval of a capital plan and can be subject to
a capital directive and certain restrictions on its operations. At June 30,
1996, the minimum regulatory capital requirements were:
. Tangible and core capital of 1.5 percent and 3 percent, respectively,
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 value of
risk-weighted assets.
At June 30, 1996, 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, 1996 that management
believes have changed the institution's category.
F-43
<PAGE>
GLENDALE FEDERAL BANK AND SUBSIDIARIES
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS--(CONTINUED)
JUNE 30, 1996, 1995 AND 1994
The following table summarizes the Bank's actual capital and required
capital as of June 30, 1996 and 1995 (dollars in thousands):
<TABLE>
<CAPTION>
TIER 1
TANGIBLE CORE RISK-BASED RISK-BASED
CAPITAL CAPITAL CAPITAL CAPITAL
-------- -------- ---------- ----------
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%
<CAPTION>
JUNE 30, 1995
<S> <C> <C> <C> <C>
Actual capital:
Amount........................... $868,703 $868,703 $868,703 $ 962,491
Ratio............................ 5.44% 5.44% 10.02% 11.15%
FIRREA minimum required capital:
Amount........................... $239,565 $479,131 N/A $ 700,666
Ratio............................ 1.50% 3.00% N/A 8.00%
FDICIA well capitalized required
capital:
Amount........................... N/A $798,551 $534,635 $ 866,697
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, 1996 and 1995 (in thousands):
<TABLE>
<CAPTION>
JUNE 30
--------------------
1996 1995
---------- --------
<S> <C> <C>
Capital in accordance with GAAP.......................... $ 957,451 $941,847
Adjustments for tangible and core capital:
Goodwill and other intangible assets................... (59,216) (63,538)
Investments in and advances to non-permissible subsidi-
aries................................................. (2,830) (43)
Net unrealized holding loss (gain) on debt securities
available for sale.................................... 11,391 (37)
Purchased mortgage servicing rights in excess of 90% of
fair value............................................ -- (9,526)
---------- --------
Total tangible capital................................... 906,796 868,703
Adjustments for core capital............................. -- --
---------- --------
Total core capital....................................... 906,796 868,703
Adjustments for risk-based capital:
Allowance for general loan losses(1)................... 104,339 104,786
Equity risk investments required to be deducted........ (9,469) (10,998)
---------- --------
Total risk-based capital................................. $1,001,666 $962,491
========== ========
</TABLE>
- --------
(1) Limited to 1.25% of risk-weighted assets.
F-44
<PAGE>
GLENDALE FEDERAL BANK AND SUBSIDIARIES
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS--(CONTINUED)
JUNE 30, 1996, 1995 AND 1994
NOTE 18: 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 Recapitalization resulted in the issuance of 31.7 million shares of the
Bank's 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 new series of preferred stock were issued in the Recapitalization: 8.9
million shares of Series D Preferred Stock and 8.0 million shares of Series E
Preferred Stock. All of the Series D Preferred Stock remaining outstanding at
August 27, 1994 was mandatorily converted into common stock on a share-for-
share basis on that date.
F-45
<PAGE>
GLENDALE FEDERAL BANK AND SUBSIDIARIES
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS--(CONTINUED)
JUNE 30, 1996, 1995 AND 1994
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 also 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 1996, the Bank entered into separately negotiated agreements
with certain holders of its Series E Preferred Stock providing, in the
aggregate, for exchanges of 2,226,118 shares of the Series E Preferred Stock
for 5,901,771 shares 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 per share earnings results, 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 available to common shareholders in the
calculation of earnings per share. The Bank has made additional exchanges of
Bank common stock for Series E Preferred Stock since June 30, 1996 and may
enter into further exchange agreements in the future.
Warrants
The Bank has a class of common stock purchase warrants outstanding (the
"Warrants") totaling 19,674 at June 30, 1996 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 22,090
Warrants in fiscal 1996.
F-46
<PAGE>
GLENDALE FEDERAL BANK AND SUBSIDIARIES
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS--(CONTINUED)
JUNE 30, 1996, 1995 AND 1994
In the Recapitalization, standby purchasers received an aggregate of
approximately 10.85 million transferable Standby Warrants, none of which had
been exercised as of June 30, 1996. 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.
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. The OTS has granted approval to the Bank
to pay dividends on its Series E Preferred Stock, subject to the limitation
that after making such payments the Bank's core and risk-based capital ratios
remain above 4.0% and 8.0%, respectively.
Retained earnings at June 30, 1996 and 1995 include approximately $45
million and $53 million, respectively, for which no provision for Federal
income tax has been made. These amounts represent allocations of earnings to
bad debt reserves for tax purposes and are a restriction upon retained
earnings. If, in the future, this portion of retained earnings and an
additional approximately $105 million of similar tax basis reserves from
acquired associations are reduced for any purpose other than tax bad debt
losses, Federal income taxes may be imposed at the then applicable rates.
NOTE 19: EMPLOYEE BENEFIT PLAN
The 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-47
<PAGE>
GLENDALE FEDERAL BANK AND SUBSIDIARIES
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS--(CONTINUED)
JUNE 30, 1996, 1995 AND 1994
The following table sets forth the Plan's funded status as of March 31, 1996
and 1995 and amounts recognized in the Bank's statements of financial
condition at June 30, 1996 and 1995 (in thousands):
<TABLE>
<CAPTION>
JUNE 30
----------------
1996 1995
------- -------
<S> <C> <C>
Actuarial present value of benefit obligations:
Vested accumulated benefits............................................. $44,159 $38,497
Non-vested accumulated benefits......................................... 1,543 1,753
------- -------
Total accumulated benefits............................................ $45,702 $40,250
======= =======
Projected benefit obligation for service rendered to date................. $54,292 $49,276
Plan assets at fair value; primarily listed stocks, U. S.
Government obligations and savings certificates of the Bank.............. 79,873 69,879
------- -------
Funded status--Plan assets in excess of projected benefit obligation...... 25,581 20,603
Items not yet recognized in earnings:
Unrecognized net gain................................................... (8,613) (4,483)
Prior service cost not yet recognized in net periodic pension cost...... 210 227
Unrecognized net asset at June 30, 1996 and 1995 being recognized
over approximately 12 years......................................... (339) (790)
------- -------
Prepaid pension cost included in "Other assets" at end of period.......... $16,839 $15,557
======= =======
</TABLE>
Net periodic pension income for fiscal 1996, 1995 and 1994 included the
following components (in thousands):
<TABLE>
<CAPTION>
YEARS ENDED JUNE 30
--------------------------
1996 1995 1994
-------- ------- -------
<S> <C> <C> <C>
Service cost-benefits earned during the period...... $ 2,246 $ 2,950 $ 3,137
Interest cost on projected benefit obligation....... 4,306 3,932 3,669
Actual return on Plan assets........................ (11,566) (4,494) (2,221)
Net amortization and deferral....................... 3,732 (2,477) (4,586)
-------- ------- -------
Net periodic pension income......................... $ (1,282) $ (89) $ (1)
======== ======= =======
</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
----------------
1996 1995 1994
---- ---- ----
<S> <C> <C> <C>
Weighted average discount rate used to calculate benefit
obligations................................................ 8.00% 8.50% 8.25%
Assumed rate of increase in future compensation.............. 4.50% 4.50% 5.00%
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 1996, 1995 and 1994 were $739,000, $851,000 and $942,000, respectively.
F-48
<PAGE>
GLENDALE FEDERAL BANK AND SUBSIDIARIES
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS--(CONTINUED)
JUNE 30, 1996, 1995 AND 1994
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 1996, 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 fifteen years. Payments of
such amounts normally commence at the later of the director's termination date
or the director's attainment of age 65.
NOTE 20: 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.
Extraordinary items, net for fiscal 1994 consisted of a $14.1 million gain
(net of income taxes of $9.6 million) resulting from the exchange of $49.1
million of GLENFED's convertible subordinated debentures for common stock of
the Bank in the Recapitalization.
NOTE 21: STOCK OPTION PLAN
The Board of Directors of the Bank adopted a stock option plan (the "New
Plan") for the Bank in replacement of the then existing stock option plans of
GLENFED, which plans, including options granted thereunder, terminated upon
completion of the Recapitalization. The New Plan has a term of five years and
covers an aggregate of 4.7 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 New 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-49
<PAGE>
GLENDALE FEDERAL BANK AND SUBSIDIARIES
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS--(CONTINUED)
JUNE 30, 1996, 1995 AND 1994
The following is a summary of transactions under the stock option plan
described above:
<TABLE>
<CAPTION>
NUMBER OF RANGE OF
SHARES OPTION PRICES
--------- --------------
<S> <C> <C>
Balance, June 30, 1993......................... -- $ --
Granted........................................ 1,650,000 6.375-9.00
Cancelled or expired........................... (38,125) 9.00
Exercised...................................... (1,875) 9.00
--------- --------------
Balance, June 30, 1994......................... 1,610,000 6.375-9.00
Granted........................................ 1,825,000 9.75-12.625
Cancelled or expired........................... (66,250) 9.00-12.625
Exercised...................................... (52,500) 9.00-12.625
--------- --------------
Balance, June 30, 1995......................... 3,316,250 6.375-12.625
Granted........................................ 750,750 9.00-16.125
Cancelled or expired........................... (82,500) 9.00-14.50
Exercised...................................... (106,000) 6.375-14.50
--------- --------------
Balance, June 30, 1996......................... 3,878,500 $6.375-$16.125
========= ==============
</TABLE>
At June 30, 1996, 2,244,293 options were exercisable, with 661,125 shares
available for future grants. The weighted average option price for shares under
option and exercisable was $10.78 and $9.76, respectively, at June 30, 1996.
F-50
<PAGE>
GLENDALE FEDERAL BANK AND SUBSIDIARIES
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS--(CONTINUED)
JUNE 30, 1996, 1995 AND 1994
NOTE 22: QUARTERLY RESULTS OF OPERATIONS (UNAUDITED)
<TABLE>
<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 before
provision for loan losses......... 87,459 86,722 80,947 77,937
Provision for loan losses.......... (10,411) (10,376) (10,394) (9,169)
--------- --------- --------- ---------
Net interest income................ 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.......................... (66,514) (64,252) (60,196) (57,902)
Other expense...................... (3,164) (5,707) (4,006) (1,938)
--------- --------- --------- ---------
Earnings (loss) before income tax
(provision) 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>
<TABLE>
<CAPTION>
QUARTERS ENDED
------------------------------------------
JUNE 30, MARCH 31, DEC. 31, SEPT. 30,
1995 1995 1994 1994
--------- --------- --------- ---------
(IN THOUSANDS, EXCEPT PER SHARE DATA)
<S> <C> <C> <C> <C>
Interest income.................... $ 279,014 $ 274,316 $ 269,554 $ 263,774
Interest expense................... (205,610) (199,637) (188,203) (175,489)
--------- --------- --------- ---------
Net interest income before
provision for loan losses......... 73,404 74,679 81,351 88,285
Provision for loan losses.......... (10,452) (15,442) (21,434) (18,822)
--------- --------- --------- ---------
Net interest income................ 62,952 59,237 59,917 69,463
Gain on sale of banking operations. -- 50,713 23,000 --
Other income....................... 11,999 13,944 17,242 17,548
General and administrative
expenses.......................... (53,521) (53,496) (65,888) (70,936)
Other expense...................... (3,784) (3,608) (2,629) (6,706)
--------- --------- --------- ---------
Earnings before income tax
provision and
extraordinary items............... 17,646 66,790 31,642 9,369
Income tax provision............... (5,544) (25,871) (20,731)
Extraordinary items, net........... -- -- 1,755 --
--------- --------- --------- ---------
Net earnings....................... $ 12,102 $ 40,919 $ 12,666 $ 9,369
========= ========= ========= =========
Earnings per share:
Primary:
Earnings before extraordinary
items........................... $ 0.18 $ 0.81 $ 0.16 $ 0.12
Net earnings..................... 0.18 0.81 0.20 0.12
Fully diluted:
Earnings before extraordinary
items........................... 0.18 0.64 0.16 0.12
Net earnings..................... 0.18 0.64 0.20 0.12
Dividends per common share declared
and paid.......................... -- -- -- --
Common stock price range:
High.............................. $ 14 $ 10 7/8 $ 11 3/4 $ 13 1/2
Low............................... $ 10 $ 8 3/4 $ 7 3/8 $ 10 3/8
</TABLE>
F-51
<PAGE>
===============================================================================
OFFICE OF THRIFT SUPERVISION
Washington, D.C. 20552
FORM 10-Q
(Mark One)
[X] QUARTERLY REPORT PURSUANT TO SECTION 13 OR 15(d) OF THE SECURITIES EXCHANGE
ACT OF 1934
For the quarterly period ended September 30, 1996
-------------------------------------------------
OR
[ ] TRANSITION REPORT PURSUANT TO SECTION 13 OR 15(d) OF THE SECURITIES
EXCHANGE ACT OF 1934
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 (I.R.S. Employer
of incorporation or organization) Identification Number)
414 North Central Avenue, Glendale, California 91203
(Address of principal executive offices) (Zip Code)
(818) 500-2000
(Registrant's telephone number, including area code)
Not Applicable
(Former name, former address, and former fiscal year, if changed since last
report.)
Indicate by check mark whether the registrant (1) has filed all reports required
to be filed by Section 13 or 15(d) of the Securities Exchange Act of 1934 during
the preceding 12 months (or for such shorter period that the registrant was
required to file such reports), and (2) has been subject to such filing
requirements for the past 90 days.
Yes X No
---- ----
The number of shares of issuer's $1.00 par value common stock outstanding as of
September 30, 1996 was 47,165,668.
================================================================================
<PAGE>
GLENDALE FEDERAL BANK AND SUBSIDIARIES
INDEX
PAGE
----
PART I. FINANCIAL INFORMATION
ITEM 1. FINANCIAL STATEMENTS (UNAUDITED)
CONSOLIDATED STATEMENTS OF FINANCIAL CONDITION -
SEPTEMBER 30, 1996 AND JUNE 30, 1996........................ 1
CONSOLIDATED STATEMENTS OF OPERATIONS -
THREE MONTHS ENDED SEPTEMBER 30, 1996 AND 1995.............. 2
CONSOLIDATED STATEMENTS OF CASH FLOWS -
THREE MONTHS ENDED SEPTEMBER 30, 1996 AND 1995.............. 3
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS................. 5-6
ITEM 2. MANAGEMENT'S DISCUSSION AND ANALYSIS OF FINANCIAL
CONDITION AND RESULTS OF OPERATIONS...................... 7-23
PART II. OTHER INFORMATION
ITEM 6. EXHIBITS AND REPORTS ON FORM 8-K................... 24
<PAGE>
PART I - FINANCIAL INFORMATION
Item 1. Financial Statements (unaudited)
GLENDALE FEDERAL BANK AND SUBSIDIARIES
CONSOLIDATED STATEMENTS OF FINANCIAL CONDITION
(dollars in thousands except share data)
<TABLE>
<CAPTION>
September 30, June 30,
1996 1996
-------------- ----------------
<S> <C> <C>
ASSETS
Cash and amounts due from banks $ 140,207 $ 153,608
Federal funds sold and securities purchased under resale agreements 684,000 433,000
Other debt securities held to maturity, at amortized cost
(fair value: $18,586 at September 30,
1996 and $18,921 at June 30, 1996) 18,536 18,877
Mortgage-backed securities held to maturity, net
(fair value: $1,303,615 at September 30,
1996 and $1,351,344 at June 30, 1996) 1,303,612 1,356,235
Mortgage-backed securities available for sale, at fair value 817,633 884,555
Loans receivable, net of allowance for loan losses of $176,631 at
September 30, 1996 and $186,756 at June 30, 1996 11,165,388 10,694,594
Loans held for sale, at lower of cost or market 13,760 33,315
Real estate held for sale or investment 11,828 12,072
Real estate acquired in settlement of loans 79,616 78,249
Interest receivable 94,133 89,237
Investment in capital stock of Federal Home Loan Bank, at cost 221,900 192,842
Premises and equipment, at cost, less accumulated depreciation 126,963 126,368
Mortgage servicing rights 143,272 93,970
Capitalized servicing fees receivable 31,328 33,429
Goodwill and other intangible assets, less accumulated amortization 57,929 59,216
Other assets 194,262 196,997
----------- -----------
$15,104,367 $14,456,564
=========== ===========
LIABILITIES AND STOCKHOLDERS' EQUITY
Liabilities:
Deposits $ 8,815,134 $ 8,723,976
Securities sold under agreements to repurchase 641,252 758,050
Borrowings from the Federal Home Loan Bank 4,438,000 3,838,000
Other borrowings 13,064 10,599
Other liabilities and accrued expenses 234,338 131,224
Income taxes payable 24,642 37,264
----------- -----------
Total liabilities 14,166,430 13,499,113
----------- -----------
Stockholders' Equity:
Preferred stock, Series E, $1.00 par value per share
(8,050,000 shares authorized; 5,681,482 shares issued
and outstanding at September 30, 1996; 5,823,882 shares
issued and outstanding at June 30, 1996) 5,681 5,824
Common stock, $1.00 par value per share
(100,000,000 shares authorized; 47,165,668 shares
issued and outstanding at September 30, 1996; 46,729,698
shares issued and outstanding at June 30, 1996) 47,166 46,730
Additional paid-in capital 791,041 790,724
Net unrealized holding loss on mortgage-backed
securities available for sale (8,423) (11,391)
Retained earnings-substantially restricted 102,472 125,564
----------- -----------
Total stockholders' equity 937,937 957,451
----------- -----------
$15,104,367 $14,456,564
=========== ===========
</TABLE>
See accompanying Notes to Consolidated Financial Statements
<PAGE>
GLENDALE FEDERAL BANK AND SUBSIDIARIES
CONSOLIDATED STATEMENTS OF OPERATIONS
(in thousands except per share data)
<TABLE>
<CAPTION>
Three Months Ended
September 30
---------------------------------
1996 1995
---------- ---------
<S> <C> <C>
Interest income:
Loans receivable $210,187 $197,678
Mortgage-backed securities 36,353 72,724
Investments 14,129 16,031
---------- ---------
Total interest income 260,669 286,433
---------- ---------
Interest expense:
Deposits 101,696 112,539
Short-term borrowings 9,813 40,893
Other borrowings 59,797 55,064
---------- ---------
Total interest expense 171,306 208,496
---------- ---------
Net interest income 89,363 77,937
Provision for loan losses 7,354 9,169
---------- ---------
Net interest income after provision for loan losses 82,009 68,768
Other income:
Loan servicing income, net 8,301 1,926
Other fees and service charges 12,851 10,431
Loss on sale of loans and mortgage-backed securities, net (217) (2,027)
Other income, net 127 869
---------- ---------
Total other income 21,062 11,199
---------- ---------
Other expenses:
Compensation and employee benefits 27,568 24,379
Regulatory insurance 6,201 7,685
Occupancy expense, net 7,856 7,220
Advertising and promotion 7,522 4,932
Furniture, fixtures and equipment 2,947 2,458
Stationery, supplies and postage 2,742 2,228
Other general and administrative expenses 14,325 9,000
---------- ---------
Total general and administrative expenses 69,161 57,902
SAIF Special Assessment 58,672 -
Operations of real estate held for sale or investment 322 (282)
Operations of real estate acquired in settlement of loans 1,316 940
Amortization of goodwill and other intangible assets 1,287 1,280
---------- ---------
Total other expenses 130,758 59,840
---------- ---------
Earnings (loss) before income tax provision (benefit) (27,687) 20,127
Income tax provision (benefit) (7,702) 6,316
---------- ---------
Net earnings (loss) $(19,985) $ 13,811
========== =========
Net earnings (loss) $(19,985) $ 13,811
Dividends declared on preferred stock (3,107) (4,403)
Premium on exchange of preferred stock for common stock (503) -
---------- ---------
Earnings (loss) applicable to common shareholders $(23,595 $ 9,408
========== =========
Earnings (loss) per share
Primary $ (0.50) $ 0.21
Fully diluted $ (0.50) $ 0.21
</TABLE>
See accompanying Notes to Consolidated Financial Statements
<PAGE>
GLENDALE FEDERAL BANK AND SUBSIDIARIES
CONSOLIDATED STATEMENTS OF CASH FLOWS
(in thousands)
<TABLE>
<CAPTION>
Three Months Ended September 30
-----------------------------------
1996 1995
---------------- ---------------
<S> <C> <C>
CASH FLOWS FROM OPERATING ACTIVITIES:
Net earnings (loss) $(19,985) $13,811
Adjustments to reconcile net earnings (loss) to net cash provided
by operating activities:
Amortization of discounts and accretion of premiums, net 2,917 973
Accretion of deferred loan fees (1,388) (1,649)
Provision for loan losses 7,354 9,169
Loss on sale of loans and mortgage-backed securities, net 217 2,027
Depreciation and amortization of servicing assets 9,349 14,693
Provision for losses on real estate 2,037 3,117
Gain on sale of real estate (2,136) (4,577)
Amortization of goodwill and other intangible assets 1,287 1,280
Net change in loans originated or purchased for resale 19,273 (21,611)
(Increase) decrease in interest receivable (4,896) 320
FHLB stock dividend received (2,749) (2,183)
(Increase) decrease in other assets 2,857 (262)
Accrual of SAIF special assessment 58,672 -
Increase in other liabilities 32,252 25,049
Other items (1,285) (9,848)
---------------- --------------
Total adjustments 123,761 16,498
---------------- --------------
Net cash provided by operating activities 103,776 30,309
---------------- --------------
CASH FLOWS FROM INVESTING ACTIVITIES:
Net decrease in other debt securities with original maturities of 3 months or less 341 11,397
Purchase of other debt securities held to maturity (3,000) -
Proceeds from maturities of other debt securities held to maturity 3,000 20,045
Principal payments on mortgage-backed securities held to maturity 52,194 241,951
Principal payments on mortgage-backed securities available for sale 69,017 55
Loans originated (net of refinances) for investment (163,211) (92,815)
Loans purchased for investment (745,782) (21,061)
Net change in undisbursed loan funds (280) (1,012)
Principal payments on loans held for investment 410,676 287,634
Proceeds from sale of loans held for investment 1,633 153,214
Cash invested in real estate (4,035) (4,515)
Cash received from real estate investments and sale of real estate
acquired in settlement of loans 25,266 49,517
Purchase of FHLB stock (26,309) (1,921)
Redemption of FHLB stock - 8,742
Net increase in premises and equipment (4,285) (2,585)
Purchase of mortgage servicing rights (52,846) -
---------------- ---------------
Net cash (used) provided by investing actitivities (437,621) 648,646
---------------- ---------------
</TABLE>
Statement continued on next page
<PAGE>
GLENDALE FEDERAL BANK AND SUBSIDIARIES
CONSOLIDATED STATEMENTS OF CASH FLOWS - (Continued)
(in thousands)
<TABLE>
<CAPTION>
Three Months Ended September 30
-------------------------------
1996 1995
----------- ------------
<S> <C> <C>
CASH FLOWS FROM FINANCING ACTIVITIES:
Net increase in deposits 91,158 143,079
Net change in short-term borrowings with original maturities of 3 months or less (116,798) (320,367)
Proceeds from fundings of FHLB advances 1,400,000 -
Repayments of FHLB advances (800,000) -
Repayment of other borrowings (12) (16,951)
Proceeds from issuance of common stock 610 214
Payment of dividends on preferred stock (3,514) (4,402)
----------- ------------
Net cash provided (used) by financing activities 571,444 (198,427)
----------- ------------
Net increase in cash and cash equivalents 237,599 480,528
Cash and cash equivalents at beginning of period 586,608 435,697
----------- ------------
Cash and cash equivalents at end of period $ 824,207 $ 916,225
=========== ============
</TABLE>
See accompanying Notes to Consolidated Financial Statements
4
<PAGE>
GLENDALE FEDERAL BANK AND SUBSIDIARIES
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
SEPTEMBER 30, 1996
NOTE (1) - BASIS OF PRESENTATION
The accompanying consolidated financial statements have been prepared in
accordance with generally accepted accounting principles and with the
instructions to Form 10-Q and Rule 10-01 of Regulation S-X for interim financial
information. Accordingly, they do not include all of the information and
footnotes required by generally accepted accounting principles for complete
financial statements. For further information, refer to the consolidated
financial statements and footnotes thereto included in the Bank's Annual Report
on Form 10-K for the fiscal year ended June 30, 1996.
In the opinion of Glendale Federal Bank, Federal Savings Bank and its
subsidiaries ("Glendale Federal" or the "Bank"), the accompanying unaudited
consolidated financial statements contain all adjustments (consisting solely of
normal recurring accruals) necessary for a fair presentation of the Bank's
financial condition as of September 30, 1996 and June 30, 1996, the results of
its operations for the three months ended September 30, 1996 and 1995, and its
cash flows for the three months ended September 30, 1996 and 1995. 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 both September 30, 1996 and June 30, 1996. Certain reclassifications
have been made to prior years' consolidated financial statements to conform to
the September 30, 1996 presentation.
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. Actual
results could differ significantly from those estimates and assumptions.
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 securities
purchased under resale agreements."
Supplemental disclosure of cash flow information is as follows (in thousands):
<TABLE>
<CAPTION>
Three months ended
September 30
-------------------------------
1996 1995
----------------- -----------
<S> <C> <C>
Cash paid for:
Interest $184,177 $194,900
Income taxes 6,140 ---
Non-cash investing and financing
activities:
Principal reductions to loans due to
foreclosure 42,053 44,467
Loans exchanged for mortgage-backed
securities 11,685 22,668
Loans made to facilitate the sale of
real estate held for investment and
real estate acquired in settlement of loans 15,800 23,176
Net transfers of loans from held for
investment to held for sale 82 5,628
Exchange of Series E preferred stock
for common stock 142 ---
Issuance of common stock in exchange
for Series E preferred stock 370 ---
</TABLE>
5
<PAGE>
GLENDALE FEDERAL BANK AND SUBSIDIARIES
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS - (Continued)
NOTE (3) - NET EARNINGS (LOSS) PER SHARE INFORMATION
For the purpose of calculating net earnings (loss) per share, the Bank used
the following numbers of shares for the periods presented (in thousands):
<TABLE>
<CAPTION>
Three months ended
September 30
-------------------------------
1996 1995
------------- -----------
<S> <C> <C>
Primary net earnings (loss) per share 47,112 47,050
Fully diluted net earnings (loss) per share 47,112 47,050
</TABLE>
For primary and fully-diluted calculations, no adjustments were made to the
weighted average number of common shares for the quarter ended September 30,
1996 as their effect would be anti-dilutive.
During the quarter ended September 30, 1996, the Bank entered into separately
negotiated agreements with certain holders of its Series E preferred stock
providing, in the aggregate, for exchanges of 142,400 shares of the Series E
preferred stock for 370,452 shares 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 (loss) 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
loss to arrive at the loss applicable to common shareholders in the calculation
of loss per share.
Subsequent to September 30, 1996, the Bank has entered into similar agreements
with holders of its Series E preferred stock providing, in the aggregate, for
exchanges of 499,500 shares of the Series E preferred stock for 1,303,695 shares
of Bank common stock. These exchanges were also 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. The Bank may enter into further exchange
agreements in the future.
The table in Exhibit 11.1 presents the calculation of net earnings (loss) per
share on a primary and fully-diluted basis for the three months ended September
30,1996 and 1995, respectively.
NOTE (4) - 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 is
payable by all SAIF-insured institutions at the rate of $0.657 per $100 of
deposits held by such institutions at March 31, 1995. The money collected will
recapitalize the SAIF reserve to the level required by law. In September 1996,
the Bank recorded an accrual of $58.7 million ($37.6 million after-tax) for this
assessment.
The new law provides for the merger, subject to certain conditions, of the
SAIF into the Bank Insurance Fund ("BIF") by 1999 and also requires BIF-insured
institutions to share in the payment of interest on the bonds issued by a
specially created government entity ("FICO"), the proceeds of which were
applied toward resolution of the thrift industry crisis in the 1980s. Beginning
on January 1, 1997, in addition to the insurance premiums that will be paid by
SAIF-insured institutions to maintain the SAIF reserve at its required level,
which are expected to range from zero basis points to 27 basis points pursuant
to the current risk classification system, SAIF-insured institutions will pay
deposit insurance premiums at the annual rate of 6.4 basis points of their
insured deposits and BIF-insured institutions will pay deposit insurance
premiums at the annual rate of 1.3 basis points of their insured deposits
towards the payment of interest on the FICO bonds.
The recapitalization of the SAIF is expected to result in lower deposit
insurance premiums in the future for most SAIF-insured financial institutions,
including the Bank. Based on the Bank's deposits at September 30, 1996, the
expected new premium level, inclusive of the payment of interest on the FICO
bonds, would result in an estimated annual pre-tax savings of $14.5 million
beginning in the March 1997 quarter.
6
<PAGE>
ITEM 2. MANAGEMENT'S DISCUSSION AND ANALYSIS OF FINANCIAL CONDITION AND RESULTS
OF OPERATIONS
OVERVIEW
EARNINGS PERFORMANCE
The Bank recorded a net loss of $20.0 million, or $0.50 per share, for the
three months ended September 30, 1996, compared to net earnings of $13.8
million, or $0.21 per share, for the same period last year. The net loss in the
current quarter includes an after-tax accrual of $37.6 million for a special
assessment by the FDIC to recapitalize the SAIF. See Note 4 of the Notes to
Consolidated Financial Statements for additional discussion.
During the quarter ended September 30, 1996, the Bank exchanged 142,400
shares of the Series E preferred stock for 370,452 shares of Bank common stock.
See Note 3 of the Notes to Consolidated Financial Statements for additional
discussion regarding this transaction.
Excluding the SAIF assessment and the effect of the conversion of preferred
stock to common stock on the calculation of earnings per share, earnings would
have increased by $3.8 million, or 28%, to $17.6 million, or $0.27 per fully
diluted share, for the quarter ended September 30, 1996, compared to the same
period last year.
The improvement in earnings, exclusive of the SAIF assessment, in the three
months ended September 30, 1996, compared to the same period last year, reflects
higher net interest income, a lower level of provision for loan losses and
increases in loan servicing income and other fees and service charges, partially
offset by 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 2.49% at September 30, 1996, as compared
with 2.02% at September 30, 1995 and 2.41% at June 30, 1996. The Bank's interest
rate spread continued to improve in the first quarter of fiscal 1997 primarily
due to a decline in the Bank's cost of funds. The decrease in the cost of funds
reflects a lower interest rate environment, the replacement of maturing higher-
cost Federal Home Loan Bank 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. See "Results of
Operations--Net Interest Income" for a discussion of the factors affecting the
Bank's yield-cost spread for the first quarter of fiscal 1997, compared to the
first quarter of fiscal 1996.
STRATEGIC DIRECTION
The Bank continues to experience growth in its new business lines, which
were introduced early in fiscal 1996. During the quarter ended September 30,
1996, the net increase in the Bank's number of checking accounts was 17,960,
including 3,958 business checking accounts. Retail and business checking
accounts increased a combined $62 million, or 9.5%, to $715 million, during the
quarter.
Asset growth in the Bank's new business lines remained relatively modest
during the quarter ended September 30, 1996. The Bank's commercial and consumer
loan portfolios increased by $8.0 million and $1.0 million, or 77% and 1%, to
$18.4 million and $74.1 million, respectively, during the quarter. See "Balance
Sheet Analysis--Loans Receivable" for a discussion of loan volume activity in
these portfolios.
Implementation of the Bank's strategic decision to transform itself from a
savings institution to a community banking organization has resulted in an
increase in general and administrative expenses. These expenses may increase in
future periods as the Bank expands its business lines and continues to maintain
a higher level of marketing activity. The targeted benefits sought from this
transformation--increased net interest margin resulting from investment in
business and consumer loans with higher yields than single-family mortgage
loans, greater amounts of lower costing demand deposit accounts and increased
fee income--are expected to lag the increase in expenditures.
7
<PAGE>
The ability of the Bank to achieve its planned transformation into a
community banking organization and realize the benefits intended to result from
that transformation, is subject to an intense level of competition from
California's existing commercial banks as well as from other non-bank financial
institutions. The Bank's ability to sustain the earnings growth experienced over
the past eight quarters, excluding non-recurring items, is dependent on its
ability to successfully complete its transformation to a commercial bank and its
ability to originate and/or purchase interest-earning assets.
RECENT ACQUISITIONS
On August 28, 1996, the Bank entered into an agreement to acquire OneCentral
Bank ("OneCentral") in a cash transaction valued at $11.4 million. The
agreement is subject to regulatory and other approvals and is expected to close
early in the first calendar quarter of 1997. At September 30, 1996, OneCentral
had $79.4 million in assets, including $35.9 million in gross loans receivable,
and $73.8 million in deposits, over 45% of which were in checking accounts.
On November 1, 1996, the Bank entered into an agreement to acquire
TransWorld Bancorp and its principal subsidiary, TransWorld Bank (collectively,
"TransWorld") in a cash transaction valued at $63 million. The agreement is
subject to regulatory and other approvals, including approval of the TransWorld
shareholders, and is expected to close in the second calendar quarter of 1997.
At September 30, 1996, TransWorld had $375.4 million in assets and $337.8
million in deposits, 40% of which were in checking accounts and 32.6% of which
were in savings and money market accounts.
The OneCentral and TransWorld acquisitions are expected to accelerate the
pace of the Bank's transformation to a community bank by providing established
business customer relationships and personnel experienced in serving a primarily
business customer base. In addition, TransWorld has been a significant Small
Business Administration lender and provides the Bank with the expertise to enter
that sub-market.
CAPITAL
At September 30, 1996, the Bank's tangible book value was $15.65 per common
share and $13.96 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 risk-based capital ratios at September 30, 1996 were
5.88%, 10.18% and 11.33%, respectively, placing the Bank in the "well-
capitalized" category as defined by federal regulations, which require 5% core,
6% Tier 1 risk-based capital and 10% risk-based capital to qualify for that
designation. At June 30, 1996, the Bank's core capital, Tier 1 risk-based
capital and risk-based capital ratios were 6.29%, 10.79% and 11.93%,
respectively.
The Bank's capital ratios decreased in the three months ended September 30,
1996 due to the reduction in capital resulting from the assessment to
recapitalize the SAIF and the nearly $650 million increase in assets during the
quarter and could decrease in future periods due to, among other things,
acquisition activity and further growth in assets.
BALANCE SHEET ANALYSIS
Asset size and composition have been determined principally by seeking to
balance regulatory capital requirements, liquidity, yield and risk. It is the
Bank's intention to increase consolidated assets, from the June 1996 level, by
approximately $1 billion to $2 billion during fiscal 1997, primarily through the
purchase of single-family residential loans in the secondary market. The Bank's
ability to realize such growth is dependent upon a number of factors, such as
the availability of loans for purchase at acceptable prices and the interest
rate and economic environment. If such conditions are not favorable, the Bank
may be unable to purchase or originate sufficient assets to meet this growth
objective, and may experience a decrease in total assets due to loan repayments
and prepayments.
8
<PAGE>
Consolidated assets of the Bank increased by $647.8 million, to $15.1
billion, in the three months ended September 30, 1996. Loans receivable
increased by $451.2 million, to $11.2 billion, in the quarter, primarily due to
loan purchases and originations, partially offset by principal payments. In
addition, mortgage servicing assets increased by $47.2 million, to $174.6
million, in the three months ended September 30, 1996, primarily due to the
Bank's purchase of mortgage servicing rights relating to $4.1 billion of loans.
Mortgage-backed securities decreased by $119.5 million, to $2.1 billion, in the
quarter, primarily due to principal payments received of $121.2 million.
LOANS RECEIVABLE
Loans receivable held for investment increased by $470.8 million, to $11.2
billion, in the three months ended September 30, 1996. The increase was
primarily due to loans originated for investment, net of refinances, of $179.0
million and loans purchased for investment totaling $745.8 million, partially
offset by principal payments of $410.7 million and loans transferred to real
estate acquired in settlement of loans ("REO") of $42.1 million. The loans
purchased include $368.8 million of single-family residential, adjustable-rate
mortgage loans and $372.6 million of single-family residential, fixed-rate
mortgage loans, purchased in the secondary market. In general, loan purchases
have been used to increase the Bank's interest-earning assets and its net
interest income.
Loans receivable held for sale decreased by $19.6 million, to $13.8
million, in the three months ended September 30, 1996, primarily due to
securitization of loans for mortgage-backed securities in the amount of $11.7
million, and fixed-rate loan sales totaling $7.7 million. During the quarter
ended September 30, 1996, fixed-rate loans were originated for investment
purposes.
As of September 30, 1996, commitments of the Bank to purchase and originate
loans totaled $81.5 million and $37.9 million, respectively. At that date,
commitments of the Bank to sell loans totaled $1.8 million and commitments of
the Bank to sell mortgage-backed securities, comprised of fixed-rate loans
originated and securitized by the Bank, totaled $13.0 million. As of September
30, 1996, commitments on outstanding letters of credit totaled $8.9 million.
Loan originations by property type (including the refinanced portion of the
Bank's loans) and loans purchased under the Bank's correspondent lending program
and in the secondary market are summarized as follows (in millions):
<TABLE>
<CAPTION>
Three months ended
----------------------------------------------------------
Sept. 30 June 30 Mar. 31 Dec. 31 Sept. 30
Originations: 1996 1996 1996 1995 1995
------------ ---------- ---------- ---------- ---------
<S> <C> <C> <C> <C> <C>
Permanent Loans:
Single-family 1-4 units $ 176 $ 192 $ 190 $ 201 $ 195
Multi-family 5-36 units 5 6 5 7 8
Multi-family 37 or more units -- -- 3 3 --
Non-residential 1 3 1 6 3
Land -- 1 -- -- --
Construction Loans:
Single-family 1-4 units 3 3 7 6 --
Multi-family 5-36 units 3 1 4 -- --
Commercial loans 7 -- -- 1 --
Consumer loans 4 5 3 6 7
------------ ---------- ---------- ---------- ---------
Total Originations 199 211 213 230 213
Purchases:
Secondary market (1-4 units) 741 401 1,241 382 --
Correspondent lending (1-4 units) -- 13 15 12 13
------------ ---------- ---------- ---------- ---------
$ 940 $ 625 $1,469 $ 624 $ 226
============ ========== ========== ========== =========
</TABLE>
9
<PAGE>
Loan originations for the three months ended September 30, 1996 did not
change significantly from the quarters ended June 30, 1996 and September 30,
1995 due to a relatively stable interest rate environment. Loans refinanced
totaled $19.9 million, or 10% of total originations, for the three months ended
September 30, 1996, compared to $36.2 million, or 17% of total originations, and
$32.0 million, or 15% of total originations, for the quarters ended June 30,
1996 and September 30, 1995, respectively.
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") properties or to refinance maturing loans. The
single-family residential and multi-family residential construction loans
originated in the current quarter are part of the construction lending program
that was reintroduced in the first quarter of fiscal 1996. This program has been
terminated in fiscal 1997 along with the Bank's correspondent lending program.
In addition to the commercial and consumer term loans originated during the
current quarter, as indicated in the table above, the Bank also generated
commitments under lines of credit through its commercial and consumer lending
programs, totaling $8.5 million and $37.2 million, respectively. As of September
30, 1996, outstanding commitments on lines of credit under the Bank's commercial
and consumer lending programs totaled $16.0 million and $192.4 million,
respectively, of which the unused amounts totaled $11.4 million and $168.7
million, respectively.
During the first quarter of fiscal 1997, the Bank purchased fixed-rate
whole loans totaling $372.6 million and adjustable-rate whole loans totaling
$368.8 million. In fiscal 1996, the Bank purchased $2.0 billion of single-family
residential, adjustable-rate mortgage loans, primarily to replace $1.7 billion
of fixed-rate collateralized mortgage obligation ("CMO") investments sold by the
Bank and to replace loan run-off resulting from principal payments that exceeded
the rate of the Bank's loan originations.
10
<PAGE>
NON-PERFORMING ASSETS ("NPAS") AND RESTRUCTURED LOANS
The following table summarizes the Bank's NPAs and restructured loans at the
dates indicated (dollars in thousands):
<TABLE>
<CAPTION>
September 30, 1996 June 30, 1996
--------------------- --------------------------
% of % of
Dollar Total Dollar Total
Amount Assets Amount Assets
---------- --------- ---------- ----------
<S> <C> <C> <C> <C>
Non-accrual loans $171,465 1.14% $192,445 1.33%
REO and other assets 83,513 0.55% 82,204 0.57%
---------- --------- ---------- ----------
Total NPAs $254,978 1.69% $274,649 1.90%
========== ======== ========== =========
Restructured loans $ 11,527 0.08% $ 9,194 0.06%
========== ======== ========== =========
</TABLE>
The following table summarizes NPA and restructured loan activity during the
first three months of fiscal 1997 (in thousands):
<TABLE>
<CAPTION>
JUNE 30, PAYOFFS/ SEPT. 30,
1996 FORE- WRITE- SALES/ 1996
BALANCE ADDITIONS CLOSURES DOWNS OTHER BALANCE
--------------------------------------------------------------------------
NON-ACCRUAL LOANS:
<S> <C> <C> <C> <C> <C> <C>
Single-family 1-4 units $119,978 $44,736 $(32,274) $ -- $(25,177) $107,263
Multi-family 5-36 units 33,123 11,993 (6,177) (1,154) (4,378) 33,407
Multi-family 37 or more units 14,461 1,435 -- (2,369) (772) 12,755
Non-residential 23,860 2,849 (3,602) (113) (5,623) 17,371
Commercial 22 12 -- (28) 6 12
Consumer 1,001 -- -- -- (344) 657
--------------------------------------------------------------------------
Total $192,445 $61,025 $(42,053) $(3,664) $(36,288) $171,465
==========================================================================
REO AND OTHER ASSETS:
Single-family 1-4 units $ 39,693 $ 3,329 $ 24,692 $ (571) $(28,680) $ 38,463
Multi-family 5-36 units 11,668 524 5,381 (394) (5,472) 11,707
Multi-family 37 or more units 4,827 2,477 468 -- (140) 7,632
Non-residential 25,893 14 2,224 (150) (2,335) 25,646
Consumer 123 -- -- -- (58) 65
--------------------------------------------------------------------------
Total $ 82,204 $ 6,344 $ 32,765 $(1,115) $(36,685) $ 83,513
==========================================================================
TOTAL NPAS:
Single-family 1-4 units $159,671 $48,065 $ (7,582) $ (571) $(53,857) $145,726
Multi-family 5-36 units 44,791 12,517 (796) (1,548) (9,850) 45,114
Multi-family 37 or more units 19,288 3,912 468 (2,369) (912) 20,387
Non-residential 49,753 2,863 (1,378) (263) (7,958) 43,017
Commercial 22 12 -- (28) 6 12
Consumer 1,124 -- -- -- (402) 722
--------------------------------------------------------------------------
Total $274,649 $67,369 $ (9,288) $(4,779) $(72,973) $254,978
==========================================================================
RESTRUCTURED LOANS:
Single-family 1-4 units $ 3,222 $ 709 $ -- $ -- $ (1,641) $ 2,290
Multi-family 5-36 units 2,197 853 -- -- (642) 2,408
Multi-family 37 or more units 2,251 -- -- -- (9) 2,242
Non-residential 1,524 3,137 -- -- (74) 4,587
--------------------------------------------------------------------------
Total $ 9,194 $ 4,699 $ -- $ -- $ (2,366) $ 11,527
==========================================================================
</TABLE>
11
<PAGE>
The $19.7 million, or 7%, decrease in NPAs for the three months ended
September 30, 1996 reflects $36.7 million in sales of REO through the Bank's
regular problem asset workout process, $19.9 million in non-accrual loans being
sold or paid off and $16.4 million in non-accrual loans reinstating to accrual
status, partially offset by NPA additions. NPA additions, which totaled $67.4
million and $105.7 million, during the three months ended September 30, 1996 and
1995, respectively, have decreased in four out of the last five quarters,
reflecting an improving California economy. For the three months ended September
30, 1996, 71% of NPA additions were loans and REO that were secured by single-
family residences, compared to 66% for the same period last year. NPAs at
September 30, 1995 totaled $304.3 million.
NPAs in the single-family residential and non-residential portfolios
declined by $13.9 million and $6.7 million, to $145.7 million and $43.0 million,
respectively, in the three months ended September 30, 1996. These declines were
partially offset by an increase in NPAs in the multi-family residential
portfolio of $1.4 million, to $65.5 million, during the same period.
The $2.3 million increase in restructured loans for the three months ended
September 30, 1996 was primarily due to $4.7 million of new restructured loans
transferred from non-accrual status, partially offset by $2.1 million of
restructured loans being transferred to performing status.
The table in Exhibit 99E presents the Bank's gross loan portfolio, NPAs and
restructured loans by property type as of September 30, 1996. The table in
Exhibit 99G summarizes the activity in the Bank's NPAs for the past five
quarters.
Total delinquent loans decreased by $4.6 million, to $276.8 million, in the
three months ended September 30, 1996. This decrease was attributable to the
single-family residential portfolio which declined by $8.7 million, to $186.7
million, during the three months ended September 30, 1996. This decrease was
partially offset by an increase in delinquent loans in the non-residential
portfolio of $4.2 million, to $28.0 million, during the same period. Delinquent
loans in the multi-family portfolio were $59.4 million at September 30, 1996 and
remained relatively unchanged compared to the balance of such loans at June 30,
1996. Single-family delinquent loans decreased as a percentage of total
delinquent loans from 69% at June 30, 1996 to 67% at September 30, 1996. Loans
secured by single-family properties have a significantly lower historical loss
experience than those secured by multi-family or non-residential properties. The
table in Exhibit 99H presents the Bank's delinquent loans by property type for
the past five quarters.
If the recent economic improvements in the Bank's principal market areas do
not continue or if California experiences 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.
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 as 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. In addition, 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.
12
<PAGE>
The following table sets forth the allocation of Glendale Federal's
allowance for loan losses at September 30, 1996 and June 30, 1996 by property
type (dollars in thousands):
<TABLE>
<CAPTION>
September 30, 1996 June 30, 1996
---------------------------------------------- -------------------------------------
Gross Percent of Gross Percent 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 $ 53,787 $ 8,109,350 0.66% $ 56,833 $ 7,580,312 0.75%
Multi-family:
5-36 units 46,617 1,542,896 3.02 48,628 1,564,542 3.11
37 or more units 20,788 386,853 5.37 26,062 400,415 6.51
Non-residential 46,761 1,297,830 3.60 47,260 1,357,225 3.48
Commercial 3,444 18,422 18.70 4,699 10,391 45.22
Consumer 5,234 74,120 7.06 3,274 73,158 4.48
------------ ------------ ---------- -----------
$176,631 $11,429,471 1.55% $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.
Specific valuation allowances of $21.3 million and $26.5 million have been
established for impaired loans, which totaled $151.3 million and $158.8 million
at September 30, 1996 and June 30, 1996, respectively, and are included in the
allowance for loan losses. The decrease in impaired loans during the three
months ended September 30, 1996 is primarily due to an improving California
economy. 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 September 30, 1996 and June 30, 1996 totaled
$93.4 million and $106.5 million, respectively. Those impaired loans without
related specific valuation allowances at September 30, 1996 and June 30, 1996
totaled $57.9 million and $52.3 million, respectively.
The allowance for loan losses declined by $10.1 million, to $176.6 million,
in the first three months of 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. 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 ratios of allowance to non-
accrual loans and total gross loans at September 30, 1996 were 103.0% and 1.6%,
respectively, compared to 97.0% and 1.7%, respectively, at June 30, 1996. The
table in Exhibit 99D sets forth the ratios of the Bank's allowance for loan
losses to its gross loan portfolio and NPAs.
13
<PAGE>
A summary of activity in the allowance for loan losses by property type
during the first three months of fiscal 1997 is as follows (in thousands):
<TABLE>
<CAPTION>
Balance Balance
June 30, Charge- Sept. 30,
1996 Additions offs Recoveries 1996
---------- ---------- ---------- ---------- ---------
<S> <C> <C> <C> <C> <C>
Single-family 1-4 units $ 56,833 $ 4,514 $ (7,573) $ 13 $ 53,787
Multi-family:
5-36 units 48,628 929 (2,945) 5 46,617
37 or more units 26,062 (890) (4,384) -- 20,788
Non-residential 47,260 2,283 (2,837) 55 46,761
Commercial 4,699 (2,111) (28) 884 3,444
Consumer 3,274 2,629 (990) 321 5,234
---------- ---------- ---------- --------- ---------
$186,756 $ 7,354 $(18,757) $1,278 $176,631
========== ========== ========== ========= =========
</TABLE>
A summary of activity in the allowance for loan losses by property
type during the first three months of fiscal 1996 is as follows (in thousands):
<TABLE>
<CAPTION>
Balance Balance
June 30, Charge- Sept. 30,
1995 Additions offs Recoveries 1995
-------- ----------- ---------- ---------- ---------
<S> <C> <C> <C> <C> <C>
Single-family 1-4 units $ 44,483 $ 8,887 $ (7,753) $ 8 $ 45,625
Multi-family:
5-36 units 41,736 (617) (3,456) 168 37,831
37 or more units 31,569 1,736 (1,494) 208 32,019
Non-residential 83,086 1,395 (4,495) 661 80,647
Commercial 4,176 (2,687) (867) 1,793 2,415
Consumer 4,092 455 (840) 288 3,995
-------- ----------- ---------- --------- ---------
$209,142 $ 9,169 $(18,905) $3,126 $202,532
======== =========== ========== ========= =========
</TABLE>
Additions to the allowance for loan losses declined by $1.8 million, to
$7.4 million, in the three months ended September 30, 1996, compared to the same
period last year, 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 real estate portfolios 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 continues to emphasize the attraction of retail deposits,
especially low-cost demand deposits. The Bank's ratio of deposits to borrowings
was 63%/37% at September 30, 1996 compared to a ratio of 65%/35% at June 30,
1996. The reduction in the ratio of deposits to borrowings during the current
quarter was due to the use of borrowings to fund the purchase of interest-
earning assets. The Bank expects to replace borrowings with retail deposits over
time through a combination of retail sales efforts and acquisitions of deposits.
See deposit composition table following for additional information.
14
<PAGE>
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 $91.2 million, to
$8.8 billion, in the first three months of fiscal 1997.
Glendale Federal's deposit composition at September 30, 1996 and June 30,
1996 was as follows (dollars in millions):
<TABLE>
<CAPTION>
September 30, 1996 June 30, 1996
----------------------- --------------------------
% of % of
Balance Total Balance Total
---------- --------- ----------- --------
<S> <C> <C> <C> <C>
Checking/NOW accounts $ 878 10% $ 779 9%
Passbook accounts 468 5 493 5
Money market checking/savings 1,820 21 1,719 20
---------- --------- ----------- -------
Total daily access 3,166 36 2,991 34
Short-term certificates
(1 year or less) 3,160 36 3,047 35
Long-term certificates
(over 1 year) 2,271 25 2,438 28
Branch and business development
jumbo certificates 161 2 190 2
--------- ---------- ------------ --------
Total retail deposits 8,758 99 8,666 99
Brokered certificates of
of deposit 57 1 58 1
--------- ---------- ------------ --------
Total $8,815 100% $8,724 100%
========= ========== ============ ========
</TABLE>
The $175 million increase in daily access deposits during the first three
months of fiscal 1997 resulted from net inflows of $101 million and $99 million
in money market accounts and checking accounts, respectively, partially offset
by net outflows of $25 million in savings accounts. Retail and business checking
accounts increased a combined $62 million, or 9.5%, to $715 million, during the
quarter. Management believes that the overall increase in daily access deposits
and short-term certificate accounts during the first three months of fiscal 1997
reflects the Bank's aggressive branch marketing efforts and advertising campaign
instituted throughout California, as well as the maturation of long-term
certificates of deposit and the reinvestment of these funds in short-term
certificate accounts due to depositors' uncertainty as to the future direction
of interest rates.
BORROWINGS
Total borrowings increased by $485.7 million, to $5.1 billion, during the
three months ended September 30, 1996. Securities sold under agreements to
repurchase decreased by $116.8 million, to $641.3 million, and borrowings from
the Federal Home Loan Bank ("FHLB") increased by $600.0 million, to $4.4
billion, during the same period. Total borrowings as of September 30, 1996 and
June 30, 1996 included $2.6 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 structure.
STOCKHOLDERS' EQUITY
Stockholders' equity decreased by $19.5 million, to $937.9 million, during
the three months ended September 30, 1996, primarily due to a net loss of $20.0
million and dividends declared of $3.1 million on the Bank's Series E preferred
stock, partially offset by a $3.0 million decrease in the net unrealized loss
recorded on the portfolio of mortgage-backed securities available for sale.
During the quarter ended September 30, 1996, the Bank issued 370,452 shares
of common stock in exchange for 142,400 shares of the Bank's Series E preferred
stock. See Note 3 of the Notes to Consolidated Financial Statements for
additional discussion regarding these transactions.
15
<PAGE>
REGULATORY CAPITAL
The following table compares Glendale Federal's regulatory capital at
September 30, 1996 to its minimum regulatory capital requirements at that date
(dollars in thousands):
<TABLE>
<CAPTION>
Capital at As a % Capital As a % Excess
Sept. 30, 1996 of Assets Required of Assets Capital
----------------- ---------- -------- --------- ---------
<S> <C> <C> <C> <C> <C>
Capital in accordance with generally
accepted accounting principles $937,937
Adjustments for tangible and core
capital:
Goodwill and other intangible assets (57,929)
Investments in and advances to
non-permissible subsidiaries (3,810)
Net unrealized holding loss on debt
securities available for sale 8,423
-----------
Total tangible capital 884,621 5.88% $225,806 1.50% $658,815
Adjustment for core capital --
-----------
Total core capital 884,621 5.88% $451,611* 3.00%* $433,010*
Adjustments for risk-based capital:
Allowance for general loan losses** 107,698
Equity risk investments required
to be deducted (9,449)
-----------
Total risk-based capital $982,870 11.33% $697,468* 8.00%* $285,402*
===========
</TABLE>
- ----------------
*Under the standards for "well capitalized" institutions established pursuant to
the Federal Deposit Insurance Corporation Improvement Act of 1991 ("FDICIA"),
the corresponding amounts for core capital are $752,686, 5.00% and $131,935,
respectively, and the corresponding amounts for risk-based capital are $868,833,
10.00% and $114,037, respectively.
**Limited to 1.25% of risk-weighted assets.
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 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 September 30, 1996, these available sources totaled approximately $3.1
billion and consisted primarily of the repurchase agreement markets.
During the three months ended September 30, 1996, the Bank experienced a
net cash outflow from investing activities of $437.6 million, consisting
primarily of loans purchased and originated for investment, partially offset by
principal payments on loans and mortgage-backed securities. In addition, the
Bank experienced positive cash flows from operating activities during the period
of $103.8 million. The Bank's financing activities during the period resulted in
a net cash inflow of $571.4 million, consisting principally of net increases in
deposits and borrowings.
During September 1996, the Bank's average liquidity ratio was 5.51%. The
current minimum regulatory requirement for this ratio is 5%.
16
<PAGE>
ASSET AND LIABILITY MANAGEMENT
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 Exhibit 99A 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 September 30, 1996.
The following table is a summary of Glendale Federal's one-year GAP at the
dates indicated (dollars in millions):
<TABLE>
<CAPTION>
Sept. 30, June 30,
1996 1996
---------- ---------
<S> <C> <C>
Interest-earning assets maturing or
repricing within one year $11,309 $11,004
Interest-bearing liabilities maturing
or repricing within one year 8,314 7,956
---------- ----------
One-year maturity GAP $ 2,995 $ 3,048
========== ==========
One-year maturity GAP as a percent of
total assets 19.8% 21.1%
========== ==========
</TABLE>
The $53 million decrease in the one-year GAP for the first three months of
fiscal 1997 was primarily due to a $358 million increase in liabilities maturing
or repricing within one year, partially offset by a $305 million increase in
assets maturing or repricing within one year. The growth in one-year
liabilities was principally due to a net increase in FHLB borrowings totaling
$600 million, partially offset by a reduction of approximately $117 million in
securities sold under agreements to repurchase and a decrease in certificates of
deposit. The growth in one-year assets was primarily due to an increase of $251
million in federal funds sold and securities purchased under resale agreements
as well as the purchase of approximately $369 million of adjustable-rate
mortgage loans in the secondary market.
The Bank remains subject to possible interest rate spread compression,
which would adversely impact the Bank's net interest income, if interest rates
rise. The amount of that compression would depend upon the frequency and
severity of such interest rate fluctuations. This adverse impact would be
attributable 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. Management has
mitigated the effect of such an increase through the extension of certain
liabilities during fiscal 1996 which resulted in a shift in the Bank's one-year
GAP from a negative GAP of $1.0 billion at September 30, 1995 to a positive one-
year GAP of $3.0 billion at September 30, 1996. 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.
17
<PAGE>
The following tables present the Bank's total gross loan and mortgage-
backed securities portfolios (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>
September 30, 1996
----------------------------------------------------
Mortgage-
backed Percent
Loans Securities Total of Total
----------- --------------- -------- ------------
<S> <C> <C> <C> <C>
Adjustable:
6-month Treasury Bills $ 408 $ 416 $ 824 6%
1-Year Treasury Bills 3,728 918 4,646 34
11th District Cost of Funds 3,883 149 4,032 30
Prime 87 11 98 1
Other 169 143 312 2
----------- --------------- -------- ------------
8,275 1,637 9,912 73
Fixed for 3-5 Years Converting to 842 254 1,096 8
Adjustable Fixed:
Loans receivable 2,312 -- 2,312 17
Mortgage-backed securities -- 209 209 2
----------- --------------- -------- ------------
2,312 209 2,521 19
----------- --------------- -------- ------------
Total $11,429 $2,100 $13,529 100%
========== =============== ========= ============
June 30, 1996
----------------------------------------------------
Mortgage-
backed Percent
Loans Securities Total of Total
-------------- ----------- -------- ---------
<S> <C> <C> <C> <C>
Adjustable:
6-month Treasury Bills $ 428 $ 433 $ 861 7%
1-Year Treasury Bills 3,568 982 4,550 34
11th District Cost of Funds 3,936 154 4,090 31
Prime 63 12 75 1
Other 212 154 366 3
-------------- ----------- -------- ---------
8,207 1,735 9,942 76
Fixed for 3-5 Years Converting to 782 259 1,041 8
Adjustable Fixed:
Loans receivable 1,997 -- 1,997 15
Mortgage-backed securities -- 227 227 1
-------------- ----------- -------- ---------
1,997 227 2,224 16
-------------- ----------- -------- ---------
Total $10,986 $2,221 $13,207 100%
============== =========== ======== =========
</TABLE>
18
<PAGE>
RESULTS OF OPERATIONS
NET INTEREST INCOME
Net interest income increased by $11.4 million, to $89.4 million, for the
three months ended September 30, 1996, compared to the corresponding quarter
last year, primarily because of an improvement in the yield-cost spread. The
yield-cost spread increased by 48 basis points, to 2.37%, in the three months
ended September 30, 1996, compared to the same period last year, primarily due
to a decrease of 50 basis points, to 4.99%, in the Bank's cost of funds,
slightly offset by a decrease of 2 basis points, to 7.36%, in the yield on
interest-earning assets. Additionally, the Bank experienced an increase of $84
million, to $551 million, in the amount by which average interest-earning assets
exceeded average interest-bearing liabilities.
The decrease in the Bank's cost of funds during the three months ended
September 30, 1996, compared to the same period last year, was primarily due to
a change in the mix of funding sources from higher-cost borrowings to lower-cost
deposits, principally attributable to the $2.0 billion reduction in the average
balance of securities sold under agreements to repurchase using the proceeds
from the Bank's sale of $1.7 billion of CMO investments. This resulted in
deposits comprising 64.4% of total average interest-bearing liabilities during
the current quarter versus 58.5% in the same quarter last year. Other factors
contributing to the decrease in the Bank's cost of funds were the replacement of
maturing higher-cost FHLB borrowings with lower-cost FHLB borrowings, a change
in the mix of deposits from higher-cost certificates of deposit to lower-cost
daily access accounts, and a decline in the interest rate environment.
The yields on loans and mortgage-backed securities decreased by only 1
basis point, to 7.41%, in the three months ended September 30, 1996, compared to
the same period last year, however the mix has changed due to the previously
mentioned sale of CMO investments and the purchase of loans in the secondary
market. See the Bank's average balances of interest-earning assets and interest-
bearing liabilities and their respective weighted average yields and costs in
the table following. The yield on loans decreased by 40 basis points, to 7.57%,
for the first quarter of fiscal 1997, compared to the same quarter last year
primarily due to the decrease in the repricing of the Bank's adjustable-rate
portfolio that was attributable to the lower interest rate environment and to an
increase in adjustable-rate loans that was attributable principally to the
purchase of $2.0 billion of adjustable-rate loans yielding 6.74% in the
secondary market during the last nine months of fiscal 1996. During the first
quarter of fiscal 1997, the Bank purchased $372.6 million of fixed-rate loans
yielding 8.50% and $368.8 million of adjustable-rate loans yielding 7.31% in the
secondary market. Partially offsetting the above decrease in the yield on loans
was an increase of 37 basis points, to 6.59%, in the yield on mortgage-backed
securities, which was primarily attributable to the sale of $1.7 billion of
lower-yield CMOs in the second and third quarters of fiscal 1996.
The declining level of NPAs had a positive impact on net interest income as
the Bank was able to reinvest the proceeds from liquidation of these assets into
interest-earning assets. The average balance of NPAs in the first quarter of
fiscal 1997 and 1996 was $264.8 million and $329.9 million, respectively. The
impact of non-accrual assets on the yield on loans and mortgage-backed
securities was a reduction in yield of 9 basis points in the first quarter of
fiscal 1997 versus a reduction of 13 basis points in the first quarter of
fiscal 1996.
The yield on the investment portfolio decreased by 11 basis points, to
6.65%, in the current quarter, compared to the same quarter last year, primarily
due to a decrease in short-term interest rates.
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 pays fixed interest rates and receives variable interest rates
under its swap contracts. The impact of swaps for the three months ended
September 30, 1996 was to increase the total cost of funds by 2 basis points.
At September 30, 1996, the Bank had $200 million in notional principal amount of
swaps maturing in April 1997, compared to the $220 million in notional principal
amount of swaps outstanding at September 30, 1995.
During fiscal 1996, the Federal Reserve Board lowered the federal funds
rate by a total of 0.75%, to 5.25%. The impact of this reduction has been a
decrease in the Bank's borrowing costs. Because adjustments to
19
<PAGE>
interest rates on adjustable-rate loans and mortgage-backed securities tend to
follow changes in market rates, the impact of lower interest rates will be
experienced in yields for these assets more slowly than in the cost of the
Bank's short-term borrowings. If current interest rates remain stable, the Bank
would not expect its interest rate spread to change significantly. However,
future increases in short-term interest rates could result in interest rate
spread compression. The amount of that compression would depend upon the timing
and magnitude of such interest rate movements.
The following rate/volume analysis depicts the increase (decrease) in net
interest income attributable to interest rate fluctuations (change in rate
multiplied by prior period average balance) and volume fluctuations (change in
average balance multiplied by prior period rate) when compared to the same
period of the prior year (in thousands):
<TABLE>
<CAPTION>
Three months ended September 30,
1996 vs. 1995
Changes due to
------------------------------------
Volume Rate Total
------------ ---------- ----------
<S> <C> <C> <C>
Interest income:
Loans receivable, net $ 22,547 $(10,038) $ 12,509
Mortgage-backed securities, net (40,359) 3,988 (36,371)
------------ ---------- ----------
Total loans and mortgage-backed
securities (17,812) (6,050) (23,862)
Federal funds sold and securities
purchased under resale agreement (1,638) (819) (2,457)
U.S. Government and other investment
securities 379 176 555
------------ ---------- ----------
Total investments (1,259) (643) (1,902)
------------ ---------- ----------
Total interest income (19,071) (6,693) (25,764)
Interest expense:
Deposits - daily access 3,934 (732) 3,202
Deposits - certificates (8,141) (5,904) (14,045)
------------ ---------- ----------
Total deposits (4,207) (6,636) (10,843)
Securities sold under agreements to
repurchase and other short-term
borrowings (27,748) (3,332) (31,080)
Borrowings from FHLB 8,782 (3,668) 5,114
Other borrowings (74) (307) (381)
------------ ---------- ----------
Total borrowings (19,040) (7,307) (26,347)
------------ ---------- ----------
Total interest expense (23,247) (13,943) (37,190)
------------ ---------- ----------
Net interest income $ 4,176 $ 7,250 $ 11,426
============ ========== ==========
</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.
20
<PAGE>
The following table sets forth the Bank's average balances of and weighted
average yields on interest-earning assets, the average balances of and weighted
average interest rates paid on interest-bearing liabilities, the dollar
difference between such average balances and the spread between the weighted
average yields earned and rates paid for the three months ended September 30,
1996 and 1995 (dollars in millions):
<TABLE>
<CAPTION>
Three months ended September 30
-------------------------------------------------
1996 1995
------------------------ -----------------------
Weighted Weighted
Average Average Average Average
Balances Yield/Cost Balances Yield/Cost
----------- ----------- ---------- -----------
<S> <C> <C> <C> <C>
Loans receivable, net $11,107 7.57% $ 9,968 7.97%
Mortgage-backed securities, net 2,208 6.59 4,634 6.22
----------- ----------
Total loans and mortgage-backed
securities 13,315 7.41 14,602 7.42
Federal funds sold and securities
purchased under resale agreements 615 5.54 729 6.01
U.S. Government and other investment
securities 228 9.63 212 9.31
----------- ----------
Total investments 843 6.65 941 6.76
----------- ----------
Total interest-earning assets 14,158 7.36 15,543 7.38
----------- ----------
Deposits - daily access 3,084 3.00 2,567 3.11
Deposits - certificates 5,684 5.47 6,259 5.86
----------- ----------
Total deposits 8,768 4.60 8,826 5.06
Securities sold under agreements to
repurchase and other short-term
borrowings 713 5.46 2,708 5.99
Borrowings from the Federal Home
Loan Bank 4,084 5.77 3,495 6.17
Other borrowings 42 3.42 47 6.24
----------- ----------
Total borrowings 4,839 5.71 6,250 6.09
----------- ----------
Total interest-bearing liabilities 13,607 4.99 15,076 5.49
----------- ----------
Difference between average
interest-earning assets
and interest-bearing liabilities $ 551 $ 467
=========== ==========
Yield-cost spread 2.37% 1.89%
Effective net spread /1/ 2.56% 2.06%
</TABLE>
_______________
/1/Annualized net interest income divided by average interest-earning assets.
21
<PAGE>
PROVISION FOR LOAN LOSSES
Provisions for loan losses totaled $7.4 million and $9.2 million in the
three months ended September 30, 1996 and 1995, respectively. The reduction in
the provision was primarily due to declining NPAs and delinquent loans and
management's assessment that there is a decreased risk of loss inherent in the
Bank's loan portfolios. NPAs at September 30, 1996 totaled $255.0 million, which
represents a 16% decline from the $304.3 million of NPAs recorded at September
30, 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".
LOAN SERVICING INCOME, NET
Loan servicing income, net, increased by $6.4 million, to $8.3 million, in
the three months ended September 30, 1996, compared to the same period last
year. This increase was attributable to increased servicing fees earned
resulting from recent purchases of mortgage servicing rights and to adjustments
made in the September 1995 quarter to reduce the value of the Bank's servicing
assets. In the September 1995 quarter, an adjustment totaling $3.7 million was
made to reduce the carrying value of the Bank's purchased mortgage servicing
rights due to an increase in prepayment expectations. In the same quarter, an
adjustment of $2.2 million was made to reduce the carrying value of the Bank's
capitalized servicing fees receivable due to changes in the underlying
assumptions relating to that asset. If prepayment expectations increase from the
levels as of September 30, 1996, further reductions to the value of the Bank's
servicing assets may be necessary depending upon the frequency and magnitude of
such increases. During fiscal 1996, the Bank purchased servicing rights relating
to $3.7 billion of loans for $50.8 million. During the three months ended
September 30, 1996, the Bank purchased servicing rights relating to $4.1 billion
of loans for $52.8 million.
The Bank's portfolio of loans serviced for others totaled $17.8 billion and
$11.4 billion at September 30, 1996 and 1995, respectively.
OTHER FEES AND SERVICE CHARGES
Other fees and service charges increased by $2.4 million, to $12.9 million,
in the current quarter compared to the same period in fiscal 1996. This increase
primarily reflects an increase in deposit fee income of $1.8 million related to
growth in the number of transaction accounts and an increase in commissions and
broker fees related to higher sales from the Bank's securities brokerage
subsidiary.
LOSS ON SALE OF LOANS AND MORTGAGE-BACKED SECURITIES, NET
Loss on sale of loans and mortgage-backed securities, net decreased by $1.8
million, to $0.2 million, in the three months ended September 30, 1996, compared
to the same period last year, primarily due to reduced provisions for estimated
losses related to loans sold in prior years subject to certain recourse
arrangements.
GENERAL AND ADMINISTRATIVE EXPENSES
General and administrative expenses increased by $11.3 million, to $69.2
million, in the three months ended September 30, 1996, compared to the same
period last year. The increase reflects costs associated with new business lines
and increased advertising and legal expenses. Advertising and legal expenses
increased by $2.6 million and $1.8 million, to $7.5 million and $2.3 million,
respectively, in the current quarter, compared to the same period last year.
General and administrative expenses may increase in future periods as the Bank
continues to expand its business lines and continues to maintain a higher level
of marketing activity. Management expects that the new business lines will
result in additional fee income, higher yielding loans and lower costing
deposits, but these benefits are expected to lag the increase in expenditures.
22
<PAGE>
OPERATIONS OF REO
Operations of REO resulted in losses of $1.3 million in the three months
ended September 30, 1996, as compared to losses of $0.9 million in the same
period last year. Losses in the current quarter were primarily due to $1.9
million in provisions to adjust the REO portfolio to current fair value, and
$1.6 million of operating expenses. These current period expenses were partially
offset by gains realized on the sale of REO (after market valuation adjustments)
of $2.1 million.
Losses in the three months ended September 30, 1995 were primarily due to
$3.6 million in provisions to adjust the REO portfolio to current fair value,
and $1.9 million of operating expenses, partially offset by gains realized on
the sale of REO (after market valuation adjustments) of $4.6 million, of which
$2.1 million was recognized in connection with the August 1995 sale of
underperforming loans and REO.
INCOME TAX PROVISION (BENEFIT)
The Bank recorded an income tax benefit of $7.7 million in the three months
ended September 30, 1996, compared to an income tax provision of $6.3 million
for the same period last year.
As of June 30, 1996, the Bank had recognized the benefit of all of its net
operating loss carryforwards and nearly all of its alternative minimum tax
credit carryforwards. Because of these credits, the loss for the three months
ended September 30, 1996 produced a tax benefit at the federal alternative
minimum tax rate plus state income tax effect. The loss also made alternative
minimum tax credits available to reduce the federal income tax on approximately
$27 million of future earnings.
On August 20, 1996, the President signed legislation which repealed the
reserve method of accounting for bad debts for savings institutions effective
for taxable years beginning after 1995. The Bank, therefore, will be required
to use the specific charge-off method on its 1996 and subsequent federal income
tax returns. The Bank will also be required to recapture its "applicable excess
reserves", which are its federal tax bad debt reserves in excess of the base
year reserve amount. 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. As of December 31, 1995 the Bank had
approximately $72 million of applicable excess reserves. One-sixth of that
amount will be included in taxable income in each tax year from 1996 through
2001. This will not affect the Bank's tax provisions as the deferred tax
liability for this recapture had been recorded as of December 31, 1995.
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.
In July 1993 the Bank received notices from the California Franchise Tax
Board (the "FTB") proposing to assess taxes for the years 1988 through 1990. The
Bank protested the proposed taxes and in September 1996 made a payment to the
FTB in settlement of the disputed amount. The payment was charged to existing
reserves.
23
<PAGE>
PART II - OTHER INFORMATION
ITEM 6. EXHIBITS AND REPORTS ON FORM 8-K
(a) Exhibits
11.1 Statement Regarding Computation of Per Share Earnings
99A Maturity and Rate Sensitivity Analysis
99B Interest Rate Margin
99C Loan Originations by Type
99D Analysis of Allowance for Loan Losses and Non-Performing Assets
99E Gross Loans, Non-Performing Assets and Restructured Loans by Property
Type
99F Non-Performing Assets and Restructured Loans
99G Non-Performing Assets Activity
99H Delinquent Loans by Property Type
(b) Reports on Form 8-K
None
24
<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.
Glendale Federal Bank, Federal Savings Bank
-------------------------------------------
(Registrant)
Date: November 13, 1996 By: /s/John E. Haynes
----------------------- ------------------------
Executive Vice President and
Chief Financial Officer
(Principal Financial Officer)
25
<PAGE>
EXHIBIT 11.1
GLENDALE FEDERAL BANK AND SUBSIDIARIES
STATEMENT REGARDING COMPUTATION OF PER SHARE EARNINGS (LOSS)
(In thousands, except per share data)
<TABLE>
<CAPTION>
Three Months Ended
September 30
-----------------------
<S> <C>
PRIMARY EARNINGS (LOSS) PER SHARE 1996 1995
-------- -------
Computation for Statement of Operations
Net earnings (loss) per statement of operations used in
primary earnings (loss) per share computation:
Net earnings (loss) $(19,985) $13,811
Dividends on Series E Preferred Stock (3,107) (4,403)
Premium on conversion of Series E Preferred Stock (503) -
Interest on borrowings, net of tax effect, on application of
assumed proceeds from exercise of warrants and options
in excess of 20% limitation (a) - 585
-------- -------
Net earnings (loss), as adjusted $(23,595) $ 9,993
========= =======
Weighted average number of shares outstanding used in
primary earnings (loss) per share computation:
Weighted average number of shares 47,112 40,727
Net shares issuable from assumed exercise of warrants
and options, as determined by the application
of the Modified Treasury Stock Method - 6,323
-------- -------
47,112 47,050
======== =======
Primary earnings (loss) per share (b) $ (0.50) $ 0.21
======== =======
Additional Primary Earnings (Loss) Per Share Computation
Net earnings (loss), as per primary computation above $(23,595) $ 9,993
Interest on borrowings, net of tax effect, on application of ======== =======
assumed proceeds from exercise of warrants and options
in excess of 20% limitation (a) 123 -
-------- -------
Net earnings (loss), as adjusted $(23,472) $ 9,993
======== =======
Weighted average number of shares outstanding,
as per primary computation above 47,112 47,050
Net shares issuable from assumed exercise of warrants
and options, as determined by the application
of the Modified Treasury Stock Method 5,726 -
-------- -------
Weighted average number of shares outstanding, as adjusted 52,838 47,050
======== =======
Primary earnings (loss) per share, as adjusted $ (0.44)(c) $ 0.21
======== =======
</TABLE>
<PAGE>
EXHIBIT 11.1
GLENDALE FEDERAL BANK AND SUBSIDIARIES
STATEMENT REGARDING COMPUTATION OF PER SHARE EARNINGS (LOSS) - Continued
(In thousands, except per share data)
<TABLE>
<CAPTION>
Three Months Ended
September 30
---------------------------
FULLY DILUTED EARNINGS (LOSS) PER SHARE 1996 1995
------------- -----------
<S> <C> <C>
Computation for Statement of Operations
Net earnings (loss) per statement of operations used in
fully diluted earnings (loss) per share computation:
Net earnings (loss) $(19,985) $ 13,811
Dividends on Series E Preferred Stock (3,107) (4,403)
Premium on conversion of Series E Preferred Stock (503)
Interest on borrowings, net of tax effect, on application of
assumed proceeds from exercise of warrants and options
in excess of 20% limitation (a) -- 429
-------- --------
Net earnings (loss), as adjusted $(23,595) $ 9,837
======== ========
Weighted average number of shares outstanding used in
fully diluted earnings (loss) per share computation:
Weighted average number of shares 47,112 40,727
Net shares issuable from assumed exercise of warrants
and options, as determined by the application
of the Modified Treasury Stock Method -- 6,323
-------- --------
47,112 47,050
======== ========
Fully diluted earnings (loss) per share (b) $ (0.50) $ 0.21
======== ========
Additional Fully Diluted Earnings (Loss) Per Share Computation (c)
Net earnings (loss), as per fully diluted computation above $(23,595) $ 9,837
Dividends on Series E Preferred Stock 3,107 4,403
Interest on borrowings, net of tax effect, on application of
assumed proceeds from exercise of warrants and options
in excess of 20% limitation (a) 123 --
Interest on GLENFED Debentures, net of tax effect (a) 118 148
-------- --------
Net earnings (loss), as adjusted $(20,247) $ 14,388
======== ========
Weighted average number of shares outstanding,
as per fully diluted computation above 47,112 47,050
Shares issuable from assumed conversion of
Series E Preferred Stock 13,696 19,351
Net shares issuable from assumed exercise of warrants
and options, as determined by the application
of the Modified Treasury Stock Method 5,726 --
Shares issuable from assumed exercise of GLENFED Debentures 15 15
-------- --------
Weighted average number of shares outstanding, as adjusted 66,549 66,416
======== ========
Fully diluted earnings (loss) per share, as adjusted $ (0.30) $ 0.22
======== ========
</TABLE>
- ---------
(a) Adjustments to earnings (loss) 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.
27
<PAGE>
EXHIBIT 99A
GLENDALE FEDERAL BANK AND SUBSIDIARIES
MATURITY AND RATE SENSITIVITY ANALYSIS
(dollars in millions)
(Unaudited)
<TABLE>
<CAPTION>
Maturity/Rate Sensitivity
--------------------------------------------
Total % of Within 1-5 6-10 Over 10
At September 30, 1996 Balance Total 1 Year Years Years Years
- --------------------- --------- -------- --------- --------- --------- ---------
<S> <C> <C> <C> <C> <C> <C>
Interest-earning Assets (1):
Loans receivable:
Single-family 1-4 units (2)(3) $ 8,109 55.6% $ 5,663 $ 1,445 $509 $492
Multi-family and non-residential (2)(3) 3,216 22.1% 2,973 120 70 53
Consumer and commercial (3) 92 0.6% 38 49 5 -
Mortgage-backed securities (2)(3) 2,100 14.4% 1,710 311 51 28
Investment securities (4) 703 4.8% 703 - - -
Other assets (5) 362 2.5% 222 - - 140
--------- -------- --------- --------- --------- ---------
Total interest-earning assets 14,582 100.0% 11,309 1,925 635 713
Non-interest-earning assets 522 ======== --------- --------- --------- ---------
---------
Total assets $15,104
=========
Interest-bearing Liabilities:
Deposits:
Checking/NOW accounts (6) $ 878 6.3% 149 383 210 136
Passbook accounts (6) 468 3.4% 65 182 117 104
Money market accounts (6) 1,820 13.1% 582 973 226 39
Certificate accounts (4) 5,649 40.6% 4,339 1,309 1 -
Borrowings:
FHLB(4) 4,438 31.9% 2,538 1,900 - -
Other(4) 654 4.7% 641 11 - 2
--------- -------- --------- --------- --------- ---------
Total interest-bearing liabilities 13,907 100.0% 8,314 4,758 554 281
Non-interest-bearing liabilities 259 ======== --------- --------- --------- ---------
---------
Total liabilities 14,166
Stockholders' equity 938
---------
Total liabilities and stockholders' equity $15,104
=========
Maturity GAP $2,995 $(2,833) $ 81 $432
========= ========= ========= =========
Cumulative GAP $2,995 $ 162 $243 $675
As % of total assets 19.8% 1.1% 1.6% 4.5%
June 30, 1996 Cumulative GAP $3,048 $ 194 $231 $646
As % of total assets 21.1% 1.3% 1.6% 4.5%
</TABLE>
- ---------
(1) Asset balances are net of loans in process.
(2) ARM loans are predominantly included in the "within 1 year" category, 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 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/repricing 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 have been applied to these deposits.
28
<PAGE>
EXHIBIT 99B
GLENDALE FEDERAL BANK AND SUBSIDIARIES
INTEREST RATE MARGIN
(unaudited)
<TABLE>
<CAPTION>
As of
----------------------------------------------------
Sept. 30, June 30, Mar. 31, Dec. 31, Sept. 30,
1996 1996 1996 1995 1995
-------- -------- -------- -------- --------
<S> <C> <C> <C> <C> <C>
Weighted average rate:
Loans receivable, net 7.64% 7.74% 7.88% 7.99% 8.05%
Mortgage-backed securities, net 6.69% 6.26% 6.34% 6.35% 6.30%
-------- -------- -------- -------- --------
Total loans and MBS 7.49% 7.49% 7.61% 7.59% 7.50%
Federal funds sold and securities purchased
under resale agreements 6.06% 5.69% 5.63% 6.04% 6.63%
U.S. Government and other investment securities 8.95% 9.58% 8.98% 8.94% 9.22%
-------- -------- -------- -------- --------
Total investments 6.82% 6.99% 6.78% 6.75% 7.16%
-------- -------- -------- -------- --------
Total loans, MBS and investments 7.45% 7.46% 7.58% 7.53% 7.48%
-------- -------- -------- -------- --------
Weighted average rate:
Deposits - daily access 3.01% 3.02% 2.97% 3.04% 3.12%
Deposits - certificates 5.44% 5.46% 5.59% 5.80% 5.87%
-------- -------- -------- -------- --------
Total deposits 4.57% 4.62% 4.74% 4.96% 5.05%
Securities sold under agreements to repurchase
and other short-term borrowings 5.46% 5.50% 5.42% 5.86% 5.90%
FHLB borrowings 5.66% 5.94% 6.04% 5.83% 6.18%
Other borrowings 7.63% 7.76% 7.99% 8.04% 8.06%
-------- -------- -------- -------- --------
Total borrowings 5.64% 5.87% 5.87% 5.85% 6.08%
-------- -------- -------- -------- --------
Total deposits and borrowings 4.96% 5.05% 5.11% 5.26% 5.46%
-------- -------- -------- -------- --------
Interest rate spread 2.49% 2.41% 2.47% 2.27% 2.02%
======== ======== ======== ======== ========
Adjusted interest rate spread/1/ 2.66% 2.59% 2.67% 2.44% 2.19%
======== ======== ======== ======== ========
<CAPTION>
Quarter Ended
----------------------------------------------------
Sept. 30, June 30, Mar. 31, Dec. 31, Sept. 30,
1996 1996 1996 1995 1995
-------- -------- -------- -------- --------
<S> <C> <C> <C> <C> <C>
Weighted average yield:
Loans receivable, net 7.57% 7.62% 7.83% 7.94% 7.97%
Mortgage-backed securities, net 6.59% 6.44% 6.44% 6.31% 6.22%
-------- -------- -------- -------- --------
Total loans and MBS 7.41% 7.41% 7.54% 7.46% 7.42%
Federal funds sold and securities purchased
under resale agreements 5.54% 5.56% 5.60% 6.02% 6.01%
U.S. Government and other investment securities 9.63% 10.91% 9.41% 9.73% 9.31%
-------- -------- -------- -------- --------
Total investments 6.65% 7.11% 6.44% 6.84% 6.76%
-------- -------- -------- -------- --------
Total loans, MBS and investments 7.36% 7.40% 7.46% 7.43% 7.38%
-------- -------- -------- -------- --------
Weighted average cost:
Deposits - daily access 3.00% 3.04% 3.01% 3.09% 3.11%
Deposits - certificates 5.47% 5.52% 5.68% 5.84% 5.86%
-------- -------- -------- -------- --------
Total deposits 4.60% 4.69% 4.84% 5.01% 5.06%
Securities sold under agreements to repurchase
and other short-term borrowings 5.46% 5.47% 5.62% 5.93% 5.99%
FHLB borrowings 5.77% 6.03% 5.94% 6.08% 6.17%
Other borrowings 3.42% 4.79% 3.88% 3.86% 6.24%
-------- -------- -------- -------- --------
Total borrowings 5.71% 5.86% 5.83% 6.00% 6.09%
-------- -------- -------- -------- --------
Total deposits and borrowings 4.99% 5.09% 5.18% 5.39% 5.49%
-------- -------- -------- -------- --------
Yield-cost spread 2.37% 2.31% 2.28% 2.04% 1.89%
======== ======== ======== ======== ========
Effective net spread/1/ 2.56% 2.50% 2.47% 2.22% 2.06%
======== ======== ======== ======== ========
</TABLE>
- -------------------------------------
/1/ The effective net spread for a period is net interest income during the
period divided by average interest-earning assets during the period. The
adjusted interest rate spread as of a particular date is net interest
income annualized at the rates in effect on such date divided by the
balance of interest earning assets as of such date.
29
<PAGE>
EXHIBIT 99C
GLENDALE FEDERAL BANK AND SUBSIDIARIES
LOAN ORIGINATIONS BY TYPE
(dollars in thousands)
(unaudited)
<TABLE>
<CAPTION>
Real Estate
-------------------------------------------------------
Convertible/ Call Construction/
Quarter Ended Fixed ARM Date Fixed Tract Consumer Commercial Total (1)(2)
- -------------- ----------- -------- ------- -------- ------------- -------- ---------- -----------
<S> <C> <C> <C> <C> <C> <C> <C> <C>
Sept. 30, 1996 $20,616 $104,616 $ 5,449 $ 51,109 $ 6,180 $4,255 $6,675 $198,900
10% 53% 3% 26% 3% 2% 3% 100%
June 30, 1996 $47,337 $ 71,785 $ 7,991 $ 73,749 $ 5,041 $4,349 $ 533 $210,785
23% 34% 4% 35% 2% 2% 0% 100%
Mar. 31, 1996 $58,998 $ 22,595 $ 7,807 $109,034 $10,846 $3,296 $ 294 $212,870
28% 11% 4% 51% 5% 1% 0% 100%
Dec. 31, 1995 $76,148 $ 29,628 $16,665 $ 96,042 $ 5,700 $5,686 $ 318 $230,187
34% 13% 7% 42% 2% 2% 0% 100%
Sept. 30, 1995 $60,953 $ 40,809 $11,132 $ 92,786 $ 370 $7,173 $ 241 $213,464
29% 19% 5% 44% 0% 3% 0% 100%
</TABLE>
- -----------
(1) Includes refinanced portion of Bank's loans, which amounted to $19,889,
$36,174, $48,294, $37,021 and $31,960 for the quarters ended September 30, 1996,
June 30, 1996, March 31, 1996 December 31, 1995 and September 30, 1995,
respectively.
(2) Excludes correspondent lending purchases totaling $189, $12,570,
$14,668, $12,116 and $13,428 for the quarters ended September 30, 1996, June 30,
1996, March 31, 1996, December 31, 1995 and September 30, 1995, respectively.
<PAGE>
EXHIBIT 99D
GLENDALE FEDERAL BANK AND SUBSIDIARIES
ANALYSIS OF ALLOWANCE FOR LOAN LOSSES AND
NON-PERFORMING ASSETS ("NPA")
AT SEPTEMBER 30, 1996
(DOLLARS IN THOUSANDS)
(Unaudited)
<TABLE>
<CAPTION>
Allowance for
Loan Losses Allowance for NPA
Gross Allowance As a % of Loan Losses As a % of Allowance for
Loan for Gross Loan Non- As a % of Gross Loan Loan Losses
Portfolio Loan Portfolio Accrual Non-Accrual Portfolio As a % of
Property Type Balance Losses Balance Loans Loans NPA Balance NPA
- ------------- ----------- -------- --------- -------- ------------ -------- ---------- ----------
<S> <C> <C> <C> <C> <C> <C> <C> <C>
Single-family
1-4 units $ 8,109,350 $ 53,787 0.66% $107,263 50.14% $145,726 1.80% 36.91%
Multi-family:
5-36 units 1,542,896 46,617 3.02% 33,407 139.54% 45,114 2.92% 103.33%
37 or more units 386,853 20,788 5.37% 12,755 162.98% 20,387 5.27% 101.97%
Non-residential 1,297,830 46,761 3.60% 17,371 269.19% 43,017 3.31% 108.70%
Commercial 18,422 3,444 18.70% 12 N/A 12 0.07% N/A
Consumer 74,120 5,234 7.06% 657 796.65% 722 0.97% 724.93%
----------- -------- -------- --------
$11,429,471 $176,631 1.55% $171,465 103.01% $254,978 2.23% 69.27%
=========== ======== ======== ========
</TABLE>
31
<PAGE>
EXHIBIT 99E
GLENDALE FEDERAL BANK AND SUBSIDIARIES
GROSS LOANS, NON-PERFORMING ASSETS ("NPA")
AND RESTRUCTURED LOANS ("TDR") BY PROPERTY TYPE
At September 30, 1996
(in thousands)
(unaudited)
<TABLE>
<CAPTION>
Non-
Gross Accrual REO and Total Restructured
Property Type Loans Loans Other Assets NPA Loans
------------------ --------------- ------------- --------------- -------------
<S> <C> <C> <C> <C> <C>
Single-family
1-4 units $ 8,109,350 $ 107,263 $ 38,463 $ 145,726 $ 2,290
Multi-family:
5-36 units 1,542,896 33,407 11,707 45,114 2,408
37 or more units 386,853 12,755 7,632 20,387 2,242
Non-residential:
Office buildings 440,496 2,798 9,654 12,452 4,587
Shopping centers 380,464 8,342 256 8,598 -
Warehouse/storage 96,664 - - - -
Hotels/motels 42,939 - 99 99 -
Industrial parks 100,029 2,529 - 2,529 -
Land 14,558 632 14,466 15,098 -
Mobile home parks 37,359 1,501 - 1,501 -
Commercial/
industrial 185,321 1,569 1,171 2,740 -
------------------- --------------- ------------- --------------- -------------
Total non-residential 1,297,830 17,371 25,646 43,017 4,587
Commercial 18,422 12 - 12 -
Consumer 74,120 657 65 722 -
------------------- --------------- ------------- --------------- -------------
Total $ 11,429,471 $ 171,465 $ $83,513 $ 254,978 $ 11,527
=================== =============== ============= =============== =============
</TABLE>
<PAGE>
EXHIBIT 99F
GLENDALE FEDERAL BANK AND SUBSIDIARIES
NON-PERFORMING ASSETS AND RESTRUCTURED LOANS
(dollars in thousands)
(unaudited)
<TABLE>
<CAPTION>
Sept. 30 June 30 Mar. 31 Dec. 31 Sept. 30
1996 1996 1996 1995 1995
---------- --------- --------- --------- ---------
<S> <C> <C> <C> <C> <C>
Balances:
Non-accrual loans $171,465 $192,445 $207,328 $200,451 $216,986
Real estate owned and other asset 83,513 82,204 82,449 86,838 87,326
--------- --------- --------- --------- ---------
Total non-performing assets $254,978 $274,649 $289,777 $287,289 $304,312
========= ========= ========= ========= =========
Restructured loans $ 11,527 $ 9,194 $ 8,373 $ 8,053 $ 7,191
========= ========= ========= ========= =========
Percent of total assets:
Non-accrual loans 1.14% 1.33% 1.44% 1.37% 1.37%
Real estate owned and other asset 0.55% 0.57% 0.58% 0.59% 0.55%
--------- --------- --------- --------- ---------
Total non-performing assets 1.69% 1.90% 2.02% 1.96% 1.92%
========= ========= ========= ========= =========
Restructured loans 0.08% 0.06% 0.06% 0.06% 0.05%
========= ========= ========== ========== =========
</TABLE>
<PAGE>
EXHIBIT 99G
GLENDALE FEDERAL BANK AND SUBSIDIARIES
NON-PERFORMING ASSETS ACTIVITY
(dollars in millions)
(unaudited)
<TABLE>
<CAPTION>
Quarter Ended
-----------------------------------------------------
Sept. 30, June 30, Mar. 31, Dec. 31, Sept. 30,
1996 1996 1996 1995 1995
-------- -------- -------- -------- ---------
<S> <C> <C> <C> <C> <C>
Beginning Balance $274,649 $289,777 $287,289 $304,312 $355,522
Additions:
Single-family 1-4 units 48,065 60,385 82,203 59,799 69,680
Multi-family:
5 to 36 units 12,517 25,131 18,130 17,684 16,522
37 or more units 3,912 1,920 8,374 9,000 3,766
Non-residential 2,863 8,016 6,500 9,513 15,567
Commercial 12 ---- ---- ---- ----
Consumer ---- 328 5 437 188
-------- -------- -------- -------- ---------
67,369 95,780 115,212 96,433 105,723
-------- -------- -------- -------- ---------
Deletions:
Foreclosures:
Single-family 1-4 units (7,582) (10,503) (7,982) (11,700) (7,795)
Multi-family:
5 to 36 units (796) (2,299) (2,877) 1,196 (654)
37 or more units 468 (662) (249) (827) (124)
Non-residential (1,378) (992) (128) 428 (161)
-------- -------- -------- -------- ---------
(9,288) (14,456) (11,236) (10,903) (8,734)
-------- -------- -------- -------- ---------
Write-downs:
Single-family 1-4 units (571) (216) (1,973) (2,505) (2,548)
Multi-family:
5 to 36 units (1,548) (1,197) (1,292) (631) (1,909)
37 or more units (2,369) ---- (697) (906) (1,093)
Non-residential (263) (2,857) (1,022) (3,516) (1,510)
Commercial (28) ---- ---- ---- ----
-------- -------- -------- -------- ---------
(4,779) (4,270) (4,984) (7,558) (7,060)
-------- -------- -------- -------- ---------
Payoffs/Sales/Other:
Single-family 1-4 units (53,857) (55,872) (64,789) (47,869) (47,841)
Multi-family:
5 to 36 units (9,850) (21,316) (16,858) (22,610) (30,847)
37 or more units (912) (5,989) (3,973) (3,611) (12,612)
Non-residential (7,958) (8,890) (10,452) (20,743) (49,454)
Commercial 6 (95) (17) (6) (143)
Consumer (402) (20) (415) (156) (242)
-------- -------- -------- -------- ---------
(72,973) (92,182) (96,504) (94,995) (141,139)
-------- -------- -------- -------- ---------
Ending Balance $254,978 $274,649 $289,777 $287,289 $304,312
======== ======== ======== ======== =========
Net (Increase) Decrease $ 19,671 $ 15,128 $ (2,488) $ 17,023 $ 51,210
======== ======== ======== ======== =========
</TABLE>
34
<PAGE>
EXHIBIT 99H
GLENDALE FEDERAL BANK AND SUBSIDIARIES
DELINQUENT LOANS BY PROPERTY TYPE
(dollars in thousands)
(unaudited)
<TABLE>
<CAPTION>
% of Type of % of Type of % of Type of
Gross Gross Gross
Sept. 30, Loans June 30, Loans Mar. 31, Loans
1996 Receivable 1996 Receivable 1996 Receivable
--------- ---------- --------- ---------- -------- ----------
<S> <C> <C> <C> <C> <C> <C>
Single-family 1-4 units:
31 - 60 Days $ 51,442 0.63% $ 57,047 0.75% $ 82,640 1.10%
61 - 90 Days 28,023 0.35% 18,416 0.24% 36,930 0.49%
Over 90 Days 107,263 1.32% 119,978 1.59% 127,409 1.71%
--------- ---------- --------- ---------- -------- ----------
186,728 2.30% 195,441 2.58% 246,979 3.30%
--------- ---------- --------- ---------- -------- ----------
Multi-family 5-36 units:
31 - 60 Days 13,629 0.88% 9,528 0.61% 21,419 1.36%
61 - 90 Days 5,619 0.36% 7,601 0.49% 7,046 0.45%
Over 90 Days 27,391 1.78% 25,595 1.63% 26,458 1.68%
--------- ---------- --------- ---------- -------- ----------
46,639 3.02% 42,724 2.73% 54,923 3.49%
--------- ---------- --------- ---------- -------- ----------
Multi-family 37 or more units:
31 - 60 Days ---- ---- 2,126 0.53% 4,190 0.97%
61 - 90 Days ---- ---- ---- ---- 1,669 0.38%
Over 90 Days 12,755 3.30% 14,461 3.61% 12,299 2.83%
--------- ---------- --------- ---------- -------- ----------
12,755 3.30% 16,587 4.14% 18,158 4.18%
--------- ---------- --------- ---------- -------- ----------
Non-residential:
31 - 60 Days 12,579 0.97% 3,169 0.23% 15,616 1.11%
61 - 90 Days 607 0.05% 2,762 0.20% 4,512 0.32%
Over 90 Days 14,840 1.14% 17,907 1.33% 13,084 0.93%
--------- ---------- --------- ---------- -------- ----------
28,026 2.16% 23,838 1.76% 33,212 2.36%
--------- ---------- --------- ---------- -------- ----------
Commercial:
31 - 60 Days 16 0.09% 38 0.37% 94 1.00%
61 - 90 Days ---- ---- ---- ---- ---- ----
Over 90 Days 12 0.06% ---- ---- ---- ----
--------- ---------- --------- ---------- -------- ----------
28 0.15% 38 0.37% 94 1.00%
--------- ---------- --------- ---------- -------- ----------
Consumer:
31 - 60 Days 1,480 2.00% 1,081 1.48% 2,415 3.27%
61 - 90 Days 448 0.60% 612 0.84% 465 0.63%
Over 90 Days 657 0.89% 1,001 1.36% 708 0.96%
--------- ---------- --------- ---------- -------- ----------
2,585 3.49% 2,694 3.68% 3,588 4.86%
--------- ---------- --------- ---------- -------- ----------
Total:
31 - 60 Days 79,146 0.69% 72,989 0.66% 126,374 1.15%
61 - 90 Days 34,697 0.30% 29,391 0.27% 50,622 0.46%
Over 90 Days 162,918 1.43% 178,942 1.63% 179,958 1.64%
--------- ---------- --------- ---------- -------- ----------
$276,761 2.42% $281,322 2.56% $356,954 3.25%
========= ========== ========= ========== ======== ==========
<CAPTION>
% of Type of % of Type of
Gross Gross
Dec. 31, Loans Sept. 30 Loans
1995 Receivable 1995 Receivable
--------- ---------- --------- ----------
<S> <C> <C> <C> <C>
Single-family 1-4 units:
31 - 60 Days $ 66,968 1.04% $ 65,753 1.06%
61 - 90 Days 25,227 0.39% 27,690 0.44%
Over 90 Days 119,762 1.85% 121,591 1.96%
--------- ---------- --------- ----------
211,957 3.28% 215,034 3.46%
--------- ---------- --------- ----------
Multi-family 5-36 units:
31 - 60 Days 16,876 1.06% 20,693 1.28%
61 - 90 Days 12,833 0.81% 5,961 0.37%
Over 90 Days 21,040 1.33% 25,013 1.55%
--------- ---------- --------- ----------
50,749 3.20% 51,667 3.20%
--------- ---------- --------- ----------
Multi-family 37 or more units:
31 - 60 Days 5,198 1.17% 7,586 1.69%
61 - 90 Days 6,036 1.35% 3,541 0.79%
Over 90 Days 5,877 1.32% 9,970 2.23%
--------- ---------- --------- ----------
17,111 3.84% 21,097 4.71%
--------- ---------- --------- ----------
Non-residential:
31 - 60 Days 2,548 0.17% 12,665 0.84%
61 - 90 Days 1,568 0.11% 13,079 0.87%
Over 90 Days 21,496 1.47% 28,675 1.90%
--------- ---------- --------- ----------
25,612 1.75% 54,419 3.61%
--------- ---------- --------- ----------
Commercial:
31 - 60 Days ---- ---- 27 0.26%
61 - 90 Days ---- ---- ---- ----
Over 90 Days ---- ---- ---- ----
--------- ---------- --------- ----------
---- ---- 27 0.26%
--------- ---------- --------- ----------
Consumer:
31 - 60 Days 1,898 2.49% 2,333 2.95%
61 - 90 Days 901 1.18% 840 1.07%
Over 90 Days 1,168 1.53% 815 1.03%
--------- ---------- --------- ----------
3,967 5.20% 3,988 5.05%
--------- ---------- --------- ----------
Total:
31 - 60 Days 93,488 0.93% 109,057 1.11%
61 - 90 Days 46,565 0.46% 51,111 0.52%
Over 90 Days 169,343 1.69% 186,064 1.88%
--------- ---------- --------- ----------
$309,396 3.08% $346,232 3.51%
========= ========== ========= ==========
</TABLE>
35
<PAGE>
===============================================================================
OFFICE OF THRIFT SUPERVISION
Washington, D.C. 20552
FORM 10-Q
(Mark One)
[X] QUARTERLY REPORT PURSUANT TO SECTION 13 OR 15(d) OF THE SECURITIES EXCHANGE
ACT OF 1934
For the quarterly period ended December 31, 1996
------------------------------------------------
OR
[_] TRANSITION REPORT PURSUANT TO SECTION 13 OR 15(d) OF THE SECURITIES
EXCHANGE ACT OF 1934
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 (I.R.S. Employer
of incorporation or organization) Identification Number)
414 North Central Avenue, Glendale, California 91203
(Address of principal executive offices) (Zip Code)
(818) 500-2000
(Registrant's telephone number, including area code)
Not Applicable
(Former name, former address, and former fiscal year,
if changed since last report.)
Indicate by check mark whether the registrant (1) has filed all reports required
to be filed by Section 13 or 15(d) of the Securities Exchange Act of 1934 during
the preceding 12 months (or for such shorter period that the registrant was
required to file such reports), and (2) has been subject to such filing
requirements for the past 90 days. Yes X No
--- ---
The number of shares of issuer's $1.00 par value common stock outstanding as of
December 31, 1996 was 49,808,780.
===============================================================================
<PAGE>
GLENDALE FEDERAL BANK AND SUBSIDIARIES
INDEX
<TABLE>
<CAPTION>
PAGE
----
<S> <C>
PART I. FINANCIAL INFORMATION
ITEM 1. FINANCIAL STATEMENTS (UNAUDITED)
DECEMBER 31, 1996 AND JUNE 30, 1996.......................... 1
CONSOLIDATED STATEMENTS OF OPERATIONS -
THREE AND SIX MONTHS ENDED DECEMBER 31, 1996 AND 1995........ 2
CONSOLIDATED STATEMENTS OF CASH FLOWS -
SIX MONTHS ENDED DECEMBER 31, 1996 AND 1995.................. 3
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS................... 5
ITEM 2. MANAGEMENT'S DISCUSSION AND ANALYSIS OF FINANCIAL
CONDITION AND RESULTS OF OPERATIONS......................... 7
PART II. OTHER INFORMATION
ITEM 1. LEGAL PROCEEDINGS............................................ 25
ITEM 4. SUBMISSION OF MATTERS TO A VOTE OF SECURITY HOLDERS.......... 26
ITEM 6. EXHIBITS AND REPORTS ON FORM 8-K............................. 26
</TABLE>
<PAGE>
PART I - FINANCIAL INFORMATION
Item 1. Financial Statements (unaudited)
GLENDALE FEDERAL BANK AND SUBSIDIARIES
CONSOLIDATED STATEMENTS OF FINANCIAL CONDITION
(dollars in thousands except share data)
<TABLE>
<CAPTION>
December 31, June 30,
1996 1996
----------- -----------
ASSETS
<S> <C> <C>
Cash and amounts due from banks $ 147,314 $ 153,608
Federal funds sold and securities purchased under resale agreements 501,000 433,000
Other debt securities held to maturity, at amortized cost
(fair value: $6,990 at December 31, 1996 and $18,921 at June 30, 1996) 6,990 18,877
Other debt and equity securities available for sale, at fair value 7,914 -
Mortgage-backed securities held to maturity, net (fair value:
$1,267,235 at December 31, 1996 and $1,351,344 at June 30, 1996) 1,257,888 1,356,235
Mortgage-backed securities available for sale, at fair value 1,081,961 884,555
Loans receivable, net of allowance for loan losses of $173,965 at
December 31, 1996 and $186,756 at June 30, 1996 11,114,666 10,694,594
Loans held for sale, at lower of cost or market 15,323 33,315
Real estate held for sale or investment 11,492 12,072
Real estate acquired in settlement of loans 68,750 78,249
Interest receivable 94,194 89,237
Investment in capital stock of Federal Home Loan Bank, at cost 251,900 192,842
Premises and equipment, at cost, less accumulated depreciation 127,196 126,368
Mortgage servicing rights 159,434 93,970
Capitalized servicing fees receivable 29,229 33,429
Goodwill and other intangible assets, less accumulated amortization 56,642 59,216
Other assets 196,299 196,997
----------- -----------
$15,128,192 $14,456,564
=========== ===========
LIABILITIES AND STOCKHOLDERS' EQUITY
Liabilities:
Deposits $ 8,779,981 $ 8,723,976
Securities sold under agreements to repurchase 149,804 758,050
Borrowings from the Federal Home Loan Bank 5,038,000 3,838,000
Other borrowings 10,594 10,599
Other liabilities and accrued expenses 150,310 131,224
Income taxes payable 36,225 37,264
----------- -----------
Total liabilities 14,164,914 13,499,113
----------- -----------
Stockholders' Equity:
Preferred stock, Series E, $1.00 par value per share
(8,050,000 shares authorized; 4,704,182 shares issued
and outstanding at December 31, 1996; 5,823,882 shares
issued and outstanding at June 30, 1996) 4,704 5,824
Common stock, $1.00 par value per share
(100,000,000 shares authorized; 49,808,780 shares
issued and outstanding at December 31, 1996; 46,729,698
shares issued and outstanding at June 30, 1996) 49,809 46,730
Additional paid-in capital 790,838 790,724
Net unrealized holding loss on debt and equity
securities available for sale (5,088) (11,391)
Retained earnings-substantially restricted 123,015 125,564
----------- -----------
Total stockholders' equity 963,278 957,451
----------- -----------
$15,128,192 $14,456,564
=========== ===========
</TABLE>
See accompanying Notes to Consolidated Financial Statements
1
<PAGE>
GLENDALE FEDERAL BANK AND SUBSIDIARIES
CONSOLIDATED STATEMENTS OF OPERATIONS
(in thousands except per share data)
<TABLE>
<CAPTION>
Three Months Ended Six Months Ended
December 31 December 31
------------------------- -------------------------
1996 1995 1996 1995
-------- -------- -------- --------
<S> <C> <C> <C> <C>
Interest income:
Loans receivable $214,815 $196,357 $425,002 $394,035
Mortgage-backed securities 37,448 64,008 73,801 136,732
Investments 15,322 16,204 29,451 32,235
-------- -------- -------- --------
Total interest income 267,585 276,569 528,254 563,002
-------- -------- -------- --------
Interest expense:
Deposits 101,628 112,263 203,324 224,802
Short-term borrowings 3,254 30,454 13,067 71,347
Other borrowings 69,471 52,905 129,268 107,969
-------- -------- -------- --------
Total interest expense 174,353 195,622 345,659 404,118
-------- -------- -------- --------
Net interest income 93,232 80,947 182,595 158,884
Provision for loan losses 7,829 10,394 15,183 19,563
-------- -------- -------- --------
Net interest income after provision for loan losses 85,403 70,553 167,412 139,321
Other income:
Loan servicing income, net 8,823 7,357 17,124 9,283
Other fees and service charges 13,573 10,918 26,424 21,349
Loss on sale of loans and mortgage-backed securities, net (1,348) (35,950) (1,565) (37,977)
Other income, net 151 (1,357) 278 (488)
-------- -------- -------- --------
Total other income 21,199 (19,032) 42,261 (7,833)
-------- -------- -------- --------
Other expenses:
Compensation and employee benefits 27,527 24,397 55,095 48,776
Regulatory insurance 4,995 7,043 11,196 14,728
Occupancy expense, net 7,781 6,946 15,637 14,166
Advertising and promotion 5,568 6,330 13,090 11,262
Furniture, fixtures and equipment 2,958 3,042 5,905 5,500
Stationery, supplies and postage 2,725 2,523 5,467 4,751
Other general and administrative expenses 16,846 9,915 31,171 18,915
-------- -------- -------- --------
Total general and administrative expenses 68,400 60,196 137,561 118,098
SAIF Special Assessment - - 58,672 -
Operations of real estate held for sale or investment 290 529 612 247
Operations of real estate acquired in settlement of loans 2,504 2,184 3,820 3,124
Amortization of goodwill and other intangible assets 1,286 1,293 2,573 2,573
-------- -------- -------- --------
Total other expenses 72,480 64,202 203,238 124,042
-------- -------- -------- --------
Earnings (loss) before income tax provision (benefit) 34,122 (12,681) 6,435 7,446
Income tax provision (benefit) 10,900 (2,028) 3,198 4,288
-------- -------- -------- --------
Net earnings (loss) $ 23,222 $(10,653) $ 3,237 $ 3,158
======== ======== ======== ========
Earnings (loss) applicable to common shareholders:
Net earnings (loss) $ 23,222 $(10,653) $ 3,237 $ 3,158
Dividends declared on preferred stock (2,679) (4,402) (5,786) (8,805)
Premium on exchange of preferred stock for common stock (3,429) - (3,932) -
-------- -------- -------- --------
$ 17,114 $(15,055) $ (6,481) $ (5,647)
======== ======== ======== ========
Earnings (loss) per share:
Primary $ 0.31 $ (0.37) $ (0.14) $ (0.14)
Fully diluted $ 0.29 $ (0.37) $ (0.14) $ (0.14)
</TABLE>
See accompanying Notes to Consolidated Financial Statements
2
<PAGE>
GLENDALE FEDERAL BANK AND SUBSIDIARIES
CONSOLIDATED STATEMENTS OF CASH FLOWS
(in thousands)
<TABLE>
<CAPTION>
Six Months Ended December 31
------------------------------
1996 1995
------------ ------------
<S> <C> <C>
CASH FLOWS FROM OPERATING ACTIVITIES:
Net earnings $ 3,237 $ 3,158
Adjustments to reconcile net earnings to net cash provided
by operating activities:
Amortization of discounts and accretion of premiums, net 5,303 3,860
Accretion of deferred loan fees (2,481) (3,027)
Provision for loan losses 15,183 19,563
Loss on sale of loans and mortgage-backed securities, net 1,565 37,977
Depreciation and amortization of servicing assets 20,706 22,871
Provision for deferred income taxes 5,849 14,445
Provision for losses on real estate 4,641 5,213
Gain on sale of real estate (4,264) (6,368)
Amortization of goodwill and other intangible assets 2,573 2,573
Net change in loans originated or purchased for resale 21,361 (17,831)
(Increase) decrease in interest receivable (4,957) 11,503
FHLB stock dividend received (6,006) (4,637)
(Increase) decrease in other assets 313 (6,379)
Increase (decrease) in other liabilities 12,065 (7,835)
Other items (3,803) (11,696)
----------- ----------
Total adjustments 68,048 60,232
----------- ----------
Net cash provided by operating activities 71,285 63,390
----------- ----------
CASH FLOWS FROM INVESTING ACTIVITIES:
Net change in other debt securities with original maturities of 3 months or less (23) 7,516
Purchase of other debt securities held to maturity (3,000) (6,800)
Purchase of mortgage-backed securities held to maturity - (3,181)
Purchase of mortgage-backed securities available for sale (327,656) -
Proceeds from maturities of other debt securities held to maturity 7,810 26,145
Principal payments on mortgage-backed securities held to maturity 97,361 368,967
Principal payments on mortgage-backed securities available for sale 134,324 117,202
Loans originated (net of refinances) for investment (277,924) (195,848)
Loans purchased for investment (1,069,380) (419,939)
Net change in undisbursed loan funds (4,146) 9,210
Principal payments on loans held for investment 884,122 590,401
Proceeds from sale of loans held for investment 1,637 155,315
Proceeds from sale of mortgage-backed securities available for sale - 983,000
Cash invested in real estate (7,323) (8,387)
Cash received from real estate investments and sale of real estate
acquired in settlement of loans 49,726 64,933
Purchase of FHLB stock (53,052) (7,303)
Redemption of FHLB stock - 8,742
Net increase in premises and equipment (8,157) (5,955)
Purchase of mortgage servicing rights (74,627) (845)
----------- ----------
Net cash (used) provided by investing actitivities (650,308) 1,683,173
----------- ----------
</TABLE>
Statement continued on next page
3
<PAGE>
GLENDALE FEDERAL BANK AND SUBSIDIARIES
CONSOLIDATED STATEMENTS OF CASH FLOWS - (Continued)
(in thousands)
<TABLE>
<CAPTION>
Six Months Ended December 31
----------------------------
1996 1995
---------- ----------
<S> <C> <C>
CASH FLOWS FROM FINANCING ACTIVITIES:
Net increase in deposits 56,005 152,792
Net change in short-term borrowings with original maturities of 3 months or less (608,246) (1,135,298)
Proceeds from fundings of FHLB advances 2,300,000 1,200,000
Repayments of FHLB advances (1,100,000) (1,595,000)
Repayment of other borrowings (2,482) (17,373)
Proceeds from issuance of common stock 2,073 422
Payment of dividends on preferred stock (6,621) (8,805)
----------- -----------
Net cash provided (used) by financing activities 640,729 (1,403,262)
----------- -----------
Net increase in cash and cash equivalents 61,706 343,301
Cash and cash equivalents at beginning of period 586,608 435,697
----------- -----------
Cash and cash equivalents at end of period $ 648,314 $ 778,998
=========== ===========
</TABLE>
See accompanying Notes to Consolidated Financial Statements
4
<PAGE>
GLENDALE FEDERAL BANK AND SUBSIDIARIES
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
DECEMBER 31, 1996
NOTE (1) - BASIS OF PRESENTATION
The accompanying consolidated financial statements have been prepared in
accordance with generally accepted accounting principles and with the
instructions to Form 10-Q and Rule 10-01 of Regulation S-X for interim financial
information. Accordingly, they do not include all of the information and
footnotes required by generally accepted accounting principles for complete
financial statements. For further information, refer to the consolidated
financial statements and footnotes thereto included in the Bank's Annual Report
on Form 10-K for the fiscal year ended June 30, 1996.
In the opinion of Glendale Federal Bank, Federal Savings Bank and its
subsidiaries ("Glendale Federal" or the "Bank"), the accompanying unaudited
consolidated financial statements contain all adjustments (consisting solely of
normal recurring accruals) necessary for a fair presentation of the Bank's
financial condition as of December 31, 1996 and June 30, 1996, the results of
its operations for the three and six months ended December 31, 1996 and 1995,
and its cash flows for the six months ended December 31, 1996 and 1995. 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 both December 31, 1996 and June 30, 1996. Certain reclassifications have
been made to prior years' consolidated financial statements to conform to the
December 31, 1996 presentation.
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. Actual
results could differ significantly from those estimates and assumptions.
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 securities
purchased under resale agreements."
Supplemental disclosure of cash flow information is as follows (in thousands):
<TABLE>
<CAPTION>
Six months ended
December 31
----------------------
1996 1995
-------- ----------
<S> <C> <C>
Cash paid for:
Interest $358,968 $ 394,814
Income taxes 6,140 ----
Non-cash investing and financing
activities:
Principal reductions to loans due to
foreclosure 72,462 91,307
Loans exchanged for mortgage-backed
securities 25,056 60,678
Loans made to facilitate the sale of
real estate held for investment and
real estate acquired in settlement
of loans 34,831 45,139
Net transfers of loans from held for
investment to held for sale 4,245 18,830
Exchange of Series E preferred stock
for common stock 1,120 ----
Issuance of common stock in exchange
for Series E preferred stock 2,896 ----
Transfer of other debt and equity
securities to available for sale 7,914 ----
Transfer of mortgage-backed securities
to available for sale ---- 2,818,831
Transfer of former headquarters
facility to other assets ---- 31,739
</TABLE>
5
<PAGE>
GLENDALE FEDERAL BANK AND SUBSIDIARIES
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS - (CONTINUED)
DECEMBER 31, 1996
NOTE (3) - NET EARNINGS (LOSS) PER SHARE INFORMATION
For the purpose of calculating net earnings (loss) per share, the Bank used
the following numbers of shares for the periods presented (in thousands):
<TABLE>
<CAPTION>
Three months Six months
ended December 31 ended December 31
----------------- -----------------
1996 1995 1996 1995
------ ------ ------ ------
<S> <C> <C> <C> <C>
Primary net earnings (loss) per share 55,175 40,752 47,976 40,740
Fully diluted net earnings (loss) per
share 68,659 40,752 47,976 40,740
</TABLE>
For primary and fully-diluted calculations, no adjustments were made to the
weighted average number of common shares for the three months ended December 31,
1995 and the six months ended December 31, 1996 and 1995, respectively, as their
effect would be anti-dilutive.
During the three and six months ended December 31, 1996, the Bank entered into
separately negotiated agreements with certain holders of its Series E preferred
stock providing, in the aggregate, for exchanges of 977,000 shares and 1.1
million shares, respectively, of the Series E preferred stock for 2.5 million
shares and 2.9 million 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 (loss) 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 (loss) applicable to common shareholders in
the calculation of earnings (loss) per share.
Subsequent to December 31, 1996, the Bank has entered into a similar agreement
with a holder of its Series E preferred stock providing, in the aggregate, for
the exchange of 82,200 shares of the Series E preferred stock for 207,966 shares
of Bank common stock. This exchange was also made at a premium above the stated
conversion rate of 2.404 shares of Bank common stock for each share of the
Series E preferred stock. The Bank may enter into further exchange agreements in
the future.
The table in Exhibit 11.1 presents the calculation of net earnings (loss) per
share on a primary and fully-diluted basis for the three and six months ended
December 31, 1996 and 1995, respectively.
NOTE (4) - 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. The money collected was
used to increase the SAIF reserve to the level required by law. In September
1996, the Bank recorded an accrual of $58.7 million ($37.6 million after-tax)
for this assessment.
The recapitalization of the SAIF is expected to result in lower deposit
insurance premiums in the future for most SAIF-insured financial institutions,
including the Bank. Based on the Bank's deposits at December 31, 1996, the
expected new premium level would result in an estimated annual pre-tax savings
of $14.5 million beginning with the first calendar quarter of 1997.
6
<PAGE>
ITEM 2. MANAGEMENT'S DISCUSSION AND ANALYSIS OF FINANCIAL CONDITION AND RESULTS
OF OPERATIONS
OVERVIEW
EARNINGS PERFORMANCE
The Bank recorded net earnings of $23.2 million, or $0.29 per fully diluted
share, for the three months ended December 31, 1996, compared to a net loss of
$10.7 million, or $0.37 per fully diluted share, for the same period last year.
For each of the six months ended December 31, 1996 and 1995, the Bank recorded
net earnings of $3.2 million. In the calculation of per share results, dividends
on preferred stock and premiums paid on exchanges of preferred stock for common
stock are subtracted from net earnings to arrive at net earnings (loss)
applicable to common stockholders. Accordingly, the six-month per share results
for both periods were a loss of $0.14 per fully diluted share.
Included in net earnings for the six months ended December 31, 1996 is a
special assessment by the FDIC to recapitalize the SAIF. The Bank recorded an
accrual of $58.7 million ($37.6 million after-tax) for this assessment in
September 1996. See Note 4 of the Notes to Consolidated Financial Statements for
additional discussion.
During the three and six months ended December 31, 1996, the Bank exchanged
977,000 shares and 1.1 million shares, respectively, of the Series E preferred
stock for 2.5 million shares and 2.9 million shares, respectively, of Bank
common stock. See Note 3 of the Notes to Consolidated Financial Statements for
additional information on these transactions.
Included in net earnings (loss) for the three and six months ended December
31, 1995 is an after-tax loss of $23.8 million resulting from the Bank's
decision to sell $1.7 billion of collateralized mortgage obligation ("CMO")
investments and an after-tax loss of $1.3 million resulting from the Bank's
decision to sell its former headquarters facility.
Excluding the effect of the conversion of preferred stock to common stock on
the calculation of earnings per share, the current quarter results were earnings
of $0.34 per fully diluted share. Excluding both the SAIF assessment and the
effect of the preferred stock conversions, earnings for the six months ended
December 31, 1996 were $40.9 million, or $0.60 per fully diluted share.
Excluding the fiscal 1996 non-recurring items noted above, net earnings were
$14.4 million, or $0.22 per fully diluted share, and $28.2 million, or $0.43 per
fully diluted share, for the three and six months ended December 31, 1995,
respectively.
The improvement in earnings, exclusive of the non-recurring items noted above,
in the three and six months ended December 31, 1996, compared to the same
periods last year, reflects higher net interest income, a lower level of
provision for loan losses and increases in loan servicing income and other fees
and service charges, partially offset by 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 2.52% at December 31, 1996, as compared
with 2.27% at December 31, 1995 and 2.41% at June 30, 1996. The Bank's interest
rate spread continued to improve in the first half of fiscal 1997 primarily due
to a decline in the Bank's cost of funds. The decrease in the cost of funds
reflects a lower interest rate environment, the replacement of maturing higher-
cost Federal Home Loan Bank 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. See "Results of
Operations--Net Interest Income" for a discussion of the factors affecting the
Bank's yield-cost spread for the first half of fiscal 1997, compared to the
first half of fiscal 1996.
7
<PAGE>
STRATEGIC DIRECTION
The Bank continues to achieve growth in its new business lines. The Bank's
commercial and consumer loan portfolios increased by $46.9 million and $9.1
million, or 451% and 12%, to $57.3 million and $82.2 million, respectively,
during the first half of fiscal 1997. In December 1996, the Bank introduced a
new agricultural lending program and also purchased $35.6 million of outstanding
agricultural loans. The new program will serve central California and will
specialize 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. The Bank has hired experienced
personnel to staff the new agricultural lending facilities. See "Balance Sheet
Analysis--Loans Receivable" for additional discussion of loan volume activity in
these portfolios.
During the six months ended December 31, 1996, the Bank experienced a net
increase of 25,152 in its number of checking accounts, including 7,666 business
checking accounts. Retail and business checking account balances increased a
combined $118 million, or 18%, to $771 million, during the current six-month
period.
Implementation of the Bank's strategic decision to transform itself from a
savings institution to a community banking organization contributed to the
increase in general and administrative expenses in the three and six months
ended December 31, 1996, compared to the same periods last year. These expenses
may increase in future periods as the Bank expands its business lines and
continues to maintain a higher level of marketing activity.
The ability of the Bank to achieve its planned transformation into a community
banking organization and realize the benefits intended to result from that
transformation is subject to an intense level of competition from California's
existing commercial banks as well as from other non-bank financial institutions.
The Bank's ability to achieve and sustain the improved financial performance
resulting from this transformation is dependent upon the successful completion
of that transformation including; (1) the ability to originate and/or purchase
interest-earning assets; and (2) successfully shifting the mix of liabilities
from higher-cost certificates of deposit and borrowings to lower-cost demand
deposits.
On January 31, 1997, the Bank completed its acquisition of OneCentral Bank
("OneCentral"). At January 31, 1997, OneCentral had $74.3 million in assets,
including $38.0 million in gross loans receivable, and $69.5 million in
deposits.
CAPITAL
At December 31, 1996, the Bank's tangible book value was $15.84 per common
share and $14.31 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 risk-based capital ratios at December 31, 1996 were
6.03%, 10.54% and 11.68%, respectively, placing the Bank in the "well-
capitalized" category as defined by federal regulations, which require 5% core,
6% Tier 1 risk-based capital and 10% risk-based capital to qualify for that
designation. At June 30, 1996, the Bank's core capital, Tier 1 risk-based
capital and risk-based capital ratios were 6.29%, 10.79% and 11.93%,
respectively.
The Bank's capital ratios decreased in the six months ended December 31, 1996
due to the reduction in capital resulting from the assessment to recapitalize
the SAIF and the $671.6 million increase in assets during the period. The Bank's
capital ratios are expected to decrease during the second six months of fiscal
1997 due to the completion of the OneCentral acquisition, the anticipated
completion during the fourth fiscal quarter of the pending acquisition of
TransWorld Bancorp and its principal subsidiary, TransWorld Bank, and
anticipated growth in assets during the period of approximately $1 billion. The
Bank's capital ratios could decrease in future periods due to, among other
things, acquisition activity and further growth in assets.
8
<PAGE>
BALANCE SHEET ANALYSIS
Asset size and composition have been determined principally by seeking to
balance regulatory capital requirements, liquidity, yield and risk. It is the
Bank's intention to increase consolidated assets, from the December 1996 level,
by approximately $1 billion during the remainder of fiscal 1997, primarily
through the purchase of single-family residential loans in the secondary market.
The Bank's ability to realize such growth is dependent upon a number of factors,
such as the availability of loans for purchase at acceptable prices and the
interest rate and economic environment. If such conditions are not favorable,
the Bank may be unable to purchase or originate sufficient loans to meet its
growth objective, and may experience a decrease in total assets due to loan
repayments and prepayments.
Consolidated assets of the Bank increased by $671.6 million, to $15.1 billion,
in the six months ended December 31, 1996. Loans receivable increased by $402.1
million, to $11.1 billion, primarily due to loan purchases and originations,
partially offset by principal payments. In addition, mortgage servicing rights
increased by $65.5 million, to $159.4 million, primarily due to the Bank's
purchase of mortgage servicing rights relating to $5.8 billion of loans.
Mortgage-backed securities increased by $99.1 million, to $2.3 billion,
primarily due to purchases of adjustable-rate securities issued by the
Government National Mortgage Association ("GNMA") totaling $321.8 million,
partially offset by principal payments received of $231.7 million. Mortgage-
backed securities purchased during the current six-month period have been
classified as available for sale.
LOANS RECEIVABLE
Loans receivable held for investment increased by $420.1 million, to $11.1
billion, in the six months ended December 31, 1996. The increase was primarily
due to loans originated for investment, net of refinances, of $312.8 million and
loans purchased for investment totaling $1.1 billion, partially offset by
principal payments of $884.1 million and loans transferred to real estate
acquired in settlement of loans ("REO") of $72.5 million. The loans purchased
include $627.4 million of single-family residential, adjustable-rate mortgage
loans and $372.6 million of single-family residential, fixed-rate mortgage
loans, purchased in the secondary market. The loans purchased also include $35.6
million of agricultural loans as previously discussed.
Loans receivable held for sale decreased by $18.0 million, to $15.3 million,
in the six months ended December 31, 1996, primarily due to securitization of
loans for mortgage-backed securities in the amount of $25.1 million, and fixed-
rate loan sales totaling $27.4 million, partially offset by term loan
originations of $30.2 million and the transfer of loans from held for investment
totaling $4.2 million.
As of December 31, 1996, commitments of the Bank to purchase and originate
loans totaled $52.6 million and $28.5 million, respectively. At that date,
commitments of the Bank to sell loans totaled $3.2 million and commitments of
the Bank to sell mortgage-backed securities, comprised of fixed-rate loans
originated and securitized by the Bank, totaled $14.5 million. As of December
31, 1996, commitments on outstanding letters of credit totaled $8.9 million.
Commitments under lines of credit that were purchased and generated through
the Bank's consumer and commercial lending programs are summarized as follows
(in millions):
<TABLE>
<CAPTION>
Three months ended
-------------------------------------------------
Dec. 31 Sept. 30 June 30 Mar. 31 Dec. 31
1996 1996 1996 1996 1995
------- -------- ------- ------- -------
<S> <C> <C> <C> <C> <C>
Consumer loans $ 31 $ 40 $ 24 $ 30 $ 14
Commercial loans 63 8 4 1 2
----- ----- ----- ----- -----
$ 94 $ 48 $ 28 $ 31 $ 16
===== ===== ===== ===== =====
</TABLE>
9
<PAGE>
Commitments under lines of credit that were purchased and generated through
the Bank's commercial lending program during the three months ended December 31,
1996 includes $50 million of agricultural loan commitments that were purchased
in December 1996.
As of December 31, 1996, outstanding commitments on lines of credit under the
Bank's consumer and commercial lending programs totaled $219.8 million and $78.9
million, respectively, of which the unused amounts totaled $186.4 million and
$41.6 million, respectively.
Term loan originations by property type (including the refinanced portion of
the Bank's loans) and loans purchased under the Bank's correspondent lending
program and in the secondary market are summarized as follows (in millions):
<TABLE>
<CAPTION>
Three months ended
-------------------------------------------------
Dec. 31 Sept. 30 June 30 Mar. 31 Dec. 31
1996 1996 1996 1996 1995
------- -------- ------- ------- -------
<S> <C> <C> <C> <C> <C>
Originations:
Permanent Loans:
Single-family 1-4 units $ 164 $ 176 $ 192 $ 190 $ 201
Multi-family 5-36 units 9 5 6 5 7
Multi-family 37 or more units 2 -- -- 3 3
Non-residential 3 1 3 1 6
Land -- -- 1 -- --
Construction Loans:
Single-family 1-4 units -- 3 3 7 6
Multi-family 5-36 units 1 3 1 4 --
Commercial loans 1 7 -- -- 1
Consumer loans 6 4 5 3 6
----- ------ ------ ------ -----
Total Originations 186 199 211 213 230
Purchases:
Secondary market (1-4 units) 259 741 401 1,241 382
Correspondent lending (1-4 units) -- -- 13 15 12
----- ------ ------ ------ -----
$ 445 $ 940 $ 625 $1,469 $ 624
===== ===== ===== ====== =====
</TABLE>
Term loan originations for the three months ended December 31, 1996 did not
change significantly from the quarter ended September 30, 1996 due to a
relatively stable interest rate environment. Loans refinanced totaled $22.1
million, or 12% of total originations, for the three months ended December 31,
1996, compared to $19.9 million, or 10% of total originations, for the quarter
ended September 30, 1996.
Term loan originations for the three months ended December 31, 1996 declined
as compared to the same quarter last year primarily due to a decline in
refinancing activity. Loans refinanced totaled $37.0 million, or 16% of total
originations, for the three months ended December 31, 1995.
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") properties or to refinance maturing loans. The single-family
residential and multi-family residential construction loans originated in the
current fiscal year are part of the construction lending program that was
terminated during fiscal 1997 along with the Bank's correspondent lending
program.
During the second quarter of fiscal 1997, the Bank purchased in the secondary
market adjustable-rate whole loans totaling $258.6 million. During the first
quarter of fiscal 1997, the Bank purchased fixed-rate whole loans totaling
$372.6 million and adjustable-rate whole loans totaling $368.8 million. In
fiscal 1996, the Bank purchased $2.0 billion of single-family residential,
adjustable-rate mortgage loans, primarily to replace $1.7 billion of fixed-rate
CMO investments sold by the Bank and to replace loan run-off resulting from
principal payments that exceeded the rate of the Bank's term loan originations.
10
<PAGE>
NON-PERFORMING ASSETS ("NPAS") AND RESTRUCTURED LOANS
The following table summarizes the Bank's NPAs and restructured loans at the
dates indicated (dollars in thousands):
<TABLE>
<CAPTION>
December 31, 1996 June 30, 1996
------------------ ------------------
% of % of
Dollar Total Dollar Total
Amount Assets Amount Assets
-------- ------ -------- ------
<S> <C> <C> <C> <C>
Non-accrual loans $152,100 1.01% $192,445 1.33%
REO and other assets 72,634 0.48% 82,204 0.57%
-------- ---- -------- ----
Total NPAs $224,734 1.49% $274,649 1.90%
======== ==== ======== ====
Restructured loans $ 30,712 0.20% $ 9,194 0.06%
======== ==== ======== ====
</TABLE>
The following table summarizes NPA and restructured loan activity during the
first six months of fiscal 1997 (in thousands):
<TABLE>
<CAPTION>
JUNE 30, PAYOFFS/ DEC. 31,
1996 FORE- WRITE- SALES/ 1996
BALANCE ADDITIONS CLOSURES DOWNS OTHER BALANCE
----------------------------------------------------------------------
<S> <C> <C> <C> <C> <C> <C>
NON-ACCRUAL LOANS:
Single-family 1-4 units $119,978 $ 90,878 $(53,006) $ -- $ (57,843) $100,007
Multi-family 5-36 units 33,123 30,257 (13,809) (1,410) (20,323) 27,838
Multi-family 37 or more units 14,461 1,435 (1,240) (2,982) (757) 10,917
Non-residential 23,860 6,449 (4,407) (729) (12,356) 12,817
Commercial 22 12 -- (28) 3 9
Consumer 1,001 142 -- -- (631) 512
----------------------------------------------------------------------
Total $192,445 $129,173 $(72,462) $(5,149) $ (91,907) $152,100
======================================================================
REO AND OTHER ASSETS:
Single-family 1-4 units $ 39,693 $ 6,138 $ 45,424 $(1,305) $ (54,809) $ 35,141
Multi-family 5-36 units 11,668 882 12,501 (744) (12,654) 11,653
Multi-family 37 or more units 4,827 2,477 1,703 (141) (5,032) 3,834
Non-residential 25,893 14 3,495 (411) (7,036) 21,955
Consumer 123 -- -- -- (72) 51
----------------------------------------------------------------------
Total $ 82,204 $ 9,511 $ 63,123 $(2,601) $ (79,603) $ 72,634
======================================================================
TOTAL NPAS:
Single-family 1-4 units $159,671 $ 97,016 $ (7,582) $(1,305) $(112,652) $135,148
Multi-family 5-36 units 44,791 31,139 (1,308) (2,154) (32,977) 39,491
Multi-family 37 or more units 19,288 3,912 463 (3,123) (5,789) 14,751
Non-residential 49,753 6,463 (912) (1,140) (19,392) 34,772
Commercial 22 12 -- (28) 3 9
Consumer 1,124 142 -- -- (703) 563
----------------------------------------------------------------------
Total $274,649 $138,684 $ (9,339) $(7,750) $(171,510) $224,734
======================================================================
RESTRUCTURED LOANS:
Single-family 1-4 units $ 3,222 $ 1,112 $ -- $ -- $ (2,199) $ 2,135
Multi-family 5-36 units 2,197 1,093 -- -- (132) 3,158
Multi-family 37 or more units 2,251 16,244 -- -- (49) 18,446
Non-residential 1,524 5,010 -- -- 439 6,973
----------------------------------------------------------------------
Total $ 9,194 $ 23,459 $ -- $ -- $ (1,941) $ 30,712
======================================================================
</TABLE>
11
<PAGE>
The $49.9 million, or 18%, decrease in NPAs for the six months ended December
31, 1996 reflects $79.6 million in sales of REO through the Bank's regular
problem asset workout process, $55.4 million in non-accrual loans being sold or
paid off and $34.7 million in non-accrual loans reinstating to accrual status,
partially offset by NPA additions. NPA additions, which totaled $138.7 million
and $202.2 million, during the six months ended December 31, 1996 and 1995,
respectively, have decreased in four out of the last six quarters, reflecting an
improving California economy. For the six months ended December 31, 1996, 70% of
NPA additions were loans and REO that were secured by single-family residences,
compared to 64% for the same period last year. NPAs at December 31, 1995 totaled
$287.3 million.
The $21.5 million increase in restructured loans for the six months ended
December 31, 1996 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 $7.8 million of new restructured loans transferred from non-
accrual status, partially offset by $2.5 million of restructured loans being
transferred to performing status.
The table in Exhibit 99E presents the Bank's gross loan portfolio, NPAs and
restructured loans by property type as of December 31, 1996. The table in
Exhibit 99G summarizes the activity in the Bank's NPAs for the past five
quarters.
Total delinquent loans decreased by $32.4 million, to $249.0 million, in the
six months ended December 31, 1996. This decrease was attributable primarily to
the single-family residential and multi-family residential portfolios, in which
delinquent loans declined by $20.4 million and $9.1 million, to $175.1 million
and $50.2 million, respectively, during the six months ended December 31, 1996.
Single-family delinquent loans increased as a percentage of total delinquent
loans from 69% at June 30, 1996 to 70% at December 31, 1996. Loans secured by
single-family properties have a significantly lower historical loss experience
than those secured by multi-family or non-residential properties. The table in
Exhibit 99H presents the Bank's delinquent loans by property type for the past
five quarters.
If the recent economic improvements in the Bank's principal market areas do
not continue or if California experiences 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.
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 through the levels 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. In addition,
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.
12
<PAGE>
The following table sets forth the allocation of Glendale Federal's allowance
for loan losses at December 31, 1996 and June 30, 1996 by property type (dollars
in thousands):
<TABLE>
<CAPTION>
December 31, 1996 June 30, 1996
------------------------------------ -------------------------------------
Gross Percent of Gross Percent 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 $ 55,905 $ 8,096,614 0.69% $ 56,833 $ 7,580,312 0.75%
Multi-family:
5-36 units 44,220 1,512,742 2.92 48,628 1,564,542 3.11
37 or more units 20,994 376,854 5.57 26,062 400,415 6.51
Non-residential 43,547 1,244,837 3.50 47,260 1,357,225 3.48
Commercial 3,026 57,284 5.28 4,699 10,391 45.22
Consumer 6,273 82,240 7.63 3,274 73,158 4.48
-------- ----------- -------- -----------
$173,965 $11,370,571 1.53% $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.
Specific valuation allowances of $19.4 million and $26.5 million have been
established for impaired loans, which totaled $147.0 million and $158.8 million
at December 31, 1996 and June 30, 1996, respectively, and are included in the
allowance for loan losses. The decrease in impaired loans during the six months
ended December 31, 1996 is primarily due to an improving California economy.
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 December 31, 1996 and June 30, 1996 totaled $83.8 million and
$106.5 million, respectively. Those impaired loans without related specific
valuation allowances at December 31, 1996 and June 30, 1996 totaled $63.2
million and $52.3 million, respectively.
The allowance for loan losses declined by $12.8 million, to $174.0 million, in
the first six months of 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. 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 ratios of allowance to non-accrual loans and total
gross loans at December 31, 1996 were 114.4% and 1.5%, respectively, compared to
97.0% and 1.7%, respectively, at June 30, 1996. The table in Exhibit 99D sets
forth the ratios of the Bank's allowance for loan losses to its gross loan
portfolio and NPAs.
13
<PAGE>
A summary of activity in the allowance for loan losses by property type during
the first six months of fiscal 1997 is as follows (in thousands):
<TABLE>
<CAPTION>
Balance Balance
June 30, Charge- Dec. 31,
1996 Additions offs Recoveries 1996
-------- --------- -------- ---------- --------
<S> <C> <C> <C> <C> <C>
Single-family 1-4 units $ 56,833 $13,179 $(14,181) $ 74 $ 55,905
Multi-family:
5-36 units 48,628 1,919 (6,346) 19 44,220
37 or more units 26,062 (44) (5,051) 27 20,994
Non-residential 47,260 417 (4,191) 61 43,547
Commercial 4,699 (4,682) (28) 3,037 3,026
Consumer 3,274 4,394 (1,888) 493 6,273
-------- ------- -------- ------ --------
$186,756 $15,183 $(31,685) $3,711 $173,965
======== ======= ======== ====== ========
</TABLE>
A summary of activity in the allowance for loan losses by property type during
the first six months of fiscal 1996 is as follows (in thousands):
<TABLE>
<CAPTION>
Balance Balance
June 30, Charge- Dec. 31,
1995 Additions offs Recoveries 1995
-------- --------- -------- ---------- --------
<S> <C> <C> <C> <C> <C>
Single-family 1-4 units $ 44,483 $16,809 $(16,258) $ 13 $ 45,047
Multi-family:
5-36 units 41,736 (301) (6,422) 168 35,181
37 or more units 31,569 4,058 (3,395) 222 32,454
Non-residential 83,086 1,015 (9,437) 1,796 76,460
Commercial 4,176 (2,643) (867) 2,936 3,602
Consumer 4,092 625 (1,671) 567 3,613
-------- ------- -------- ------ --------
$209,142 $19,563 $(38,050) $5,702 $196,357
======== ======= ======== ====== ========
</TABLE>
Additions to the allowance for loan losses declined by $4.4 million, to $15.2
million, in the six months ended December 31, 1996, compared to the same period
last year, 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 real estate portfolios 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 continues to emphasize the attraction of retail deposits, especially
low-cost demand deposits. The Bank's ratio of deposits to borrowings was 63%/37%
at December 31, 1996 compared to a ratio of 65%/35% at June 30, 1996. The
reduction in the ratio of deposits to borrowings during the first half of fiscal
1997 was due to the use of borrowings to fund the purchase of interest-earning
assets. 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.
14
<PAGE>
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 $56.0 million, to
$8.8 billion, in the first six months of fiscal 1997.
Glendale Federal's deposit composition at December 31, 1996 and June 30, 1996
was as follows (dollars in millions):
<TABLE>
<CAPTION>
December 31, 1996 June 30, 1996
----------------- ---------------
% of % of
Balance Total Balance Total
------- ----- ------- -----
<S> <C> <C> <C> <C>
Checking/NOW accounts $ 920 10.5% $ 779 8.9%
Passbook accounts 451 5.2 493 5.7
Money market checking/savings 1,892 21.5 1,719 19.7
------ ----- ------ -----
Total daily access 3,263 37.2 2,991 34.3
Short-term certificates (1 year or 2,973 33.9 3,047 34.9
less)
Long-term certificates (over 1 year) 2,345 26.7 2,438 27.9
Branch and business development
jumbo certificates 146 1.6 190 2.2
------ ----- ------ -----
Total retail deposits 8,727 99.4 8,666 99.3
Brokered certificates of deposit 53 0.6 58 0.7
------ ----- ------ -----
Total $8,780 100.0% $8,724 100.0%
====== ===== ====== =====
</TABLE>
Retail and business checking accounts, which exclude custodial accounts,
increased a combined $118 million, or 18%, to $771 million, during the fiscal
1997 first and second quarters. Management believes that the overall increase in
daily access deposits during the first six months of fiscal 1997 reflects the
Bank's aggressive branch marketing efforts and advertising campaign instituted
throughout California, as well as the maturation of long- and short-term
certificates of deposit and the reinvestment of these funds in daily access
money market accounts due to depositors' uncertainty as to the future direction
of interest rates.
BORROWINGS
Total borrowings increased by $591.7 million, to $5.2 billion, during the six
months ended December 31, 1996 to support asset growth. Securities sold under
agreements to repurchase decreased by $608.2 million, to $149.8 million, and
borrowings from the Federal Home Loan Bank ("FHLB") increased by $1.2 billion,
to $5.0 billion, during the same period. Total borrowings as of December 31,
1996 and June 30, 1996 included $3.8 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 structure.
STOCKHOLDERS' EQUITY
Stockholders' equity increased by $5.8 million, to $963.3 million, during the
six months ended December 31, 1996, primarily due to net earnings of $3.2
million and a $6.3 million decrease in the net unrealized loss recorded on the
portfolio of mortgage-backed securities available for sale, partially offset by
dividends declared of $5.8 million on the Bank's Series E preferred stock.
During the six months ended December 31, 1996, the Bank issued 2.9 million
shares of common stock in exchange for 1.1 million shares of the Bank's Series E
preferred stock. See Note 3 of the Notes to Consolidated Financial Statements
for additional information regarding these transactions.
15
<PAGE>
REGULATORY CAPITAL
The following table compares Glendale Federal's regulatory capital at December
31, 1996 to its minimum regulatory capital requirements at that date (dollars in
thousands):
<TABLE>
<CAPTION>
Capital at As a % Capital As a % Excess
Dec. 31, 1996 of Assets Required of Assets Capital
------------- --------- -------- --------- -------
<S> <C> <C> <C> <C> <C>
Capital in accordance with generally
accepted accounting principles $ 963,278
Adjustments for tangible and core
capital:
Goodwill and other intangible
assets (56,642)
Investments in and advances to
non-permissible subsidiaries (2,930)
Net unrealized holding loss on debt
securities available for sale 5,088
----------
Total tangible capital 908,794 6.03% $226,078 1.50% $682,716
Adjustment for core capital ----
----------
Total core capital 908,794 6.03% $452,155* 3.00%* $456,639*
Adjustments for risk-based capital:
Allowance for general loan losses** 107,008
Equity risk investments required
to be deducted (9,123)
----------
Total risk-based capital $1,006,679 11.68% $692,971* 8.00%* $313,708*
==========
</TABLE>
*Under the standards for "well capitalized" institutions established pursuant to
the Federal Deposit Insurance Corporation Improvement Act of 1991 ("FDICIA"),
the corresponding amounts for core capital are $753,592, 5.00% and $155,202,
respectively, and the corresponding amounts for risk-based capital are $863,233,
10.00% and $143,446, respectively.
**Limited to 1.25% of risk-weighted assets.
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 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 December 31, 1996, these available sources totaled approximately $3.4 billion
and consisted primarily of the repurchase agreement markets.
During the six months ended December 31, 1996, the Bank experienced a net cash
outflow from investing activities of $650.3 million, 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.
In addition, the Bank experienced positive cash flows from operating activities
during the period of $71.3 million. The Bank's financing activities during the
period resulted in a net cash inflow of $640.7 million, consisting principally
of net increases in deposits and borrowings.
During December 1996, the Bank's average liquidity ratio was 5.36%. The
current minimum regulatory requirement for this ratio is 5%.
16
<PAGE>
ASSET AND LIABILITY MANAGEMENT
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 Exhibit 99A 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 December 31, 1996.
The following table is a summary of Glendale Federal's one-year GAP at the
dates indicated (dollars in millions):
<TABLE>
<CAPTION>
Dec. 31, June 30,
1996 1996
--------- --------
<S> <C> <C>
Interest-earning assets maturing or
repricing within one year $11,422 $11,004
Interest-bearing liabilities maturing
or repricing within one year 8,754 7,956
------- -------
One-year maturity GAP $ 2,668 $ 3,048
======= =======
One-year maturity GAP as a percent of
total assets 17.6% 21.1%
======= =======
</TABLE>
The $380 million decrease in the one-year GAP for the first six months of
fiscal 1997 was primarily due to a $798 million increase in liabilities maturing
or repricing within one year, partially offset by a $418 million increase in
assets maturing or repricing within one year. The growth in one-year liabilities
was principally due to an increase of $1.7 billion in FHLB borrowings that
mature or reprice within one year, partially offset by a reduction of
approximately $600 million in securities sold under agreements to repurchase and
a decrease in certificates of deposit. The growth in one-year assets was
primarily due to an increase of $235 million in adjustable-rate mortgage-backed
securities that mature or reprice within one year.
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 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. Management has mitigated the
effect of rising interest rates through the extension of certain liabilities
which has resulted in a shift in the Bank's one-year GAP from a negative GAP of
$1.0 billion at September 30, 1995 to a positive one-year GAP of $2.7 billion at
December 31, 1996. The positive one-year GAP decreased by $327 million in the
three months ended December 31, 1996 and 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.
17
<PAGE>
The following tables present the Bank's self-serviced gross loan portfolio,
the portfolio of loans that are serviced by other institutions ("LSBO") and the
Bank's 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>
December 31, 1996
--------------------------------------------------------
Mortgage-
Self-serviced backed Percent
Loans LSBO Securities Total of Total
------------- ------ ---------- ------- --------
<S> <C> <C> <C> <C> <C>
Adjustable:
6-month Treasury $ 354 $ 37 $ 400 $ 791 6%
1-Year Treasury (1) 2,481 2,114 1,428 6,023 44
11th District Cost of Funds 3,721 77 144 3,942 29
Prime 122 - 10 132 1
Other 146 10 135 291 2
------ ------ ------ ------- ---
6,824 2,238 2,117 11,179 82
Fixed:
Loans receivable 940 1,369 - 2,309 17
Mortgage-backed securities - - 194 194 1
940 1,369 194 2,503 18
------ ------ ------ ------- ---
Total $7,764 $3,607 $2,311 $13,682 100%
====== ====== ====== ======= ===
</TABLE>
<TABLE>
<CAPTION>
June 30, 1996
--------------------------------------------------------
Mortgage-
Self-serviced backed Percent
Loans LSBO Securities Total of Total
------------- ------ ---------- ------- --------
<S> <C> <C> <C> <C> <C>
Adjustable:
6-month Treasury $ 384 $ 44 $ 433 $ 861 7%
1-Year Treasury (1) 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:
Loans receivable 928 1,069 - 1,997 15
Mortgage-backed securities - - 227 227 1
------ ------ ------ ------- ---
928 1,069 227 2,224 16
------ ------ ------ ------- ---
Total $7,842 $3,144 $2,221 $13,207 100%
====== ====== ====== ======= ===
</TABLE>
________________
(1) Includes loans with interest rates that are fixed for three to five years
which then convert to adjustable rates for the remainder of the loan term.
18
<PAGE>
RESULTS OF OPERATIONS
NET INTEREST INCOME
Net interest income increased by $12.3 million and $23.7 million, to $93.2
million and $182.6 million, respectively, for the three and six months ended
December 31, 1996, compared to the same periods last year, primarily because of
an improvement in the yield-cost spread. The yield-cost spread increased by 40
basis points and 45 basis points, to 2.44% and 2.41%, respectively, in the three
and six months ended December 31, 1996, compared to the same periods last year,
primarily due to a decrease of 44 basis points and 47 basis points, to 4.95% and
4.97%, respectively, in the Bank's cost of funds. Additionally, the Bank
experienced an increase of $23.9 million and $53.3 million, to $511.8 million
and $532.0 million, respectively, in the amount by which average interest-
earning assets exceeded average interest-bearing liabilities during the current
three- and six-month periods.
The decrease in the Bank's cost of funds during the three and six months ended
December 31, 1996, compared to the same periods last year, was primarily due to
a change in the mix of funding sources from higher-cost borrowings to lower-cost
deposits. This was partially attributable to the reduction in the balance of
securities sold under repurchase agreements using the proceeds from the Bank's
sale of $1.7 billion of CMO investments. This resulted in deposits comprising
63.4% and 63.9% of total average interest-bearing liabilities during the current
three- and six-month periods, respectively, versus 61.8% and 60.1% in the same
periods last year. Other factors contributing to the decrease in the Bank's cost
of funds were the replacement of maturing higher-cost FHLB borrowings with
lower-cost FHLB borrowings, a change in the mix of deposits from higher-cost
certificates of deposit to lower-cost daily access accounts, and a decline in
the interest rate environment.
The yields on loans and mortgage-backed securities decreased by 1 basis point,
to 7.45% and 7.43%, respectively, in the three and six months ended December 31,
1996, compared to the same periods last year. The yield on loans decreased by 34
basis points and 37 basis points, to 7.60% and 7.58%, respectively, in the three
and six months ended December 31, 1996, compared to the same periods last year
primarily due to the decrease in the repricing of the Bank's adjustable-rate
portfolio that was attributable to the lower interest rate environment and to an
increase in adjustable-rate loans that was attributable principally to the
purchase of $2.0 billion of adjustable-rate loans yielding 6.74% in the
secondary market during the last nine months of fiscal 1996. During the first
six months of fiscal 1997, the Bank purchased $372.6 million of fixed-rate loans
yielding 8.50% and $627.4 million of adjustable-rate loans yielding 7.33% in the
secondary market. Partially offsetting the above decrease in the yield on loans
was an increase of 42 basis points and 39 basis points, to 6.73% and 6.66%,
respectively, in the yield on mortgage-backed securities, which was primarily
attributable to the sale of $1.7 billion of lower-yielding CMOs in the second
and third quarters of fiscal 1996.
The declining level of NPAs had a positive impact on net interest income as
the Bank was able to reinvest the proceeds from liquidation of these assets into
interest-earning assets. The average balance of NPAs in the three and six months
ended December 31, 1996 was $239.9 million and $252.4 million, respectively. The
average balance of NPAs in the three and six months ended December 31, 1995 was
$295.8 million and $315.7 million, respectively. The impact of non-accrual
assets on the yield on loans and mortgage-backed securities was a reduction in
yield of 9 basis points in the three and six months ended December 31, 1996,
respectively, versus a reduction of 12 basis points and 11 basis points in the
three and six months ended December 31, 1995.
The yield on the investment portfolio decreased by 41 basis points and 26
basis points, to 6.43% and 6.53%, respectively, in the three and six months
ended December 31, 1996, compared to the same periods last year, primarily due
to a decrease in short-term interest rates.
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 pays fixed interest rates and receives variable interest rates
under its swap contracts. The impact of swaps for each of the three and six
months ended December 31, 1996 was to increase the total cost of funds by 2
basis points. At December 31, 1996, the Bank had $200 million in notional
principal amount of swaps maturing in April 1997, compared to the $220 million
in notional principal amount of swaps outstanding at December 31, 1995.
19
<PAGE>
During fiscal 1996, the Federal Reserve Board lowered the federal funds rate
by a total of 0.75%, to 5.25%. The impact of this reduction has been a decrease
in 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 will be experienced in yields
for these assets more slowly than in the cost of the Bank's short-term
borrowings. If current interest rates remain stable, the Bank would not expect
its interest rate spread to change significantly. However, future increases in
short-term interest rates could result in interest rate spread compression. The
amount of that compression would depend upon the timing and magnitude of such
interest rate movements.
The following rate/volume analysis depicts the increase (decrease) in net
interest income attributable to interest rate fluctuations (change in rate
multiplied by prior period average balance) and volume fluctuations (change in
average balance multiplied by prior period rate) when compared to the same
periods of the prior year (in thousands):
<TABLE>
<CAPTION>
Three months ended December 31, Six months ended December 31,
1996 vs. 1995 1996 vs. 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 $ 27,146 $ (8,688) $ 18,458 $ 49,708 $(18,741) $ 30,967
Mortgage-backed
securities, net (30,565) 4,005 (26,560) (70,874) 7,943 (62,931)
-------- -------- -------- -------- -------- --------
Total loans and mortgage-
backed securities (3,419) (4,683) (8,102) (21,166) (10,798) (31,964)
Federal funds sold and
securities purchased under
resale agreements (782) (890) (1,672) (2,413) (1,716) (4,129)
U.S. Government and other
investment securities 1,326 (536) 790 1,683 (338) 1,345
-------- -------- -------- -------- -------- --------
Total investments 544 (1,426) (882) (730) (2,054) (2,784)
-------- -------- -------- -------- -------- --------
Total interest income (2,875) (6,109) (8,984) (21,896) (12,852) (34,748)
Interest expense:
Deposits - daily access 4,517 (555) 3,962 8,426 (1,237) 7,189
Deposits - certificates (9,036) (5,561) (14,597) (17,242) (11,425) (28,667)
-------- -------- -------- -------- -------- --------
Total deposits (4,519) (6,116) (10,635) (8,816) (12,662) (21,478)
Securities sold under
agreements to repurchase and
other short-term borrowings (25,641) (1,559) (27,200) (53,160) (5,120) (58,280)
Borrowings from the Federal Home 20,418 (3,839) 16,579 29,233 (7,540) 21,693
Loan Bank
Other borrowings 58 (71) (13) (28) (366) (394)
-------- -------- -------- -------- -------- --------
Total borrowings (5,165) (5,469) (10,634) (23,955) (13,026) (36,981)
-------- -------- -------- -------- -------- --------
Total interest expense (9,684) (11,585) (21,269) (32,771) (25,688) (58,459)
-------- -------- -------- -------- -------- --------
Net interest income $ 6,809 $ 5,476 $ 12,285 $ 10,875 $ 12,836 $ 23,711
======== ======== ======== ======== ======== ========
</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.
20
<PAGE>
The following table sets forth the Bank's average balances of and weighted
average yields on interest-earning assets, the average balances of and weighted
average interest rates paid on interest-bearing liabilities, the dollar
difference between such average balances and the spread between the weighted
average yields earned and rates paid for the three months ended December 31,
1996 and 1995 (dollars in millions):
<TABLE>
<CAPTION>
Three months ended December 31
-------------------------------------------------
1996 1995
------------------------ ---------------------
Weighted Weighted
Average Average Average Average
Balances Yield/Cost Balances Yield/Cost
-------- ---------- -------- ----------
<S> <C> <C> <C> <C>
Loans receivable, net $11,311 7.60% $ 9,897 7.94%
Mortgage-backed securities, net 2,227 6.73 4,056 6.31
------- -------
Total loans and mortgage-backed
securities 13,538 7.45 13,953 7.46
Federal funds sold and securities
purchased under resale agreements 680 5.52 734 6.02
U.S. Government and other investment
securities 265 8.77 207 9.73
------- -------
Total investments 945 6.43 941 6.84
------- -------
Total interest-earning assets 14,483 7.39 14,894 7.43
------- -------
Deposits - daily access 3,294 3.01 2,702 3.09
Deposits - certificates 5,557 5.47 6,195 5.84
------- -------
Total deposits 8,851 4.56 8,897 5.01
Securities sold under agreements to
repurchase and other short-term
borrowings 230 5.61 2,039 5.93
Borrowings from the Federal Home Loan
Bank 4,842 5.66 3,428 6.08
Other borrowings 48 3.24 42 3.86
------- -------
Total borrowings 5,120 5.63 5,509 6.00
------- -------
Total interest-bearing liabilities 13,971 4.95 14,406 5.39
------- -------
Difference between average
interest-earning assets
and interest-bearing liabilities $ 512 $ 488
======= =======
Yield-cost spread 2.44% 2.04%
Effective net spread/1/ 2.61% 2.22%
</TABLE>
_______________
/1/ Annualized net interest income divided by average interest-earning assets.
21
<PAGE>
The following table sets forth the Bank's average balances of and weighted
average yields on interest-earning assets, the average balances of and weighted
average interest rates paid on interest-bearing liabilities, the dollar
difference between such average balances and the spread between the weighted
average yields earned and rates paid for the six months ended December 31, 1996
and 1995 (dollars in millions):
<TABLE>
<CAPTION>
Six months ended December 31
-------------------------------------------------
1996 1995
------------------------ ---------------------
Weighted Weighted
Average Average Average Average
Balances Yield/Cost Balances Yield/Cost
-------- ---------- -------- ----------
<S> <C> <C> <C> <C>
Loans receivable, net $11,209 7.58% $ 9,934 7.95%
Mortgage-backed securities, net 2,217 6.66 4,345 6.27
------- -------
Total loans and mortgage-backed
securities 13,426 7.43 14,279 7.44
Federal funds sold and securities
purchased under resale agreements 648 5.53 732 6.02
U.S. Government and other investment
securities 247 9.16 210 9.47
------- -------
Total investments 895 6.53 942 6.79
------- -------
Total interest-earning assets 14,321 7.38 15,221 7.40
------- -------
Deposits - daily access 3,193 3.01 2,634 3.10
Deposits - certificates 5,617 5.47 6,227 5.85
------- -------
Total deposits 8,810 4.58 8,861 5.03
Securities sold under agreements to
repurchase and other short-term
borrowings 471 5.50 2,373 5.96
Borrowings from the Federal Home Loan
Bank 4,463 5.71 3,462 6.12
Other borrowings 45 3.33 46 4.93
------- -------
Total borrowings 4,979 5.67 5,881 6.05
------- -------
Total interest-bearing liabilities 13,789 4.97 14,742 5.44
------- -------
Difference between average
interest-earning assets
and interest-bearing liabilities $ 532 $ 479
======= =======
Yield-cost spread 2.41% 1.96%
Effective net spread/1/ 2.59% 2.13%
</TABLE>
_______________
/1/ Annualized net interest income divided by average interest-earning assets.
22
<PAGE>
PROVISION FOR LOAN LOSSES
Provisions for loan losses decreased by $2.6 million and $4.4 million, to $7.8
million and $15.2 million, respectively, in the three and six months ended
December 31, 1996, compared to the same periods last year. The reduction in the
provision was primarily due to 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 December 31, 1996 totaled $224.7
million, which represents a 22% decline from the $287.3 million of NPAs recorded
at December 31, 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".
LOAN SERVICING INCOME, NET
Loan servicing income, net, increased by $1.5 million and $7.8 million, to
$8.8 million and $17.1 million, respectively, in the three and six months ended
December 31, 1996, compared to the same periods last year. This increase was
attributable to increased servicing fees earned resulting from recent purchases
of mortgage servicing rights and to the effect of adjustments made in the
September 1995 quarter to reduce the value of the Bank's servicing assets. In
the September 1995 quarter, an adjustment totaling $3.7 million was made to
reduce the carrying value of the Bank's purchased mortgage servicing rights due
to an increase in prepayment expectations. In the same quarter, an adjustment of
$2.2 million was made to reduce the carrying value of the Bank's capitalized
servicing fees receivable due to changes in the underlying assumptions relating
to that asset. If prepayment expectations increase from the levels as of
December 31, 1996, further reductions to the value of the Bank's servicing
assets may be necessary, depending upon the frequency and magnitude of such
increases. During fiscal 1996, the Bank purchased servicing rights relating to
$3.7 billion of loans for $50.8 million. During the six months ended December
31, 1996, the Bank purchased servicing rights relating to $5.8 billion of loans
for $74.6 million.
The Bank's portfolio of loans serviced for others totaled $19.1 billion and
$11.6 billion at December 31, 1996 and 1995, respectively.
OTHER FEES AND SERVICE CHARGES
Other fees and service charges increased by $2.7 million and $5.1 million, to
$13.6 million and $26.4 million, respectively, in the three and six months ended
December 31, 1996, compared to the same periods in fiscal 1996. This increase
primarily reflects an increase in deposit fee income of $2.2 million and $4.0
million, respectively, related to growth in the number of transaction accounts
and an increase in commissions and broker fees related to higher sales from the
Bank's securities brokerage subsidiary.
LOSS ON SALE OF LOANS AND MORTGAGE-BACKED SECURITIES, NET
Loss on sale of loans and mortgage-backed securities, net decreased by $34.6
million and $36.4 million, to $1.3 million and $1.6 million, respectively, in
the three and six months ended December 31, 1996, compared to the same periods
last year, primarily due to a pre-tax loss of $33.9 million recorded in the
December 1995 quarter associated with the Bank's decision to sell $1.7 billion
of fixed-rate CMO investments.
GENERAL AND ADMINISTRATIVE EXPENSES
General and administrative expenses increased by $8.2 million and $19.5
million, to $68.4 million and $137.6 million, respectively, in the three and six
months ended December 31, 1996, compared to the same periods last year. The
increase primarily reflects costs associated with new business lines and
increased legal expenses. Legal expenses increased by $4.8 million and $6.6
million, to $5.7 million and $8.0 million, respectively, in the current three-
and six-month periods, compared to the same periods last year primarily due to
expenses related to the Bank's goodwill litigation against the federal
government. General and administrative expenses may increase in future periods
as the Bank continues to expand its business lines and continues to
23
<PAGE>
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.
Regulatory insurance totaled $5.0 million in the second quarter of fiscal 1997
after a refund of $1.1 million from the FDIC for a portion of the second quarter
assessment. In the third quarter of fiscal 1997, regulatory assessments will
total approximately $2.5 million as a result of the reduced assessment from the
FDIC following the SAIF recapitalization. Based on deposits at December 31,
1996, the Bank expects to save, on a pre-tax basis, approximately $14.5 million
annually in assessments due to the SAIF recapitalization.
OPERATIONS OF REO
Operations of REO resulted in losses of $2.5 million and $3.8 million in the
three and six months ended December 31, 1996 as compared to losses of $2.2
million and $3.1 million in last year's comparable periods. Losses in the
current three- and six-month periods were primarily due to $2.6 million and $4.5
million, respectively, in provisions to adjust the REO portfolio to current fair
value, and $2.0 million and $3.6 million, respectively, of operating expenses.
These current period expenses were partially offset by gains realized on the
sale of REO (after market valuation adjustments) of $2.1 million and $4.3
million, respectively.
Losses in the prior year's comparable periods were primarily due to $2.1
million and $5.7 million, respectively, in provisions to adjust the REO
portfolio to current fair value, and $1.9 million and $3.8 million,
respectively, of operating expenses. These expenses were partially offset by
gains realized on the sale of REO (after market valuation adjustments) of $1.8
million and $6.4 million, respectively, of which $2.1 million was recognized in
the September 1995 quarter in connection with the August 1995 sale of
underperforming loans and REO.
INCOME TAX PROVISION (BENEFIT)
The Bank recorded income tax provisions of $10.9 million and $3.2 million in
the three and six months ended December 31, 1996, respectively. The Bank
recorded an income tax benefit of $2.0 million and an income tax provision of
$4.3 million in the three and six months ended December 31, 1995, respectively.
As of June 30, 1996, the Bank had recognized the benefit of all of its net
operating loss carryforwards and nearly all of its alternative minimum tax
credit carryforwards. Because of these credits, the loss for the three months
ended September 30, 1996 produced a tax benefit at the federal alternative
minimum tax rate plus state income tax effect. The loss also made alternative
minimum tax credits available to reduce the effective federal income tax rate on
earnings for the three months ended December 31, 1996. For the six months ended
December 31, 1996, the effective tax rate is higher than the federal statutory
rate due to state taxes and non-deductible goodwill amortization.
24
<PAGE>
PART II - OTHER INFORMATION
ITEM 1. 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 U.S.
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 U.S. 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 determination of damages. The litigation is now in
the damages phase. On December 18, 1996, the Claims Court granted permission for
the Bank to present evidence on three alternative damages theories: (1)
"Reliance Damages", pursuant to which the Bank expects to present evidence of
damages in an amount in excess of $900 million; (2) "Expectation Damages",
pursuant to which the Bank expects to present evidence of damages in the amount
of approximately $1.5 billion; and (3) "Restitution", pursuant to which the Bank
expects to present evidence of damages in excess of $1.9 billion. The case is
presently scheduled for trial to determine damages on February 24, 1997.
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., 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
25
<PAGE>
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. The case is scheduled for
trial on this issue in March of 1997.
ITEM 4. SUBMISSION OF MATTERS TO A VOTE OF SECURITY HOLDERS
The Annual Meeting of Stockholders of Glendale Federal Bank was held on
October 22, 1996. Two nominees for election as Directors, John F. Kooken and
Gilbert R. Vasquez, were elected for three-year terms. The votes cast for John
F. Kooken were 43,731,606 shares "For" and 159,681 shares withheld. The votes
cast for Gilbert R. Vasquez were 43,724,732 shares "For" and 166,555 shares
withheld.
The stockholders approved the amendments to Glendale Federal's Amended and
Restated 1993 Stock Option and Long-Term Performance Incentive Plan with
27,219,814 votes cast for the proposal, 7,507,460 votes cast against the
proposal, 202,694 shares abstaining and 8,961,319 broker non-votes.
The stockholders ratified the appointment of KPMG Peat Marwick LLP as Glendale
Federal's independent auditors for fiscal 1997 with 43,711,390 votes cast for
the proposal, 100,114 votes cast against the proposal and 79,783 shares
abstaining.
ITEM 6. EXHIBITS AND REPORTS ON FORM 8-K
(a) Exhibits
11.1 Statement Regarding Computation of Per Share Earnings (Loss)
99A Maturity and Rate Sensitivity Analysis
99B Interest Rate Margin
99C Loan Originations by Type
99D Analysis of Allowance for Loan Losses and Non-Performing Assets
99E Gross Loans, Non-Performing Assets and Restructured Loans by Property
Type
99F Non-Performing Assets and Restructured Loans
99G Non-Performing Assets Activity
99H Delinquent Loans by Property Type
(b) Reports on Form 8-K
None
26
<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.
Glendale Federal Bank, Federal Savings Bank
-------------------------------------------
(Registrant)
Date: February 13, 1997 By: /s/John E. Haynes
----------------------- ---------------------------------------
Executive Vice President and
Chief Financial Officer
(Principal Financial Officer)
27
<PAGE>
EXHIBIT 11.1
GLENDALE FEDERAL BANK AND SUBSIDIARIES
STATEMENT REGARDING COMPUTATION OF PER SHARE EARNINGS (LOSS)
(In thousands, except per share data)
<TABLE>
<CAPTION>
Three Months Ended Six Months Ended
December 31, December 31,
------------------------ ----------------------
PRIMARY EARNINGS (LOSS) PER SHARE 1996 1995 1996 1995
-------- --------- --------- ----------
<S> <C> <C> <C> <C>
Computation for Statement of Operations
Net earnings (loss) per statement of operations used in
primary earnings (loss) per share computation:
Net earnings (loss) $23,222 $(10,653) $ 3,237 $ 3,158
Dividends on Series E Preferred Stock (2,679) (4,402) (5,786) (8,805)
Premium on conversion of Series E Preferred Stock (3,429) - (3,932) -
Interest on borrowings, net of tax effect,
on application of assumed proceeds from
exercise of warrants and options in excess of
20% limitation (a) 39 - - -
------- -------- ------- -------
Net earnings (loss), as adjusted $17,153 $(15,055) $(6,481) $(5,647)
======= ======== ======= =======
Weighted average number of shares outstanding used in
primary earnings (loss) per share computation:
Weighted average number of shares 48,839 40,752 47,976 40,740
Net shares issuable from assumed exercise of warrants
and options, as determined by the application
of the Modified Treasury Stock Method 6,336 - - -
------- -------- ------- -------
55,175 40,752 47,976 40,740
======= ======== ======= =======
Primary earnings (loss) per share (b) $ 0.31 $ (0.37) $ (0.14) $ (0.14)
======= ======== ======= =======
Additional Primary Earnings (Loss) Per Share Computation
Net earnings (loss), as per primary computation above $17,153 $(15,055) $(6,481) $(5,647)
Interest on borrowings, net of tax effect,
on application of assumed proceeds from
exercise of warrants and options in excess of
20% limitation (a) - 413 250 988
------- -------- ------- -------
Net earnings (loss), as adjusted $17,153 $(14,642) $(6,231) $(4,659)
======= ======== ======= =======
Weighted average number of shares outstanding,
as per primary computation above 55,175 40,752 47,976 40,740
Net shares issuable from assumed exercise of warrants
and options, as determined by the application
of the Modified Treasury Stock Method - 6,704 6,030 6,534
------- -------- ------- -------
Weighted average number of shares outstanding,
as adjusted 55,175 47,456 54,006 47,274
======= ======== ======= =======
Primary earnings (loss) per share (b) $ 0.31 $ (0.31)(c) $ (0.12)(c) $ (0.10)(c)
======= ======== ======= =======
</TABLE>
<PAGE>
EXHIBIT 11.1
GLENDALE FEDERAL BANK AND SUBSIDIARIES
STATEMENT REGARDING COMPUTATION OF PER SHARE EARNINGS (LOSS) - Continued
(In thousands, except per share data)
<TABLE>
<CAPTION>
Three Months Ended Six Months Ended
December 31, December 31,
---------------------- --------------------
FULLY DILUTED EARNINGS (LOSS) PER SHARE 1996 1995 1996 1995
-------- -------- ------- -------
<S> <C> <C> <C> <C>
Computation for Statement of Operations
Net earnings (loss) per statement of operations used in
fully diluted earnings (loss) per share computation:
Net earnings (loss) $23,222 $(10,653) $ 3,237 $ 3,158
Dividends on Series E Preferred Stock - (4,402) (5,786) (8,805)
Premium on conversion of Series E Preferred Stock (3,429) - (3,932) -
------- -------- -------- -------
Net earnings (loss), as adjusted $19,793 $(15,055) $ (6,481) $(5,647)
======= ======== ======== =======
Weighted average number of shares outstanding used in
fully diluted earnings (loss) per share computation:
Weighted average number of shares 48,839 40,752 47,976 40,740
Shares issuable from assumed conversion of
Series E Preferred Stock 12,211 - - -
Net shares issuable from assumed exercise of warrants
and options, as determined by the application
of the Modified Treasury Stock Method 7,609 - - -
------- -------- -------- -------
68,659 40,752 47,976 40,740
======= ======== ======== =======
Fully diluted earnings (loss) per share (b) $ 0.29 $ (0.37) $ (0.14) $ (0.14)
======= ======== ======== =======
Additional Fully Diluted Earnings (Loss) Per Share
Computation (c)
Net earnings (loss) as per fully diluted computation abov $19,793 $(15,055) $(6,481) $(5,647)
Dividends on Series E Preferred Stock - 4,402 5,786 8,805
Interest on borrowings, net of tax effect,
on application of assumed proceeds from
exercise of warrants and options in excess of
20% limitation (a) - 320 - 650
Interest on GLENFED Debentures, net of tax effect (a) 118 144 236 292
------- -------- -------- -------
Net earnings (loss), as adjusted $19,911 $(10,189) $ (459) $ 4,100
======= ======== ======== =======
Weighted average number of shares outstanding,
as per fully diluted computation above 68,659 40,752 47,976 40,740
Shares issuable from assumed conversion of
Series E Preferred Stock - 19,351 13,042 19,351
Net shares issuable from assumed exercise of warrants
and options, as determined by the application
of the Modified Treasury Stock Method - 6,704 7,291 6,534
Shares issuable from assumed exercise of GLENFED Debentures 15 15 15 15
------- -------- -------- -------
Weighted average number of shares outstanding, as adjusted 68,674 66,822 68,324 66,640
======= ======== ======== =======
Fully diluted earnings (loss) per share, as adjusted $ 0.29 $ (0.15) $ (0.01) $ 0.06
======= ======== ======== =======
</TABLE>
- --------
(a) Adjustments to earnings (loss) 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 99A
GLENDALE FEDERAL BANK AND SUBSIDIARIES
MATURITY AND RATE SENSITIVITY ANALYSIS
(dollars in millions)
(Unaudited)
<TABLE>
<CAPTION>
Maturity/Rate Sensitivity
-----------------------------------------------------
Total % of Within 1-5 6-10 Over 10
At December 31, 1996 Balance Total 1 Year Years Years Years
- -------------------- --------- ------- -------- ------- ------- -------
<S> <C> <C> <C> <C> <C> <C>
Interest-earning Assets (1):
Loans receivable:
Single-family 1-4 units (2)(3) $ 8,097 55.5% $ 5,666 $1,537 $511 $383
Multi-family and non-residential (2)(3) 3,127 21.4% 2,894 114 64 55
Consumer and commercial (3) 139 1.0% 110 24 5 -
Mortgage-backed securities (2)(3) 2,311 15.9% 1,984 264 48 15
Investment securities (4) 516 3.5% 516 - - -
Other assets (5) 399 2.7% 252 - - 147
------- ------ ------- ------ ---- ----
Total interest-earning assets 14,589 100.0% 11,422 1,939 628 600
====== ------- ------ ---- ----
Non-interest-earning assets 539
-------
Total assets $15,128
=======
Interest-bearing Liabilities:
Deposits:
Checking/NOW accounts (6) $ 920 6.6% 156 401 220 143
Passbook accounts (6) 451 3.2% 6 176 112 100
Money market accounts (6) 1,892 13.5% 606 1,011 235 40
Certificate accounts (4) 5,517 39.5% 4,141 1,375 - -
Borrowings:
FHLB(4) 5,038 36.0% 3,638 1,400 - -
Other(4) 161 1.2% 150 1 - -
------- ------ ------- ------ ---- ----
Total interest-bearing liabilities 13,979 100.0% 8,754 4,374 568 283
======= ------- ------ ---- ----
Non-interest-bearing liabilities 186
-------
Total liabilities 14,165
Stockholders' equity 963
-------
Total liabilities and stockholders' equity $15,128
=======
Maturity GAP $ 2,668 (2,435) $ 60 $317
======= ====== ==== ====
Cumulative GAP $ 2,668 233 $293 $610
As % of total assets 17.6% 1.5% 1.9% 4.0%
June 30, 1996 Cumulative GAP $ 3,048 194 $231 $646
As % of total assets 21.1% 1.3% 1.6% 4.5%
</TABLE>
- ---------------
(1) Asset balances are net of loans in process.
(2) ARM loans are predominantly included in the "within 1 year" category, 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 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/repricing 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 have been applied to these deposits.
<PAGE>
EXHIBIT 99B
GLENDALE FEDERAL BANK AND SUBSIDIARIES
INTEREST RATE MARGIN
(UNAUDITED)
<TABLE>
<CAPTION>
AS OF
------------------------------------------------------------
Dec. 31, Sept. 30, June 30, Mar. 31, Dec. 31,
1996 1996 1996 1996 1995
-------- --------- -------- -------- --------
<S> <C> <C> <C> <C> <C>
Weighted average rate:
Loans receivable, net 7.68% 7.64% 7.74% 7.88% 7.99%
Mortgage-backed securities, net 6.77% 6.69% 6.26% 6.34% 6.35%
---- ---- ---- ---- ----
Total loans and MBS 7.52% 7.49% 7.49% 7.61% 7.59%
Federal funds sold and securities purchased
under resale agreements 6.67% 6.06% 5.69% 5.63% 6.04%
U.S. Government and other investment securities 8.37% 8.95% 9.58% 8.98% 8.94%
---- ---- ---- ---- ----
Total investments 7.27% 6.82% 6.99% 6.78% 6.75%
---- ---- ---- ---- ----
Total loans, MBS and investments 7.51% 7.45% 7.46% 7.58% 7.53%
---- ---- ---- ---- ----
Weighted average rate:
Deposits - daily access 3.01% 3.01% 3.02% 2.97% 3.04%
Deposits - certificates 5.47% 5.44% 5.46% 5.59% 5.80%
---- ---- ---- ---- ----
Total deposits 4.56% 4.57% 4.62% 4.74% 4.96%
Securities sold under agreements to repurchase
and other short-term borrowings 5.69% 5.46% 5.50% 5.42% 5.86%
FHLB borrowings 5.72% 5.66% 5.94% 6.04% 5.83%
Other borrowings 7.76% 7.63% 7.76% 7.99% 8.04%
---- ---- ---- ---- ----
Total borrowings 5.72% 5.64% 5.87% 5.87% 5.85%
---- ---- ---- ---- ----
Total deposits and borrowings 4.99% 4.96% 5.05% 5.11% 5.26%
---- ---- ---- ---- ----
Interest rate spread 2.52% 2.49% 2.41% 2.47% 2.27%
==== ==== ==== ==== ====
Adjusted interest rate spread/1/ 2.67% 2.66% 2.59% 2.67% 2.44%
==== ==== ==== ==== ====
</TABLE>
<TABLE>
<CAPTION>
QUARTER ENDED
------------------------------------------------------------
Dec. 31, Sept. 30, June 30, Mar. 31, Dec. 31,
1996 1996 1996 1996 1995
-------- --------- -------- -------- --------
<S> <C> <C> <C> <C> <C>
Weighted average yield:
Loans receivable, net 7.60% 7.57% 7.62% 7.83% 7.94%
Mortgage-backed securities, net 6.73% 6.59% 6.44% 6.44% 6.31%
---- ---- ----- ---- ----
Total loans and MBS 7.45% 7.41% 7.41% 7.54% 7.46%
Federal funds sold and securities purchased
under resale agreements 5.52% 5.54% 5.56% 5.60% 6.02%
U.S. Government and other investment securities 8.77% 9.63% 10.91% 9.41% 9.73%
---- ---- ----- ---- ----
Total investments 6.43% 6.65% 7.11% 6.44% 6.84%
---- ---- ----- ---- ----
Total loans, MBS and investments 7.39% 7.36% 7.40% 7.46% 7.43%
---- ---- ----- ---- ----
Weighted average cost:
Deposits - daily access 3.01% 3.00% 3.04% 3.01% 3.09%
Deposits - certificates 5.47% 5.47% 5.52% 5.68% 5.84%
---- ---- ----- ---- ----
Total deposits 4.56% 4.60% 4.69% 4.84% 5.01%
Securities sold under agreements to repurchase
and other short-term borrowings 5.61% 5.46% 5.47% 5.62% 5.93%
FHLB borrowings 5.66% 5.77% 6.03% 5.94% 6.08%
Other borrowings 3.24% 3.42% 4.79% 3.88% 3.86%
---- ---- ----- ---- ----
Total borrowings 5.63% 5.71% 5.86% 5.83% 6.00%
---- ---- ----- ---- ----
Total deposits and borrowings 4.95% 4.99% 5.09% 5.18% 5.39%
---- ---- ----- ---- ----
Yield-cost spread 2.44% 2.37% 2.31% 2.28 2.04%
==== ==== ===== ==== ====
Effective net/1/ 2.61% 2.56% 2.50% 2.47% 2.22%
==== ==== ===== ==== ====
</TABLE>
- --------------------------------------
/1/ The effective net pread for a period is net interest income during the
period divided by average interest-earning assets during the period. The
adjusted interest rate spread as of a particular date is net interest income
annualized at the rates in effect on such date divided by the balance of
interest earning assets as of such date.
<PAGE>
EXHIBIT 99B
GLENDALE FEDERAL BANK AND SUBSIDIARIES
INTEREST RATE MARGIN - (Continued)
(unaudited)
<TABLE>
<CAPTION>
Year-to-date Ended
------------------------------------------------------
Dec. 31, Sept. 30, June 30, Mar. 31, Dec. 31,
1996 1996 1996 1996 1995
-------- -------- -------- --------- ---------
<S> <C> <C> <C> <C> <C>
Weighted average yield:
Loans receivable, net 7.58% 7.57% 7.82% 7.90% 7.95%
Mortgage-backed securities, net 6.66% 6.59% 6.33% 6.32% 6.27%
----- ----- ----- ----- -----
Total loans and MBS 7.43% 7.41% 7.45% 7.47% 7.44%
Federal funds sold and securities purchased
under resale agreements 5.53% 5.54% 5.84% 5.88% 6.02%
U.S. Government and other investment securities 9.16% 9.63% 9.83% 9.45% 9.47%
----- ----- ----- ----- -----
Total investments 6.53% 6.65% 6.78% 6.67% 6.79%
----- ----- ----- ----- -----
Total loans, MBS and investments 7.38% 7.36% 7.41% 7.42% 7.40%
----- ----- ----- ----- -----
Weighted average cost:
Deposits - daily access 3.01% 3.00% 3.09% 3.08% 3.10%
Deposits - certificates 5.47% 5.47% 5.73% 5.79% 5.85%
----- ----- ----- ----- -----
Total deposits 4.58% 4.60% 4.91% 4.97% 5.03%
Securities sold under agreements to repurchase
and other short-term borrowings 5.50% 5.46% 5.82% 5.89% 5.96%
FHLB borrowings 5.71% 5.77% 6.07% 6.07% 6.12%
Other borrowings 3.33% 3.42% 4.66% 4.61% 4.93%
----- ----- ----- ----- -----
Total borrowings 5.67% 5.71% 5.97% 5.99% 6.05%
----- ----- ----- ----- -----
Total deposits and borrowings 4.97% 4.99% 5.31% 5.36% 5.44%
----- ----- ----- ----- -----
Yield-cost spread 2.41% 2.37% 2.10% 2.06% 1.96%
===== ===== ===== ===== =====
Effective net spread /1/ 2.59% 2.56% 2.29% 2.24% 2.13%
===== ===== ===== ===== =====
</TABLE>
- ---------------------------
/1/ The effective net spread for a period is annualized net interest income
during the period divided by average interest-earning assets during the
period.
<PAGE>
EXHIBIT 99C
GLENDALE FEDERAL BANK AND SUBSIDIARIES
LOAN ORIGINATIONS BY TYPE
(dollars in thousands)
(unaudited)
<TABLE>
<CAPTION>
Real Estate
---------------------------------------------------------------------------
Convertible/ Call Construction/
Quarter Ended Fixed ARM Date Fixed Tract Consumer Commercial Total (1) (2)
- ------------- ------------ --- ---- ----- ------------ ------- ---------- ------------
<S> <C> <C> <C> <C> <C> <C> <C> <C>
Dec. 31, 1996 $35,390 $ 61,404 $10,789 $ 71,224 $ 600 $5,314 $1,347 $186,068
19% 33% 6% 38% 0% 3% 1% 100%
Sept. 30, 1996 $20,616 $104,616 $ 5,449 $ 51,109 $ 6,180 $4,255 $6,675 $198,900
10% 53% 3% 26% 3% 2% 3% 100%
June 30, 1996 $47,337 $71,785 $ 7,991 $ 73,749 $ 5,041 $4,349 $ 533 $210,785
23% 34% 4% 35% 2% 2% 0% 100%
Mar. 31, 1996 $58,998 $22,595 $ 7,807 $109,034 $10,846 $3,296 $ 294 $212,870
28% 11% 4% 51% 5% 1% 0% 100%
Dec. 31, 1995 $76,148 $29,628 $16,665 $ 96,042 $ 5,700 $5,686 $ 318 $230,187
34% 13% 7% 42% 2% 2% 0% 100%
</TABLE>
- -----------
(1) Includes refinanced portion of Bank's loans, which amounted to $22,075,
$19,889, $36,174, $48,294 and $37,021 for the quarters ended December 31,
1996, September 30, 1996, June 30, 1996, March 31, 1996 and December 31,
1995, respectively.
(2) Excludes correspondent lending purchases totaling $189, $12,570, $14,668
and $12,116 for the quarters ended September 30, 1996, June 30, 1996,
March 31, 1996 and December 31, 1995, respectively.
<PAGE>
EXHIBIT 99D
GLENDALE FEDERAL BANK AND SUBSIDIARIES
ANALYSIS OF ALLOWANCE FOR LOAN LOSSES AND
NON-PERFORMING ASSETS ("NPA")
At December 31, 1996
(dollars in thousands)
(Unaudited)
<TABLE>
<CAPTION>
Allowance for
Loan Losses Allowance for NPA
Gross Allowance As a % of Loan Losses As a % of Allowance for
Loan for Gross Loan Non- As a % of Gross Loan Loan Losses
Portfolio Loan Portfolio Accrual Non-Accrual Portfolio As a % of
Property Type Balance Losses Balance Loans Loans NPA Balance NPA
- ------------- --------- --------- ------------- ------- ------------ --- ---------- ------------
<S> <C> <C> <C> <C> <C> <C> <C> <C>
Single-family
1-4 units $8,096,614 $ 55,905 0.69% $100,007 55.90% $135,148 1.67% 41.37%
Multi-family:
5-36 units 1,512,742 44,220 2.92% 27,838 158.85% 39,491 2.61% 111.97%
37 or more units 376,854 20,994 5.57% 10,917 192.31% 14,751 3.91% 142.32%
Non-residential 1,244,837 43,547 3.50% 12,817 339.76% 34,772 2.79% 125.24%
Commercial 57,284 3,026 5.28% 9 N/A 9 0.02% N/A
Consumer 82,240 6,273 7.63% 512 1225.20% 563 0.68% 1114.21%
----------- -------- ----- -------- -------- -------- ----- --------
$11,370,571 $173,965 1.53% $152,100 114.38% $224,734 1.98% 77.41%
=========== ======== ===== ======== ======== ======== ===== ========
</TABLE>
<PAGE>
EXHIBIT 99E
GLENDALE FEDERAL BANK AND SUBSIDIARIES
GROSS LOANS, NON-PERFORMING ASSETS ("NPA")
AND RESTRUCTURED LOANS ("TDR") BY PROPERTY TYPE
At December 31, 1996
(in thousands)
(unaudited)
<TABLE>
<CAPTION>
Non-
Gross Accrual REO and Total Restructured
Property Type Loans Loans Other Assets NPA Loans
- ------------- ---------- -------- ------------ --------- ------------
<S> <C> <C> <C> <C> <C>
Single-family
1-4 units $ 8,096,614 $100,007 $35,141 $135,148 $ 2,135
Multi-family:
5-36 units 1,512,742 27,838 11,653 39,491 3,158
37 or more units 376,854 10,917 3,834 14,751 18,446
Non-residential:
Office buildings 425,539 4,041 5,831 9,872 4,570
Shopping centers 368,995 6,550 728 7,278 -
Warehouse/storage 93,499 - - - -
Hotels/motels 41,996 - 102 102 -
Industrial parks 95,181 455 - 455 1,871
Land 13,656 268 13,982 14,250 532
Mobile home parks 34,497 1,503 - 1,503 -
Commercial/
industrial 171,474 - 1,312 1,312 -
----------- -------- ------- -------- -------
Total non-residential 1,244,837 12,817 21,955 34,772 6,973
Commercial 57,284 9 - 9 -
Consumer 82,240 512 51 563 -
----------- -------- ------- -------- -------
Total $11,370,571 $152,100 $72,634 $224,734 $30,712
=========== ======== ======= ======== =======
</TABLE>
<PAGE>
EXHIBIT 99F
GLENDALE FEDERAL BANK AND SUBSIDIARIES
NON-PERFORMING ASSETS AND RESTRUCTURED LOANS
(dollars in thousands)
(unaudited)
<TABLE>
<CAPTION>
Dec. 31 Sept. 30 June 30 Mar. 31 Dec. 31
1996 1996 1996 1996 1995
-------- -------- -------- -------- --------
<S> <C> <C> <C> <C> <C>
Balances:
Non-accrual loans $152,100 $171,465 $192,445 $207,328 $200,451
Real estate owned and other assets 72,634 83,513 82,204 82,449 86,838
-------- -------- -------- -------- --------
Total non-performing assets $224,734 $254,978 $274,649 $289,777 $287,289
======== ======== ======== ======== ========
Restructured loans $ 30,712 $ 11,527 $ 9,194 $ 8,373 $ 8,053
======== ======== ======== ======== ========
Percent of total assets:
Non-accrual loans 1.01% 1.14% 1.33% 1.44% 1.37%
Real estate owned and other assets 0.48% 0.55% 0.57% 0.58% 0.59%
-------- -------- -------- -------- --------
Total non-performing assets 1.49% 1.69% 1.90% 2.02% 1.96%
======== ======== ======== ======== ========
Restructured loans 0.20% 0.08% 0.06% 0.06% 0.06%
======== ======== ======== ======== ========
</TABLE>
<PAGE>
EXHIBIT 99G
GLENDALE FEDERAL BANK AND SUBSIDIARIES
NON-PERFORMING ASSETS ACTIVITY
(dollars in thousands)
(unaudited)
<TABLE>
<CAPTION>
Quarter Ended
---------------------------------------------------------------
Dec. 31, Sept. 30, June 30, Mar. 31, Dec. 31,
1996 1996 1996 1996 1995
-------- -------- -------- -------- --------
<S> <C> <C> <C> <C> <C>
Beginning Balance $254,978 $274,649 $289,777 $287,289 $304,312
Additions:
Single-family 1-4 units 48,951 48,065 60,385 82,203 59,799
Multi-family:
5 to 36 units 18,622 12,517 25,131 18,130 17,684
37 or more units - 3,912 1,920 8,374 9,000
Non-residential 3,600 2,863 8,016 6,500 9,513
Commercial - 12 - - -
Consumer 142 - 328 5 437
-------- -------- -------- -------- --------
78,559 67,369 95,780 115,212 96,433
-------- -------- -------- -------- --------
Deletions:
Foreclosures:
Single-family 1-4 units - (7,582) (10,503) (7,982) (11,700)
Multi-family:
5 to 36 units (512) (796) (2,299) (2,877) 1,196
37 or more units (5) 468 (662) (249) (827)
Non-residential 466 (1,378) (992) (128) 428
-------- -------- -------- -------- --------
(51) (9,288) (14,456) (11,236) (10,903)
-------- -------- -------- -------- --------
Write-downs:
Single-family 1-4 units (734) (571) (216) (1,973) (2,505)
Multi-family:
5 to 36 units (606) (1,548) (1,197) (1,292) (631)
37 or more units (754) (2,369) - (697) (906)
Non-residential (877) (263) (2,857) (1,022) (3,516)
Commercial - (28) - - -
-------- -------- -------- -------- --------
(2,971) (4,779) (4,270) (4,984) (7,558)
-------- -------- -------- -------- --------
Payoffs/Sales/Other:
Single-family 1-4 units (58,795) (53,857) (55,872) (64,789) (47,869)
Multi-family:
5 to 36 units (23,127) (9,850) (21,316) (16,858) (22,610)
37 or more units (4,877) (912) (5,989) (3,973) (3,611)
Non-residential (11,434) (7,958) (8,890) (10,452) (20,743)
Commercial (3) 6 (95) (17) (6)
Consumer (301) (402) (20) (415) (156)
-------- -------- -------- -------- --------
(98,537) (72,973) (92,182) (96,504) (94,995)
-------- -------- -------- -------- --------
Ending Balance $224,734 $254,978 $274,649 $289,777 $287,289
======== ======== ======== ======== ========
Net (Increase) Decrease $ 30,244 $ 19,671 $ 15,128 $ (2,488) $ 17,023
======== ======== ======== ======== ========
</TABLE>
<PAGE>
EXHIBIT 99H
<TABLE>
<CAPTION>
% of Type of % of Type of
Gross Gross
Dec. 31, Loans Sept. 30, Loans June 30,
1996 Receivable 1996 Receivable 1996
-------- ------------ --------- ------------ --------
<S> <C> <C> <C> <C> <C>
Single-family 1-4 units:
31 - 60 Days $ 52,280 0.65% $ 51,442 0.63% $ 57,047
61 - 90 Days 22,787 0.28% 28,023 0.35% 18,416
Over 90 Days 100,006 1.23% 107,263 1.32% 119,978
-------- ----- -------- ----- --------
175,073 2.16% 186,728 2.30% 195,441
-------- ----- -------- ----- --------
Multi-family 5-36 units:
31 - 60 Days 10,507 0.69% 13,629 0.88% 9,528
61 - 90 Days 4,932 0.33% 5,619 0.36% 7,601
Over 90 Days 21,009 1.39% 27,391 1.78% 25,595
-------- ----- -------- ----- --------
36,448 2.41% 46,639 3.02% 42,724
-------- ----- -------- ----- --------
Multi-family 37 or more units:
31 - 60 Days 1,887 0.50% -- -- 2,126
61 - 90 Days 988 0.26% -- -- --
Over 90 Days 10,917 2.90% 12,755 3.30% 14,461
-------- ----- -------- ----- --------
13,792 3.66% 12,755 3.30% 16,587
-------- ----- -------- ----- --------
Non-residential:
31 - 60 Days 8,827 0.71% 12,579 0.97% 3,169
61 - 90 Days 18 -- 607 0.05% 2,762
Over 90 Days 12,262 0.99% 14,840 1.14% 17,907
-------- ----- -------- ----- --------
21,107 1.70% 28,026 2.16% 23,838
-------- ----- -------- ----- --------
Commercial:
31 - 60 Days 2 -- 16 0.09% 38
61 - 90 Days -- -- -- -- --
Over 90 Days -- -- 12 0.06% --
-------- ----- -------- ----- --------
2 -- 28 0.15% 38
-------- ----- -------- ----- --------
Consumer:
31 - 60 Days 1,517 1.85% 1,480 2.00% 1,081
61 - 90 Days 521 0.63% 448 0.60% 612
Over 90 Days 512 0.62% 657 0.89% 1,001
-------- ----- -------- ----- --------
2,550 3.10% 2,585 3.49% 2,694
-------- ----- -------- ----- --------
Total:
31 - 60 Days 75,020 0.66% 79,146 0.69% 72,989
61 - 90 Days 29,246 0.26% 34,697 0.30% 29,391
Over 90 Days 144,706 1.27% 162,918 1.43% 178,942
-------- ----- -------- ----- --------
$248,972 2.19% $276,761 2.42% $281,322
======== ===== ======== ===== ========
</TABLE>
<TABLE>
<CAPTION>
% of Type of % of Type of % of Type of
Gross Gross Gross
Loans Mar. 31, Loans Dec. 31, Loans
Receivable 1996 Receivable 1995 Receivable
------------ -------- ------------ --------- ------------
<S> <C> <C> <C> <C> <C>
Single-family 1-4 units:
31 - 60 Days 0.75% $ 82,640 1.10% $ 66,968 1.04%
61 - 90 Days 0.24% 36,930 0.49% 25,227 0.39%
Over 90 Days 1.59% 127,409 1.71% 119,762 1.85%
----- -------- ----- -------- -----
2.58% 246,979 3.30% 211,957 3.28%
----- -------- ----- -------- -----
Multi-family 5-36 units:
31 - 60 Days 0.61% 21,419 1.36% 16,876 1.06%
61 - 90 Days 0.49% 7,046 0.45% 12,833 0.81%
Over 90 Days 1.63% 26,458 1.68% 21,040 1.33%
----- -------- ----- -------- -----
2.73% 54,923 3.49% 50,749 3.20%
----- -------- ----- -------- -----
Multi-family 37 or more units:
31 - 60 Days 0.53% 4,190 0.97% 5,198 1.17%
61 - 90 Days -- 1,669 0.38% 6,036 1.35%
Over 90 Days 3.61% 12,299 2.83% 5,877 1.32%
----- -------- ----- -------- -----
4.14% 18,158 4.18% 17,111 3.84%
----- -------- ----- -------- -----
Non-residential:
31 - 60 Days 0.23% 15,616 1.11% 2,548 0.17%
61 - 90 Days 0.20% 4,512 0.32% 1,568 0.11%
Over 90 Days 1.33% 13,084 0.93% 21,496 1.47%
----- -------- ----- -------- -----
1.76% 33,212 2.36% 25,612 1.75%
----- -------- ----- -------- -----
Commercial:
31 - 60 Days 0.37% 94 1.00% -- --
61 - 90 Days -- -- -- -- --
Over 90 Days -- -- -- -- --
----- -------- ----- -------- -----
0.37% 94 1.00% -- --
----- -------- ----- -------- -----
Consumer:
31 - 60 Days 1.48% 2,415 3.27% 1,898 2.49%
61 - 90 Days 0.84% 465 0.63% 901 1.18%
Over 90 Days 1.36% 708 0.96% 1,168 1.53%
----- -------- ----- -------- -----
3.68% 3,588 4.86% 3,967 5.20%
----- -------- ----- -------- -----
Total:
31 - 60 Days 0.66% 126,374 1.15% 93,488 0.93%
61 - 90 Days 0.27% 50,622 0.46% 46,565 0.46%
Over 90 Days 1.63% 179,958 1.64% 169,343 1.69%
----- -------- ----- -------- -----
2.56% $356,954 3.25% $309,396 3.08%
===== ======== ===== ======== =====
</TABLE>
<PAGE>
================================================================================
OFFICE OF THRIFT SUPERVISION
Washington, D.C. 20552
FORM 10-Q
(Mark One)
[X] QUARTERLY REPORT PURSUANT TO SECTION 13 OR 15(d) OF THE SECURITIES
EXCHANGE ACT OF 1934
For the quarterly period ended March 31, 1997
-------------------------------------------
OR
[ ] TRANSITION REPORT PURSUANT TO SECTION 13 OR 15(d) OF THE SECURITIES
EXCHANGE ACT OF 1934
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 (I.R.S. Employer
of incorporation or organization) Identification Number)
414 North Central Avenue, Glendale, California 91203
(Address of principal executive offices) (Zip Code)
(818) 500-2000
(Registrant's telephone number, including area code)
Not Applicable
(Former name, former address, and former fiscal year, if changed since last
report.)
Indicate by check mark whether the registrant (1) has filed all reports required
to be filed by Section 13 or 15(d) of the Securities Exchange Act of 1934 during
the preceding 12 months (or for such shorter period that the registrant was
required to file such reports), and (2) has been subject to such filing
requirements for the past 90 days. Yes X No
------- -------
The number of shares of issuer's $1.00 par value common stock outstanding as of
March 31, 1997 was 50,305,615.
================================================================================
<PAGE>
GLENDALE FEDERAL BANK AND SUBSIDIARIES
INDEX
Page
----
Part I. Financial Information
Item 1. Financial Statements (unaudited)
Consolidated Statements of Financial Condition -
March 31, 1997 and June 30, 1996............................ 1
Consolidated Statements of Operations -
Three and nine months ended March 31, 1997 and 1996......... 2
Consolidated Statements of Cash Flows -
Nine months ended March 31, 1997 and 1996................... 3
Notes to Consolidated Financial Statements.................. 5
Item 2. Management's Discussion and Analysis of Financial
Condition and Results of Operations............... 7
Part II. Other Information
Item 1. Legal Proceedings.................................. 26
Item 6. Exhibits and Reports on Form 8-K................... 27
<PAGE>
PART I - FINANCIAL INFORMATION
ITEM 1. FINANCIAL STATEMENTS (UNAUDITED)
GLENDALE FEDERAL BANK AND SUBSIDIARIES
CONSOLIDATED STATEMENTS OF FINANCIAL CONDITION
(DOLLARS IN THOUSANDS EXCEPT SHARE DATA)
<TABLE>
<CAPTION>
March 31, June 30,
1997 1996
---------------- -------------
<S> <C> <C>
ASSETS
Cash and amounts due from banks $ 148,305 $ 153,608
Federal funds sold and securities purchased under resale agreements 682,000 433,000
Other debt securities held to maturity, at amortized cost
(fair value: $6,998 at March 31, 1997 and
$18,921 at June 30, 1996) 6,998 18,877
Other debt and equity securities available for sale, at fair value 24,086 --
Mortgage-backed securities held to maturity, net
(fair value: $1,211,699 at March 31, 1997 and
$1,351,344 at June 30, 1996) 1,209,320 1,356,235
Mortgage-backed securities available for sale, at fair value 1,035,332 884,555
Loans receivable, net of allowance for loan losses of $165,944 at
March 31, 1997 and $186,756 at June 30, 1996 11,273,085 10,694,594
Loans held for sale, at lower of cost or market 12,963 33,315
Real estate held for sale or investment 11,484 12,072
Real estate acquired in settlement of loans 68,015 78,249
Interest receivable 97,908 89,237
Investment in capital stock of Federal Home Loan Bank, at cost 255,834 192,842
Premises and equipment, at cost, less accumulated depreciation 128,710 126,368
Mortgage servicing assets 180,847 127,399
Goodwill and other intangible assets, less accumulated amortization 61,096 59,216
Other assets 197,725 196,997
------------ ------------
$ 15,393,708 $ 14,456,564
============ ============
LIABILITIES AND STOCKHOLDERS' EQUITY
Liabilities:
Deposits $ 9,185,895 $ 8,723,976
Securities sold under agreements to repurchase -- 758,050
Borrowings from the Federal Home Loan Bank 4,988,000 3,838,000
Other borrowings 10,591 10,599
Other liabilities and accrued expenses 163,891 131,224
Income taxes payable 58,897 37,264
------------ ------------
Total liabilities 14,407,274 13,499,113
------------ ------------
Stockholders' Equity:
Preferred stock, Series E, $1.00 par value per share
(8,050,000 shares authorized; 4,621,982 shares issued
and outstanding at March 31, 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; 50,305,615 shares
issued and outstanding at March 31, 1997; 46,729,698
shares issued and outstanding at June 30, 1996) 50,306 46,730
Additional paid-in capital 792,667 790,724
Net unrealized holding loss on debt and equity
securities available for sale (4,541) (11,391)
Retained earnings-substantially restricted 143,380 125,564
------------ ------------
Total stockholders' equity 986,434 957,451
------------ ------------
$ 15,393,708 $ 14,456,564
============ ============
</TABLE>
See accompanying Notes to Consolidated Financial Statements
1
<PAGE>
GLENDALE FEDERAL BANK AND SUBSIDIARIES
CONSOLIDATED STATEMENTS OF OPERATIONS
(IN THOUSANDS EXCEPT PER SHARE DATA)
<TABLE>
<CAPTION>
Three Months Ended Nine Months Ended
March 31 March 31
---------------------- ----------------------
1997 1996 1997 1996
--------- --------- --------- ---------
<S> <C> <C> <C> <C>
Interest income:
Loans receivable $ 213,675 $ 202,503 $ 638,677 $ 596,538
Mortgage-backed securities 38,184 43,125 111,985 179,857
Investments 16,496 15,038 45,947 47,273
--------- --------- --------- ---------
Total interest income 268,355 260,666 796,609 823,668
--------- --------- --------- ---------
Interest expense:
Deposits 100,682 107,204 304,006 332,006
Short-term borrowings 837 19,197 13,904 90,544
Other borrowings 70,315 47,543 199,583 155,512
--------- --------- --------- ---------
Total interest expense 171,834 173,944 517,493 578,062
--------- --------- --------- ---------
Net interest income 96,521 86,722 279,116 245,606
Provision for loan losses 6,143 10,376 21,326 29,939
--------- --------- --------- ---------
Net interest income after provision for loan losses 90,378 76,346 257,790 215,667
Other income:
Loan servicing income, net 8,354 7,409 25,478 16,692
Other fees and service charges 14,811 11,593 41,235 32,942
Gain (loss) on sale of loans and mortgage-backed securities, net (283) 3,951 (1,848) (34,026)
Other income (loss), net (165) 105 113 (383)
--------- --------- --------- ---------
Total other income 22,717 23,058 64,978 15,225
--------- --------- --------- ---------
Other expenses:
Compensation and employee benefits 29,403 26,366 84,498 75,142
Regulatory insurance 2,563 6,500 13,759 21,228
Occupancy expense, net 7,726 7,718 23,363 21,884
Advertising and promotion 4,635 7,105 17,725 18,367
Furniture, fixtures and equipment 3,069 3,038 8,974 8,538
Stationery, supplies and postage 3,009 2,448 8,476 7,199
Other general and administrative expenses 12,965 10,375 38,618 29,068
--------- --------- --------- ---------
Total general and administrative expenses 63,370 63,550 195,413 181,426
SAIF Special Assessment -- -- 58,672 --
Legal expense - Goodwill lawsuit 8,202 702 13,720 924
Operations of real estate held for sale or investment 104 189 716 436
Operations of real estate acquired in settlement of loans 2,086 4,231 5,906 7,355
Amortization of goodwill and other intangible assets 1,351 1,287 3,924 3,860
--------- --------- --------- ---------
Total other expenses 75,113 69,959 278,351 194,001
--------- --------- --------- ---------
Earnings before income tax provision 37,982 29,445 44,417 36,891
Income tax provision 15,090 9,047 18,288 13,335
--------- --------- --------- ---------
Net earnings $ 22,892 $ 20,398 $ 26,129 $ 23,556
========= ========= ========= =========
Earnings applicable to common shareholders:
Net earnings $ 22,892 $ 20,398 $ 26,129 $ 23,556
Dividends declared on preferred stock (2,527) (3,837) (8,313) (12,642)
Premium on exchange of preferred stock for common stock (241) (5,452) (4,173) (5,452)
--------- --------- --------- ---------
$ 20,124 $ 11,109 $ 13,643 $ 5,462
========= ========= ========= =========
Earnings per share:
Primary $ 0.34 $ 0.24 $ 0.25 $ 0.13
Fully diluted $ 0.33 $ 0.23 $ 0.24 $ 0.13
</TABLE>
See accompanying Notes to Consolidated Financial Statements
2
<PAGE>
GLENDALE FEDERAL BANK AND SUBSIDIARIES
CONSOLIDATED STATEMENTS OF CASH FLOWS
(IN THOUSANDS)
<TABLE>
<CAPTION>
Nine Months Ended March 31
--------------------------
1997 1996
----------- -----------
<S> <C> <C>
CASH FLOWS FROM OPERATING ACTIVITIES:
Net earnings $ 26,129 $ 23,556
Adjustments to reconcile net earnings to net cash provided
by operating activities:
Amortization of discounts and accretion of premiums, net 8,006 4,863
Accretion of deferred loan fees (3,382) (4,173)
Provision for loan losses 21,326 29,939
Loss on sale of loans and mortgage-backed securities, net 1,848 34,026
Depreciation and amortization of servicing assets 32,363 31,009
Provision for deferred income taxes 14,502 17,877
Provision for losses on real estate 6,412 9,300
Gain on sale of real estate (5,352) (8,160)
Amortization of goodwill and other intangible assets 3,924 3,860
Net change in loans originated or purchased for resale 33,804 (4,635)
(Increase) decrease in interest receivable (8,671) 4,208
FHLB stock dividend received (9,940) (7,064)
(Increase) decrease in other assets (755) 27,000
Increase in other liabilities 39,705 1,318
Other items (3,115) (17,017)
----------- -----------
Total adjustments 130,675 122,351
----------- -----------
Net cash provided by operating activities 156,804 145,907
----------- -----------
CASH FLOWS FROM INVESTING ACTIVITIES:
Net change in other debt securities with original maturities of 3 months or less (622) 11,289
Purchase of other debt securities held to maturity (3,000) (9,800)
Purchase of other debt securities available for sale (16,112) --
Purchase of mortgage-backed securities held to maturity -- (3,181)
Purchase of mortgage-backed securities available for sale (359,315) --
Proceeds from maturities of other debt securities held to maturity 7,810 24,145
Principal payments on mortgage-backed securities held to maturity 144,417 427,222
Principal payments on mortgage-backed securities available for sale 210,513 250,589
Loans originated (net of refinances) for investment (371,132) (267,038)
Loans purchased for investment (1,659,636) (1,688,305)
Net change in undisbursed loan funds (8,370) 5,315
Principal payments on loans held for investment 1,378,029 946,152
Proceeds from sale of other debt securities available for sale 702 --
Proceeds from sale of loans held for investment 1,637 158,512
Proceeds from sale of mortgage-backed securities available for sale -- 1,682,569
Cash invested in real estate (9,586) (11,670)
Cash received from real estate investments and sale of real estate
acquired in settlement of loans 72,151 81,312
Purchase of FHLB stock (53,052) (7,303)
Redemption of FHLB stock -- 19,756
Net (increase) decrease in premises and equipment (13,498) 23,359
Purchase of mortgage servicing assets (74,640) (5,133)
Goodwill acquired from the OneCentral Bank acquisition (5,805) --
----------- -----------
Net cash (used) provided by investing actitivities (759,509) 1,637,790
----------- -----------
</TABLE>
Statement continued on next page
3
<PAGE>
GLENDALE FEDERAL BANK AND SUBSIDIARIES
CONSOLIDATED STATEMENTS OF CASH FLOWS - (CONTINUED)
(IN THOUSANDS)
<TABLE>
<CAPTION>
Nine Months Ended March 31
--------------------------------------
1997 1996
---------------- ----------------
<S> <C> <C>
CASH FLOWS FROM FINANCING ACTIVITIES:
Net increase in deposits 461,919 151,387
Net change in short-term borrowings with original maturities of 3 months or less (758,050) (1,487,472)
Proceeds from fundings of FHLB advances 2,300,000 2,300,000
Repayments of FHLB advances (1,150,000) (2,645,000)
Repayment of other borrowings (2,485) (17,466)
Proceeds from issuance of common stock 4,317 761
Payment of dividends on preferred stock (9,299) (13,207)
----------- -----------
Net cash provided (used) by financing activities 846,402 (1,710,997)
----------- -----------
Net increase in cash and cash equivalents 243,697 72,700
Cash and cash equivalents at beginning of period 586,608 435,697
----------- -----------
Cash and cash equivalents at end of period $ 830,305 $ 508,397
=========== ===========
</TABLE>
See accompanying Notes to Consolidated Financial Statements
4
<PAGE>
GLENDALE FEDERAL BANK AND SUBSIDIARIES
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
MARCH 31, 1997
NOTE (1) - BASIS OF PRESENTATION
The accompanying consolidated financial statements have been prepared in
accordance with generally accepted accounting principles and with the
instructions to Form 10-Q and Rule 10-01 of Regulation S-X for interim financial
information. Accordingly, they do not include all of the information and
footnotes required by generally accepted accounting principles for complete
financial statements. For further information, refer to the consolidated
financial statements and footnotes thereto included in the Bank's Annual Report
on Form 10-K for the fiscal year ended June 30, 1996.
In the opinion of Glendale Federal Bank, Federal Savings Bank and its
subsidiaries ("Glendale Federal" or the "Bank"), the accompanying unaudited
consolidated financial statements contain all adjustments (consisting solely of
normal recurring accruals) necessary for a fair presentation of the Bank's
financial condition as of March 31, 1997 and June 30, 1996, the results of its
operations for the three and nine months ended March 31, 1997 and 1996, and its
cash flows for the nine months ended March 31, 1997 and 1996. 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 both
March 31, 1997 and June 30, 1996. The acquisition of OneCentral Bank, completed
in January 1997, has been accounted for under the purchase method of accounting
in accordance with Accounting Principles Board Opinion No. 16 "Business
Combinations". Certain reclassifications have been made to prior years'
consolidated financial statements to conform to the March 31, 1997 presentation.
In preparing the consolidated financial statements, management is required to
make estimates and assumptions that affect the reported amounts of assets and
liabilities and disclosure of contingent assets and liabilities as of the dates
of the balance sheets and revenues and expenses for the periods covered,
including the allowance for loan losses and liability for income taxes. Actual
results could differ significantly from those estimates and assumptions.
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 securities
purchased under resale agreements."
Supplemental disclosure of cash flow information is as follows (in
thousands):
<TABLE>
<CAPTION>
Nine months ended March 31
------------------------------------------
1997 1996
------------------- ------------------
<S> <C> <C>
Cash paid for:
Interest $ 529,039 $ 566,664
Income taxes 6,145 --
Non-cash investing and financing activities:
Principal reductions to loans due to foreclosure 121,233 132,530
Loans exchanged for mortgage-backed securities 38,198 109,591
Loans made to facilitate the sale of real estate
held for investment and real estate acquired in
settlement of loans 45,858 65,829
Net transfers of loans from held for investment to held for sale 14,859 18,757
Exchange of Series E preferred stock for common stock 1,202 1,231
Issuance of common stock in exchange for Series E preferred stock 3,104 3,294
Transfer of other debt and equity securities to available for sale 7,100 --
Transfer of mortgage-backed securities to available for sale -- 2,818,831
</TABLE>
5
<PAGE>
GLENDALE FEDERAL BANK AND SUBSIDIARIES
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS - (CONTINUED)
MARCH 31, 1997
During the nine months ended March 31, 1997 and 1996, the Bank received
income tax refunds of $8,383,000 and $6,469,000, respectively.
NOTE (3) - NET EARNINGS (LOSS) 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>
Three months Nine months
ended March 31 ended March 31
---------------------------------- ----------------------------------
1997 1996 1997 1996
---------------- -------------- ----------------- -------------
<S> <C> <C> <C> <C>
Primary net earnings per share 58,419 47,891 55,180 41,128
Fully diluted net earnings per share 69,563 66,429 56,057 47,043
</TABLE>
During the three and nine months ended March 31, 1997, the Bank
entered into separately negotiated agreements with certain holders of its Series
E preferred stock providing, in the aggregate, for exchanges of 82,200 shares
and 1.2 million shares, respectively, of the Series E preferred stock for
207,966 shares and 3.1 million shares, respectively, of Bank common stock.
During the quarter ended March 31, 1996, the Bank exchanged 1.2 million shares
of the Series E preferred stock for 3.3 million shares 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.
The table in Exhibit 11.1 presents the calculation of net earnings per
share on a primary and fully-diluted basis for the three and nine months ended
March 31, 1997 and 1996, respectively.
NOTE (4) - 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. The money collected was
used to increase the SAIF reserve to the level required by law. In September
1996, the Bank recorded an accrual of $58.7 million ($37.6 million after-tax)
for this assessment. In December 1996, the Bank received a refund of $1.1
million from the FDIC for a portion of the second quarter assessment. The
recapitalization of the SAIF has resulted in lower deposit insurance premiums
beginning with the third quarter of fiscal 1997.
6
<PAGE>
ITEM 2. MANAGEMENT'S DISCUSSION AND ANALYSIS OF FINANCIAL CONDITION AND RESULTS
OF OPERATIONS
OVERVIEW
EARNINGS PERFORMANCE
The Bank recorded net earnings of $22.9 million, or $0.33 per fully diluted
share, for the three months ended March 31, 1997, compared to net earnings of
$20.4 million, or $0.23 per fully diluted share, for the same period last year.
For the nine months ended March 31, 1997, the Bank recorded net earnings of
$26.1 million, or $0.24 per fully diluted share, compared to net earnings of
$23.6 million, or $0.13 per fully diluted share, for the same period last year.
Included in net earnings for the nine months ended March 31, 1997 is a
special assessment by the FDIC to recapitalize the SAIF. The Bank recorded an
accrual of $58.7 million ($37.6 million after-tax) for this assessment in
September 1996. See Note 4 of the Notes to Consolidated Financial Statements for
additional discussion.
Included in net earnings for the quarter ended March 31, 1996 are after-
tax gains of $4.0 million on the sale of $695 million of collateralized mortgage
obligation ("CMO") investments. Excluding this gain, the current quarter's
results represent a 40 percent improvement over the same period last year. Net
earnings for the nine months ended March 31, 1996 reflects an after-tax loss of
$19.7 million on the sale of $1.7 billion of CMOs, including the CMO sale
mentioned above, and an after-tax loss of $1.7 million on the sale of the Bank's
former headquarters facility.
During the three and nine months ended March 31, 1997, the Bank
exchanged 82,200 shares and 1.2 million shares, respectively, of its Series E
preferred stock for 207,966 shares and 3.1 million shares, respectively, of Bank
common stock. During the quarter ended March 31, 1996, the Bank exchanged 1.2
million shares of the Series E preferred stock for 3.3 million shares of Bank
common stock. See Note 3 of the Notes to Consolidated Financial Statements for
additional information on these transactions.
The impact of the preferred stock conversions on the calculation of earnings
per share for the current quarter was negligible. Excluding the after-tax impact
of the SAIF assessment and the effect of the preferred stock conversions,
earnings for the nine months ended March 31, 1997 would have been $63.8 million,
or $0.93 per fully diluted share.
Excluding the effect of the preferred stock conversions and the other non-
recurring items noted above, net earnings were $16.4 million, or $0.25 per fully
diluted share, and $45.1 million, or $0.69 per fully diluted share, for the
three and nine months ended March 31, 1996, respectively.
The improvement in earnings, exclusive of the non-recurring items noted
above, in the three and nine months ended March 31, 1997, compared to the same
periods last year, reflects higher net interest income, lower levels of
provision for loan losses and increases in loan servicing income and other fees
and service charges, partially offset by a significant increase in legal
expenses related to the Bank's goodwill litigation, increase in the Bank's
effective income tax rates and increases in certain general and administrative
expenses due to expansion of the Bank's business lines. See "Results of
Operations" for a further discussion of factors affecting the Bank's earnings
performance.
The Bank's interest rate spread was 2.56% at March 31, 1997, as compared
with 2.47% at March 31, 1996 and 2.41% at June 30, 1996. The Bank's interest
rate spread continued to improve in the first nine months of fiscal 1997
primarily due to a decline in the Bank's cost of funds. The decrease in the cost
of funds reflects a lower interest rate environment, the replacement of maturing
higher-cost Federal Home Loan Bank 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. See
"Results of Operations--Net Interest Income" for a discussion of the factors
affecting the Bank's yield-cost spread.
7
<PAGE>
STRATEGIC DIRECTION
The Bank has made considerable progress in expanding its business lines
and product offerings. The Bank's commercial and consumer loan portfolios
increased by $63.4 million and $17.2 million, or 610% and 24%, to $73.8 million
and $90.4 million, respectively, during the nine months ended March 31, 1997.
New commitments under commercial and consumer lines of credit during the nine
months ended March 31, 1997 were $143.2 million and $102.0 million,
respectively, compared to $3.3 million and $46.7 million during the same periods
last year. The commercial loan portfolio at March 31, 1997 includes $17.3
million of loans purchased in the OneCentral Bank ("OneCentral") acquisition
completed in January 1997, and $27.1 million of agricultural loans purchased in
December 1996 when the Bank introduced a new agricultural lending program. The
agricultural lending program serves central California and specializes 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. The Bank has hired experienced personnel to staff the
new agricultural lending facilities. See "Balance Sheet Analysis--Loans
Receivable" for additional discussion of loan volume activity in these
portfolios. The Bank intends to add Small Business Administration ("SBA")
lending to its commercial lending product line in the fourth quarter to
complement the SBA program gained through the acquisition of TransWorld Bancorp
("TransWorld") and its principal subsidiary TransWorld Bank, in May 1997.
During the nine months ended March 31, 1997, the Bank experienced a net
increase of 39,005 in its number of checking accounts, including 14,100 business
checking accounts. Retail and business checking account balances increased a
combined $209 million, or 32%, to $862 million, during the current nine-month
period. This increase includes $35.2 million of checking accounts purchased in
the OneCentral acquisition. The ratios of checking and daily access accounts to
total deposits at March 31, 1997 were 11.1% and 38.2%, respectively, compared to
8.6% and 32.4%, respectively, at March 31, 1996.
The Bank purchased servicing rights relating to $5.7 billion of mortgage
loans for $74.9 million during the nine months ended March 31, 1997, and has
signed an agreement to purchase servicing rights for $11.6 billion of mortgage
loans in the fourth quarter of the current fiscal year.
Implementation of the Bank's strategic decision to transform itself from
a savings institution to a community banking organization contributed to the
increase in general and administrative expenses in the nine months ended March
31, 1997, compared to the same period last year. These expenses may increase in
future periods as the Bank expands its business lines.
The ability of the Bank to achieve its planned transformation into a
community banking organization and realize the benefits intended to result from
that transformation is subject to an intense level of competition from
California's existing commercial banks as well as from other non-bank financial
institutions. The Bank's ability to achieve and sustain the improved financial
performance resulting from this transformation is dependent upon the successful
completion of that transformation including; (1) the ability to originate and/or
purchase interest-earning assets; and (2) successfully shifting the mix of
liabilities from higher-cost certificates of deposit and borrowings to lower-
cost demand deposits.
On April 30, 1997, the Bank received approval from the Office of Thrift
Supervision to proceed with its acquisition of TransWorld. The shareholders of
TransWorld have also approved this transaction. This acquisition is scheduled
to close on May 16, 1997. At March 31, 1997, TransWorld had $378.7 million in
assets, including $133.9 million in loans, and $335.8 million in deposits.
Approximately 79 percent of its loans are to businesses and 73 percent of its
deposits are in daily access accounts.
On January 31, 1997, the Bank completed its acquisition of OneCentral. At
January 31, 1997, 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.
8
<PAGE>
CAPITAL
At March 31, 1997, the Bank's tangible book value was $16.10 per common
share and $14.52 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 risk-based capital ratios at March 31, 1997 were 6.05%,
10.67% and 11.82%, 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% 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 risk-based capital ratios were 6.29%, 10.79% and 11.93%,
respectively.
The Bank's capital ratios decreased in the nine months ended March 31,
1997 due to the impact of the assessment to recapitalize the SAIF, the
completion of the OneCentral acquisition and the $937.1 million increase in
assets during the period. The Bank's capital ratios are expected to decrease in
the fourth quarter of fiscal 1997 due to the targeted growth in assets of up to
$1 billion, as discussed below under "Balance Sheet Analysis". The Bank's
capital ratios could decrease in future periods due to, among other things,
acquisition activity and further growth in assets. However, taking the
aforementioned into consideration, the Bank expects to remain "well
capitalized".
BALANCE SHEET ANALYSIS
Asset size and composition have been determined principally by seeking
to balance regulatory capital requirements, liquidity, yield and risk. It is the
Bank's intention to increase consolidated assets from the March 1997 level by up
to $1 billion in the fourth quarter of fiscal 1997, primarily through the
purchase of single-family residential loans in the secondary market and the
acquisition of TransWorld. The Bank's ability to realize such growth is
dependent upon a number of factors, such as the availability of loans for
purchase at acceptable prices and the interest rate and economic environment. If
such conditions are not favorable, the Bank may be unable to purchase or
originate sufficient loans to meet its growth objective, and may experience a
decrease in total assets due to loan repayments.
Consolidated assets of the Bank increased by $937.1 million, to $15.4
billion, in the nine months ended March 31, 1997. Loans receivable increased by
$558.1 million, to $11.3 billion, primarily due to loan purchases and
originations, partially offset by principal payments. In addition, mortgage
servicing assets increased by $53.4 million, to $180.8 million, primarily due to
the purchase of $74.9 million of mortgage servicing rights relating to $5.7
billion of loans. Contributing to the growth in assets were increases of $249.0
million and $63.0 million in federal funds sold and securities purchased under
resale agreements and investments in Federal Home Loan Bank ("FHLB") capital
stock, (required to permit increased FHLB advances), respectively.
Consolidated liabilities of the Bank increased by $908.2 million, to $14.4
billion, in the nine months ended March 31, 1997. This was mainly attributable
to additional borrowings from the FHLB of $1.2 billion and an increase of $461.9
million in deposits, partially offset by the repayment of $758.1 million of
securities sold under agreements to repurchase.
9
<PAGE>
LOANS RECEIVABLE
Loans receivable held for investment increased by $578.5 million, to
$11.3 billion, in the nine months ended March 31, 1997. The increase was
primarily due to loans originated for investment, net of refinances, of $417.0
million, loans purchased for investment totaling $1.7 billion, partially offset
by principal payments of $1.4 billion, and loans transferred to real estate
acquired in settlement of loans ("REO") of $113.8 million. The loans purchased
included $841.7 million of single-family residential, adjustable-rate mortgage
loans and $696.5 million 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 $38.0 million of loans acquired with the
purchase of OneCentral, as previously discussed.
Loans receivable held for sale decreased by $20.4 million, to $13.0
million, in the nine months ended March 31, 1997, primarily due to
securitization of loans for mortgage-backed securities in the amount of $38.2
million, and fixed-rate loan sales totaling $56.4 million, partially offset by
term loan originations of $59.5 million and the transfer of loans from held for
investment totaling $14.9 million.
As of March 31, 1997, commitments of the Bank to purchase loans in the
secondary market totaled $575.3 million and was comprised of $507.1 million
fixed rate loans and $68.2 million adjustable rate loans. At that date,
commitments of the Bank to originate loans and sell mortgage-backed securities
totaled $39.6 million and $5.0 million, respectively. As of March 31, 1997,
commitments on outstanding letters of credit totaled $9.0 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 millions):
<TABLE>
<CAPTION>
Three months ended
----------------------------------------------------------------------
Mar. 31 Dec. 31 Sept. 30 June 30 Mar. 31
1997 1996 1996 1996 1996
-------------- ------------ ------------- ----------- ------------
<S> <C> <C> <C> <C> <C>
Consumer loans $ 32 $ 31 $ 40 $ 24 $ 30
Commercial loans 71 63 8 4 1
============== ============ ============= =========== ============
$ 103 $ 94 $ 48 $ 28 $31
============== ============ ============= =========== ============
</TABLE>
New commitments under lines of credit that were purchased or generated
through the Bank's commercial lending program during the nine months ended March
31, 1997 include $25 million through the OneCentral acquisition and $80 million
of agricultural loan commitments, of which $50 million were purchased in
December 1996.
As of March 31, 1997, outstanding commitments on lines of credit under
the Bank's consumer and commercial lending programs totaled $245.1 million and
$126.1 million, respectively, of which the outstanding principal balances
totaled $42.0 million and $46.7 million, respectively. As of June 30, 1996,
outstanding commitments on lines of credit under the Bank's consumer and
commercial lending programs totaled $138.0 million and $7.6 million,
respectively, of which the outstanding principal balances totaled $17.9 million
and $2.3 million, respectively.
10
<PAGE>
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 (in millions):
<TABLE>
<CAPTION>
Three months ended
--------------------------------------------------------------
Mar. 31 Dec. 31 Sept. 30 June 30 Mar. 31
1997 1996 1996 1996 1996
------------ ---------- ------------ ---------- -----------
<S> <C> <C> <C> <C> <C>
Originations:
Permanent Loans:
Single-family 1-4 units $ 141 $ 164 $ 176 $ 192 $ 190
Multi-family 5-36 units 4 9 5 6 5
Multi-family 37 or more units -- 2 -- -- 3
Non-residential 1 3 1 3 1
Land -- -- -- 1 --
Construction Loans:
Single-family 1-4 units -- -- 3 3 7
Multi-family 5-36 units -- 1 3 1 4
Commercial loans 5 1 7 -- --
Consumer loans 3 6 4 5 3
------------ ---------- ------------ ---------- -----------
Total Originations 154 186 199 211 213
Secondary Market Purchases (1-4 units):
Adjustable 214 259 369 401 1,241
Fixed 324 -- 372 -- --
------------ ---------- ------------ ---------- -----------
Total Purchases 538 259 741 401 1,241
============ ========== ============ ========== ===========
$ 692 $ 445 $ 940 $ 612 $1,454
============ ========== ============ ========== ===========
</TABLE>
Term loan originations for the three months ended March 31, 1997
declined 17% from the quarter ended December 31, 1996. Loans refinanced totaled
$20.2 million, or 13% of total originations, for the three months ended March
31, 1997, compared to $22.1 million, or 12% of total originations, for the
quarter ended December 31, 1996.
Term loan originations for the three months ended March 31, 1997
declined as compared to the same quarter last year primarily due to a decline in
refinancing activity. Loans refinanced totaled $48.3 million, or 23% of total
originations, for the three months ended March 31, 1996.
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") properties or to refinance maturing loans. The
single-family residential and multi-family residential construction loans
originated in the current fiscal year are part of the construction lending
program that was terminated during fiscal 1997.
NON-PERFORMING ASSETS ("NPAS") AND RESTRUCTURED LOANS
The following table summarizes the Bank's NPAs and restructured loans
at the dates indicated (dollars in thousands):
<TABLE>
<CAPTION>
March 31, 1997 June 30, 1996
---------------------------- --------------------------
% of % of
Dollar Total Dollar Total
Amount Assets Amount Assets
------------- ------------ ------------ ------------
<S> <C> <C> <C> <C>
Non-accrual loans $153,402 1.00% $192,445 1.33%
REO and other assets 71,371 0.46% 82,204 0.57%
============= ============ ============ ============
Total NPAs $224,773 1.46% $274,649 1.90%
============= ============ ============ ============
Restructured loans $ 31,342 0.20% $ 9,194 0.06%
============= ============ ============ ============
</TABLE>
11
<PAGE>
The following table summarizes NPA and restructured loan activity
during the first nine months of fiscal 1997 (in thousands):
<TABLE>
<CAPTION>
JUNE 30, PAYOFFS/ MARCH 31,
1996 FORE- WRITE- SALES/ 1997
BALANCE ADDITIONS CLOSURES DOWNS OTHER BALANCE
------------------------------------------------------------------------
<S> <C> <C> <C> <C> <C> <C>
NON-ACCRUAL LOANS:
Single-family 1-4 units $ 119,978 $ 146,763 $ (88,421) $ (2,229) $ (82,980) $ 93,111
Multi-family 5-36 units 33,123 41,715 (22,754) (2,241) (27,712) 22,131
Multi-family 37 or more units 14,461 1,435 (4,372) (3,074) (838) 7,612
Non-residential 23,860 27,987 (5,459) (729) (15,535) 30,124
Commercial 22 470 - (28) (449) 15
Consumer 1,001 213 - - (805) 409
------------------------------------------------------------------------
Total $ 192,445 $ 218,583 $(121,006) $ (8,301) $(128,319) $ 153,402
========================================================================
REO AND OTHER ASSETS:
Single-family 1-4 units $ 39,693 $ 7,832 $ 66,671 $ (1,826) $ (76,042) $ 36,328
Multi-family 5-36 units 11,668 1,103 17,974 (863) (19,849) 10,033
Multi-family 37 or more units 4,827 2,477 4,280 (295) (5,673) 5,616
Non-residential 25,893 14 4,339 (531) (10,545) 19,170
Consumer 123 - - - 101 224
------------------------------------------------------------------------
Total $ 82,204 $ 11,426 $ 93,264 $ (3,515) $(112,008) $ 71,371
========================================================================
TOTAL NPAS:
Single-family 1-4 units $ 159,671 $ 154,595 $ (21,750) $ (4,055) $(159,022) $ 129,439
Multi-family 5-36 units 44,791 42,818 (4,780) (3,104) (47,561) 32,164
Multi-family 37 or more units 19,288 3,912 (92) (3,369) (6,511) 13,228
Non-residential 49,753 28,001 (1,120) (1,260) (26,080) 49,294
Commercial 22 470 - (28) (449) 15
Consumer 1,124 213 - - (704) 633
------------------------------------------------------------------------
Total $ 274,649 $ 230,009 $ (27,742) $ (11,816) $(240,327) $ 224,773
========================================================================
RESTRUCTURED LOANS:
Single-family 1-4 units $ 3,222 $ 2,393 $ - $ - $ (2,759) $ 2,856
Multi-family 5-36 units 2,197 1,093 - - (141) 3,149
Multi-family 37 or more units 2,251 16,244 - - (106) 18,389
Non-residential 1,524 5,010 - - 414 6,948
------------------------------------------------------------------------
Total $ 9,194 $ 24,740 $ - $ - $ (2,592) $ 31,342
========================================================================
</TABLE>
The $49.9 million, or 18%, decrease in NPAs for the nine months ended
March 31, 1997 reflects $112.0 million in sales of REO through the Bank's
regular liquidation process, $68.5 million in non-accrual loans being sold or
paid off and $59.8 million in non-accrual loans being reinstated to accrual
status, partially offset by NPA additions of $230.0 million. For the nine
months ended March 31, 1997, 67% 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 $22.1 million increase in restructured loans for the nine months
ended March 31, 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 $8.5 million of new restructured loans transferred from non-
accrual status, partially offset by $2.6 million of restructured loans being
transferred to performing status.
The table in Exhibit 99E presents the Bank's gross loan portfolio,
NPAs and restructured loans by property type as of March 31, 1997. The table in
Exhibit 99G summarizes the activity in the Bank's NPAs for the past five
quarters.
12
<PAGE>
Total delinquent loans decreased by $47.3 million, to $234.0 million,
in the nine months ended March 31, 1997. This decrease was attributable
primarily to the single-family residential and multi-family residential
portfolios, in which delinquent loans declined by $32.1 million and $20.5
million, to $163.3 million and $38.8 million, respectively. At March 31, 1997,
single-family residential and multi-family residential loans comprised 70% and
17%, respectively, of total delinquent loans. The table in Exhibit 99H presents
the Bank's delinquent loans by property type for the past five quarters.
If the recent economic improvements in the Bank's principal market
areas do not continue or 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 March
31, 1997, the states in which the Bank had loan concentrations greater than $150
million were California, Florida, New York, Virginia, New Jersey and Texas.
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 through the
levels 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. In addition,
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 March 31, 1997 and June 30, 1996 by property type
(dollars in thousands):
<TABLE>
<CAPTION>
March 31, 1997 June 30, 1996
---------------------------------------- --------------------------------------
Gross Percent of Gross Percent 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 $ 52,365 $ 8,280,356 0.63% $ 56,833 $ 7,580,312 0.75%
Multi-family:
5-36 units 44,921 1,502,267 2.99 48,628 1,564,542 3.11
37 or more units 19,846 361,938 5.48 26,062 400,415 6.51
Non-residential 38,568 1,203,959 3.20 47,260 1,357,225 3.48
Commercial 3,277 73,807 4.44 4,699 10,391 45.22
Consumer 6,967 90,355 7.71 3,274 73,158 4.48
-------- ----------- -------- -----------
$165,944 $11,512,682 1.44% $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.
13
<PAGE>
Specific valuation allowances of $15.2 million and $26.5 million have
been established for impaired loans, which totaled $156.0 million and $158.8
million at March 31, 1997 and June 30, 1996, respectively, 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 March 31, 1997 and June 30, 1996
totaled $84.7 million and $106.5 million, respectively. Those impaired loans
without related specific valuation allowances at March 31, 1997 and June 30,
1996 totaled $71.3 million and $52.3 million, respectively.
The allowance for loan losses declined by $20.8 million, to $165.9
million, in the first nine months of 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. 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 ratios of allowance to non-
accrual loans and total gross loans at March 31, 1997 were 108.2% and 1.4%,
respectively, compared to 97.0% and 1.7%, respectively, at June 30, 1996. The
table in Exhibit 99D sets forth the ratios of the Bank's allowance for loan
losses to its gross loan portfolio and NPAs.
A summary of activity in the allowance for loan losses by property
type during the first nine months of fiscal 1997 is as follows (in thousands):
<TABLE>
<CAPTION>
Balance Balance
June 30, Charge- OneCentral March 31,
1996 Additions offs Recoveries Bank 1997
---------- ---------- ---------- ----------- ----------- ---------
<S> <C> <C> <C> <C> <C> <C>
Single-family 1-4 units $ 56,833 $17,464 $(22,044) $ 112 $ - $ 52,365
Multi-family:
5-36 units 48,628 4,727 (8,448) 14 - 44,921
37 or more units 26,062 (1,197) (5,189) 170 - 19,846
Non-residential 47,260 619 (10,435) 1,124 - 38,568
Commercial 4,699 (5,717) (58) 3,323 1,030 3,277
Consumer 3,274 5,430 (2,473) 736 - 6,967
-------- ------- -------- ------ ------ --------
$186,756 $21,326 $(48,647) $5,479 $1,030 $165,944
======== ======= ======== ====== ====== ========
</TABLE>
A summary of activity in the allowance for loan losses by property
type during the first nine months of fiscal 1996 is as follows (in thousands):
<TABLE>
<CAPTION>
Balance Balance
June 30, Charge- March 31,
1995 Additions offs Recoveries 1996
--------- ---------- --------- ---------- ----------
<S> <C> <C> <C> <C> <C>
Single-family 1-4 units $ 44,483 $ 35,017 $(25,992) $ 24 $ 53,532
Multi-family:
5-36 units 41,736 11,812 (9,123) 171 44,596
37 or more units 31,569 (1,116) (4,254) 231 26,430
Non-residential 83,086 (11,850) (11,275) 2,885 62,846
Commercial 4,176 (4,543) (881) 4,447 3,199
Consumer 4,092 619 (2,203) 871 3,379
-------- -------- -------- ------ --------
$209,142 $ 29,939 $(53,728) $8,629 $193,982
======== ======== ======== ====== ========
</TABLE>
14
<PAGE>
Additions to the allowance for loan losses declined by $8.6 million,
to $21.3 million, in the nine months ended March 31, 1997, compared to the same
period last year, 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 real estate portfolios 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 continues to emphasize the attraction of retail deposits,
especially low-cost demand deposits. The Bank's ratio of deposits to borrowings
was 65%/35% at March 31, 1997 and June 30, 1996. 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 $461.9 million, to
$9.2 billion, in the first nine months of fiscal 1997. Included in the net
deposit inflows in daily access and certificates were $62.8 million and $6.0
million, respectively, of deposits purchased in the OneCentral acquisition.
Glendale Federal's deposit composition at March 31, 1997 and June 30,
1996 was as follows (dollars in millions):
<TABLE>
<CAPTION>
March 31, 1997 June 30, 1996
--------------------- -------------------------
% of % of
Balance Total Balance Total
---------- --------- ---------- -------------
<S> <C> <C> <C> <C>
Checking/NOW accounts $1,024 11.1% $ 779 8.9%
Passbook accounts 452 4.9 493 5.7
Money market checking/savings 2,036 22.2 1,719 19.7
------ ---- ------ -----
Total daily access 3,512 38.2 2,991 34.3
Short-term certificates (1 year or less) 2,728 29.7 3,047 34.9
Long-term certificates (over 1 year) 2,752 30.0 2,438 27.9
Branch and business development
jumbo certificates 159 1.7 190 2.2
------ ----- ------ -----
Total retail deposits 9,151 99.6 8,666 99.3
Brokered certificates of deposit 35 0.4 58 0.7
====== ===== ====== =====
Total $9,186 100.0% $8,724 100.0%
====== ===== ====== =====
</TABLE>
Checking accounts increased by $245 million, or 31%, to $1,024
million, during the first nine months of fiscal 1997. Management believes that
the overall increase in daily access deposits during the first nine months of
fiscal 1997 reflects the Bank's aggressive branch marketing efforts and
advertising campaign instituted throughout California. During the first nine
months of fiscal 1997, the Bank's short-term certificates of deposit decreased
$319 million offset by a $314 million increase in long-term certificates. This
shift reflects the Bank's strategy to offer promotional rates on its 15, 18 and
21 month certificate products in anticipation of an increase in short-term
interest rates.
15
<PAGE>
BORROWINGS
Total borrowings increased by $391.9 million, to $5.0 billion, during
the nine months ended March 31, 1997 to support asset growth. Borrowings from
the Federal Home Loan Bank ("FHLB") increased by $1.2 billion to $5.0 billion.
The Bank increased adjustable-rate FHLB borrowings by $2.3 billion, to $2.9
billion during the nine months ended March 31, 1997, while fixed-rate FHLB
borrowings decreased by $1.1 billion, to $2.1 billion, during the same period.
These advances were also used to repay the balance of securities sold under
agreements to repurchase of $758.1 million. Total borrowings as of March 31,
1997 and June 30, 1996 included $3.5 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 $29.0 million, to $986.4 million,
during the nine months ended March 31, 1997, primarily due to net earnings of
$26.1 million, proceeds of $4.3 million received from the issuance of common
stock related to the exercise of stock options and a $6.9 million decrease in
the net unrealized loss recorded on the portfolio of mortgage-backed securities
available for sale, partially offset by dividends declared of $8.3 million on
the Bank's Series E preferred stock.
During the nine months ended March 31, 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 3 of the Notes to Consolidated Financial Statements
for additional information regarding these transactions.
REGULATORY CAPITAL
The following table compares Glendale Federal's regulatory capital at March
31, 1997 to its minimum regulatory capital requirements at that date (dollars in
thousands):
<TABLE>
<CAPTION>
Capital at As a % Capital As a % Excess
Mar. 31, 1997 of Assets Required of Assets Capital
--------------- ------------ ------------- ---------- ----------------
<S> <C> <C> <C> <C> <C>
Capital in accordance with generally
accepted accounting principles $ 986,434
Adjustments for tangible and core capital:
Goodwill and other intangible assets (61,096)
Investments in and advances to
non-permissible subsidiaries (2,260)
Net unrealized holding loss on debt
securities available for sale 4,541
-----------
Total tangible capital 927,619 6.05% $230,028 1.50% $697,591
Adjustment for core capital --
-----------
Total core capital 927,619 6.05% $460,056* 3.00%* $467,563*
Adjustments for risk-based capital:
Allowance for general loan losses** 107,866
Equity risk investments required
to be deducted (9,118)
-----------
Total risk-based capital $ 1,026,367 11.82% $698,698* 8.00%* $327,669*
===========
</TABLE>
- ----------
*Under the standards for "well capitalized" institutions established pursuant to
the Federal Deposit Insurance Corporation Improvement Act of 1991 ("FDICIA"),
the corresponding amounts for core capital are $766,760, 5.00% and $160,859,
respectively, and the corresponding amounts for risk-based capital are $870,427,
10.00% and $155,940, respectively.
**Limited to 1.25% of risk-weighted assets.
16
<PAGE>
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 March 31, 1997, funds estimated to be available from these
sources totaled approximately $3.7 billion and consisted primarily of the
repurchase agreement markets.
During the nine months ended March 31, 1997, the Bank experienced a net
cash outflow from investing activities of $759.5 million, 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.
In addition, the Bank experienced positive cash flows from operating activities
during the period of $156.8 million. The Bank's financing activities during the
period resulted in a net cash inflow of $846.4 million, consisting principally
of net increases in deposits and borrowings.
During March 1997, the Bank's average liquidity ratio was 6.08%. The
current minimum regulatory requirement for this ratio is 5%.
ASSET AND LIABILITY MANAGEMENT
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 Exhibit
99A 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 March 31, 1997.
The following table is a summary of Glendale Federal's one-year GAP at
the dates indicated (dollars in millions):
<TABLE>
<CAPTION>
March 31, June 30,
1997 1996
---------------- ----------------
<S> <C> <C>
Interest-earning assets maturing or repricing within one year $11,523 $ 11,004
Interest-bearing liabilities maturing or repricing within one year 8,312 7,956
---------------- ----------------
One-year maturity GAP $ 3,211 $ 3,048
================ ================
One-year maturity GAP as a percent of total assets 20.9% 21.1%
================ ================
</TABLE>
The $163 million increase in the one-year GAP for the first nine months
of fiscal 1997 was primarily due to a $519 million increase in assets maturing
or repricing within one year, partially offset by a $356 million increase in
liabilities maturing or repricing within one year. The growth in one-year assets
was primarily due to an increase of $255 million in adjustable-rate single-
family residential loans that mature or reprice within one year and an increase
of $250 million in whole loans purchased under resale agreements. The growth in
one-year liabilities was principally due to an increase of $1.7 billion in FHLB
borrowings that mature or reprice within one year, partially offset by a
reduction of approximately $758 million in securities sold under agreements to
repurchase and a decrease of $673 million in certificates of deposit.
17
<PAGE>
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.
18
<PAGE>
The following tables present the Bank's gross loan portfolio,
including loans serviced by the Bank and loans 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>
March 31, 1997
----------------------------------------------------------------------
Loans Loans Mortgage-
serviced serviced backed Percent
by Bank by others Securities Total of Total
------------- ------------ --------------- --------------- -----------
<S> <C> <C> <C> <C> <C>
Adjustable:
6-month Treasury $ 343 $ 34 $ 428 $ 805 6%
1-Year Treasury (1) 2,446 2,086 1,308 5,840 43
11th District Cost of Funds 3,633 75 138 3,846 28
Prime 145 - 10 155 1
Other 111 10 125 246 2
------- ------- ------- ------- -------
6,678 2,205 2,009 10,892 80
Fixed:
Loans receivable 994 1,636 - 2,630 19
Mortgage-backed securities - - 210 210 1
------- ------- ------- ------- -------
994 1,636 210 2,840 20
------- ------- ------- ------- -------
Total $ 7,672 $ 3,841 $ 2,219 $13,732 100%
======= ======= ======= ======= =======
<CAPTION>
June 30, 1996
----------------------------------------------------------------------
Loans Loans Mortgage-
serviced serviced backed Percent
by Bank by others Securities Total of Total
------------- ------------ --------------- --------------- -----------
<S> <C> <C> <C> <C> <C>
Adjustable:
6-month Treasury $ 384 $ 44 $ 433 $ 861 7%
1-Year Treasury (1) 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:
Loans receivable 928 1,069 -- 1,997 15
Mortgage-backed securities -- 227 227 1
------- ------- ------- ------- -------
928 1,069 227 2,224 16
------- ------- ------- ------- -------
Total $ 7,842 $ 3,144 $ 2,221 $13,207 100%
======= ======= ======= ======= =======
</TABLE>
________________
(1) Includes loans with interest rates that are fixed for three to five years
which then convert to adjustable rates for the remainder of the loan term.
19
<PAGE>
RESULTS OF OPERATIONS
NET INTEREST INCOME
Net interest income increased by $9.8 million and $33.5 million, to
$96.5 million and $279.1 million, respectively, for the three and nine months
ended March 31, 1997, compared to the same periods last year, primarily because
of an improvement in the yield-cost spread. The yield-cost spread increased by
15 basis points and 36 basis points, to 2.43% and 2.42%, respectively, in the
three and nine months ended March 31, 1997, compared to the same periods last
year, primarily due to a decrease of 24 basis points and 40 basis points, to
4.94% and 4.96%, respectively, in the Bank's cost of funds. Additionally, the
Bank experienced an increase of $26.9 million to $511.6 million, in the amount
by which average interest-earning assets exceeded average interest-bearing
liabilities during the nine months ended March 31, 1997.
The decrease in the Bank's cost of funds during the three and nine
months ended March 31, 1997, compared to the same periods 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, and a decline in the interest
rate environment. The decrease in the Bank's cost of funds during the year-to-
date period was also partially attributable to a change in the mix of funding
sources from higher-cost borrowings to lower-cost deposits. This resulted in
deposits comprising 63.9% of total average interest-bearing liabilities during
the current nine-month period, versus 61.9% in the same period last year. The
Bank also replaced maturing higher-cost FHLB borrowings with lower-cost FHLB
borrowings which were in turn used to pay off the outstanding balance of
securities sold under repurchase agreements of $758.1 million.
The yields on loans and mortgage-backed securities decreased by 10 basis
points and 4 basis points, to 7.44% and 7.43%, respectively, in the three and
nine months ended March 31, 1997, compared to the same periods last year. The
yield on loans decreased by 22 basis points and 31 basis points, to 7.61% and
7.59%, respectively, in the three and nine months ended March 31, 1997, compared
to the same periods last year. This was primarily due to the decrease in the
repricing of the Bank's adjustable-rate portfolio that was attributable to the
lower interest rate environment and to an increase in adjustable-rate loans that
was attributable principally to the purchase of $2.0 billion of adjustable-rate
loans yielding 6.74% in the secondary market during the last nine months of
fiscal 1996. During the first nine months of fiscal 1997, the Bank purchased
$696.5 million of fixed-rate loans yielding 8.26% and $841.7 million of
adjustable-rate loans yielding 7.36% in the secondary market. Partially
offsetting the above decrease in the yield on loans was an increase in the yield
on mortgage-backed securities of 19 basis points and 33 basis points, to 6.63%
and 6.65%, respectively, in the three and nine months ended March 31, 1997,
primarily attributable to the sale of $1.7 billion of lower-yielding CMOs in the
second and third quarters of fiscal 1996.
The declining level of NPAs had a positive impact on net interest income
as the Bank was able to reinvest the proceeds from liquidation of these assets
into interest-earning assets. The average balance of NPAs in the three and nine
months ended March 31, 1997 was $224.8 million and $249.7 million, respectively.
The average balance of NPAs in the three and nine months ended March 31, 1996
was $288.5 million and $322.6 million, respectively. The impact of non-accrual
assets on the yield on loans and mortgage-backed securities was a reduction in
yield of 7 basis points and 8 basis points in the three and nine months ended
March 31, 1997, respectively, versus a reduction of 13 basis points in both the
three and nine months ended March 31, 1996.
The yield on the investment portfolio increased by 12 basis points to
6.56% in the three months ended March 31, 1997, compared to the same period last
year primarily due to the $53.1 million purchase of FHLB stock with higher
yields during the first six months of the current fiscal year. The yield on the
investment portfolio decreased by 13 basis points to 6.54% in the nine months
ended March 31, 1997, compared to the same period last year, primarily due to a
decrease in federal funds and repurchase agreements attributable to a lower
interest rate environment, partially offset by the above purchase of higher-
yield FHLB stock.
20
<PAGE>
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 pays fixed interest rates and receives variable interest
rates under its swap contracts. The impact of swaps for each of the three and
nine months ended March 31, 1997 was to increase the total cost of funds by 2
basis points. The impact of swaps for the three- and nine- month periods ended
March 31, 1996 was to increase the total cost of funds by 2 basis points and by
1 basis point, respectively. At March 31, 1997 and 1996, the Bank had $200
million in notional principal amount of swaps that matured in April 1997.
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.
The following rate/volume analysis depicts the increase (decrease) in net
interest income attributable to interest rate fluctuations (change in rate
multiplied by prior period average balance) and volume fluctuations (change in
average balance multiplied by prior period rate) when compared to the same
periods of the prior year (in thousands):
<TABLE>
<CAPTION>
Three months ended March 31, Nine months ended March 31,
1997 vs. 1996 1997 vs. 1996
Changes Due To Changes Due To
-------------------------------- --------------------------------
Volume Rate Total Volume Rate Total
-------- -------- -------- -------- -------- --------
<S> <C> <C> <C> <C> <C> <C>
Interest income:
Loans receivable, net $ 16,971 $ (5,799) $ 11,172 $ 66,155 $(24,016) $ 42,139
Mortgage-backed securities, net (6,189) 1,248 (4,941) (76,826) 8,954 (67,872)
-------- -------- -------- -------- -------- --------
Total loans and
mortgage-backed securities 10,782 (4,551) 6,231 (10,671) (15,062) (25,733)
Federal funds sold and securities
purchased under resale agreements 11 (164) (153) (2,417) (1,865) (4,282)
U.S. Government and other investment
securities 1,734 (123) 1,611 3,413 (457) 2,956
-------- -------- -------- -------- -------- --------
Total investments 1,745 (287) 1,458 996 (2,322) (1,326)
-------- -------- -------- -------- -------- --------
Total interest income 12,527 (4,838) 7,689 (9,675) (17,384) (27,059)
Interest expense:
Deposits - daily access 4,560 (143) 4,417 12,530 (2,078) 10,452
Deposits - certificates (7,880) (3,059) (10,939) (24,087) (14,365) (38,452)
-------- -------- -------- -------- -------- --------
Total deposits (3,320) (3,202) (6,522) (11,557) (16,443) (28,000)
Securities sold under agreements
to repurchase and other
short-term borrowings (18,125) (235) (18,360) (71,010) (5,630) (76,640)
Borrowings from the Federal Home
Loan Bank 25,038 (2,244) 22,794 54,404 (9,917) 44,487
Other borrowings (20) (2) (22) (146) (270) (416)
-------- -------- -------- -------- -------- --------
Total borrowings 6,893 (2,481) 4,412 (16,752) (15,817) (32,569)
-------- -------- -------- -------- -------- --------
Total interest expense 3,573 (5,683) (2,110) (28,309) (32,260) (60,569)
======== ======== ======== ======== ======== ========
Net interest income $ 8,954 $ 845 $ 9,799 $ 18,634 $ 14,876 $ 33,510
======== ======== ======== ======== ======== ========
</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.
21
<PAGE>
The following table sets forth the Bank's average balances of and
weighted average yields on interest-earning assets, the average balances of and
weighted average interest rates paid on interest-bearing liabilities, the dollar
difference between such average balances and the spread between the weighted
average yields earned and rates paid for the three months ended March 31, 1997
and 1996 (dollars in millions):
<TABLE>
<CAPTION>
Three months ended March 31
----------------------------------------------------
1997 1996
----------------------- --------------------------
Weighted Weighted
Average Average Average Average
Balances Yield/Cost Balances Yield/Cost
---------- ---------- --------- -----------
<S> <C> <C> <C> <C>
Loans receivable, net $11,234 7.61% $10,351 7.83%
Mortgage-backed securities, net 2,302 6.63 2,680 6.44
------- -------
Total loans and mortgage-backed
securities 13,536 7.44 13,031 7.54
Federal funds sold and securities purchased
under resale agreements 735 5.55 730 5.60
U.S. Government and other investment
securities 285 9.18 206 9.41
------- -------
Total investments 1,020 6.56 936 6.44
------- -------
Total interest-earning assets 14,556 7.37 13,967 7.46
------- -------
Deposits - daily access 3,416 2.99 2,772 3.01
Deposits - certificates 5,580 5.49 6,105 5.68
------- -------
Total deposits 8,996 4.54 8,877 4.84
Securities sold under agreements to
repurchase and other short-term
borrowings 61 5.55 1,369 5.62
Borrowings from the Federal Home Loan Bank 4,999 5.67 3,183 5.94
Other borrowings 40 3.86 41 3.88
------- -------
Total borrowings 5,100 5.66 4,593 5.83
------- -------
Total interest-bearing liabilities 14,096 4.94 13,470 5.18
------- -------
Difference between average
interest-earning assets
and interest-bearing liabilities $ 460 $ 497
======= =======
Yield-cost spread 2.43% 2.28%
Effective net spread /1/ 2.59% 2.47%
</TABLE>
_______________
/1/Annualized net interest income divided by average interest-earning assets.
22
<PAGE>
The following table sets forth the Bank's average balances of and
weighted average yields on interest-earning assets, the average balances of and
weighted average interest rates paid on interest-bearing liabilities, the dollar
difference between such average balances and the spread between the weighted
average yields earned and rates paid for the nine months ended March 31, 1997
and 1996 (dollars in millions):
<TABLE>
<CAPTION>
Nine months ended March 31
--------------------------------------------------
1997 1996
--------------------------------------------------
Weighted Weighted
Average Average Average Average
Balances Yield/Cost Balances Yield/Cost
---------- ----------- --------- -----------
<S> <C> <C> <C> <C>
Loans receivable, net $11,217 7.59% $10,072 7.90%
Mortgage-backed securities, net 2,245 6.65 3,794 6.32
------- ---- ------- ----
Total loans and mortgage-backed
securities 13,462 7.43 13,866 7.47
Federal funds sold and securities purchased
under resale agreements 677 5.54 731 5.88
U.S. Government and other investment
securities 259 9.17 209 9.45
------- ---- ------- ----
Total investments 936 6.54 940 6.67
------- ---- ------- ----
Total interest-earning assets 14,398 7.38 14,806 7.42
------- ---- ------- ----
Deposits - daily access 3,243 2.98 2,684 3.08
Deposits - certificates 5,628 5.48 6,182 5.79
------- ---- ------- ----
Total deposits 8,871 4.57 8,866 4.97
Securities sold under agreements to
repurchase and other short-term
borrowings 337 5.50 2,041 5.89
Borrowings from the Federal Home Loan Bank 4,639 5.70 3,369 6.07
Other borrowings 40 3.76 45 4.61
------- ---- ------- ----
Total borrowings 5,016 5.67 5,455 5.99
------- ---- ------- ----
Total interest-bearing liabilities 13,887 4.96 14,321 5.36
------- ---- ------- ----
Difference between average
interest-earning assets
and interest-bearing liabilities $ 511 $ 485
======= =======
Yield-cost spread 2.42% 2.06%
Effective net spread /1/ 2.59% 2.24%
</TABLE>
_______________
/1/Annualized net interest income divided by average interest-earning assets.
23
<PAGE>
PROVISION FOR LOAN LOSSES
Provisions for loan losses decreased by $4.2 million and $8.6 million,
to $6.1 million and $21.3 million, respectively, in the three and nine months
ended March 31, 1997, compared to the same periods last year. The reduction in
the provision was primarily due to 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 March 31, 1997 totaled
$224.8 million, which represents a 22% decline from the $289.8 million of NPAs
recorded at March 31, 1996. 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".
LOAN SERVICING INCOME, NET
Loan servicing income, net, increased by $0.9 million and $8.8 million,
to $8.4 million and $25.5 million, respectively, in the three and nine months
ended March 31, 1997, compared to the same periods last year. This increase was
attributable to increased servicing fees earned resulting from recent purchases
of mortgage servicing rights and to the effect of adjustments made in the
September 1995 quarter to reduce the value of the Bank's servicing assets. In
the September 1995 quarter, an adjustment totaling $3.7 million was made to
reduce the carrying value of the Bank's purchased mortgage servicing rights due
to an increase in prepayment expectations. In the same quarter, an adjustment of
$2.2 million was made to reduce the carrying value of the Bank's capitalized
servicing fees receivable due to changes in the underlying assumptions relating
to that asset.
If prepayment expectations increase from the levels as of March 31, 1997,
further reductions to the value of the Bank's servicing assets may be necessary,
depending upon the frequency and magnitude of such increases.
During fiscal 1996, the Bank purchased servicing rights relating to $3.7
billion of loans for $50.8 million. During the nine months ended March 31, 1997,
the Bank purchased servicing rights relating to $5.7 billion of loans for $74.9
million. The Bank has signed an agreement to purchase servicing rights for
$11.6 billion of mortgage loans in the fourth quarter of the current fiscal
year.
The Bank's portfolio of loans serviced for others totaled $18.2 billion
and $11.3 billion at March 31, 1997 and 1996, respectively.
OTHER FEES AND SERVICE CHARGES
Other fees and service charges increased by $3.2 million and $8.3
million, to $14.8 million and $41.2 million, respectively, in the three and nine
months ended March 31, 1997, compared to the same periods in fiscal 1996. This
increase primarily reflects an increase in deposit fee income of $1.8 million
and $5.8 million, respectively, related to growth in the number of transaction
accounts and an increase in commissions and broker fees related to higher sales
from the Bank's securities brokerage subsidiary.
GAIN (LOSS) ON SALE OF LOANS AND MORTGAGE-BACKED SECURITIES, NET
The Bank recorded a net loss on sale of loans and mortgage-backed
securities of $0.3 million during the current quarter compared with a net gain
of $4.0 million during the same period last year, primarily due to a pre-tax
recovery of $5.7 million on the sale of $695 million of fixed-rate CMO
investments in the March 1996 quarter. Loss on sale of loans and mortgage-backed
securities, net decreased by $32.2 million in the nine months ended March 31,
1997, compared to the same period last year, primarily due to a pre-tax loss of
$28.2 million on the sale of $1.7 billion of fixed-rate CMO investments during
the second and third quarters of fiscal 1996.
24
<PAGE>
GENERAL AND ADMINISTRATIVE EXPENSES
General and administrative expenses, excluding legal expenses for the
goodwill litigation, were $63.4 million for the current fiscal 1997 quarter,
down slightly compared with the same period last year. General and
administrative expenses increased by $14.0 million to $195.4 million in the nine
months ended March 31, 1997, compared to the same period last year. The year-
to-date increase primarily reflects costs associated with the Bank's new
business lines, partially offset by reduced regulatory insurance premiums and
lower advertising expenses. General and administrative expenses may increase in
future periods as the Bank continues to expand its business lines. Management
intends the new business lines to result in additional fee income, higher
yielding loans and lower costing deposits.
As a result of the reduced assessment from the FDIC following the SAIF
recapitalization, regulatory insurance decreased by $3.9 million and $7.5
million, to $2.6 million and $13.8 million in the three and nine months ended
March 31, 1997, compared with the same periods last year. The year-to-date
decrease also reflects the $1.1 million refund from the FDIC for a portion of
the second quarter assessment.
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 the current quarter and year-to-date
periods. Such expenses increased by $7.5 million and $12.8 million, to $8.2
million and $13.7 million, respectively, in the current three- and nine-month
periods, compared to the same periods last year. Management expects legal
expenses to remain high during the duration of the damages phase of the goodwill
litigation, which is currently estimated to be completed sometime in the
December 1997 quarter. See Item 1. "Legal Proceedings - Goodwill Litigation
Againist the Government" for further discussion.
OPERATIONS OF REO
Operations of REO resulted in losses of $2.1 million and $5.9 million in
the three and nine months ended March 31, 1997 as compared to losses of $4.2
million and $7.4 million in last year's comparable periods. Losses in the
current three- and nine-month periods were primarily due to $1.8 million and
$6.2 million, respectively, in provisions to adjust the REO portfolio to current
fair value, and $1.4 million and $5.0 million, respectively, of operating
expenses. These current period expenses were partially offset by gains realized
on the sale of REO (after market valuation adjustments) of $1.1 million and $5.3
million, respectively.
Losses in the prior year's comparable periods were primarily due to $4.1
million and $9.8 million, respectively, in provisions to adjust the REO
portfolio to current fair value, and $1.9 million and $5.7 million,
respectively, of operating expenses. These expenses were partially offset by
gains realized on the sale of REO (after market valuation adjustments) of $1.8
million and $8.2 million, respectively, of which $2.1 million was recognized in
the September 1995 quarter in connection with the August 1995 sale of
underperforming loans and REO.
INCOME TAX PROVISION
The Bank recorded income tax provisions of $15.1 million and $18.3
million in the three and nine months ended March 31, 1997, respectively. The
Bank recorded income tax provisions of $9.0 million and $13.3 million in the
three and nine months ended March 31, 1996, respectively. For the three and
nine months ended March 31, 1997, the effective tax rate is higher than the
federal statutory rate primarily due to state taxes.
25
<PAGE>
PART II - OTHER INFORMATION
ITEM 1. 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 U.S. 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 U.S. 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. On December 18, 1996,
the Claims Court granted permission for the Bank to present evidence on three
alternative damages theories: (1) "Reliance Damages", pursuant to which the Bank
expects to present evidence of damages in an amount in excess of $900 million;
(2) "Expectation Damages", pursuant to which the Bank expects to present
evidence of damages in the amount of approximately $1.5 billion; and (3)
"Restitution", pursuant to which the Bank expects to present evidence of damages
in excess of $1.9 billion. The trial to determine damages commenced on February
24, 1997 and is expected to end in the December 1997 quarter.
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., 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.
26
<PAGE>
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 is set for June 3, 1997. If the motion is granted, then the new
plaintiffs will be allowed to file their own motion for class certification.
ITEM 4. SUBMISSION OF MATTERS TO A VOTE OF SECURITY HOLDERS
None
ITEM 6. EXHIBITS AND REPORTS ON FORM 8-K
(a) Exhibits
11.1 Statement Regarding Computation of Per Share Earnings (Loss)
99A Maturity and Rate Sensitivity Analysis
99B Interest Rate Margin
99C Loan Originations by Type
99D Analysis of Allowance for Loan Losses and Non-Performing Assets
99E Gross Loans, Non-Performing Assets and Restructured Loans by Property
Type
99F Non-Performing Assets and Restructured Loans
99G Non-Performing Assets Activity
99H Delinquent Loans by Property Type
(b) Reports on Form 8-K
None
27
<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.
Glendale Federal Bank, Federal Savings Bank
-------------------------------------------
(Registrant)
Date: May 14, 1997 By: /s/John E. Haynes
------------------------ ---------------------------
Executive Vice President and
Chief Financial Officer
(Principal Financial Officer)
28
<PAGE>
EXHIBIT 11.1
GLENDALE FEDERAL BANK AND SUBSIDIARIES
STATEMENT REGARDING COMPUTATION OF PER SHARE EARNINGS
(In thousands, except per share data)
<TABLE>
<CAPTION>
Three Months Ended Nine Months Ended
March 31, March 31,
---------------------- --------------------
PRIMARY EARNINGS PER SHARE 1997 1996 1997 1996
------- ------- ------- -------
<S> <C> <C> <C> <C>
COMPUTATION FOR STATEMENT OF OPERATIONS
Net earnings per statement of operations used in
primary earnings per share computation:
Net earnings $22,892 $20,398 $26,129 $23,556
Dividends on Series E Preferred Stock (2,527) (3,837) (8,313) (12,642)
Premium on conversion of Series E Preferred Stock (241) (5,452) (4,173) (5,452)
Interest on borrowings, net of tax effect,
on application of assumed proceeds from
exercise of warrants and options in excess of
20% limitation (a) - 272 - -
------- ------- ------- -------
Net earnings, as adjusted $20,124 $11,381 $13,643 $ 5,462
======= ======= ======= =======
Weighted average number of shares outstanding used in
primary earnings per share computation:
Weighted average number of shares 50,140 41,914 48,687 41,128
Net shares issuable from assumed exercise of warrants
and options, as determined by the application
of the Modified Treasury Stock Method 8,279 5,977 6,493 -
------- ------- ------- -------
58,419 47,891 55,180 41,128
======= ======= ======= =======
Primary earnings per share (b) $ 0.34 $ 0.24 $ 0.25 $ 0.13
======= ======= ======= =======
ADDITIONAL PRIMARY EARNINGS PER SHARE COMPUTATION
Net earnings, as per primary computation above $20,124 $11,381 $13,643 $ 5,462
Interest on borrowings, net of tax effect,
on application of assumed proceeds from
exercise of warrants and options in excess of
20% limitation (a) - - - 1,060
------- ------- ------- -------
Net earnings, as adjusted $20,124 $11,381 $13,643 $ 6,522
======= ======= ======= =======
Weighted average number of shares outstanding,
as per primary computation above 58,419 47,891 55,180 41,128
Net shares issuable from assumed exercise of warrants
and options, as determined by the application
of the Modified Treasury Stock Method - - - 5,915
------- ------- ------- -------
Weighted average number of shares outstanding, as adjusted 58,419 47,891 55,180 47,043
======= ======= ======= =======
Primary earnings per share, as adjusted $ 0.34 $ 0.24 $ 0.25 $ 0.14 (c)
======= ======= ======= =======
</TABLE>
<PAGE>
EXHIBIT 11.1
GLENDALE FEDERAL BANK AND SUBSIDIARIES
STATEMENT REGARDING COMPUTATION OF PER SHARE EARNINGS - Continued
(In thousands, except per share data)
<TABLE>
<CAPTION>
Three Months Ended Nine Months Ended
March 31, March 31,
---------------------- ------- ----------
FULLY DILUTED EARNINGS PER SHARE 1997 1996 1997 1996
------- -------- ------- -------
<S> <C> <C> <C> <C>
COMPUTATION FOR STATEMENT OF OPERATIONS
Net earnings per statement of operations used in
fully diluted earnings per share computation:
Net earnings $22,892 $20,398 $26,129 $23,556
Dividends on Series E Preferred Stock - - (8,313) (12,642)
Premium on conversion of Series E Preferred Stock (241) (5,452) (4,173) (5,452)
Interest on borrowings, net of tax effect,
on application of assumed proceeds from
exercise of warrants and options in excess of
20% limitation (a) - 138 - 444
------- ------- ------- -------
Net earnings, as adjusted $22,651 $15,084 $13,643 $ 5,906
======= ======= ======= =======
Weighted average number of shares outstanding used in
fully diluted earnings per share computation:
Weighted average number of shares 50,140 41,914 48,687 41,128
Shares issuable from assumed conversion of
Series E Preferred Stock 11,144 18,538 - -
Net shares issuable from assumed exercise of warrants
and options, as determined by the application
of the Modified Treasury Stock Method 8,279 5,977 7,370 5,915
------- ------- ------- -------
69,563 66,429 56,057 47,043
======= ======= ======= =======
Fully diluted earnings per share (b) $ 0.33 $ 0.23 $ 0.24 $ 0.13
======= ======= ======= =======
ADDITIONAL FULLY DILUTED EARNINGS PER SHARE
COMPUTATION (c)
Net earnings as per fully diluted computation above $22,651 $15,084 $13,643 $ 5,906
Dividends on Series E Preferred Stock - - 8,313 12,642
Interest on GLENFED Debentures, net of tax effect (a) 115 142 351 434
------- ------- ------- -------
Net earnings, as adjusted $22,766 $15,226 $22,307 $18,982
======= ======= ======= =======
Weighted average number of shares outstanding,
as per fully diluted computation above 69,563 66,429 56,057 47,043
Shares issuable from assumed conversion of
Series E Preferred Stock - - 12,425 19,305
Shares issuable from assumed exercise of GLENFED Debentures 15 15 15 15
------- ------- ------- -------
Weighted average number of shares outstanding, as adjusted 69,578 66,444 68,497 66,363
======= ======= ======= =======
Fully diluted earnings per share, as adjusted $ 0.33 $ 0.23 $ 0.33 $ 0.29
======= ======= ======= =======
</TABLE>
--------
(a)Adjustments to earnings 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 99A
GLENDALE FEDERAL BANK AND SUBSIDIARIES
MATURITY AND RATE SENSITIVITY ANALYSIS
(dollars in millions)
(Unaudited)
<TABLE>
<CAPTION>
Maturity/Rate Sensitivity
---------------------------------------------------------
Total % of Within 1-5 6-10 Over 10
At March 31, 1997 Balance Total 1 Year Years Years Years
- ----------------- ------- ----- ------- ------ ----- -------
<S> <C> <C> <C> <C> <C> <C>
Interest-earning Assets (1):
Loans receivable:
Single-family 1-4 units (2)(3) $ 8,280 55.8% $ 5,771 $1,446 $525 $538
Multi-family and non-residential (2)(3) 3,064 20.6% 2,845 111 57 51
Consumer and commercial (3) 164 1.1% 134 28 2 -
Mortgage-backed securities (2)(3) 2,219 15.0% 1,804 328 46 41
Investment securities (4) 713 4.8% 713 - -
Other assets (5) 404 2.7% 256 - 148
------- ----- ------ ------ ----- -----
Total interest-earning assets 14,844 100.0% 11,523 1,913 630 778
===== ------ ------ ----- -----
Non-interest-earning assets 550
-------
Total assets $15,394
=======
Interest-bearing Liabilities:
Deposits:
Checking/NOW accounts (6) $ 1,024 7.2% 174 447 244 159
Passbook accounts (6) 452 3.2% 63 176 113 100
Money market accounts (6) 2,037 14.4% 652 1,089 253 43
Certificate accounts (4) 5,674 40.0% 3,835 1,838 1 -
Borrowings:
FHLB(4) 4,988 35.2% 3,588 1,400 - -
Other(4) 10 - 10 - -
------- ----- ------- ------ ----- -----
Total interest-bearing liabilities 14,185 100.0% 8,312 4,960 611 302
===== ------- ------ ----- -----
Non-interest-bearing liabilities 222
-------
Total liabilities 14,407
Stockholders' equity 987
-------
Total liabilities and stockholders' equity $15,394
=======
Maturity GAP $ 3,211 $(3,047) $ 19 $476
======= ======= ===== =====
Cumulative GAP $ 3,211 $ 164 $183 659
As % of total assets 20.9% 1.1% 1.2% 4.3%
June 30, 1996 Cumulative GAP $ 3,048 $ 194 $231 646
As % of total assets 21.1% 1.3% 1.6% 4.5%
</TABLE>
- ----------------------
(1) Asset balances are net of loans in process.
(2) ARM loans are predominantly included in the "within 1 year" category, 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 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/repricing 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 have been applied to these deposits.
<PAGE>
GLENDALE FEDERAL BANK AND SUBSIDIARIES
INTEREST RATE MARGIN
(unaudited)
EXHIBIT 99B
<TABLE>
<CAPTION>
As of
----------------------------------------------------------------
Mar. 31, Dec. 31, Sept. 30, June 30, Mar. 31,
1997 1996 1996 1996 1996
-------- -------- -------- -------- --------
<S> <C> <C> <C> <C> <C>
Weighted average rate:
Loans receivable, net 7.68% 7.68% 7.64% 7.74% 7.88%
Mortgage-backed securities, net 6.73% 6.77% 6.69% 6.26% 6.34%
-------- -------- -------- -------- --------
Total loans and MBS 7.52% 7.52% 7.49% 7.49% 7.61%
Federal funds sold and securities purchased
under resale agreements 5.66% 6.67% 6.06% 5.69% 5.63%
U.S. Government and other investment securities 8.51% 8.37% 8.95% 9.58% 8.98%
-------- -------- -------- -------- --------
Total investments 6.51% 7.27% 6.82% 6.99% 6.78%
-------- -------- -------- -------- --------
Total loans, MBS and investments 7.46% 7.51% 7.45% 7.46% 7.58%
-------- -------- -------- -------- --------
Weighted average rate:
Deposits - daily access 2.88% 3.01% 3.01% 3.02% 2.97%
Deposits - certificates 5.47% 5.47% 5.44% 5.46% 5.59%
-------- -------- -------- -------- --------
Total deposits 4.48% 4.56% 4.57% 4.62% 4.74%
Securities sold under agreements to repurchase
and other short-term borrowings 0.00% 5.69% 5.46% 5.50% 5.42%
FHLB borrowings 5.66% 5.72% 5.66% 5.94% 6.04%
Other borrowings 7.76% 7.76% 7.63% 7.76% 7.99%
-------- -------- -------- -------- --------
Total borrowings 5.66% 5.72% 5.64% 5.87% 5.87%
-------- -------- -------- -------- --------
Total deposits and borrowings 4.90% 4.99% 4.96% 5.05% 5.11%
-------- -------- -------- -------- --------
Interest rate spread 2.56% 2.52% 2.49% 2.41% 2.47%
======== ======== ======== ======== ========
Adjusted interest rate spread (1) 2.73% 2.67% 2.66% 2.59% 2.67%
======== ======== ======== ======== ========
Quarter Ended
-------- -------- -------- -------- --------
Mar. 31, Dec. 31, Sept. 30, June 30, Mar. 31,
1997 1996 1996 1996 1996
-------- -------- -------- -------- --------
Weighted average yield:
Loans receivable, net 7.61% 7.60% 7.57% 7.62% 7.83%
Mortgage-backed securities, net 6.63% 6.73% 6.59% 6.44% 6.44%
-------- -------- -------- -------- --------
Total loans and MBS 7.44% 7.45% 7.41% 7.41% 7.54%
Federal funds sold and securities purchased
under resale agreements 5.55% 5.52% 5.54% 5.56% 5.60%
U.S. Government and other investment securities 9.18% 8.77% 9.63% 10.91% 9.41%
-------- -------- -------- -------- --------
Total investments 6.56% 6.43% 6.65% 7.11% 6.44%
-------- -------- -------- -------- --------
Total loans, MBS and investments 7.37% 7.39% 7.36% 7.40% 7.46%
-------- -------- -------- -------- --------
Weighted average cost:
Deposits - daily access 2.99% 3.01% 3.00% 3.04% 3.01%
Deposits - certificates 5.49% 5.47% 5.47% 5.52% 5.68%
-------- -------- -------- -------- --------
Total deposits 4.54% 4.56% 4.60% 4.69% 4.84%
Securities sold under agreements to repurchase
and other short-term borrowings 5.55% 5.61% 5.46% 5.47% 5.62%
FHLB borrowings 5.67% 5.66% 5.77% 6.03% 5.94%
Other borrowings 3.86% 3.24% 3.42% 4.79% 3.88%
-------- -------- -------- -------- --------
Total borrowings 5.66% 5.63% 5.71% 5.86% 5.83%
-------- -------- -------- -------- --------
Total deposits and borrowings 4.94% 4.95% 4.99% 5.09% 5.18%
-------- -------- -------- -------- --------
Yield-cost spread 2.43% 2.44% 2.37% 2.31% 2.28%
======== ======== ======== ======== ========
Effective net spread (1) 2.59% 2.61% 2.56% 2.50% 2.47%
======== ======== ======== ======== ========
</TABLE>
----------------------------------
(1) The effective net spread for a period is net interest income during the
period divided by average interest-earning assets during the period. The
adjusted interest rate spread as of a particular date is net interest
income annualized at the rates in effect on such date divided by the
balance of interest earning assets as of such date.
<PAGE>
GLENDALE FEDERAL BANK AND SUBSIDIARIES
INTEREST RATE MARGIN - (Continued)
(unaudited)
EXHIBIT 99B
<TABLE>
<CAPTION>
Year-to-date Ended
----------------------------------------------------
Mar. 31, Dec. 31, Sept. 30, June 30, Mar. 31,
1997 1996 1996 1996 1996
-------- -------- -------- -------- --------
<S> <C> <C> <C> <C> <C>
Weighted average yield:
Loans receivable, net 7.59% 7.58% 7.57% 7.82% 7.90%
Mortgage-backed securities, net 6.65% 6.66% 6.59% 6.33% 6.32%
----- ----- ----- ----- ------
Total loans and MBS 7.43% 7.43% 7.41% 7.45% 7.47%
Federal funds sold and securities purchased
under resale agreements 5.54% 5.53% 5.54% 5.84% 5.88%
U.S. Government and other investment securities 9.17% 9.16% 9.63% 9.83% 9.45%
----- ----- ----- ----- ------
Total investments 6.54% 6.53% 6.65% 6.78% 6.67%
----- ----- ----- ----- ------
Total loans, MBS and investments 7.38% 7.38% 7.36% 7.41% 7.42%
----- ----- ----- ----- ------
Weighted average cost:
Deposits - daily access 2.98% 3.01% 3.00% 3.09% 3.08%
Deposits - certificates 5.48% 5.47% 5.47% 5.73% 5.79%
----- ----- ----- ----- ------
Total deposits 4.57% 4.58% 4.60% 4.91% 4.97%
Securities sold under agreements to repurchase
and other short-term borrowings 5.50% 5.50% 5.46% 5.82% 5.89%
FHLB borrowings 5.70% 5.71% 5.77% 6.07% 6.07%
Other borrowings 3.76% 3.33% 3.42% 4.66% 4.61%
----- ----- ----- ----- ------
Total borrowings 5.67% 5.67% 5.71% 5.97% 5.99%
----- ----- ----- ----- ------
Total deposits and borrowings 4.96% 4.97% 4.99% 5.31% 5.36%
----- ----- ----- ----- ------
Yield-cost spread 2.42% 2.41% 2.37% 2.10% 2.06%
===== ===== ===== ===== ======
Effective net spread (1) 2.59% 2.59% 2.56% 2.29% 2.24%
===== ===== ===== ===== ======
</TABLE>
----------------------------------
(1) The effective net spread for a period is annualized net interest income
during the period divided by average interest-earning assets during the
period.
<PAGE>
EXHIBIT 99C
GLENDALE FEDERAL BANK AND SUBSIDIARIES
LOAN ORIGINATIONS BY TYPE
(DOLLARS IN THOUSANDS)
(UNAUDITED)
<TABLE>
<CAPTION>
REAL ESTATE
--------------------------------------------------------------------------
CONVERTIBLE/ CALL CONSTRUCTION/
QUARTER ENDED FIXED ARM DATE FIXED TRACT CONSUMER COMMERCIAL TOTAL (1) (2)
- ------------- --------------- -------------- ------------ ----------- --------------- ------------ ---------- --------------
<S> <C> <C> <C> <C> <C> <C> <C> <C>
Mar. 31, 1997 $ 42,262 $ 25,206 $ 4,637 $ 72,900 $ - $ 3,873 $ 4,808 $ 153,686
28% 16% 3% 47% 0% 3% 3% 100%
Dec. 31, 1996 $ 35,390 $ 61,404 $ 10,789 $ 71,224 $ 600 $ 5,314 $ 1,347 $ 186,068
19% 33% 6% 38% 0% 3% 1% 100%
Sept. 30, 1996 $ 20,616 $ 104,616 $ 5,449 $ 51,109 $ 6,180 $ 4,255 $ 6,675 $ 198,900
10% 53% 3% 26% 3% 2% 3% 100%
June 30, 1996 $ 47,337 $ 71,785 $ 7,991 $ 73,749 $ 5,041 $ 4,349 $ 533 $ 210,785
23% 34% 4% 35% 2% 2% 0% 100%
Mar. 31, 1996 $ 58,998 $ 22,595 $ 7,807 $ 109,034 $ 10,846 $ 3,296 $ 294 $ 212,870
28% 11% 4% 51% 5% 1% 0% 100%
</TABLE>
- --------------------
(1) Includes refinanced portion of Bank's loans, which amounted to $20,203,
$22,075, $19,889, $36,174 and $48,294 for the quarters ended March 31, 1997,
December 31, 1996, September 30, 1996, June 30, 1996,and March 31, 1996,
respectively.
(2) Excludes correspondent lending purchases totaling $189, $12,570, and
$14,668 for the quarters ended September 30, 1996, June 30, 1996, and March 31,
1996, respectively.
<PAGE>
GLENDALE FEDERAL BANK AND SUBSIDIARIES
ANALYSIS OF ALLOWANCE FOR LOAN LOSSES AND EXHIBIT 99D
NON-PERFORMING ASSETS ("NPA")
AT MARCH 31, 1997
(DOLLARS IN THOUSANDS)
(Unaudited)
<TABLE>
<CAPTION>
Allowance for
Loan Losses Allowance for NPA
Gross Allowance As a % of Loan Losses As a % of Allowance for
Loan for Gross Loan Non- As a % of Gross Loan Loan Losses
Portfolio Loan Portfolio Accrual Non-Accrual Portfolio As a % of
Property Type Balance Losses Balance Loans Loans NPA Balance NPA
- ------------- ----------- ---------- ---------- --------- ------------- --- ----------- -------------
<S> <C> <C> <C> <C> <C> <C> <C> <C>
Single-family
1-4 units $ 8,280,356 $ 52,365 0.63% $ 93,111 56.24% $129,439 1.56% 40.46%
Multi-family:
5-36 units 1,502,267 44,921 2.99% 22,131 202.98% 32,164 2.14% 139.66%
37 or more units 361,938 19,846 5.48% 7,612 260.72% 13,228 3.65% 150.03%
Non-residential 1,203,959 38,568 3.20% 30,124 128.03% 49,294 4.09% 78.24%
Commercial 73,807 3,277 4.44% 15 N/A 15 0.02% N/A
Consumer 90,355 6,967 7.71% 409 1703.42% 633 0.70% 1100.63%
----------- -------- -------- --------
$11,512,682 $165,944 1.44% $153,402 108.18% $224,773 1.95% 73.83%
=========== ======== ======== ========
</TABLE>
<PAGE>
EXHIBIT 99E
GLENDALE FEDERAL BANK AND SUBSIDIARIES
GROSS LOANS, NON-PERFORMING ASSETS ("NPA")
AND RESTRUCTURED LOANS ("TDR") BY PROPERTY TYPE
AT MARCH 31, 1997
(IN THOUSANDS)
(unaudited)
<TABLE>
<CAPTION>
Non-
Gross Accrual REO and Total Restructured
Property Type Loans Loans Other Assets NPA Loans
- ------------- ----------- ------------- --------------- ----------- -------------
<S> <C> <C> <C> <C> <C>
Single-family
1-4 units $ 8,280,356 $ 93,111 $ 36,328 $ 129,439 $ 2,856
Multi-family:
5-36 units 1,502,267 22,131 10,033 32,164 3,149
37 or more units 361,938 7,612 5,616 13,228 18,389
Non-residential:
Office buildings 417,633 5,135 4,682 9,817 4,560
Shopping centers 353,891 18,918 -- 18,918 --
Warehouse/storage 90,436 -- -- -- --
Hotels/motels 36,883 3,471 102 3,573 --
Industrial parks 93,424 -- 429 429 1,861
Land 13,313 237 13,957 14,194 527
Mobile home parks 31,438 1,503 -- 1,503 --
Commercial/
industrial 166,941 860 -- 860 --
----------- ----------- ----------- ---------- -----------
Total non-residential 1,203,959 30,124 19,170 49,294 6,948
Commercial 73,807 15 -- 15 --
Consumer 90,355 409 224 633 --
----------- ----------- ----------- ---------- -----------
Total $11,512,682 $ 153,402 $ 71,371 $ 224,773 $ 31,342
=========== =========== =========== ========== ===========
</TABLE>
<PAGE>
EXHIBIT 99F
GLENDALE FEDERAL BANK AND SUBSIDIARIES
NON-PERFORMING ASSETS AND RESTRUCTURED LOANS
(dollars in thousands)
(unaudited)
<TABLE>
<CAPTION>
Mar. 31 Dec. 31 Sept. 30 June 30 Mar. 31
1997 1996 1996 1996 1996
--------- --------- --------- --------- ---------
<S> <C> <C> <C> <C> <C>
Balances:
Non-accrual loans $153,402 $152,100 $171,465 $192,445 $207,328
Real estate owned and other asset 71,371 72,634 83,513 82,204 82,449
--------- --------- --------- --------- -----------
Total non-performing assets $224,773 $224,734 $254,978 $274,649 $289,777
========= ========= ========= ========= ===========
Restructured loans $ 31,342 $ 30,712 $ 11,527 $ 9,194 $ 8,373
========= ========= ========= ========= ===========
Percent of total assets:
Non-accrual loans 1.00% 1.01% 1.14% 1.33% 1.44%
Real estate owned and other asset 0.46% 0.48% 0.55% 0.57% 0.58%
--------- --------- --------- --------- -----------
Total non-performing assets 1.46% 1.49% 1.69% 1.90% 2.02%
========= ========= ========= ========= ===========
Restructured loans 0.20% 0.20% 0.08% 0.06% 0.06%
========= ========= ========= ========= ===========
</TABLE>
<PAGE>
EXHIBIT 99G
GLENDALE FEDERAL BANK AND SUBSIDIARIES
NON-PERFORMING ASSETS ACTIVITY
(dollars in thousands)
(unaudited)
<TABLE>
<CAPTION>
Quarter Ended
----------------------------------------------------
Mar. 31, Dec. 31, Sept. 30, June 30, Mar. 31,
1997 1996 1996 1996 1996
-------- -------- -------- -------- --------
<S> <C> <C> <C> <C> <C>
Beginning Balance $224,734 $254,978 $274,649 $289,777 $287,289
Additions:
Single-family 1-4 units 52,103 54,427 48,065 60,385 82,203
Multi-family:
5 to 36 units 9,911 20,390 12,517 25,131 18,130
37 or more units - - 3,912 1,920 8,374
Non-residential 21,538 3,600 2,863 8,016 6,500
Commercial 458 - 12 - -
Consumer 71 142 - 328 5
-------- -------- -------- -------- --------
84,081 78,559 67,369 95,780 115,212
-------- -------- -------- -------- --------
Deletions:
Foreclosures:
Single-family 1-4 units (8,692) (5,476) (7,582) (10,503) (7,982)
Multi-family:
5 to 36 units (1,704) (2,280) (796) (2,299) (2,877)
37 or more units (555) (5) 468 (662) (249)
Non-residential (208) 466 (1,378) (992) (128)
-------- -------- -------- -------- --------
(11,159) (7,295) (9,288) (14,456) (11,236)
-------- -------- -------- -------- --------
Write-downs:
Single-family 1-4 units (2,750) (734) (571) (216) (1,973)
Multi-family:
5 to 36 units (950) (606) (1,548) (1,197) (1,292)
37 or more units (246) (754) (2,369) - (697)
Non-residential (120) (877) (263) (2,857) (1,022)
Commercial - - (28) - -
-------- -------- -------- -------- --------
(4,066) (2,971) (4,779) (4,270) (4,984)
-------- -------- -------- -------- --------
Payoffs/Sales/Other:
Single-family 1-4 units (46,370) (58,795) (53,857) (55,872) (64,789)
Multi-family:
5 to 36 units (14,584) (23,127) (9,850) (21,316) (16,858)
37 or more units (722) (4,877) (912) (5,989) (3,973)
Non-residential (6,688) (11,434) (7,958) (8,890) (10,452)
Commercial (452) (3) 6 (95) (17)
Consumer (1) (301) (402) (20) (415)
-------- -------- -------- -------- --------
(68,817) (98,537) (72,973) (92,182) (96,504)
-------- -------- -------- -------- --------
Ending Balance $224,773 $224,734 $254,978 $274,649 $289,777
======== ======== ======== ======== ========
Net (Increase) Decrease $ (39) $ 30,244 $ 19,671 $ 15,128 $ (2,488)
======== ======== ======== ======== ========
</TABLE>
<PAGE>
GLENDALE FEDERAL BANK AND SUBSIDIARIES
DELINQUENT LOANS BY PROPERTY TYPE
(DOLLARS IN THOUSANDS)
(UNAUDITED)
EXHIBIT 99H
<TABLE>
<CAPTION>
% OF TYPE OF % OF TYPE OF % OF TYPE OF % OF TYPE OF % OF TYPE OF
GROSS GROSS GROSS GROSS GROSS
MAR. 31, LOANS DEC. 31, LOANS SEPT. 30, LOANS JUNE 30, LOANS MAR. 31, LOANS
1997 RECEIVABLE 1996 RECEIVABLE 1996 RECEIVABLE 1996 RECEIVABLE 1996 RECEIVABLE
-------- ---------- -------- ---------- --------- ----------- -------- ----------- -------- ----------
<S> <C> <C> <C> <C> <C> <C> <C> <C> <C> <C>
Single-family 1-4 units:
31 - 60 Days $ 52,181 0.63% $ 52,280 0.65% $ 51,442 0.63% $ 57,047 0.75% $ 82,640 1.10%
61 - 90 Days 18,035 0.22% 22,787 0.28% 28,023 0.35% 18,416 0.24% 36,930 0.49%
Over 90 Days 93,111 1.12% 100,006 1.23% 107,263 1.32% 119,978 1.59% 127,409 1.71%
-------- ---- -------- ---- -------- ---- -------- ---- -------- ----
163,327 1.97% 175,073 2.16% 186,728 2.30% 195,441 2.58% 246,979 3.30%
-------- ---- -------- ---- -------- ---- -------- ---- -------- ----
Multi-family 5-36 units:
31 - 60 Days 11,351 0.76% 10,507 0.69% 13,629 0.88% 9,528 0.61% 21,419 1.36%
61 - 90 Days 4,105 0.27% 4,932 0.33% 5,619 0.36% 7,601 0.49% 7,046 0.45%
Over 90 Days 17,405 1.16% 21,009 1.39% 27,391 1.78% 25,595 1.63% 26,458 1.68%
-------- ---- -------- ---- -------- ---- -------- ---- -------- ----
32,861 2.19% 36,448 2.41% 46,639 3.02% 42,724 2.73% 54,923 3.49%
-------- ---- -------- ---- -------- ---- -------- ---- -------- ----
Multi-family 37 or
more units:
31 - 60 Days -- -- 1,887 0.50% -- -- 2,126 0.53% 4,190 0.97%
61 - 90 Days 1,478 0.41% 988 0.26% -- -- -- -- 1,669 0.38%
Over 90 Days 4,470 1.23% 10,917 2.90% 12,755 3.30% 14,461 3.61% 12,299 2.83%
-------- ---- -------- ---- -------- ---- -------- ---- -------- ----
5,948 1.64% 13,792 3.66% 12,755 3.30% 16,587 4.14% 18,158 4.18%
-------- ---- -------- ---- -------- ---- -------- ---- -------- ----
Non-residential:
31 - 60 Days 12,226 1.02% 8,827 0.71% 12,579 0.97% 3,169 0.23% 15,616 1.11%
61 - 90 Days 2,422 0.20% 18 -- 607 0.05% 2,762 0.20% 4,512 0.32%
Over 90 Days 12,660 1.05% 12,262 0.99% 14,840 1.14% 17,907 1.33% 13,084 0.93%
-------- ---- -------- ---- -------- ---- -------- ---- -------- ----
27,308 2.27% 21,107 1.70% 28,026 2.16% 23,838 1.76% 33,212 2.36%
-------- ---- -------- ---- -------- ---- -------- ---- -------- ----
Commercial:
31 - 60 Days 929 1.26% 2 -- 16 0.09% 38 0.37% 94 1.00%
61 - 90 Days -- -- -- -- -- -- -- -- -- --
Over 90 Days 6 0.01% -- -- 12 0.06% -- -- -- --
-------- ---- -------- ---- -------- ---- -------- ---- -------- ----
935 1.27% 2 -- 28 0.15% 38 0.37% 94 1.00%
-------- ---- -------- ---- -------- ---- -------- ---- -------- ----
Consumer:
31 - 60 Days 2,462 2.73% 1,517 1.85% 1,480 2.00% 1,081 1.48% 2,415 3.27%
61 - 90 Days 769 0.85% 521 0.63% 448 0.60% 612 0.84% 465 0.63%
Over 90 Days 409 0.45% 512 0.62% 657 0.89% 1,001 1.36% 708 0.96%
-------- ---- -------- ---- -------- ---- -------- ---- -------- ----
3,640 4.03% 2,550 3.10% 2,585 3.49% 2,694 3.68% 3,588 4.86%
-------- ---- -------- ---- -------- ---- -------- ---- -------- ----
Total:
31 - 60 Days 79,149 0.69% 75,020 0.66% 79,146 0.69% 72,989 0.66% 126,374 1.15%
61 - 90 Days 26,809 0.23% 29,246 0.26% 34,697 0.30% 29,391 0.27% 50,622 0.46%
Over 90 Days 128,061 1.11% 144,706 1.27% 162,918 1.43% 178,942 1.63% 179,958 1.64%
-------- ---- -------- ---- -------- ---- -------- ---- -------- ----
$234,019 2.03% $248,972 2.19% $276,761 2.42% $281,322 2.56% $356,954 3.25%
======== ==== ======== ==== ======== ==== ======== ==== ======== ====
</TABLE>
<PAGE>
- -------------------------------------------------------------------------------
- -------------------------------------------------------------------------------
SCHEDULE 14A INFORMATION
PROXY STATEMENT PURSUANT TO SECTION 14(A) OF THE SECURITIES
EXCHANGE ACT OF 1934
Filed by the registrant [X]
Filed by a party other than the Registrant [_]
Check the appropriate box:
[_] Preliminary proxy statement
[X] Definitive proxy statement
[_] Definitive additional materials
[_] Soliciting material pursuant to Section 240.14a-11(c) or Section 240.14a-12
GLENDALE FEDERAL BANK, FEDERAL SAVINGS BANK
-------------------------------------------------------------------
(Name of Registrant as Specified in Its Charter)
-------------------------------------------------------------------
(Name of Person(s) Filing Proxy Statement, if other than the Registrant)
Payment of filing fee (Check the appropriate box):
[_] $125 per Exchange Act Rule 0-11(c)(l)(ii), 14a-6(i)(l), or 14a-6(i)(2) or
Item 22(a)(2) of Schedule 14A.
[_] $500 per each party to the controversy pursuant to Exchange Act Rule 14a-
6(i)(3).
[_] Fee computed on table below per Exchange Act Rules 14a-6(i)(4) and 0-11.
(1) Title of each class of securities to which transaction applies:
---------------------------------------------------------------------------
(2) Aggregate number of securities to which transactions applies:
---------------------------------------------------------------------------
(3) Per unit price or other underlying value of transaction computed
pursuant to Exchange Act Rule 0-11 (Set forth the amount on which the
filing fee is calculated and state how it was determined):
---------------------------------------------------------------------------
(4) Proposed maximum aggregate value of transaction:
---------------------------------------------------------------------------
(5) Total fee paid:
---------------------------------------------------------------------------
[X] Check box if any part of the fee is offset as provided by Exchange Act Rule
0-11(a)(2) and identify the filing for which the offsetting fee was paid
previously. Identify the previous filing by registration statement number,
or the form or schedule and the date of its filing.
(1) Amount previously paid:
$125
(2) Form, schedule or registration statement no.:
Schedule 14A
(3) Filing party:
Glendale Federal Bank, Federal Savings Bank
(4) Date filed:
August 12, 1996
- -------------------------------------------------------------------------------
- -------------------------------------------------------------------------------
<PAGE>
GLENDALE FEDERAL BANK F.S.B.
414 NORTH CENTRAL AVENUE
GLENDALE, CALIFORNIA 91203
Dear Stockholder: September 20, 1996
On behalf of the Board of Directors, I cordially invite you to attend the
Annual Meeting of Stockholders of Glendale Federal Bank, Federal Savings Bank
("Glendale Federal"), which will be held in the Viennese Ballroom at the Ritz-
Carlton Huntington Hotel, located at 1401 South Oak Knoll Avenue, Pasadena,
California, at 10:00 a.m. on Tuesday, October 22, 1996.
As described in the accompanying Notice of Annual Meeting of Stockholders
and Proxy Statement, you will be asked to consider and vote upon the election
of directors, proposed amendments to Glendale Federal's Amended and Restated
1993 Stock Option and Long-Term Performance Incentive Plan and the appointment
of the independent auditors for Glendale Federal.
Your vote is very important, regardless of the amount of stock you own.
Please complete and sign each proxy card you receive and return it as soon as
possible in the postage-paid envelope provided even if you currently plan to
attend the Annual Meeting. This will not prevent you from voting in person,
but will assure that your vote is counted if you are unable to attend the
meeting.
Thank you for your consideration of these matters and please vote today.
Sincerely,
/s/ Stephen J. Trafton
Stephen J. Trafton
Chairman of the Board
IMPORTANT: IF YOUR GLENDALE FEDERAL STOCK IS HELD IN THE NAME OF A BROKERAGE
FIRM OR NOMINEE, ONLY THEY CAN EXECUTE A PROXY ON YOUR BEHALF. TO ENSURE THAT
YOUR STOCK IS VOTED, WE URGE YOU TO FOLLOW THE VOTING INSTRUCTIONS PROVIDED TO
YOU BY SUCH FIRM OR NOMINEE WITH THIS PROXY STATEMENT OR TO TELEPHONE THE
INDIVIDUAL RESPONSIBLE FOR YOUR ACCOUNT TODAY AND OBTAIN INSTRUCTIONS ON HOW
TO DIRECT HIM OR HER TO EXECUTE A PROXY.
IF YOU HAVE ANY QUESTIONS OR NEED HELP IN VOTING YOUR STOCK OR NEED
DIRECTIONS TO THE ANNUAL MEETING SITE, PLEASE TELEPHONE INVESTOR RELATIONS:
(818) 500-2723, OR CALL OUR PROXY SOLICITOR, MCCORMICK AND PRYOR: (800) 326-
9653.
<PAGE>
GLENDALE FEDERAL BANK F.S.B.
414 NORTH CENTRAL AVENUE
GLENDALE, CALIFORNIA 91203
----------------
NOTICE OF ANNUAL MEETING OF STOCKHOLDERS
TO BE HELD ON OCTOBER 22, 1996
----------------
NOTICE IS HEREBY GIVEN that the Annual Meeting of Stockholders of Glendale
Federal Bank, Federal Savings Bank, will be held in the Viennese Ballroom at
the Ritz-Carlton Huntington Hotel, located at 1401 South Oak Knoll Avenue,
Pasadena, California, on Tuesday, October 22, 1996, at 10:00 a.m., California
time, to:
1.Elect two directors for terms of three years each.
2.Approve the amendments to Glendale Federal's Amended and Restated 1993
Stock Option and Long-Term Performance Incentive Plan.
3.Ratify the appointment of KPMG Peat Marwick LLP as Glendale Federal's
independent auditors for the fiscal year ending June 30, 1997.
4.Transact such other business as may properly come before the Annual
Meeting or any adjournment thereof and may properly be acted upon.
The Board of Directors has selected September 3, 1996 as the record date for
the Annual Meeting. Only those stockholders of record at the close of business
on that date will be entitled to notice of and to vote at the Annual Meeting
or any postponements or adjournments thereof.
By order of the Board of Directors
/s/ James R. Eller, Jr.
James R. Eller, Jr.
Secretary
Glendale, California
September 20, 1996
<PAGE>
GLENDALE FEDERAL BANK F.S.B.
414 NORTH CENTRAL AVENUE
GLENDALE, CALIFORNIA 91203
----------------
PROXY STATEMENT
----------------
VOTING AT THE ANNUAL MEETING
This Proxy Statement is furnished in connection with the solicitation of
proxies by the Board of Directors of Glendale Federal Bank, Federal Savings
Bank ("Glendale Federal"), for use at the Annual Meeting of Stockholders of
Glendale Federal to be held on October 22, 1996, and at any postponements or
adjournments thereof. The approximate date of mailing of this Proxy Statement
is September 20, 1996.
The Board of Directors of Glendale Federal has selected September 3, 1996 as
the record date (the "Record Date") for the determination of stockholders
entitled to notice of and to vote at the Annual Meeting. At the close of
business on the Record Date, the only class of stock outstanding and entitled
to vote at the meeting was Glendale Federal's common stock, of which
47,161,877 shares were issued and outstanding.
The holders of common stock entitled to vote at the Annual Meeting will have
one vote per share on all matters to come before the Annual Meeting other than
the election of directors. Abstentions will be treated as shares that are
present and entitled to vote for purposes of determining the presence of a
quorum, but as unvoted for purposes of determining the approval of any matter
submitted for a vote of the stockholders. If a broker indicates on its proxy
that the broker does not have discretionary authority to vote on a particular
matter as to certain shares, those shares will be counted for general quorum
purposes but will not be considered as present and entitled to vote with
respect to that matter.
With respect to the election of directors, stockholders will be entitled to
cumulate their votes. Cumulative voting entitles each stockholder to give one
candidate as many votes as the number of directors to be elected multiplied by
the number of shares held by such stockholder or to distribute such votes on
the same principle among any number of candidates. The election of directors
will require the affirmative vote of a plurality of the shares of common stock
voting in person or by proxy at the Annual Meeting. The proxy enclosed with
this proxy statement grants discretionary authority to cumulate votes in such
manner as the proxy holders deem appropriate. If a stockholder withholds his
or her vote for any individual nominee in the manner instructed on the proxy
card, the stockholder's votes will be voted for the remaining nominees in such
manner as the proxy holders determine.
The approval of the amendments to Glendale Federal's Amended and Restated
1993 Stock Option and Long-Term Performance Incentive Plan (the "Plan")
described herein will require the affirmative vote of a majority of the
outstanding shares of Glendale Federal common stock entitled to vote on the
proposal.
All valid proxies received in response to this solicitation will be voted in
accordance with the instructions indicated thereon by the stockholders giving
such proxies. If no contrary instructions are given, such proxies will be
voted FOR the election of each of the nominees for election as directors
named, or as many thereof as may be elected with the proxies received, and FOR
each of the other proposals described herein. Any stockholder has the power to
revoke his or her proxy at any time before it is voted at the Annual Meeting
by giving written notice of such revocation to the Secretary of Glendale
Federal (which notice may be given by the filing of a duly executed proxy
bearing a later date) or by attending the Annual Meeting and voting in person.
The cost of this solicitation will be paid by Glendale Federal. Glendale
Federal has retained McCormick & Pryor to assist in the solicitation of
proxies for a fee of $7,000 and reimbursement of certain expenses. To the
extent necessary, proxies may also be solicited by personnel of Glendale
Federal in person, by telephone or through other forms of communication.
Glendale Federal personnel who participate in this solicitation will not
receive any additional compensation for such solicitation. Glendale Federal
will request record holders of shares beneficially owned by others to forward
this proxy statement and related materials to the beneficial owners of such
shares and will reimburse such record holders for their reasonable expenses
incurred in doing so.
1
<PAGE>
ELECTION OF DIRECTORS
Glendale Federal's Charter and Bylaws provide, with certain exceptions, that
the authorized number of directors shall be not fewer than five and not more
than fifteen, with the exact number of directors to be fixed from time to time
by Glendale Federal's Board of Directors. Glendale Federal's Charter and
Bylaws also provide that the Board of Directors shall be divided into three
classes as nearly equal in number as possible. Generally, the members of each
class are to be elected for terms of three years and until their successors
are elected and qualified, with one of the three classes of directors to be
elected each year.
The Board of Directors presently consists of eleven directors, four of whose
terms will expire at the Annual Meeting. Two of the Directors whose terms
expire at the Annual Meeting, Dean R. Bailey and E. Gex Williams, Jr., will
retire and one Director, Brian P. Dempsey, will not seek re-election. The
Board has determined not to replace Messrs. Bailey, Dempsey and Williams, and
has fixed the number of directors at eight. The Board of Directors has
nominated the other Director whose term expires at the Annual Meeting, Gilbert
R. Vasquez, for re-election as director with a term to expire at the 1999
Annual Meeting of Glendale Federal. In addition, in order to more evenly
balance the three classes of Directors, the Board has nominated John F. Kooken
to serve an additional two years beyond the expiration of his current term in
1997 to a term to expire at the 1999 Annual Meeting of the Stockholders of
Glendale Federal. Each of the nominees has indicated his willingness to serve
if elected. If any nominee becomes unable to serve, the proxies solicited
hereby will be voted for the election of such other person or persons as the
Board of Directors may select.
THE BOARD OF DIRECTORS UNANIMOUSLY RECOMMENDS THE ELECTION OF MESSRS. KOOKEN
AND VASQUEZ AS DIRECTORS OF GLENDALE FEDERAL.
The following table sets forth the names of and certain information with
respect to the two persons nominated by the Board of Directors for election as
directors of Glendale Federal at the Annual Meeting and each other director of
Glendale Federal who will continue to serve as a director after the Annual
Meeting.
<TABLE>
<CAPTION>
DIRECTOR TERM POSITIONS CURRENTLY
NOMINEES FOR DIRECTOR AGE SINCE (1) EXPIRING HELD WITH GLENDALE FEDERAL
- --------------------- --- --------- -------- ----------------------------
<S> <C> <C> <C> <C>
John F. Kooken (2)(3)(4).... 64 1992 1999 Director
Gilbert R. Vasquez (2)(5)... 56 1981 1999 Director
CONTINUING DIRECTORS
- --------------------
Diane C. Creel (3)(4)....... 47 1992 1998 Director
Richard H. Daniel (5)(6).... 69 1994 1997 Director
Richard A. Fink (3)(6)(7)... 56 1992 1998 Senior Executive Vice
President and Chief Credit
Officer and Director
John F. King (3)(4)(7)...... 63 1994 1998 Director
Orin S. Kramer (2).......... 51 1994 1997 Director
Stephen J. Trafton (3)...... 50 1991 1997 Chairman of the Board, Chief
Executive Officer, President
and Director
</TABLE>
- --------
(1) The date given includes years during which the director served on the
Board of GLENFED, Inc., the former holding company of Glendale Federal.
(2) Member of the Audit Committee, of which Mr. Kooken is Chair.
(3) Member of the Executive Committee, of which Mr. Trafton is Chair.
(4) Member of the Officer Compensation and Personnel Committee, of which Ms.
Creel is Chair.
(5) Member of the Community Investment Committee, of which Mr. Bailey is
Chair.
(6) Member of the Credit Review Committee, of which Mr. Dempsey is Chair.
(7) Member of the Finance Committee, of which Mr. King is Chair.
2
<PAGE>
NOMINEES FOR DIRECTOR:
John F. Kooken retired as Vice Chairman and Chief Financial Officer of
Security Pacific Corporation in 1992 after 32 years with the company. Mr.
Kooken is also a director of US Facilities Corp. and of Pacific Gulf
Properties, Inc.
Gilbert R. Vasquez is Managing Partner of Vasquez, Farukhi & Company, a
certified public accounting firm in Los Angeles, California. Mr. Vasquez is a
director of several nonprofit organizations. From 1980 to 1993 he served as a
director of General Telephone Company of California and from 1987 to 1996 he
was a director of Blue Cross of California.
CONTINUING DIRECTORS:
Diane C. Creel is Chief Executive Officer and President of The Earth
Technology Corporation, headquartered in Long Beach, California. She also
serves as a Director of Teledyne, Inc. and of The Fixed Income Funds of the
American Funds Group. Ms. Creel served as Chief Operating Officer of The Earth
Technology Corporation from December 1987 until January 1993. She became its
President in September 1988 and its Chief Executive Officer in January 1993.
She served as Chairwoman from March 1993 until January 1996 when The Earth
Technology Corporation was sold.
Richard H. Daniel retired in 1993 after serving for seven years as Vice
Chairman, Director and Chief Credit Officer of Mellon Bank Corporation. From
1950 to 1985 Mr. Daniel served in positions of increasing responsibility with
Security Pacific National Bank. He served as Executive Vice President and
Manager, Special Assets Department, of Crocker National Bank from 1985 to
1986.
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 as 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 Glendale Federal with respect to legal and
regulatory matters. On March 31, 1993 a state court receiver was appointed for
McKenna & Fitting.
John F. King is President and Chief Executive Officer of Weingart Center
Association, a nonprofit association whose goal is to help break the cycle of
the homeless. He was Chairman and Chief Executive Officer of World Trade Bank
from 1987 to 1990 and served as a Senior Advisor to Union Bank of Switzerland
from 1990 to 1993. Mr. King is a former Vice Chairman of Crocker National Bank
and a former Chairman of the Board of First Interstate Bank of California. Mr.
King is a Director of Ameron International, Inc. and of Holmes Hally
Industries, a Trustee of the University of Southern California and of the
California Hospital Center Foundation, the founding Chairperson of Kidspace
and a Director of the National Institute of Transplantation Foundation.
Orin S. Kramer has been a general partner since 1992 of Boston Provident
Partners, L.P., an investment partnership focusing on the financial services
industry. From 1987 to 1992, Mr. Kramer was a consultant on financial services
industry issues. In May 1995, he was appointed by United States Secretary of
the Treasury Rubin as a member of the Advisory Commission on Financial
Services. Prior to 1987, Mr. Kramer was a member of the McKinsey Co. Financial
Services Group. Mr. Kramer also served as an Associate Director of the
White House Domestic Policy Staff under President Carter.
3
<PAGE>
Stephen J. Trafton joined Glendale Federal as Senior Executive Vice
President and Chief Financial Officer in July 1990. In June 1991, he was
elected a Director and Vice Chairman of the Board and Chief Financial Officer
of Glendale Federal. Since April 1992, Mr. Trafton has served as Chairman of
the Board, Chief Executive Officer and President of Glendale Federal.
MEETINGS AND COMMITTEES:
The Board of Directors of Glendale Federal, which met twelve times during
the fiscal year ended June 30, 1996, had, during fiscal 1996, standing
Executive, Audit, Community Investment, Credit Review, Finance and Officer
Compensation and Personnel Committees which met during the year.
The Executive Committee, which, with certain exceptions, may exercise the
authority of the Board of Directors when the Board is not in session, met once
in fiscal 1996.
The Audit Committee, which met ten times during fiscal 1996, reviews and
reports to the Board of Directors with respect to various auditing and
accounting matters, including the selection of Glendale Federal's independent
auditors.
The Community Investment Committee, which met four times during fiscal 1996,
oversees and participates in the development and implementation of Glendale
Federal's policies and programs adopted to comply with federal fair lending
and credit availability statutes and regulations.
The Credit Review Committee reviews the credit quality, portfolio structure
and portfolio monitoring activities of Glendale Federal and its subsidiaries.
During fiscal 1996, this Committee met twelve times.
The Finance Committee met a total of thirteen times in fiscal 1996. The
Finance Committee oversees the asset/liability risk management activities of
Glendale Federal and reviews the performance of Glendale Federal under its
business plans.
The Officer Compensation and Personnel Committee approves, subject to the
approval of the Board of Directors with respect to Mr. Trafton, the
compensation for Mr. Trafton and all executive vice presidents and other
executive officers of Glendale Federal who report directly to Mr. Trafton,
approves grants of stock options and stock incentives to Mr. Trafton and all
other officers, reviews the compensation of all other officers of Glendale
Federal and reviews and approves Glendale Federal's benefit programs. During
fiscal 1996, this Committee met ten times.
During fiscal 1996, Ms. Creel attended less than 75% of the combined total
of meetings held by the Board of Directors and of Board committees on which
she serves.
The Board of Directors acts as the Nominating Committee of Glendale Federal
and identifies, recruits, interviews, evaluates and nominates individuals for
election as Directors of Glendale Federal. The Bylaws of Glendale Federal
provide that, except to the extent that any supplementary charter section
addresses the matter and except in the case of a nominee substituted as a
result of death or incapacity of a management nominee, the Board of Directors
shall deliver written nominations to the Secretary of Glendale Federal at
least 20 days prior to the date of the Annual Meeting and that upon delivery
such nominations shall be posted in a conspicuous place in each office of
Glendale Federal. No nominations for directors other than those made by the
Committee may be voted upon at the Annual Meeting unless other nominations by
stockholders are made in writing at least five days prior to the date of the
Annual Meeting and delivered by such date to the Secretary of Glendale
Federal. Upon delivery, such nominations are required to be posted in a
conspicuous place in each office of Glendale Federal. Ballots bearing the
names of all persons nominated by the Committee and by stockholders are
required to be provided for use at the Annual Meeting. If the Committee does
not act at least 20 days prior to the Annual Meeting, nominations for
directors may be made at the Annual Meeting by any stockholder entitled to
vote.
4
<PAGE>
BENEFICIAL OWNERSHIP OF GLENDALE FEDERAL SECURITIES
BY MANAGEMENT
The following table sets forth information as of July 31, 1996, concerning
the shares of Glendale Federal common stock beneficially owned by each
director of Glendale Federal, by each executive officer named in the Summary
Compensation Table and by all directors and executive officers of Glendale
Federal as a group. All shares are of common stock except as otherwise
specifically indicated.
<TABLE>
<CAPTION>
AMOUNT AND NATURE OF
NAME BENEFICIAL OWNERSHIP PERCENT OF CLASS
- ---- -------------------- ----------------
<S> <C> <C>
Dean R. Bailey........................... 10,196 (1) *
William J. Birch......................... 182,510 (2) *
Diane C. Creel........................... 10,100 (1) *
Brian P. Dempsey......................... 20,500 (3) *
Richard H. Daniel........................ 10,500 (1) *
Richard A. Fink.......................... 227,000 (4) *
John E. Haynes........................... 165,008 (5) *
Terry D. Hess............................ 175,050 (5) *
John F. King............................. 10,300 (1) *
John F. Kooken........................... 23,404 (1)(6) *
Orin S. Kramer........................... 47,000 (1)(7) *
Stephen J. Trafton....................... 951,300 (8) 2.02%
Gilbert R. Vasquez....................... 10,331 (1) *
E. Gex Williams, Jr...................... 10,950 (1) *
All directors and executive officers as a
group (23 persons)...................... 2,188,528 (9) 4.66%
</TABLE>
- --------
*Less than one percent of the outstanding shares in each case.
(1) Includes options to acquire 10,000 shares.
(2) Includes options to acquire 182,500 shares.
(3) Includes options to acquire 20,000 shares. Voting and investment power are
shared as to 500 shares.
(4) Includes options to acquire 225,000 shares and 2,000 shares of common
stock that are held jointly with Mr. Fink's spouse, as to which voting and
investment power are shared.
(5) Includes options to acquire 165,000 shares.
(6) Includes 2,404 shares of common stock that Mr. Kooken has the right to
receive upon the conversion of 1,000 shares of Glendale Federal's
Noncumulative Preferred Stock, Series E owned by him.
(7) Includes 35,000 shares held by a limited partnership for its account. Mr.
Kramer and his cogeneral partner have sole voting and dispositive power as
to the 35,000 shares. Mr. Kramer disclaims beneficial ownership of the
shares held by the partnership except to the extent of his pecuniary
interest therein.
(8) Includes options to acquire 950,000 shares. 1,300 shares of common stock
are held as Trustee of the Trafton Family Trust, for which voting
authority is shared.
(9) Includes 131 shares held at June 30, 1996 under the Sheltered Pay Plan,
2,404 shares that Mr. Kooken has the right to acquire upon the conversion
of his 1,000 shares of Noncumulative Preferred Stock, Series E, 962 shares
that an executive has the right to acquire upon the conversion of 400
shares of Noncumulative Preferred Stock, Series E, and an aggregate of
2,130,750 shares which the directors and executive officers have the power
to acquire pursuant to outstanding options granted under the Glendale
Federal 1993 Stock Option and Long-Term Performance Incentive Plan. Also
includes 38,800 shares as to which voting and investment power are shared.
5
<PAGE>
BY OTHERS
Management knows of no person, except as set forth below, who owned as of
July 31, 1996 more than five percent of Glendale Federal's outstanding common
stock.
<TABLE>
<CAPTION>
AMOUNT AND NATURE OF
NAME AND ADDRESS OF BENEFICIAL OWNER BENEFICIAL OWNERSHIP PERCENT OF CLASS
- ------------------------------------ -------------------- ----------------
<S> <C> <C>
Arnold and S. Bleichroeder, Inc.
45 Broadway
New York, New York 10006.................. 2,075,800 (1) 5.1% (1)
Boston Partners Asset Management L.P.
Boston Partners, Inc.
Desmond John Heathwood
One Financial Center, 43rd Floor
Boston, Massachusetts 02111............... 3,245,699 (2) 7.6% (2)
FMR Corp.
Fidelity Management & Research Company
Fidelity Contrafund
Edward C. Johnson 3d
Abigail P. Johnson
82 Devonshire Street
Boston, Massachusetts 02109............... 3,793,215 (3) 9.12% (3)
Mellon Bank Corporation
One Mellon Bank Center
Pittsburgh, Pennsylvania 15258............ 2,130,000 (4) 5.22% (4)
Merrill Lynch & Co., Inc.
World Financial Center, North Tower
250 Vesey Street
New York, New York 10281.................. 4,178,594 (5) 9.6% (5)
Travelers Group Inc.
Smith Barney Holdings, Inc.
388 Greenwich Street
New York, New York 10013.................. 2,364,099 (6) 5.8% (6)
Gerald B. Unterman
70 East 55th Street
New York, New York 10022.................. 3,117,720 (7) 7.4% (7)
Wellington Management Company
75 State Street
Boston, Massachusetts 02109............... 2,235,792 (8) 5.25% (8)
</TABLE>
- --------
(1) Amount, nature of beneficial ownership and percent of class are taken from
a Schedule 13G dated February 14, 1996 filed pursuant to the Securities
Exchange Act of 1934 (the "Exchange Act") that states that Arnold and S.
Bleichroeder, Inc., is an investment advisor for a number of investment
companies and for certain discretionary accounts. Such Schedule 13G
indicates that Arnold and S. Bleichroeder, Inc., has sole voting power as
to 144,000 shares, shared voting power as to 1,931,700 shares and sole
dispositive power as to all reported shares.
(2) Amount, nature of beneficial ownership and percent of class are taken from
a Schedule 13G dated February 12, 1996 filed pursuant to the Exchange Act
that states that Boston Partners Asset Management L.P. ("BPAM") is an
investment advisor that owns 1,017,404 shares of Glendale Federal common
stock, 760,000 shares of Glendale Federal preferred stock that may be
converted into 1,827,040 shares of Glendale Federal common stock and
warrants to purchase 401,255 shares of Glendale Federal common stock. Such
6
<PAGE>
Schedule 13G indicates that BPAM has shared voting and dispositive power as
to all shares. Such filing further indicates that Boston Partners, Inc., is
the sole general partner of BPAM, that Desmond John Heathwood is the
principal stockholder of Boston Partners, Inc., and that, as such, Boston
Partners, Inc. and Mr. Heathwood may be deemed to beneficially own the
shares of Glendale Federal common stock reported by BPAM.
(3) Amount, nature of beneficial ownership and percent of class are taken from
a Schedule 13G dated February 14, 1996 filed pursuant to the Exchange Act
that states that FMR Corp.'s beneficial ownership derives from its
ownership of Fidelity Management & Research Company, which acts as an
investment advisor and beneficially owns 3,541,303 shares (8.52%) of
Glendale Federal common stock, and from its ownership of Fidelity
Management Trust Company. Such filing further states that one fund advised
by Fidelity Management & Research Company, the Fidelity Contrafund,
beneficially owns 2,169,700 shares (5.22%) of Glendale Federal common
stock. Such filing indicates that (i), of FMR Corp.'s and Fidelity
Management & Research Company's beneficially owned shares, 674,803 are
shares that may be obtained upon the conversion of 280,700 shares of
Glendale Federal preferred stock and (ii), of FMR's beneficially owned
shares, an additional 163,712 are shares that may be obtained upon the
conversion of 68,100 shares of Glendale Federal preferred stock
beneficially owned by Fidelity Management Trust Company, (iii) the
beneficial ownership of Edward C. Johnson 3d and Abigail P. Johnson
derives from their control of FMR Corp. and (iv) FMR Corp. and Mr. and
Mrs. Johnson have sole power to vote 247,712 shares and sole power to
dispose of all reported shares.
(4) Amount, nature of beneficial ownership and percent of class are taken from
a Schedule 13G dated January 26, 1996 filed pursuant to the Exchange Act
that states that Mellon Bank Corporation is a holding company for six
direct or indirect subsidiaries and that it has sole voting power as to
2,087,000 shares, sole dispositive power as to 2,088,000 shares and shared
dispositive power as to 42,000 shares.
(5) Amount, nature of beneficial ownership and percent of class are taken from
Amendment No. 4 dated February 12, 1996 to a Schedule 13G filed pursuant
to the Exchange Act that states that Merrill Lynch & Co., Inc. is a parent
holding company that may be deemed to share with its affiliated companies
voting and dispositive power as to such shares. Included within such
shares beneficially owned are (i) 4,140,534 (9.6%) that Merrill Lynch
Group, Inc., and Princeton Services, Inc., which are parent holding
companies, may be deemed to beneficially own and as to which such
corporation may be deemed to have shared voting and dispositive power;
(ii) 4,030,434 (9.3%) that Merrill Lynch Asset Management, L.P., an
investment advisor, may be deemed to beneficially own and as to which such
corporation may be deemed to have shared voting and dispositive power; and
(iii) 3,760,434 (8.7%) that Merrill Lynch Global Allocation Fund, Inc., an
investment company, may be deemed to beneficially own and as to which such
corporation may be deemed to have shared voting and dispositive power.
(6) Amount, nature of beneficial ownership and percent of class are taken from
a Schedule 13G dated February 1, 1996 filed pursuant to the Exchange Act
that states that Travelers Group Inc. is a parent holding company for
Smith Barney Holdings and that they have shared voting and dispositive
power as to all reported shares.
(7) Amount, nature of beneficial ownership and percent of class are taken from
an Amendment No. 2 to Schedule 13D dated January 19, 1996 filed pursuant
to the Exchange Act that states that Mr. Unterman acts through registered
investment advisors that advise investment funds and managed accounts.
Voting and investment power are shared as to all shares. Includes 695,000
shares of Glendale Federal preferred stock, which is convertible into
1,670,780 shares of Glendale Federal common stock.
(8) Amount, nature of beneficial ownership and percent of class are taken from
a Schedule 13G dated January 29, 1996 filed pursuant to the Exchange Act
that states that Wellington Management Company ("WMC") acts as an
investment advisor for numerous investment counselling clients.
Dispositive power is shared as to all reported shares and voting power is
shared as to 1,830,959 shares.
7
<PAGE>
EXECUTIVE COMPENSATION AND OTHER INFORMATION
SUMMARY COMPENSATION TABLE
The following table summarizes the compensation earned by Glendale Federal's
Chief Executive Officer and each of the four other most highly compensated
executive officers of Glendale Federal during the fiscal year ended June 30,
1996 for services rendered in all capacities to Glendale Federal and its
subsidiaries for the fiscal years ended June 30, 1994, 1995, and 1996.
<TABLE>
<CAPTION>
NAME AND PRINCIPAL SALARY BONUS AWARDS ALL OTHER
POSITION FISCAL YEAR ($) ($) OPTIONS/SARS (#) COMPENSATION
- ------------------ ----------- -------- -------- ---------------- ------------
<S> <C> <C> <C> <C> <C>
Stephen J. Trafton.................. 1996 $650,000 $202,000 0 $2,808 (1)
Chief Executive Officer 1995 $650,000 $240,000 500,000 $2,808 (1)
1994 $650,000 $ 0 600,000 $2,244 (1)
Richard A. Fink..................... 1996 $261,250 (2) $108,000 0 $3,631 (3)
Sr. Executive Vice President 1995 $261,250 (2) $125,000 130,000 $3,581 (3)
and Chief Credit Officer 1994 $257,789 (2) $ 0 135,000 $4,179 (3)
Terry D. Hess....................... 1996 $215,897 (2) $ 88,000 0 $3,130 (4)
Executive Vice President 1995 $215,897 (2) $ 95,000 80,000 $2,956 (4)
and Director, Business Banking 1994 $213,037 (2) $ 0 110,000 $4,163 (4)
John E. Haynes...................... 1996 $174,966 (2) $ 74,000 0 $2,956 (5)
Executive Vice President and 1995 $174,966 (2) $ 80,000 80,000 $2,396 (5)
Chief Financial Officer 1994 $172,803 (2) $ 0 110,000 $3,181 (5)
William J. Birch.................... 1996 $180,000 (2) $ 65,000 0 $3,192 (6)
Executive Vice President 1995 $180,000 (2) $ 80,000 65,000 $2,974 (6)
and Manager, Retail Bank 1994 $203,266 (2) $ 0 135,000 $2,971 (6)
</TABLE>
- --------
(1) Amount consists of basic and executive life insurance costs to Glendale
Federal.
(2) Amounts shown include salary deferred at the election of the executive
officer pursuant to the Sheltered Pay Plan.
(3) For fiscal 1996, the amount consists of $1,471 for basic and executive
life insurance and Glendale Federal's $2,160 contribution to the Sheltered
Pay Plan. For fiscal 1995, amount consists of $1,471 for basic and
executive life insurance and Glendale Federal's $2,110 contribution to the
Sheltered Pay Plan. For fiscal 1994, amount consists of $1,139 for basic
and executive life insurance and Glendale Federal's $3,040 contribution to
the Sheltered Pay Plan.
(4) For fiscal 1996, the amount consists of $1,213 for basic and executive
life insurance and Glendale Federal's $1,917 contribution to the Sheltered
Pay Plan. For fiscal 1995, amount consists of $1,213 for basic and
executive life insurance and Glendale Federal's $1,743 contribution to the
Sheltered Pay Plan. For fiscal 1994, amount consists of $959 for basic and
executive life insurance and Glendale Federal's $3,204 contribution to the
Sheltered Pay Plan.
(5) For fiscal 1996 the amount consists of $983 for basic and executive life
insurance and Glendale Federal's $1,973 contribution to the Sheltered Pay
Plan. For fiscal 1995, amount consists of $983 for basic and executive
life insurance and Glendale Federal's $1,413 contribution to the Sheltered
Pay Plan. For fiscal 1994, amount consists of $779 for basic and executive
life insurance and Glendale Federal's $2,402 contribution to the Sheltered
Pay Plan.
(6) For fiscal 1996, the amount consists of $1,011 for basic and executive
life insurance and Glendale Federal's $2,181 contribution to the Sheltered
Pay Plan. For fiscal 1995, amount consists of $1,010 for basic and
executive life insurance and Glendale Federal's $1,964 contribution to the
Sheltered Pay Plan. For fiscal 1994, amount consists of $808 for basic and
executive life insurance and Glendale Federal's $2,163 contribution to the
Sheltered Pay Plan.
8
<PAGE>
STOCK OPTIONS
Glendale Federal granted no options to purchase Glendale Federal common
stock during the fiscal year ended June 30, 1996 to any of the executive
officers of Glendale Federal named in the Summary Compensation Table above.
Glendale Federal also had no outstanding stock appreciation rights during the
fiscal year ended June 30, 1996.
AGGREGATED OPTION EXERCISES IN FISCAL YEAR ENDED
JUNE 30, 1996 AND FISCAL YEAR END OPTION VALUES
<TABLE>
<CAPTION>
NUMBER OF SECURITIES VALUE OF UNEXERCISED
UNDERLYING UNEXERCISED IN-THE-MONEY OPTIONS AT
OPTIONS AT JUNE 30, 1996 JUNE 30, 1996
(#)(1) ($)(2)
------------------------- -------------------------
SHARES ACQUIRED VALUE
NAME ON EXERCISE (#) REALIZED EXERCISABLE UNEXERCISABLE EXERCISABLE UNEXERCISABLE
- ---- --------------- -------- ----------- ------------- ----------- -------------
<S> <C> <C> <C> <C> <C> <C>
Stephen J. Trafton...... -- -- 750,000 350,000 $7,156,250 $2,718,500
Richard A. Fink......... -- -- 175,000 90,000 1,633,750 700,625
Terry D. Hess........... -- -- 133,334 56,666 1,272,298 415,202
John E. Haynes.......... -- -- 133,334 56,666 1,272,298 415,202
William J. Birch........ 10,000 $107,500 132,500 57,500 1,244,063 428,438
</TABLE>
- --------
(1) In the event of a change of control of Glendale Federal, the stock options
shown become immediately exercisable to their full extent.
(2) Value is based upon the difference between the closing price on the New
York Stock Exchange on June 30, 1996, the end of Glendale Federal's fiscal
year, and the exercise price.
PENSION PLANS
The following table sets forth, in straight life annuity amounts that are
not subject to any deduction for Social Security or other offset amounts, the
estimated annual benefits payable upon retirement at age 65 to participants in
the Glendale Federal Pension Plan. Remuneration is average base salary
(excluding amounts attributable to performance incentive compensation,
commissions, overtime pay or other forms of additional compensation) for the
five highest consecutive years in the final 10 years of service.
PENSION PLAN TABLE
<TABLE>
<CAPTION>
YEARS OF SERVICE
----------------------------------------------
REMUNERATION 15 20 25 30 35
- ------------ ------- ------- -------- ---------- ----------
<S> <C> <C> <C> <C> <C>
$125,000........................ $29,710 $39,614 $ 49,517 $ 59,420 $ 69,324
$150,000........................ $36,273 $48,364 $ 60,455 $ 72,545 $ 84,636
*$175,000........................ $42,835 $57,114 $ 71,392 $ 85,670 $ 99,949
*$200,000........................ $49,398 $65,864 $ 82,330 $ 98,795 $115,261
*$250,000........................ $62,523 $83,364 $104,205 **$120,000 **$120,000
</TABLE>
* Under current Internal Revenue Code provisions, the allowable compensation
limit is $150,000 beginning in 1994 (indexed in future years). Participants
will be eligible for a grandfathered benefit as of December 31, 1993 based
on the higher 1993 allowable compensation limit of $235,840.
** Under current Internal Revenue Code provisions, the maximum allowable
annual benefit for a participant retiring at age 65 is $120,000.
At June 30, 1996, Messrs. Trafton, Fink, Hess, Haynes and Birch had 6, 4,
10, 23 and 18 years of credited service under the Glendale Federal Pension
Plan, respectively. Their compensation for purposes of the Glendale Federal
Pension Plan was $150,000 each.
9
<PAGE>
COMPENSATION OF DIRECTORS
Annual Fees and Meeting Fees. Directors of Glendale Federal who are not also
officers of Glendale Federal or its subsidiaries are paid an annual fee of
$25,000. Each such director is paid $1,400 for each meeting of the Board of
Directors attended and $750 for each committee meeting attended to a maximum
of $1,100 for any combination of committee meetings attended on the same day.
Directors who are not also officers of Glendale Federal or its subsidiaries
are also paid $333 per month for serving as chair of a standing committee of
the Board.
Stock Option Grants. Directors who are not also officers of Glendale Federal
or its subsidiaries receive annual grants of a stock option to purchase 5,000
shares of common stock pursuant to Glendale Federal's Amended and Restated
1993 Stock Option and Long-Term Performance Incentive Plan.
Directors' Retirement Plan. Glendale Federal maintains a retirement plan for
non-employee directors who currently serve on the Board of Directors of
Glendale Federal or who served on the Board of Directors of either Glendale
Federal or its former parent (collectively for purposes of this section the
"Board"). The plan provides that a non-employee director who has at least five
years of Board service (including service on the board of an institution
acquired by Glendale Federal) shall, after termination of Board membership, be
entitled to receive a monthly benefit equal in amount to one-twelfth of the
annual Board retainer in effect at the time of termination plus the monthly
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 fifteen
years. Payments under the plan normally commence immediately following the
director's termination. In the event of a change of control of Glendale
Federal, the plan provides for an immediate lump sum payment to all active and
retired directors equal to the sum of the monthly retirement benefits payable
under the plan without application of any discount factor.
EMPLOYMENT CONTRACTS; TERMINATION OF EMPLOYMENT AND CHANGE IN CONTROL
ARRANGEMENTS
Trafton Employment Agreement. Mr. Trafton has an employment agreement (the
"Trafton Agreement") with Glendale Federal that terminates on December 31,
1998. The Trafton Agreement provides for an annual base salary of not less
than $650,000, which is to be reviewed annually by Glendale Federal's Board of
Directors. Glendale Federal may terminate Mr. Trafton's employment at any time
for cause or due to Mr. Trafton's disability, and Mr. Trafton may resign for
good reason, which includes an actual or constructive termination by Glendale
Federal following a change in control of Glendale Federal, without breaching
the Trafton Agreement. In the event of his death or disability, Glendale
Federal must pay Mr. Trafton his base salary through the date of death or
termination for disability and the pro rata amount of any incentive
compensation determined to be due for the portion of the incentive period then
completed. In the event that Glendale Federal terminates the Trafton Agreement
for cause, if Mr. Trafton resigns other than for good reason or if Mr.
Trafton's employment is terminated by Glendale Federal or a regulatory body
for regulatory reasons, Mr. Trafton would be entitled to receive only base
salary to the date of termination. If the Trafton Agreement is terminated
prior to the expiration of its term other than by the death of Mr. Trafton or
by Glendale Federal due to disability or for cause, or if Mr. Trafton resigns
for good reason (collectively, an "Other Termination"), then, Mr. Trafton is
entitled to receive liquidated damages equal to his regular base salary for a
period of thirty-six months, if the Other Termination occurs at a time when
two years or more remain in the term of the Trafton Agreement; twenty-four
months if the Other Termination occurs at a time when two years or less but
more than one year remains in the term of the Trafton Agreement; and twelve
months if the Other Termination occurs at a time when one year or less remains
in the term of the Trafton Agreement. Mr. Trafton may elect annually to have
any liquidated damages paid either in installments or in a discounted lump-sum
or, if Mr. Trafton resigns for good reason after a change in control of
Glendale Federal, in an undiscounted lump-sum. As part of his liquidated
damages in connection with an Other Termination, the Trafton Agreement also
provides that Mr. Trafton is entitled to receive reimbursement of his legal
fees and expenses incurred to obtain a favorable judgment or arbitration award
with respect to any Other Termination, to medical, life and long term
disability benefits, to a pro rata portion of any incentive compensation
determined to be due for the portion of the incentive period completed at the
time of an Other Termination and to any vested benefits under Glendale
Federal's employee benefit and retirement plans.
10
<PAGE>
All payments upon the termination of Mr. Trafton's employment must be in
compliance with applicable banking regulations and are subject to reduction to
the extent necessary to cause the aggregate of all such payments to be $100
less than the amount that would be deemed an "excess parachute payment" as
defined in the Internal Revenue Code. Mr. Trafton's agreement further provides
that, for purposes of an Other Termination, the total amount payable to him
may not exceed three times his average annual compensation during the most
recent five taxable years of employment with Glendale Federal. Based thereon,
the maximum payment to Mr. Trafton in connection with an Other Termination at
June 30, 1996 would have been $2,558,963.
Severance Agreements. Glendale Federal has entered into severance agreements
with Messrs. Fink, Hess, Haynes and Birch that provide for severance payments
if any such officer's employment with Glendale Federal is terminated (i) by
Glendale Federal or its successor contemporaneously with or within one year
after the happening of a change of control for any reason other than for
cause, upon the death or disability of the officer or due to the request,
demand or order of any regulatory authority; or (ii) by the officer,
contemporaneously with or within one year after a change of control, for good
reason (as defined in the agreements). Upon any such termination, Glendale
Federal or its successor shall pay the officer his or her regular salary for a
period not to exceed two and one-half years. The officer may elect to have the
payment made in an undiscounted lump-sum. In addition, the officer receives
medical, life and long term disability benefits and the extension for one year
following termination of any employee home loan benefit in effect at the time
of termination.
Pension Plan Vesting. The Glendale Federal Pension Plan (the "Pension Plan")
provides that, in the event of a termination of the Pension Plan, in whole or
in part, following a change in control of Glendale Federal that is not
approved by its Board of Directors, the amount by which the market value of
the Pension Plan's assets exceeds the amounts required to fund all Pension
Plan liabilities at the date of termination (the "Excess") shall be applied to
fund the following benefits in the following order of priority: (i) to fully
vest all accrued benefits, (ii) to provide an additional five years of vesting
and benefit service credit for all active participants in the Pension Plan,
(iii) to increase early retirement benefits for participants over the age of
50 with at least five years of service with Glendale Federal, (iv) to provide
cost of living adjustments for retirees and (v) to the extent that funds
remain, to provide pro rata increases in all benefits for active participants.
To the extent that the Excess is not sufficient to fund fully the benefits
described in one of items (i) through (iv) in the preceding sentence, all
individuals to whom the item applies shall receive benefits under such item on
a pro rata basis.
CERTAIN RELATIONSHIPS AND RELATED TRANSACTIONS
Indebtedness of Management. Glendale Federal offers home mortgage and
consumer loans to officers, directors and full-time employees. These loans are
made in the ordinary course of business and, in the judgment of management, do
not involve more than the normal risk of collectability or present other
unfavorable features. Loans made to senior executive officers and directors
since 1989 are made on substantially the same terms as those prevailing at the
time for comparable transactions with non-affiliated persons. Loans made to
other officers and employees are also made on such terms except that the
interest rate and loan fees charged to other officers and employees, and with
respect to loans made to senior executive officers and directors prior to
1989, are made under preferential terms pursuant to an employee loan program.
All such employee mortgage loans are written at Glendale Federal's prevailing
rates at the time of origination, but provide for a reduced interest rate
while the borrower is employed by Glendale Federal. The employee loan policy
provides that for adjustable rate mortgage loans the reduced rate is Glendale
Federal's weighted average cost of interest bearing liabilities, plus 1/4 of
1%, adjusted semiannually. For consumer loans, including equity loans, the
reduced rate is Glendale Federal's stated rate for its customers, less 1.0%.
In addition, employees must pay all normal loan origination fees and closing
costs, except that loan points and appraisal fees are not charged in
connection with adjustable rate first mortgage loans. The rate of interest
borne by a mortgage loan reverts to the normal rate provided in the loan
instruments upon termination of employment, except that employees (and in
certain instances their spouses) who retire or whose employment is terminated
due to permanent disability continue to receive the preferential interest rate
as long as they occupy the premises securing the mortgage loan as their
principal residence.
11
<PAGE>
The following table sets forth information as of June 30, 1996, relating to
loans made to each individual who is a director or executive officer of
Glendale Federal, whose indebtedness to Glendale Federal or its subsidiaries
exceeded $60,000 at any time since July 1, 1995, and who has a loan at an
employee loan rate. Other outstanding loans to directors and executive
officers of Glendale Federal in the ordinary course of business that were made
on substantially the same terms, including interest rates and collateral, as
those prevailing at the time for comparable transactions with other persons
are not shown.
<TABLE>
<CAPTION>
HIGHEST
BALANCE
OUTSTANDING EFFECTIVE
YEAR END BALANCE ORIGINAL RATE AT
JUNE 30, AT JUNE NOTE JUNE 30, DATE
NAME LOAN 1996 30, 1996 RATE 1996 MADE
- ---- -------- ----------- -------- -------- --------- ----
<S> <C> <C> <C> <C> <C> <C>
Dean R. Bailey............ Mortgage $259,019 $252,334 8.500% 5.502% 1986
Vincent L. Beatty......... Mortgage 266,783 264,386 7.500% 5.502% 1990
John E. Haynes............ Mortgage 470,915 466,542 9.875% 5.502% 1990
Terry D. Hess............. Mortgage 598,709 592,932 10.375% 5.502% 1989
Robert R. Trujillo........ Mortgage 292,562 289,785 8.875% 5.502% 1990
</TABLE>
REPORT OF THE OFFICER COMPENSATION AND PERSONNEL COMMITTEE
The Officer Compensation and Personnel Committee of the Board of Directors
of Glendale Federal (the "Committee") establishes and administers executive
compensation and benefit policies and programs for all executive officers. The
Committee recommends to the full Board of Directors for its approval the
compensation and benefits of the Chief Executive Officer ("CEO"). The
Committee approves the compensation and benefits of all officers reporting
directly to the CEO. The Committee reviews individual compensation and benefit
actions for all other executive officers, as approved by the CEO within the
framework of plans and programs established by the Committee. The Committee
also administers Glendale Federal's Amended and Restated 1993 Stock Option and
Long-Term Performance Incentive Plan (the "Existing Plan") and approves all
stock option grants.
EXECUTIVE COMPENSATION GOAL AND POLICY
The primary goal of the Committee is to ensure that the overall
compensation, employee benefits and management development policies of
Glendale Federal are in accordance with the business goals and strategies of
Glendale Federal, consistent with the financial strength of Glendale Federal,
and consistent and competitive with employment practices in the financial
services industry--contributing to the primary objective of maximizing
stockholder value.
The Committee believes that this singular objective of maximizing
stockholder value is best supported by an executive officer compensation
policy which:
1. Focuses executive attention on those annual objectives which will lead
to enhanced stockholder value.
2. Delivers competitive total compensation opportunity through stock
options issued at 100% of fair market value.
Specifically, the Committee compares compensation for the 10 senior
executives of Glendale Federal to the practices of similar sized U.S.
commercial banks and savings institutions; and in the case of the CEO and one
other executive, also compares their compensation to the practices of a
specific peer group of 12 large commercial and savings banks and savings and
loan associations (which peer group includes all but one of the peer financial
institutions used for the purposes of the Performance Graph appearing
elsewhere in this Proxy Statement). These analyses are conducted by an
independent, nationally recognized executive compensation consulting firm.
12
<PAGE>
The Committee's policy in regard to the 10 senior executives in fiscal 1996
has been to target both base salary and total annual cash compensation
opportunity (base salary and target annual incentive) below the median of
competitive practice. Stock option grants, which have no value unless the
share price increases, have been used to bring total compensation opportunity
to between the median and the third quartile (50th to 75th percentile) of
competitive practice.
Beginning in fiscal 1997, the Committee has determined that the interest of
stockholders would be better served by modifying this policy to provide base
salary and annual incentive opportunity targeted around the median of
competitive practice, with stock option grants continuing to be used to bring
total compensation opportunity to between the median and third quartile (50th
to 75th percentile) of competitive practice. The Committee believes that this
change in compensation mix, but not in the competitiveness of the total
package, is appropriate in light of Glendale Federal's continuing financial
turnaround, the performance of the executive team, the need to recruit and
retain the services of talented executives through competitive cash
compensation and the importance of continuing to focus executive attention and
rewards on the achievement of key annual financial and strategic objectives.
There are four executive officers not included in the senior executive group
whose compensation is determined under Glendale Federal's middle management
compensation plans, and consists of base salary, short-term incentive cash
compensation paid through Glendale Federal's Management Incentive Plan ("MIP")
and a long-term incentive compensation opportunity provided through the grant
of options under the Existing Plan.
ANNUAL INCENTIVE OPPORTUNITY
During fiscal 1996, annual incentive opportunity was provided through the
Executive Incentive Plan ("EIP"). The EIP incorporated the Committee's fiscal
1996 philosophy that annual cash compensation opportunity should be
conservative and below typical competitive levels. In general, target annual
cash compensation opportunity (base salary and target annual incentive) was at
about 90% of competitive medians for the 10 senior executives. For the CEO,
the fiscal year 1996 target annual incentive was 25% of salary, with a maximum
of 40% of salary.
Under the EIP, each executive was assigned a mix of corporate and individual
performance goals. For the CEO, this mix was 80% corporate and 20% individual.
For the other executive officers, this mix varied from 70% corporate and 30%
individual to 30% corporate and 70% individual. Corporate and individual goals
were approved by the Committee. For fiscal 1996, corporate goals were core
earnings, net earnings, asset quality, and capital adequacy.
For the second level executives covered by the MIP, for fiscal 1996, the
Committee approved team and individual goals.
Following the close of fiscal year 1996, the Committee reviewed Glendale
Federal's fiscal year 1996 results against the established EIP goals for core
earnings, net earnings, asset quality, and capital adequacy. Based upon the
total evaluation of all criteria, the corporate performance portion of the EIP
award for each participant was accordingly paid above the target level. The
Committee also reviewed individual performance results against established
goals for each EIP participant and determined the amount of this portion of
each participant's EIP award to be paid. Individual goals were tailored to
each position, and included both financial and operational objectives for the
particular executive's area of responsibility. The Committee approved the
awards for all executive officers of Glendale Federal, including the four
executive officers who participate in the MIP, and recommended to the Board
Mr. Trafton's award. The average executive officer award, excluding Mr.
Trafton's award, was 117% of target. The Board of Directors approved the award
for Mr. Trafton following the Committee's review.
13
<PAGE>
LONG-TERM INCENTIVES
In fiscal year 1995, the Committee established stock option grant guidelines
for the 10 senior executives. These guidelines were developed in conjunction
with an analysis of executive compensation developed by an independent,
nationally recognized executive compensation consulting firm. This competitive
analysis included the prevalence and value of the supplemental executive
retirement plans which a number of peer company executives have but which
Glendale Federal does not provide. The guidelines were developed on a basis of
providing each executive with a total compensation opportunity between the
median and the third quartile (50th to 75th percentile) of competitive
practice, after taking account of each executive's annual compensation
opportunity (base salary and target annual incentive). By providing a
significant portion of total compensation opportunity to executives in the
form of stock options, the Committee seeks to ensure that their interests are
closely aligned with the interests of the stockholders. Because a significant
portion of these executives' total compensation is at risk based on the market
performance of Glendale Federal's common stock, the Committee believes that
this increased risk is properly compensated with a total compensation
opportunity level on average somewhat above the median of the executives'
peers.
In fiscal 1995, senior executives were granted stock options intended to
provide competitive compensation opportunity through fiscal 1996. As a result
no stock options were granted to the 10 senior executives in fiscal 1996.
CEO COMPENSATION
Effective as of January 1, 1994 and amended as of January 1, 1996, Glendale
Federal entered into an employment agreement with Mr. Trafton, the terms of
which are set forth above under "Employment Contracts; Termination of
Employment, and Change in Control Arrangements." No change was made to Mr.
Trafton's base salary in fiscal years 1995 or 1996, which remained unchanged
from the level set in April 1992 at the time of his promotion to CEO. Mr.
Trafton's fiscal year 1996 annual incentive award was based 80% on corporate
results against established EIP goals for core earnings, net earnings, asset
quality, and capital adequacy. In addition, 20% of Mr. Trafton's annual
incentive was based on his individual performance against a goal of enhancing
the strategic positioning of Glendale Federal to increase the value of the
franchise and future stockholder value. The Committee and the Board of
Directors assessed his performance in these areas, with particular attention
to financial results of Glendale Federal, the strategic positioning of
Glendale Federal, the successful building of California franchise value and
the successful pursuit of the goodwill case. As a result of the assessment,
Mr. Trafton's fiscal year 1996 EIP award was approved by the Board of
Directors at $202,000, or 24.3% above the target amount.
FISCAL 1997 STOCK OPTION GRANTS
In early fiscal 1997, the Committee completed a thorough review of the
compensation plans applicable to the senior executives of the company,
assisted by a nationally recognized executive compensation consulting firm.
As part of this review, the Committee assessed the performance of Mr.
Trafton as CEO, and his past and expected future contributions to creating
value for the Glendale Federal's stockholders. In keeping with prior practice,
the Committee determined that stockholder interests would be best served by
providing Mr. Trafton with future long-term compensation solely in the form of
stock options, granted at fair market value on the day of grant and covering
multiple years. The Committee approved a grant of a stock option to Mr.
Trafton, intended to provide all of his long-term compensation opportunity for
the next three years, to acquire 1,000,000 shares of common stock. The
Committee anticipates that no further grants will be made to Mr. Trafton until
fiscal 2000. The Committee granted stock options at fair market value to 10
other senior executives. These grants represent their fiscal 1997 long-term
compensation, and the Committee expects to consider new grants in fiscal 1998
for these officers.
14
<PAGE>
The grant of 667,000 of the shares covered by Mr. Trafton's option is
subject to approval by stockholders of the amendments to the Existing Plan.
Options granted in fiscal 1997 under the Existing Plan cover 333,000 shares
for Mr. Trafton and 295,000 shares for the other 10 senior executives as a
group.
DEDUCTIBILITY
In 1993, Congress enacted Section 162(m) of the U.S. Internal Revenue Code
of 1986, effective for tax years beginning in 1994. This legislation precludes
a public corporation from taking a deduction for compensation in excess of $1
million per year for its chief executive officer and any of its four other
highest-paid executive officers who are employed on the last day of the fiscal
year. Certain performance-based compensation is specifically exempt from the
deduction limit. Any taxable compensation derived from the exercise of stock
options should be exempt from the limit on the corporate tax deduction. The
base salaries and annual incentive awards paid for fiscal year 1996 were not
exempt. However, the compensation limit for the year was not exceeded for any
covered officer, so that there was no loss of tax-deductibility. The Committee
believes that, although there may be circumstances where the best interest of
the stockholders are better served otherwise, compensation expenses generally
should be deductible.
OFFICER COMPENSATION AND PERSONNEL COMMITTEE
Diane C. Creel (Chair)
Dean R. Bailey
John F. King
John F. Kooken
15
<PAGE>
STOCK PRICE PERFORMANCE GRAPH
The Stock Price Performance Graph below (the "Performance Graph") compares
the cumulative total returns of Glendale Federal, the S&P 500 Index and a
weighted index of California-based thrift institutions and holding companies
(the "Peer Group"). Prior to August 26, 1993, all shares of common stock of
Glendale Federal were owned by GLENFED, Inc. As part of the recapitalization of
Glendale Federal that was completed on that date, GLENFED, Inc. was merged into
a subsidiary of Glendale Federal and the stockholders of GLENFED, Inc. became
stockholders of Glendale Federal. The Graph reflects information relating to
the period commencing August 27, 1993, the first full day on which shares of
Glendale Federal common stock were traded on the New York Stock Exchange and
the Pacific Stock Exchange, and ending on June 30, 1996.
The Performance Graph shall not be deemed incorporated by reference by any
general statement incorporating this proxy statement into any filing under the
securities offering rules of the OTS or under the Securities Exchange Act of
1934, except to the extent that Glendale Federal specifically incorporates this
information by reference.
COMPARISON OF FIVE-YEAR CUMULATIVE TOTAL RETURN
AMONG GLENDALE FEDERAL, S&P 500 INDEX AND PEER GROUP
[PERFORMANCE GRAPH APPEARS HERE]
<TABLE>
<CAPTION>
Measurement Period GLENDALE S&P
(Fiscal Year Covered) FEDERAL PEER GROUP 500 INDEX
------------------- --------- ---------- ---------
<S> <C> <C> <C>
August - 1993 $100.00 $100.00 $100.00
December - 1993 $ 76.08 $102.21 $103.83
June - 1994 $115.07 $ 96.74 $101.29
December - 1994 $105.48 $103.56 $ 90.70
June - 1995 $136.99 $124.49 $121.69
December - 1995 $193.15 $142.47 $150.90
June - 1996 $198.63 $156.85 $152.83
</TABLE>
Assumes $100 invested on August 27, 1993 in the stock of Glendale Federal or
Peer Group.
Total Stockholder Return assumes reinvestment of dividends.
Note: The Peer Group average is weighted by August 1993 market capitalization.
The Peer Group includes H.F. Ahmanson & Company, California Federal Bank,
a Federal Savings Bank, Coast Savings Financial, Inc., Golden West
Financial Corporation and Great Western Financial Corporation.
16
<PAGE>
AMENDMENTS TO GLENDALE FEDERAL 1993 AMENDED AND RESTATED
STOCK OPTION AND LONG TERM PERFORMANCE INCENTIVE PLAN
In order to attract, motivate and retain key officers and employees of
Glendale Federal and its subsidiaries, in 1993 the Board of Directors adopted,
and Glendale Federal's stockholders approved, the Glendale Federal Bank 1993
Stock Option and Long-Term Performance Incentive Plan (as amended by the Board
of Directors and the Stockholders in 1994, the "Plan").
PROPOSED AMENDMENTS
At the 1996 Annual Meeting the common stockholders will be asked to approve
amendments to the Plan (the "Proposed Amendments") that would: (i) increase,
from 4,700,000 to 7,200,000, the number of shares of common stock that may be
issued pursuant to the Plan; (ii) reflect recent amendments to Securities and
Exchange Commission ("SEC") Rule 16b-3 by replacing the requirement that the
committee which administers the Plan (the "Committee") be made up of
"disinterested persons," as formerly defined for purposes of Rule 16b-3, with
the requirement that such Committee be comprised of directors who are not
employees of the Company or any of its subsidiaries; (iii) provide that awards
under the Plan may be assignable or transferable to members of an option
holder's Immediate Family (as defined below) with the consent of the
Committee; (iv) amend certain provisions relating to the exercise of stock
options granted to non-employee directors; and (v) clarify certain sections of
the Plan. The Proposed Amendments and the reasons therefor are described
further in the following paragraphs.
As discussed above under "Report of the Officer Compensation and Personnel
Committee," Glendale Federal's compensation philosophy is that senior
executive officers should participate in long term stock-based compensation
plans because such long term plans provide greater incentive to senior
executive officers to maximize stockholder value. At June 30, 1996, 3,878,500
shares of Glendale Federal common stock, representing 85.4% of the number of
shares currently issuable pursuant to the Plan, are covered by outstanding
stock options. The Board of Directors believes that the proposed increase in
the number of shares reserved for issuance under the Plan is necessary to
permit Glendale Federal to continue to use stock options as incentive
compensation for senior executive management and to broaden the base of
Glendale Federal officers and key employees who hold stock options pursuant to
the Plan.
As originally adopted, the Plan required that the committee of the Board of
Directors that administers the Plan (the "Committee") consist solely of
directors constituting "disinterested persons" as that term was then defined
for purposes of SEC Rule 16b-3. Rule 16b-3 provides certain exemptions from
the application of the "shortswing profits" prohibitions of Section 16(b) of
the Securities Exchange Act of 1934 (the "Exchange Act") for stock option and
other stock-based employee compensation plans. In general, a person was deemed
"disinterested" under Rule 16b-3 if the person was not eligible to receive
discretionary stock-based compensation awards and had not been eligible to
receive such awards for specified periods. The SEC has recently amended Rule
16b-3 to eliminate the concept of "disinterested persons" and has substituted
different bases upon which the relevant exemptive provisions may be made
available, including Board of Directors or stockholder approval of stock-based
compensation awards or compliance with a requirement that the award be held at
least six months before exercise. The Proposed Amendment to delete the
"disinterested person" requirement from the Plan is intended to make the Plan
consistent with the current form of Rule 16b-3. Under this Proposed Amendment,
however, the Committee will instead be required to consist solely of non-
employee directors. In addition to this requirement, the Committee members
will be subject to their fiduciary duties as directors in the performance of
their responsibilities as Committee members.
The third Proposed Amendment to the Plan is also intended to conform the
Plan with the SEC's recent amendments to Rule 16b-3. At the time the Plan was
established, it included a limitation that stock options and other awards
could not be transferred by the recipients of such awards, with a limited
exception in the event of death. This restriction conformed to Rule 16b-3 as
in effect at the time the Plan was established. The recent SEC amendments to
Rule 16b-3 removed this limitation. Accordingly, it is proposed that the Plan
be amended to
17
<PAGE>
permit awards granted under the Plan to be transferrable without consideration
by the recipient to members of his or her Immediate Family with the consent of
the Committee. The term "Immediate Family" would be defined for this purpose
as including the recipient's parents, spouse, children, stepchildren, sisters,
brothers and grandchildren, together with any persons in corresponding
adoptive relationships with the recipient. It is believed that such transfers
may be beneficial in certain cases to the recipient for estate planning or
other family financial management purposes without any adverse effects on
Glendale Federal or on the effectiveness of Plan awards as incentive
compensation arrangements.
The Plan currently provides that stock options granted under the Plan to
non-employee directors will remain exercisable for a period of 36 months after
the director's service on the Board of Directors terminates as a result of
"Retirement," which is defined for this purpose as termination of such service
after attaining the age of 65. It is proposed to amend this provision of the
Plan (with respect to both outstanding and future awards) to provide that a
director's termination of service on the Board of Directors will be deemed to
constitute termination because of Retirement only if such termination occurs
after the director has served on the Board of Directors for a period of at
least five years and to delete reference to termination of service after
reaching age 65 from the definition of Retirement. The Proposed Amendments
would provide that, if a non-employee director's death occurs while serving on
the Board of Directors, any stock options previously granted to the director
under the Plan which are not vested at the date of death will become vested at
that time. The Plan provides for annual grants of options to directors (as
described below) that become exercisable as of the next following annual
meeting of stockholders.
The preceding description of the Proposed Amendments and the following
description of the Plan are qualified in their entirety by reference to the
full text of the Plan, a copy of which is attached as Appendix A to this Proxy
Statement. Each of the Proposed Amendments to the Plan described above,
together with certain additional clarifying and other amendments to the Plan
made by the Committee under its general Plan administrative authority, is
indicated in the attached copy of the Plan.
GENERAL DESCRIPTION OF THE PLAN
The Plan provides for the grant of stock options, stock appreciation rights
and other stock or cash awards, either alone, in combination or "in tandem"
(meaning that the exercise of one part of an award, such as a stock
appreciation right, results in the cancellation of a corresponding portion of
an award, such as a stock option, granted "in tandem" therewith). In addition
to providing awards of stock options to key executives and other selected
employees, the Plan provides for annual awards of stock options to directors
who are not employees of Glendale Federal or its subsidiaries. The Plan
provides that stock options granted under the Plan must have an exercise price
at least equal to the fair market value per share of common stock of Glendale
Federal (as defined in the Plan) at the date of grant or, in the event
incentive stock options are granted to an employee who owns more than 10% of
Glendale Federal's outstanding common stock, at least 110% of such fair market
value. Except with respect to options granted to Non-employee Directors, the
Plan is administered by the Officer Compensation and Personnel Committee of
the Board of Directors, which determines the employees to whom awards under
the Plan are to be granted and is empowered to interpret, to terminate and,
subject to stockholder approval in certain circumstances, to amend the Plan.
The Plan became effective as of August 17, 1993 and, unless sooner terminated,
will terminate on the fifth anniversary of that date.
Unless the Committee otherwise determines, upon a change in control of
Glendale Federal (as defined by the Committee from time to time or in an award
agreement), participants in the Plan would have the right to exercise any
stock option or stock appreciation right, or to receive full payment of cash
awards, and any restrictions on outstanding restricted stock awards would
lapse. In such event, participants would also have the right to elect to
receive a cash payment equal to the fair market value of any stock otherwise
distributable in connection with an award under the Plan.
Upon the dissolution or liquidation of Glendale Federal, or the occurrence
of a reorganization, merger or consolidation in which Glendale Federal is not
the surviving corporation, or upon the transfer of all of the assets or shares
of Glendale Federal to another corporation, if provision is not made for the
continuation of the Plan
18
<PAGE>
and any outstanding awards granted thereunder, Plan participants would be
entitled to receive payment of, or to exercise their rights under, such
outstanding awards notwithstanding any otherwise applicable restrictions on
exercise.
Stock options granted pursuant to the Plan may be "incentive stock options",
which are entitled to special tax treatment under the Internal Revenue Code of
1986, as amended (the "Code"), or may be "non-statutory options", which are not
entitled to such benefits. Only non-statutory options may be granted to non-
employee Directors. Generally, the grant of an option, whether incentive or non-
statutory, is not a taxable event. Upon exercise of an incentive stock option,
the optionee is not taxed and Glendale Federal is not entitled to a deduction,
unless the optionee sells the shares acquired upon such exercise within one year
after the date of exercise or within two years after the date of grant of such
option. In the event of such a "disqualifying disposition", the optionee would
recognize ordinary income equal to the excess of the lesser of the sale price or
fair market value on date of exercise over the exercise price of the incentive
option and Glendale Federal would generally be entitled to a tax deduction in an
equal amount. Any additional gain would be taxable to the optionee as capital
gain. Upon the exercise of a non-statutory stock option, the optionee will
generally recognize ordinary income in an amount equal to the excess of the fair
market value of the stock acquired upon exercise (determined as of the date of
exercise) over the exercise price of the option, and Glendale Federal will be
entitled to record a tax deductible compensation expense equal to such amount,
provided that such amount is not in excess of reasonable compensation.
In the case of Plan awards consisting of sales of restricted stock to
participants, stock bonuses or other grants of stock, pursuant to Section 83
of the Code, stock so issued that is made subject to certain restrictions will
not give rise to taxable income until the earliest time at which such stock is
no longer subject to a substantial risk of forfeiture and is freely
transferable (as defined for purposes of Section 83), rather than at the date
of initial issuance or sale. At such time, the holder of such stock would
recognize ordinary income equal to the excess of the fair market value of the
shares (determined as of such time) over the purchase price (if any) and
Glendale Federal would be entitled to a tax deduction in a corresponding
amount, subject to certain limitations.
In general, Glendale Federal is required to withhold applicable taxes with
respect to any ordinary income recognized by a participant in connection with
awards made under the Plan.
NEW PLAN BENEFITS
On July 22, 1996, the following grants of options were made under the Plan.
Each option entitles the holder to acquire one share of Glendale Federal
common stock at an exercise price of $17.50 after the option vests and until
July 22, 2006. The options for each person named below become exercisable in
three equal annual installments commencing July 22, 1997. The grant of 667,000
of the 1,000,000 shares for Mr. Trafton's option is subject to the approval of
the Proposed Amendments by Glendale Federal's common stockholders at the
1996 Annual Meeting.
<TABLE>
<CAPTION>
NAME AND POSITION DOLLAR VALUE ($)(1) NUMBER OF UNITS
- ----------------- ------------------- ---------------
<S> <C> <C>
Stephen J. Trafton, Chief Executive Offi-
cer....................................... $250,000 1,000,000
Richard A. Fink, Senior Executive Vice
President and Chief Credit Officer........ 18,750 75,000
Terry D. Hess, Executive Vice President and
Director, Business Banking................ 8,750 35,000
John E. Haynes, Executive Vice President
and Chief Financial Officer............... 10,000 40,000
William J. Birch, Executive Vice President
and Manager, Retail Banking............... 8,750 35,000
Executive Group............................ 323,750 1,295,000
</TABLE>
- --------
(1) Dollar value is determined by multiplying the number of units by $0.25,
which was the difference between the closing price of Glendale Federal
common stock on the New York Stock Exchange on August 30, 1996 of $17.75
and the option exercise price of $17.50.
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<PAGE>
BOARD RECOMMENDATION
The Board of Directors believes that it is in the best interests of Glendale
Federal and its stockholders to approve the Proposed Amendments in order to
attract, retain and motivate qualified employees. Approval of the Proposed
Amendments requires the affirmative vote of a majority of the outstanding
shares of Glendale Federal common stock entitled to vote on the proposal.
THE BOARD OF DIRECTORS UNANIMOUSLY RECOMMENDS THAT
STOCKHOLDERS VOTE FOR THE APPROVAL OF THE PROPOSED AMENDMENTS
RATIFICATION OF APPOINTMENT OF INDEPENDENT AUDITORS
The Board of Directors has selected KPMG Peat Marwick LLP as Glendale
Federal's independent auditors for the fiscal year ended June 30, 1997, and to
audit the books and accounts of Glendale Federal for that year. KPMG Peat
Marwick LLP, together with its predecessors, have been the independent
auditors of Glendale Federal for more than 30 years.
Representatives of KPMG Peat Marwick LLP are expected to be present at the
Annual Meeting and to be available to respond to appropriate questions. Their
representatives will also be provided an opportunity to make a statement, if
they desire to do so.
THE BOARD OF DIRECTORS UNANIMOUSLY RECOMMENDS RATIFICATION OF THE SELECTION
OF KPMG PEAT MARWICK LLP AS INDEPENDENT AUDITORS FOR GLENDALE FEDERAL FOR THE
FISCAL YEAR ENDED JUNE 30, 1997.
OTHER BUSINESS
The Board of Directors does not know of any other business to be presented
for action at the Annual Meeting. If any other business is properly presented
at the Annual Meeting, shares represented by the proxies solicited hereby will
be voted on such matters in accordance with the best judgment of the proxy
holders named therein. OTS regulations and Glendale Federal's Bylaws require
that, in order to be considered, any new business to be taken up at the Annual
Meeting shall be stated in writing and filed with the Secretary of Glendale
Federal at least five days before the date of the Annual Meeting.
STOCKHOLDER PROPOSALS
Any stockholder wishing to have a proposal considered for inclusion in the
Board of Directors' proxy solicitation materials for the 1997 Annual Meeting
must, in addition to other applicable requirements, set forth such proposal in
writing and file it with the Secretary of Glendale Federal on or before May
24, 1997. The Board of Directors will review any proposals from stockholders
received by that date and will determine whether applicable requirements have
been met for inclusion of any such proposals in such 1997 proxy solicitation
materials.
20
<PAGE>
ADDITIONAL INFORMATION
THE ANNUAL REPORT ON FORM 10-K FILED BY GLENDALE FEDERAL WITH THE OTS FOR
ITS FISCAL YEAR ENDED JUNE 30, 1996, ACCOMPANIES THIS PROXY STATEMENT.
GLENDALE FEDERAL WILL FURNISH A COPY OF THE FORM 10-K WITHOUT CHARGE UPON THE
WRITTEN REQUEST OF ANY STOCKHOLDER SOLICITED HEREBY WHO HAS NOT RECEIVED A
COPY THEREOF. GLENDALE FEDERAL WILL ALSO FURNISH TO ANY SUCH STOCKHOLDER A
COPY OF THE EXHIBITS TO THE FORM 10-K UPON WRITTEN REQUEST AND PAYMENT OF A
COPYING CHARGE. REQUESTS SHOULD BE ADDRESSED TO JEFFREY MISAKIAN, DIRECTOR,
CORPORATE RELATIONS, GLENDALE FEDERAL BANK, FEDERAL SAVINGS BANK, 401 NORTH
BRAND BOULEVARD, GLENDALE, CALIFORNIA 91203.
By order of the Board of Directors
/s/ James R. Eller, Jr.
James R. Eller, Jr.
Secretary
September 20, 1996
21
<PAGE>
APPENDIX A
Underlined words in the following text are the proposed amendments that
stockholders are being asked to approve.
1996 AMENDMENT AND RESTATEMENT OF
GLENDALE FEDERAL BANK
1993 STOCK OPTION AND
LONG-TERM PERFORMANCE INCENTIVE PLAN
1.History and Purpose. The 1993 Stock Option and Long-Term Performance
Incentive Plan (the "Plan") is designed to promote the long-term financial
interests of the Company (as defined below) by (i) rewarding key executives,
other selected employees, and Eligible Directors of the Company for their
contributions to the success of the Company, (ii) attracting and encouraging
long service by key employees and Eligible Directors possessing outstanding
abilities, (iii) providing key employees with additional incentives in the
form of Incentive Stock Options, Non-Qualified Stock Options and Stock
Appreciation Rights as determined from time to time by the Board or the
Committee (as defined below), (iv) providing Eligible Directors with
additional incentives in the form of Non-Qualified Stock Options, and (v)
furthering the identity of interests of key employees, other selected
employees, and Eligible Directors with those of the Company's stockholders
through opportunities for increased stock ownership and awards based on
corporate performance. The Plan has been amended and restated in 1996 in the
form set forth herein, provided that such amendment and restatement is subject
to the approval of the stockholders of the Company at the first annual
stockholders meeting which occurs after July 22, 1996.
2.Definitions.
(a)"Award" means the grant of any form of stock option, stock appreciation
right, stock or cash award, whether granted alone, in combination or in
tandem, under the Plan.
(b)"Award Agreement" means an agreement between the Company and a
Participant, setting forth the terms, conditions and limitations applicable to
an Award granted to the Participant.
(c)"Board" means the Board of Directors of the company.
(d)"Common Stock" means authorized and issued or unissued Common Stock of
the Company, having a par value of $1.00 per share.
(e)"Code" means the Internal Revenue Code of 1986, as amended from time to
time.
(f)"Committee" means the Committee on Officer Compensation and Personnel of
the Board or such other committee, comprised of directors who are not
employees of the Company, designated by the Board.
(g)"Company" means Glendale Federal Bank, Federal Savings Bank, a federally
chartered stock savings bank, including any successor thereto by merger,
operation of law or otherwise, its subsidiaries and their respective
subsidiaries.
(h)"Eligible Director" means each member of the Board who is not an employee
of the Company.
(i)"Fair Market Value", unless determined otherwise by the Committee in good
faith, means with respect to a share of Common Stock as of any given date (i)
the closing market composite price for such Common Stock as reported for the
New York Stock Exchange--Composite Transactions on that date or, if Stock is
not traded on that date, on the next preceding date on which Common Stock was
traded; (ii) if the Common Stock is not traded on the New York Stock Exchange,
the closing sale price of a share of Common Stock as reported on the national
securities exchange or transaction reporting system on or through which actual
sales prices are regularly reported for such Common Stock on the date the
determination is made; or (iii) if the Common Stock is not traded on an
exchange or transaction reporting system on or through which actual sales
prices are available, the mean of the average of the closing bid and asked
prices of a share of Common Stock as reported on the date the determination is
made.
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<PAGE>
(j)"Immediate Family" means, with respect to a particular Participant, the
Participant's parents, spouse, children, stepchildren, adoptive relationships,
sisters, brothers and grandchildren.
(k)"Participant" means an employee or Eligible Director of the Company to
whom an Award has been made under the Plan.
(l)"Performance-Based Compensation" shall have the meaning ascribed to it in
Section 162(m)(4)(C) of the Code.
3.Participation. Subject to the terms and conditions of the Plan, the
Committee shall determine and designate, from time to time, the key employees
to whom Awards are to be granted under Sections 8, 9, 10, and 11, and who
thereby become "Participants" in the Plan. Subject to the terms and conditions
of the Plan, Eligible Directors shall receive Stock Options in accordance with
the provisions of Supplement A, and thereby become "Participants" in the Plan.
Individuals shall not be eligible for Awards under Sections 8, 9, 10 and 11
during the period in which they are Eligible Directors.
4.Common Stock Available for Awards. At the time of establishment of the
Plan in 1993, and subject to Section 17, the aggregate number of shares of
Common Stock with respect to which Awards could be granted under the Plan was
limited to 1,700,000, which amount was increased in 1994 to 4,700,000.
Effective as of the amendment and restatement of the Plan in 1996, and subject
to Section 17, the aggregate number of shares of Common Stock with respect to
which Awards may be granted under the Plan was increased from 4,700,000 to
7,200,000. To the extent that any Award terminates by expiration,
cancellation, forfeiture, surrender or otherwise (other than by reason of the
exercise of an Award granted in tandem therewith) without the issuance of
shares or without payment therefor or, in the case of restricted stock,
without vesting, any shares subject to such Award or on the basis of which
such Award would have been calculated shall again be available for future
Awards. Common Stock which may be issued under the Plan may be either
authorized and unissued shares or issued shares which have been reacquired by
the Company. No fractional shares of Common Stock shall be issued under the
Plan.
Notwithstanding any other provision of the Plan to the contrary, no
Participant shall receive any Award of a Stock Option or an SAR under the Plan
to the extent that the sum of:
(a) the number of shares of Common Stock subject to such Award;
(b) the number of shares of Common Stock subject to all other prior Awards
of Stock Options and SARs under the plan during the calendar year in
which the Award is made; and
(c) the number of shares of Common Stock subject to all other prior stock
options and stock appreciation rights granted to the Participant under
other plans or arrangements of the Company during the calendar year in
which the Award is made;
would exceed the Participant's Individual Limit under the Plan. The
determination made under this paragraph shall be based on the shares subject
to the awards at the time of grant, regardless of when the awards become
exercisable. A Participant's "Individual Limit" shall be 1,000,000 shares
(subject to adjustment under Section 17).
5.Administration. The Plan shall be administered by the Committee which
shall have full and exclusive power to interpret the Plan, to grant waivers of
Plan restrictions and to adopt such rules, regulations and guidelines for
carrying out the Plan as it may deem necessary or proper, all of which powers
shall be executed in the best interests of the Company and in keeping with the
objectives of the Plan. Any interpretation of the Plan by the Committee and
any decision made by it under the Plan is final and binding on all persons.
The Committee shall determine the type of or types of Awards to be made to
each Participant. Awards may be granted alone, in combination or in tandem. In
the case of Awards granted in tandem, the exercise of one award will effect
the cancellation of a corresponding portion of the Award or Awards granted in
tandem therewith. Awards may also be made in combination or in tandem with, in
replacement of, or as alternatives to, grants or rights under any
A-2
<PAGE>
other employee plan of the Company, including the plan of any acquired entity.
To the extent that the provisions of this Section 5 are inconsistent with the
terms of Supplement A, Awards made under Supplement A shall be governed by the
terms of Supplement A rather than the terms of this Section 5.
6.Delegation of Authority. The Committee may delegate to the Chief Executive
Officer and to other senior officers of the Company its duties under the Plan
pursuant to such terms, conditions or limitations as the Committee may
establish; provided, however, that no such authority may be vested in an
officer who does not also serve as a member of the Board of Directors of the
Company; further provided that only the Committee may grant and administer
Awards made to or held by Participants who, at the time such authority is
exercised, are subject to Section 16(a) or Section 16(b) of the Securities
Exchange Act of 1934, or any successor rule.
7.Award Agreement. At the time of a grant, the Committee may require as a
condition to such grant that a Participant enter into an agreement with the
Company in a form specified by the Committee agreeing to the terms and
conditions of the Plan and to such additional terms and conditions, not
inconsistent with the Plan, as the Committee, in its sole discretion, may
prescribe. To the extent that the provisions of this Section 7 are
inconsistent with the terms of Supplement A, Awards made under Supplement A
shall be governed by the terms of Supplement A rather than the terms of this
Section 7.
8.Stock Options. Each Stock Option shall entitle the Participant to whom it
is granted to purchase a specified number of shares of Common Stock at a fixed
price. Any Stock Option granted under the Plan that satisfies all of the
requirements of Section 422 of the Code may be designated by the Committee as
an "Incentive Stock Option." Stock Options not so designated, or that do not
satisfy the requirements of Section 422 of the Code shall not constitute
Incentive Stock Options and shall be "Non-Qualified Stock Options."
(a) Option Price. The option price of a Non-Qualified Stock Option shall
not be less than 100 percent of the Fair Market Value of a share of
Common Stock on the date of grant, or such other amount required to
comply with applicable law. The option price of an Incentive Stock
Option shall not be less than 100% of the Fair Market Value of a share
of Common Stock and, with respect to an employee who owns on the date
of the grant more than 10% of the Company's Common Stock, shall not be
less than 110% of its Fair Market Value on such date.
(b) Option Expiration Date. The "Expiration Date" with respect to a Stock
Option or any portion thereof means the expiration date thereof
established by the Committee at the time of the grant. The Expiration
Date of an Incentive Stock Option shall be no later than the date which
is ten years after the date it was granted and, with respect to an
employee who owns on the date of grant more than 10% of the Company's
Common Stock, shall not be later than the date which is five years
after the date of grant.
(c) Exercise of Options. Each Stock Option granted under the Plan shall be
exercisable, either in whole or in part, at such time or times as shall
be determined by the Committee at the time the option is granted or at
such earlier times as the Committee shall subsequently determine
(provided that the Fair Market Value at date of grant of shares of
Common Stock with respect to which Incentive Stock Options are
exercisable for the first time by a Participant during any calendar
year may not exceed $100,000) but in no event later than that Stock
Option's Expiration Date.
A Participant may exercise a Stock Option by giving written notice
thereof prior to the Option's Expiration Date to the Secretary of the
Company at the principal executive offices of the Company.
Contemporaneously with the delivery of such notice, the full purchase
price of the shares of Common Stock purchased pursuant to the exercise
of the Option, together with any required state or federal withholding
taxes, shall be paid in cash, by tender of stock certificates in proper
form for transfer to the Company valued at the Fair Market Value of the
shares of Common Stock on the date of exercise, by a combination of the
foregoing or with any other consideration which the Committee
determines to be consistent with the purposes of the Plan and
applicable law. A Participant may elect to pay the purchase price upon
the exercise of a Stock Option through a cashless exercise arrangement
to the
A-3
<PAGE>
extent provided by the Committee. In the case of a cashless exercise
arrangement approved by the Committee, payment may be made as soon as
practicable after the exercise.
To the extent that the provisions of this Section 8 are inconsistent with
the terms of Supplement A, Awards made under Supplement A shall be governed by
the terms of Supplement A rather than the terms of this Section 8.
9.Stock Appreciation Rights. Each Stock Appreciation Right ("SAR") shall
entitle the Participant to whom it is granted to receive from the Company, at
the time the SAR is exercised, that number of shares of Common Stock having a
Fair Market Value equal to the product of:
(a) the number of shares of Common Stock as to which the SAR is exercised;
and
(b) the excess of the Fair Market Value (at the date of exercise) of a
share of Common Stock over the exercise price specified by the
Committee at the time of the award;
provided, however, that the Committee, in its sole discretion, may elect to
settle all or a portion of the Company's obligation arising out of the
exercise of an SAR in cash equal to the Fair Market Value on the exercise date
of any or all of the shares of Common Stock that would otherwise be issuable
on exercise. SARs that are granted in tandem with Stock Options shall be
exercisable only to the extent that the related Stock Option is exercisable
and at the exercise price of that Stock Option.
An SAR may be exercised, in whole or in part, by giving written notice to
the Secretary of the Company prior to the date on which the SAR expires. Such
notice shall specify the number of shares with respect to which the SAR is
being exercised. As soon as practicable after the receipt of such notice, the
Company shall deliver to the Participant certificates for the shares of Common
Stock or cash or both to which the Participant is entitled pursuant to the
Plan.
10.Stock Awards. Subject to the terms and conditions of the Plan, the
Committee may designate Participants to receive Awards made in Common Stock or
denominated in units of Common Stock. All or any part of such Award may be
subject to such terms, conditions, restrictions and limitations as may be
established by the Committee, and set forth in the Award Agreement, which may
include, but are not limited to, continuous service with the Company,
achievement of specific business objectives, peer company comparisons,
increases in specified indices, attaining specified growth rates and other
comparable measurements of Company performance. Such Awards may be based on
Fair Market Value or other specified valuation criteria.
To the extent that the Committee determines that it is necessary or
desirable to conform any Awards under the Plan with the requirements
applicable to "Performance-Based Compensation," it may, at the time an Award
is granted, take such steps and impose such restrictions as it determines to
be necessary to satisfy such requirements with respect to such Award,
including, without limitation:
(a) The establishment of performance goals that must be satisfied prior to
the payment or distribution of benefits under such Awards;
(b) The submission of such Awards and performance goals to the Company's
shareholders for approval and making the receipt of benefits under such
Awards contingent on receipt of such approval; and
(c) Providing that no payment or distribution be made under such Awards
unless the Committee certifies that the goals and the applicable terms
of the Plan and Agreement reflecting the Awards have been satisfied.
To the extent that the Committee determines that the foregoing requirements
relating to Performance-Based Compensation do not apply to Awards under the
Plan because the Awards constitute Stock Options or SARs, the Committee may,
at the time the Award is granted, take such steps and impose such restrictions
as it determines to be necessary to conform the Award to alternative methods
of satisfying the requirements applicable to Performance-Based Compensation.
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<PAGE>
11.Other Awards. In addition to the Awards specifically provided above, the
Committee may make such other equity, incentive or performance awards payable
in cash or in kind under the Plan as it determines to be in the best interest
of the Company.
12.Payment of Awards. The Company's obligation to pay cash or deliver stock
pursuant to Awards granted under the Plan is subject to all applicable laws,
rules and regulations and the obtaining of all permits and approvals deemed
necessary or appropriate by the Committee. Payment of Awards may be made in
the form of cash, stock or combinations thereof and may include such
restrictions as the Committee shall determine, including in the case of stock,
restrictions on transfer and forfeiture provisions. When transfer of stock is
so restricted or subject to forfeiture provisions it shall be referred to as
"Restricted Stock."
13.Tax Withholding. The Company shall have the right to deduct or otherwise
effect a withholding of any amount required by federal or state tax laws to be
withheld with respect to the grant, exercise or surrender of an Award, or the
sale of stock acquired upon the exercise of an Incentive Stock Option,
including any withholding required in order for the Company to obtain a tax
deduction otherwise available as a consequence of such grant, exercise,
surrender or sale. Such amounts may be deducted or withheld, at the Company's
discretion, from Award payments or from any other payments, including regular
compensation, to be made by the Company to the Participant. If Common Stock is
used to satisfy tax withholding, such Common Stock shall be valued based on
Fair Market Value on the date it is withheld.
14.Amendment, Modification, Suspension or Discontinuance of this Plan. The
Board at any time, and from time to time, may amend the Plan, subject to the
applicable requirements of the New York Stock Exchange. The Committee may, at
any time, amend the terms of any outstanding Award Agreement; provided,
however, that such amendment may not provide terms which are inconsistent with
the terms of the Plan; and further provided that no amendment of any
outstanding Award Agreement may adversely affect a Participant's rights under
the Award Agreement in the absence of the Participant's written consent.
The Board at any time may suspend or discontinue the Plan. The Plan, unless
sooner terminated, shall terminate on the fifth anniversary of its adoption by
the Board in 1993. Any such amendment, suspension or termination shall not
affect any Award previously granted. No Award may be granted under the Plan
while the Plan is suspended or after it is terminated.
15.Termination of Employment. In the event that a Participant ceases to be
an employee of the Company for any reason, including death, any Awards then
outstanding may be exercised or shall expire in accordance with the terms of
the applicable Award Agreement.
16.Nonassignability. No award under the Plan, and no rights or interests
therein, shall be assignable or transferable by a Participant except by will
or by the laws of descent and distribution. During a Participant's lifetime,
Awards under the Plan are exercisable only by the Participant, his guardian or
legal representative, and after the Participant's death Awards are only
exercisable by the person who acquired the right to exercise such Award by
bequest or inheritance, and only in accordance with the terms of such Award as
determined by the Committee at the time of grant. Notwithstanding the
foregoing provisions of this Section 16, the Committee may permit Awards under
the Plan to be transferred by a Participant for no consideration to or for the
benefit of the Participant's Immediate Family (including, without limitation,
to a trust for the benefit of a Participant's Immediate Family or to a
partnership for members of a Participant's Immediate Family), subject to such
limits as the Committee may establish, and the transferee shall remain subject
to all the terms and conditions applicable to such Award prior to such
transfer. In the discretion of the Committee, the foregoing right to transfer
Awards shall also apply to the right to transfer ancillary rights associated
with an Award. However, in no event shall an Incentive Stock Option be
transferable to the extent that such transferability would violate the
requirements applicable to such option under Code section 422. Transfer to a
Participant's Immediate Family may be permitted by the Committee with respect
to Awards granted on or after November 1, 1996; provided that on and after
that date, the Committee may, in its discretion, also amend previously granted
outstanding Award Agreements to permit such transferability.
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<PAGE>
17.Adjustment. In the event of any change in the outstanding Common Stock of
the Company by reason of any stock split, stock dividend, combination or
reclassification of shares, recapitalization, merger, or other corporate
transaction, including but not limited to the payment of a dividend or the
making of a distribution to shareholders of the Company in property or in cash
in an amount in excess of the Company's normal dividend or distribution policy
in effect at the time, the Committee shall, where applicable, equitably adjust
the number of shares of stock reserved under the Plan and the exercise or
purchase price and the number or class of shares covered by outstanding Awards
denominated in stock or units of stock to preserve the benefit of such Awards
for the Company and the Participant.
Upon the effective date of the dissolution or liquidation of the Company, or
of a reorganization, merger or consolidation of the Company with one or more
other corporations in which the Company is not the surviving corporation, or
of the transfer of substantially all of the assets or shares of the Company to
another corporation (any such transaction being referred to herein as a
"Terminating Event"), the Plan and any Award granted hereunder shall terminate
unless provision is made in writing in connection with such Terminating Event
for the continuance of the Plan and for the assumption of Awards theretofore
granted hereunder, or the substitution for such Awards of new awards issued by
the successor corporation, or a parent or subsidiary thereof, with such
appropriate adjustments as may be determined or approved by the Committee or
its successor, in which event the Plan and the Awards theretofore granted or
substituted therefor, shall continue in the manner and under the terms so
provided. Upon the occurrence of a Terminating Event in which provision is not
made for the continuance of the Plan and for the assumption of Awards
theretofore granted or the substitution for such Awards of new awards issued
by the successor corporation, each Participant to whom an Award has been
granted under the Plan shall be entitled to receive payment, as applicable, or
to exercise, in whole or in part, such Participant's rights under any Award
granted without regard to any restrictions on exercise that would otherwise
apply, and any restrictions on outstanding Stock Awards shall lapse, in each
case effective as of the effective date of the Terminating Event. In the event
a Participant shall not, prior to the effective date of a Terminating Event
fully exercise a stock appreciation right granted under the Plan, such stock
appreciation right to the extent not previously exercised, shall be deemed
exercised by the Participant as of the effective date of the Terminating
Event. In the event a Participant shall not, prior to the effective date of a
Terminating Event fully exercise an option granted under the Plan, such
option, to the extent not previously exercised, shall be deemed surrendered by
the Participant as of the effective date of the Terminating Event and such
Participant shall receive in exchange therefor a cash payment equal to the
difference, if a positive amount, between the Fair Market Value as of the
effective date of the Terminating Event of the shares of stock then subject to
the option minus the aggregate option price therefor. To the extent that a
Participant, pursuant to this Section 17 has a right to exercise, surrender or
receive payment under any Award, or restrictions on any Stock Award lapse,
solely on account of a Terminating Event, such exercise, surrender, payment or
lapse shall be contingent upon the consummation of such Terminating Event.
Upon a "change in control" of the Company, as defined in rules or
regulations promulgated by the Committee from time to time or in Award
Agreements executed pursuant to this Plan, Participants shall, unless the
Committee otherwise determines at the time of grant, have the right,
notwithstanding any restrictions that would otherwise apply, to exercise any
stock option or stock appreciation right, any restrictions on outstanding
Stock Awards granted under the Plan shall lapse, and Participants who have
been granted Cash Awards under the Plan shall immediately be entitled to
receive full payment of such Awards. In addition, Participants shall have the
right to elect to receive a cash payment equal to the Fair Market Value of any
stock otherwise distributable in connection with an Award under the Plan. To
the extent a Participant has the right to exercise or receive payment under an
Award, or restrictions on a Stock Award lapse, solely on account of a change
in control, such right to exercise on surrender or the lapse of such
restrictions shall be contingent upon the consummation of such change in
control.
18.Employment and Stockholder Status. Neither the adoption of the Plan nor
the granting of any Award shall confer upon any Participant any right to
continue as an employee or director of the Company, nor shall it interfere in
any way with the right of the Company to terminate the employment of any of
its employees at any
A-6
<PAGE>
time. No Award shall create any rights in a Participant as a stockholder of
the Company until shares of Common Stock are registered in the name of the
Participant.
19.Governing Law. The Plan and all determinations made and actions taken
pursuant hereto, to the extent not otherwise governed by the Code, the
securities laws of the United States or other federal law, shall be governed
by the law of the State of California and construed accordingly.
20.Effective Date. The Plan shall become effective on the date in 1993 it is
adopted by the Board subject to the approval of a majority of the shares
eligible to be voted at the next annual meeting of stockholders and subject to
any required regulatory approval. All Awards granted prior to stockholder
approval are subject to such approval and, notwithstanding any other provision
of the Plan, if such approval is not obtained, all such Awards as well as
dividends paid or payable with respect to such Awards shall be forfeited.
Except as otherwise set forth in this amended and restated Plan, the changes
reflected in the amended and restated plan shall be effective July 22, 1996,
provided that the changes to Supplement A and Exhibit I shall be effective
November 1, 1996.
21.Dispute Resolution. All disputes arising as to the interpretation or
application of the Plan shall be decided by the Committee. The Committee shall
provide the Participant with a written determination within 60 days of its
decision with respect to such dispute.
A-7
<PAGE>
SUPPLEMENT A
ELIGIBLE DIRECTORS AUTOMATIC OPTION GRANT
A-1. General. The grant of a Stock Option under this Supplement A entitles
the Participant to purchase shares of Common Stock at a price fixed at the
time the Stock Option is granted. A Stock Option granted under this Supplement
A is not intended to satisfy the requirements applicable to an "incentive
stock option" as described in Section 422(b) of the Code.
A-2. Participation. As of August 23, 1994 and as of the first business day
after each annual meeting of the Company's shareholders thereafter, each
member of the Board who is then an Eligible Director shall be granted a "Stock
Option", which shall be an option to purchase 5,000 shares of Common Stock (as
adjusted pursuant to Section 17.)
A-3. Price. The determination and payment of the purchase price of a share
of Common Stock under each Stock Option granted pursuant to this Supplement A
shall be subject to the following:
(a) The purchase price shall be the greater of (i) 100% of the Fair Market
Value of a share of Common Stock as of the date on which such Stock
Option is granted, or (ii) the par value of a share of such
Common Stock on such date. For purposes of this Supplement A, in
determining the Fair Market Value of a share of Common Stock, the
phrase "unless determined otherwise by the Committee in good faith"
appearing in Section 3(h) of the Plan shall be disregarded. The
purchase price shall be subject to the adjustment described in Section
17 of the Plan relating to Extraordinary Dividends.
(b) The full purchase price of each share of Common Stock purchased upon
the exercise of any Stock Option shall be paid at the time of such
exercise and, as soon as practicable thereafter, a certificate
representing the shares so purchased shall be delivered to the person
entitled thereto.
(c) The purchase price shall be payable in cash or in shares of Common
Stock (valued at Fair Market Value as of the day of exercise), or in
any combination thereof.
A-4. Exercise. A Stock Option granted under this Supplement A as of any date
shall first be exercisable on the date of the first annual meeting of the
Company's shareholders that occurs after the date as of which the Stock Option
is granted, but only if the Participant continues to serve as a member of the
Board from the date of grant until such annual meeting (or becomes employed by
the Company, and remains employed or a director until such annual meeting.)
However, upon approval of this 1996 amendment and restatement of the Plan by
the Company's stockholders, and notwithstanding the foregoing provisions of
this Supplement A, if the Participant's Date of Termination occurs on account
of the Participant's death, the Stock Options shall be deemed to have become
exercisable as of the date immediately prior to the date of death; provided
that the revision set forth in this sentence shall apply to Stock Options
granted under this Supplement A which were outstanding on or at any time after
November 27, 1995 (regardless of whether such Stock Options were previously
granted or are granted in the future). A Stock Option granted under this
Supplement A will not be exercisable after the Expiration Date applicable to
that Stock Option, and all rights to purchase shares of Common Stock pursuant
to the Stock Option shall cease as of the Stock Option's Expiration Date.
A-5. Expiration Date. The "Expiration Date" with respect to a Stock Option
granted under this Supplement A means the earliest to occur of:
(a) the ten-year anniversary of the date on which the Stock Option is
granted;
(b) if the Participant's Date of Termination occurs by reason of
Retirement, the thirty-six-month anniversary of such Date of
Termination;
(c) if the Participant's Date of Termination occurs by reason of death, the
twelve-month anniversary of such Date of Termination; and
A-8
<PAGE>
(d) if the Participant's Date of Termination occurs for reason other than
Retirement or death, the three-month anniversary of such Date of
Termination.
A Participant shall not be permitted to exercise a Stock Option granted
under this Supplement A after the Participant's Date of Termination except to
the extent that the Stock Option is exercisable immediately prior to such Date
of Termination. For purposes of this Supplement A: (a) a Participant's "Date
of Termination" shall be the date the Participant ceases to be a member of the
Board, or, if the Participant becomes employed by the Company, the date the
Participant both ceases to be so employed and ceases to be a director; and (b)
a Participant's Date of Termination shall be deemed to be by reason of
"Retirement" if such Date of Termination occurs on or after the date on which
the Participant has attained age 65. However, upon approval of this 1996
amendment and restatement of the Plan by the Company's stockholders, clause
(b) of the preceding sentence shall be revised to read: "a Participant's Date
of Termination shall be deemed to be by reason of "Retirement" if such Date of
Termination occurs after five (5) years of Board Service as an Eligible
Director"; provided that the revision set forth in this sentence shall apply
to Stock Options granted under this Supplement A which were outstanding on or
at any time after November 27, 1995 (regardless of whether such Stock Options
were previously granted or are granted in the future).
A-6. Agreement With Company. Each Stock Option granted under this Supplement
A shall be evidenced by an Agreement (an "Agreement") duly executed on behalf
of the Company and by the Participant to whom such option is granted and dated
as of the applicable date of grant. Each Agreement shall be substantially in
the form attached hereto as Exhibit I.
A-7. Limitation on Amendment. Notwithstanding the provisions of Section 14
of the Plan, in no event shall the provisions of the Plan relating to Awards
under this Supplement A be amended more than once every six months, other than
to comport with changes in the Code, the Employee Retirement Income Security
Act, or the rules thereunder; provided, however, that the limitation set forth
in this Section A-7 shall be applied only to the extent required under SEC
Rule 16b-3(c)(2)(ii)(B), or any successor provision thereto.
A-9
<PAGE>
EXHIBIT I
ELIGIBLE DIRECTORS
STOCK OPTION AGREEMENT
1.Grant of Option. Glendale Federal Bank, Federal Savings Bank (the
"Company"), which term shall also include any direct or indirect subsidiary of
the Company hereby grants as of (the "Grant Date") to the person whose
name appears below (the "Participant" an option (the "Option") to purchase
5,000 shares of the common stock, par value $1.00 per share, of the Company
(the "Shares") at a purchase price of $ per Share, which Option shall be
exercisable as set forth in and subject to the terms and conditions of this
Stock Option Agreement (the "Agreement") and the Company's Amended and
Restated 1993 Stock Option and Long-Term Performance Incentive Plan (the
"Plan"). The Option granted herein is intended to be a nonqualified stock
option.
Name of Participant:
2.Vesting. The Option shall first become exercisable on the date of the
first annual meeting of the Company's stockholders that occurs after the Grant
Date, but only if the Participant continues to serve as a member of the Board
from the Grant Date until such annual meeting (or becomes employed by the
Company and remains employed or a director until such annual meeting).
Notwithstanding the foregoing provisions of this Section 2, if the
Participant's Date of Termination occurs on account of the Participant's
death, the Stock Options shall be deemed to have become exercisable as of the
date immediately prior to the date of death.
3.Exercise of Option.
(a) Subject to the terms and conditions set forth in this Agreement, the
Option may be exercised by the Participant by giving written notice of
exercise to the Secretary of the Company, specifying the number of
Shares to be purchased and the purchase price to be paid therefor. Such
notice shall be accompanied by payment of the required purchased price
for the Shares to be purchased and such exercise shall be effective
upon receipt by the Company of the written notice together with such
payment. The purchase price may be paid (i) in immediately available
funds, (ii) by certified check payable to the order of the Company,
(iii) by tender of stock certificates, duly endorsed, accompanied by
appropriate stock powers separate from the certificates presented or
otherwise in proper form for transfer to the Company, representing
Shares having a Fair Market Value (as determined in accordance with the
terms of the Plan) at least equal to the relevant purchase price, (iv)
by any combination of the foregoing, or (v) with any other form of
consideration (including payment with a cashless exercise program under
which, if so instructed by the Participant, Shares may be issued
directly to the Participant's broker or dealer upon receipt of the
purchase price in cash from the broker or dealer), if such form of
consideration shall have been approved by the Committee (as defined in
the Plan).
(b) If upon any exercise of the Option any federal, state or local tax
withholding is required under applicable law, the Participant shall
make satisfactory withholding arrangements with the Company, which may
include any method described in (a) above.
4.Expiration Date. The "Expiration Date" of the Option shall be the earliest
to occur of:
(a) the ten-year anniversary of the Grant Date;
(b) if the Participant's Date of Termination occurs by reason of
Retirement, the thirty-six-month anniversary of such Date of
Termination;
(c) if the Participant's Date of Termination occurs by reason of death, the
twelve-month anniversary of such Date of Termination; and
(d) if the Participant's Date of Termination occurs for a reason other than
Retirement or death, the three-month anniversary of such Date of
Termination.
A-10
<PAGE>
For purposes of this Agreement:
(A) A Participant's "Date of Termination" shall be the date the Participant
ceases to be a member of the Board, or, if the Participant becomes
employed by the Company, the date the Participant both ceases to be so
employed and ceases to be a director.
(B) A Participant's Date of Termination shall be deemed to be by reason of
"Retirement" if such Date of Termination occurs after five (5) years of
Board Service as an Eligible Director.
5.Delivery of Shares. The Company shall, upon payment of the full purchase
price for the number of Shares to be purchased, promptly deliver a certificate
or certificates evidencing such Shares to the Participant; provided, that if
any law or regulation requires the Company to take any action with respect to
such issuance of Shares, then the date of such issuance and of delivery of
such certificate or certificates shall be extended for the period necessary to
complete such action. No Shares shall be issued and delivered upon exercise of
the Option unless and until, in the opinion of counsel for the Company, any
applicable registration, qualification or other securities law requirements,
any applicable listing requirements of any national securities exchange on
which stock of the same class is then listed, and any other requirements of
law or of any regulatory authority having jurisdiction over such issuance and
delivery, shall have been complied with. The Company shall use commercially
reasonable efforts to take all required action to achieve such compliance as
promptly as practicable.
6.Nontransferability of Option. Except as provided in the following
sentence, the Option is personal and no rights granted hereunder may be
transferred, assigned, pledged or hypothecated in any way (whether by
operation of law or otherwise) nor shall any such rights be subject to
execution, attachment or similar process. In the event of the death of a
Participant, if the Option had become exercisable prior to the date of death,
the Option may be exercised within a period of up to twelve months after the
date of death by the person to whom the Option shall be transferred by will or
the laws of descent and distribution, provided, that the Option may not in any
event be exercised after the Expiration Date. The Option shall be exercisable,
during the lifetime of the Participant, only by the Participant. Upon any
attempt to transfer, assign, pledge, hypothecate or otherwise dispose of the
Option or of any such rights contrary to the provisions hereof, or upon the
levy of any attachment or similar process upon the Option or such rights, the
Option and such rights shall, at the election of the Company, become null and
void. Neither the Participant nor his executors, administrators, heirs or
legatees shall be or have any rights or privileges of a stockholder with
respect to any Shares issuable upon exercise of the Option granted hereunder
unless and until certificates representing such Shares shall have been duly
issued and delivered.
7.No Special Rights. Nothing contained in this Agreement shall confer upon
the Participant any right to continued service as a director of the Company or
interfere in any way with the right of the Company or its stockholders to
remove Participant from the Board in accordance with applicable law and the
Bylaws of the Company. In the event the Participant shall become employed by
the Company, nothing contained in this Agreement shall confer upon the
Participant any right to continued employment or interfere in any way with the
right of the Company to terminate the employment of the Participant at any
time.
8.Adjustments Upon Changes in Stock. The number and type of Shares covered
by the Option, and the exercise price and permitted time of exercise thereof,
are subject to adjustment in accordance with the provisions of paragraph 17 of
the Plan or any successor provision thereof in the event of any change in the
outstanding Common Stock of the Company or the occurrence of any Terminating
Event or the payment of any Extraordinary Dividend as referred to therein. Any
such adjustments shall be final, binding and conclusive upon the Participant
and any other party purporting to have any interest in or right with respect
to the Option. In no event shall the purchase price for a Share be adjusted
below the par value thereof, nor shall any fractions of a Share be issued upon
exercise of the Option.
9.Effect of Change in Control. Upon the occurrence of a Change in Control
with respect to the Company, the Option shall immediately become exercisable
in full notwithstanding the provisions of paragraph 2
A-11
<PAGE>
hereof and shall continue to be so exercisable for the remaining term of the
Option. For the purposes hereof, a "Change in Control" shall be deemed to have
occurred if: (i) any "Person" (as such term is used in Sections 13(d) and
14(d) of the Exchange Act and the regulations of the SEC thereunder, each as
in effect on the effective date of the Plan, and including any such persons
that may be deemed to be acting in concert with respect to the Company or the
acquisition, ownership or voting of Company 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 the Plan), of outstanding securities of the Company
representing 20% or more of the combined voting power of the Company's
outstanding securities; (ii) at any time during the three-year period after
the date hereof, the composition of the board of directors of the Company is
changed such that persons who were directors of the Company 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 Company; (iii) the stockholders of the Company
approve a merger or consolidation of the Company with, or a reorganization
transaction involving the Company and, any other entity, other than a merger,
consolidation or reorganization which would result in the voting securities of
the Company 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 Company or such surviving entity outstanding
immediately after such merger or consolidation; (iv) the stockholders of the
Company approve a plan of complete liquidation of the Company or an agreement
for the sale or disposition by the Company 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 Company (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 of the Plan).
10.Other Employee Benefits. In the event Participant becomes employed by the
Company, the amount of any compensation received by a Participant as a result
of the exercise of this Option shall not constitute "earnings" with respect to
which any other employee benefits of the Participant are determined,
including, without limitation, benefits under any qualified or nonqualified
savings, pension or life insurance plan, except to such extent, if any, as may
specifically be provided in any particular plan or agreement relating to any
such benefits.
11.Notice. Any notice required to be given under the terms of this Option
shall be properly addressed if addressed to the Secretary of the Company at
the principal executive office of the Company or to the Participant at the
address indicated below, or at such other address as either party to this
Agreement may hereafter designate in writing to the other.
Glendale Federal Bank,
Federal Savings Bank
By:
--------------------------------------
[Name]
[Title]
The Option set forth above
is hereby accepted and the
terms and provisions thereof
agreed to by the undersigned.
- ---------------------------------------
(Participant's Name)
Address:
-------------------------------
- ---------------------------------------
A-12
<PAGE>
[LOGO of Printed on Recycled Paper]
<PAGE>
PLEASE MARK
[X] YOUR CHOICE
LIKE THIS
IN DARK INK
I PLAN TO ATTEND MEETING [_]
1. ELECTION OF DIRECTORS
Nominees:
John F. Kooken and
Gilbert R. Vasquez
FOR ALL
NOMINEES WITHHOLD
(EXCEPT AS AUTHORITY
MARKED TO THE TO VOTE FOR ALL
CONTRARY BELOW) NOMINEES
[_] [_]
(INSTRUCTION: To withhold authority to vote for any individual nominee, write
that nominee's name in the space below.)
- --------------------------------------------------------------------------------
2. APPROVAL OF THE AMENDMENTS TO GLENDALE FEDERAL'S AMENDED AND RESTATED 1993
STOCK OPTION AND LONG-TERM PERFORMANCE INCENTIVE PLAN.
FOR AGAINST ABSTAIN
[_] [_] [_]
3. PROPOSAL TO RATIFY THE APPOINTMENT OF KPMG PEAT MARWICK LLP AS GLENDALE
FEDERAL'S INDEPENDENT AUDITORS FOR THE FISCAL YEAR ENDING JUNE 30, 1997.
FOR AGAINST ABSTAIN
[_] [_] [_]
4. In their discretion on such other business as may properly come before the
meeting or any adjournment thereof.
Whether or not you plan to attend the meeting, you are urged to execute and
return this proxy, which may be revoked at any time prior to its use.
Dated: ____________, 1996
- --------------------------------------------------------------------------------
(Signature of Stockholder) (Signature(s) of Additional Stockholder(s))
Please sign your name exactly as it appears hereon, date and return this proxy
in the reply envelope provided. If you receive more than one proxy card, please
sign and return all proxy cards received.
When signing as attorney, executor, administrator, trustee, or guardian, please
give full title as such. If a corporation, please sign in full corporate name
by President or other authorized officer. If a partnership, please sign in
partnership name by authorized person.
<PAGE>
REVOCABLE PROXY
GLENDALE FEDERAL BANK, FEDERAL SAVINGS BANK
The undersigned hereby appoints Stephen J. Trafton, John F. King, Diane C.
Creel, or any of them, each with full power of substitution, as the lawful
proxies of the undersigned, and hereby authorizes them to represent and to
vote as designated on the reverse side all shares of the common stock of
Glendale Federal Bank, Federal Savings Bank ("Glendale Federal"), which the
undersigned would be entitled to vote if personally present at the Annual
Meeting of Stockholders of Glendale Federal to be held on October 22, 1996,
and at any postponement or adjournment thereof. Said proxies are hereby
granted discretionary authority to cumulate votes in the election of directors
referred to below.
THIS PROXY IS SOLICITED ON BEHALF OF THE BOARD OF DIRECTORS OF GLENDALE
FEDERAL.
THIS PROXY, WHEN PROPERLY EXECUTED, WILL BE VOTED IN THE MANNER DIRECTED
HEREIN BY THE UNDERSIGNED STOCKHOLDER. IF NO DIRECTION IS GIVEN, THIS PROXY
WILL BE VOTED FOR THE ELECTION OF EACH DIRECTOR NOMINEE LISTED AND FOR
PROPOSALS 2 AND 3.
IMPORTANT--PLEASE SIGN AND DATE ON REVERSE SIDE AND RETURN PROMPTLY.
<PAGE>
PLEASE MARK
[X] YOUR CHOICE
LIKE THIS
IN DARK INK
1. ELECTION OF DIRECTORS
Nominees:
John F. Kooken and
Gilbert R. Vasquez
MARK ONLY ONE BOX
FOR ALL
NOMINEES WITHHOLD
(EXCEPT AS AUTHORITY
MARKED TO THE TO VOTE FOR ALL
CONTRARY BELOW) NOMINEES
[_] [_]
(INSTRUCTION: To withhold authority to vote for any individual nominee, write
that nominee's name in the space below.)
- --------------------------------------------------------------------------------
2. APPROVAL OF THE AMENDMENTS TO GLENDALE FEDERAL'S AMENDED AND RESTATED 1993
STOCK OPTION AND LONG-TERM PERFORMANCE INCENTIVE PLAN.
MARK ONLY ONE BOX
FOR AGAINST ABSTAIN
[_] [_] [_]
3. PROPOSAL TO RATIFY THE APPOINTMENT OF KPMG PEAT MARWICK LLP AS GLENDALE
FEDERAL'S INDEPENDENT AUDITORS FOR THE FISCAL YEAR ENDING JUNE 30, 1997.
MARK ONLY ONE BOX
FOR AGAINST ABSTAIN
[_] [_] [_]
4. In their discretion on such other business as may properly come before the
meeting or any adjournment thereof.
Unless you sign and return this form so that it is received by the Trustee
before October 11, 1996, your shares will be voted as provided by the Plan.
Dated: ____________, 1996
- --------------------------------------------------------------------------------
(Please sign EXACTLY as your name appears hereon). When signing as attorney,
executor, administrator, trustee or guardian, please give full title as such.
PLEASE DO NOT FOLD THIS CARD
<PAGE>
CONFIDENTIAL VOTING INSTRUCTIONS
GLENDALE FEDERAL BANK, FEDERAL SAVINGS BANK
ANNUAL MEETING OF STOCKHOLDERS TO BE HELD OCTOBER 22, 1996
TO: CG TRUST COMPANY AS TRUSTEE UNDER THE GLENDALE FEDERAL BANK SHELTERED PAY
PLAN (THE "PLAN")
I hereby instruct the Trustee to vote (in person or by proxy) all the shares
of Glendale Federal Bank, Federal Savings Bank ("Glendale Federal") Common
Stock which are credited to my account under the Plan on September 3, 1996, at
the Annual Meeting of Stockholders of Glendale Federal on October 22, 1996,
and any postponement or adjournment thereof, on the following matters, as
provided in the proxy statement, and in its discretion upon any other matter
which may properly come before the meeting of any adjournment thereof. The
above Trustee is hereby authorized to cumulate votes in the election of
directors referred to below.
THESE VOTING INSTRUCTIONS ARE BEING SOLICITED ON BEHALF OF THE BOARD OF
DIRECTORS OF GLENDALE FEDERAL.
PLEASE DATE AND SIGN EXACTLY AS YOUR NAME APPEARS BELOW AND RETURN IN THE
ENCLOSED ENVELOPE. YOUR SHARES WILL BE VOTED ACCORDING TO YOUR INSTRUCTIONS.
IF YOUR INSTRUCTIONS ARE RETURNED SIGNED WITH NO VOTING INSTRUCTIONS, YOUR
SHARES WILL BE VOTED FOR THE ELECTION OF EACH DIRECTOR NOMINEE LISTED AND FOR
PROPOSALS 2 AND 3.
SIGN AND DATE ON THE REVERSE SIDE
<PAGE>
1. ELECTION OF DIRECTORS NOMINEES: John F. Kooken and Gilbert R. Vasquez
I Plan to Attend
Meeting [_]
FOR all nominees WITHHOLD AUTHORITY to vote for all
listed to the nominees listed to the right
right (except
as marked to
the contrary)
2. APPROVAL OF THE AMENDMENTS TO GLENDALE FEDERAL'S AMENDED AND RESTATED 1993
STOCK OPTION AND LONG-TERM PERFORMANCE INCENTIVE PLAN.
[_] FOR [_] AGAINST [_] ABSTAIN
3. PROPOSAL TO RATIFY THE APPOINTMENT OF KPMG PEAT MARWICK LLP AS GLENDALE
FEDERAL INDEPENDENT AUDITORS FOR THE FISCAL YEAR ENDING JUNE 30, 1997.
[_] FOR [_] AGAINST [_] ABSTAIN
(Instruction: to withhold authority to vote for any individual nominees,
write that nominee's name in the space below).
-----------------------------------------------------------------------------
4. In their discretion, the Proxies are authorized to vote upon such other
business as may properly come before the meeting or any adjournment
thereof.
When signing as attorney, executor, administrator, trustee, or guardian,
please give full title as such. If corporation, please sign in full corporate
name by President or other authorized officer. If a partnership, please sign
in partnership name by authorized person.
Whether or not you plan to attend the meeting, you are urged to execute and
return this proxy, which may be revoked at any time prior to its use.
Dated:___________________________________________________________________, 1996
- -------------------------------------------------------------------------------
(Signature of Stockholder)
- -------------------------------------------------------------------------------
(Signature(s) of Additional Stockholder(s))
Please sign your name exactly as it appears hereon, date and return this proxy
in the reply envelope provided. If you receive more than one proxy card,
please sign and return all proxy cards received.
- --------------------------------------------------------------------------------
FOLD AND DETACH HERE
YOUR VOTE IS IMPORTANT TO GLENDALE FEDERAL
PLEASE SIGN AND RETURN YOUR PROXY BY
TEARING OFF THE TOP PORTION OF THIS SHEET
AND RETURNING IT IN THE ENCLOSED POSTAGE-PAID ENVELOPE.
<PAGE>
REVOCABLE PROXY
GLENDALE FEDERAL BANK, FEDERAL SAVINGS BANK
THIS PROXY IS SOLICITED ON BEHALF OF THE BOARD OF
DIRECTORS OF GLENDALE FEDERAL
The undersigned hereby appoints Stephen J. Trafton, John F. King and Diane
C. Creel or any of them, each with full power of substitution, as the lawful
proxies of the undersigned, and hereby authorizes them to represent and to
vote as designated on the reverse side all shares of the common stock of
Glendale Federal Bank, Federal Savings Bank ("Glendale Federal") which the
undersigned would be entitled to vote if personally present at the Annual
Meeting of Stockholders of Glendale Federal to be held on October 22, 1996,
and at any postponement or adjournment thereof. Said proxies are hereby
granted discretionary authority to cumulate votes in the election of directors
referred to on the reverse side.
IMPORTANT--PLEASE SIGN AND DATE ON REVERSE SIDE AND RETURN PROMPTLY.
THIS PROXY, WHEN PROPERLY EXECUTED, WILL BE VOTED IN THE MANNER DIRECTED
HEREIN BY THE UNDERSIGNED STOCKHOLDER. IF NO DIRECTION IS GIVEN, THIS PROXY
WILL BE VOTED FOR THE ELECTION OF EACH DIRECTOR NOMINEE LISTED AND FOR
PROPOSALS 2 AND 3.
- -- -- -- -- -- -- -- -- -- -- -- -- -- -- -- -- -- -- -- -- -- -- -- -- --
FOLD AND DETACH HERE
<PAGE>
1. ELECTION OF DIRECTORS NOMINEES: John F. Kooken and Gilbert R. Vasquez
I Plan to Attend
Meeting [_]
FOR all nominees WITHHOLD AUTHORITY to vote for all
listed to the nominees listed to the right
right (except
as marked to
the contrary)
2. APPROVAL OF THE AMENDMENTS TO GLENDALE FEDERAL'S AMENDED AND RESTATED 1993
STOCK OPTION AND LONG-TERM PERFORMANCE INCENTIVE PLAN.
[_] FOR [_] AGAINST [_] ABSTAIN
3. PROPOSAL TO RATIFY THE APPOINTMENT OF KPMG PEAT MARWICK LLP AS GLENDALE
FEDERAL INDEPENDENT AUDITORS FOR THE FISCAL YEAR ENDING JUNE 10, 1997.
[_] FOR [_] AGAINST [_] ABSTAIN
(Instruction: to withhold authority to vote for any individual nominees, write
that nominee's name in the space below).
- -------------------------------------------------------------------------------
4. In their discretion, the Proxies are authorized to vote upon such other
business as may properly come before the meeting or any adjournment
thereof.
When signing as attorney, executor, administrator, trustee, or guardian,
please give full title as such. If corporation, please sign in full corporate
name by President or other authorized officer. If a partnership, please sign
in partnership name by authorized person.
Whether or not you plan to attend the meeting, you are urged to execute and
return this proxy, which may be revoked at any time prior to its use.
Dated: __________________________________________________________________, 1996
- -------------------------------------------------------------------------------
(Signature of Stockholder)
- -------------------------------------------------------------------------------
(Signature(s) of Additional Stockholder(s))
Please sign your name exactly as it appears hereon, date and return this proxy
in the reply envelope provided. If you receive more than one proxy card,
please sign and return all proxy cards received.
- --------------------------------------------------------------------------------
FOLD AND DETACH HERE
YOUR VOTE IS VERY IMPORTANT TO GLENDALE FEDERAL. PLEASE SIGN AND RETURN YOUR
PROXY BY TEARING OFF THE TOP PORTION OF THIS SHEET AND RETURNING IT IN THE
ENCLOSED POSTAGE PAID ENVELOPE.
ATTENTION STOCKHOLDER:
Our records indicate you have not mailed in your GLENFED, Inc.
certificate(s) of common stock. We urge you to exchange your GLENFED, Inc.
Certificate(s) of common stock for new Glendale Federal Bank, Federal Savings
Bank, Certificate(s) of common stock immediately. It has been three years
since stockholders were notified to send in their shares of GLENFED in
exchange for the new shares of Glendale Federal Bank, FSB, as provided for
under the Plan of Reorganization which was approved by a majority of the
stockholders at a Special Meeting of Stockholders held on August 17, 1993.
For stockholders whose last known address is in California, your stock is
subject to be turned over to the state as abandoned property. In accordance
with the State of California escheatment laws, we are required to cancel all
unexchanged certificate(s) of California residents after three years and turn
over the ownership of the stock these certificates represent to the state.
ONCE YOUR STOCK IS ESCHEATED, YOUR ONLY RECOURSE TO RECLAIM YOUR STOCK WILL BE
WITH THE STATE.
For stockholders whose last known address is outside California, your stock
will escheat in accordance with the laws of the state in which you reside.
Please locate your old GLENFED certificate(s) of common stock and mail them
to our agent at the address below.
CHASEMELLON
SHAREHOLDER SERVICES
P.O. Box 845
Midtown Station
New York, NY 10018
PLEASE DO NOT MAIL YOUR CERTIFICATE(S) WITH YOUR PROXY.
If your have lost your GLENFED certificate(s) or have any questions relating
to the exchange of your certificate(s), please contact ChaseMellon at
1-800-648-8169, or our Investor Relations Department at 818-500-2723.
<PAGE>
REVOCABLE PROXY
GLENDALE FEDERAL BANK, FEDERAL SAVINGS BANK
THIS PROXY IS SOLICITED ON BEHALF OF THE BOARD OF
DIRECTORS OF GLENDALE FEDERAL
The undersigned hereby appoints Stephen J. Trafton, John F. King and Diane C.
Creel or any of them, each with full power of substitution, as the lawful
proxies of the undersigned, and hereby authorizes them to represent and to
vote as a designated on the reverse side all shares of the common stock of
Glendale Federal Bank, Federal Savings Bank ("Glendale Federal") which the
undersigned would be entitled to vote if personally present at the Annual
Meeting of Stockholders of Glendale Federal to be held on October 22, 1996,
and at any postponement or adjournment thereof. Said proxies are hereby
granted discretionary authority to cumulate votes in the election of directors
referred to on the reverse side.
IMPORTANT--PLEASE SIGN AND DATE ON REVERSE SIDE AND RETURN PROMPTLY.
THIS PROXY, WHEN PROPERLY EXECUTED, WILL BE VOTED IN THE MANNER DIRECTED
HEREIN BY THE UNDERSIGNED STOCKHOLDER. IF NO DIRECTION IS GIVEN, THIS PROXY
WILL BE VOTED FOR THE ELECTION OF EACH DIRECTOR NOMINEE LISTED AND FOR
PROPOSALS 2 AND 3.
- -- -- -- -- -- -- -- -- -- -- -- -- -- -- -- -- -- -- -- -- -- -- -- -- --
FOLD AND DETACH HERE
<PAGE>
OFFICE OF THRIFT SUPERVISION
-------------------------
SCHEDULE 14A INFORMATION
PROXY STATEMENT PURSUANT TO SECTION 14(a) OF THE SECURITIES EXCHANGE ACT OF 1934
Filed by the registrant [_]
Filed by a party other than the Registrant [_]
Check the appropriate box:
[X] Preliminary proxy statement
[_] Confidential, for use of the Commission only (as permitted by Rule 14a-
6(e)(2))
[_] Definitive proxy statement
[_] Definitive additional materials
[_] Soliciting material pursuant to Section 240.14a-11(c) or Section 240.14a-12
GLENDALE FEDERAL BANK, FEDERAL SAVINGS BANK
- --------------------------------------------------------------------------------
(NAME OF REGISTRANT AS SPECIFIED IN ITS CHARTER)
- --------------------------------------------------------------------------------
(NAME OF PERSON(S) FILING PROXY STATEMENT, IF OTHER THAN THE REGISTRANT)
Payment of filing fee (Check the appropriate box):
[_] No fee required
[_] Fee computed on table below per Exchange Act Rules 14a-6(i)(1) and 0-11.
(1) Title of each class of securities to which transaction applies:
-------------------------------------------------------------------------
(2) Aggregate number of securities to which transactions applies:
-------------------------------------------------------------------------
(3) Per unit price or other underlying value of transaction computed
pursuant to Exchange Act Rule 0-11 (Set forth the amount on which the
filing fee is calculated and state how it was determined):
-------------------------------------------------------------------------
(4) Proposed maximum aggregate value of transaction:
-------------------------------------------------------------------------
(5) Total fee paid:
$1,000 (per special OTS instruction for certain holding company
formation transactions)
-------------------------------------------------------------------------
[_] Fee paid previously with preliminary materials.
[_] Check box if any part of the fee is offset as provided by Exchange Act Rule
0-11(a)(2) and identify the filing for which the offsetting fee was paid
previously. Identify the previous filing by Registration Statement number,
or the Form or Schedule and the date of its filing.
(1) Amount previously paid:
-------------------------------------------------------------------------
(2) Form, Schedule or Registration Statement No.:
-------------------------------------------------------------------------
(3) Filing party:
-------------------------------------------------------------------------
(4) Date filed:
-------------------------------------------------------------------------
<PAGE>
GLENDALE FEDERAL BANK F.S.B.
414 NORTH CENTRAL AVENUE
GLENDALE, CALIFORNIA 91203
June __, 1997
Dear Stockholder:
On behalf of the Board of Directors, I cordially invite you to attend the
Special Meeting of Stockholders of Glendale Federal Bank, Federal Savings Bank
("Glendale Federal" or the "Bank"), which will be held in the Hoeft Center
Auditorium, located at 700 W. Lexington Drive, Glendale, California, at 10:00
a.m., California time, on Wednesday, July 23, 1997.
As described in the accompanying Proxy Statement, stockholders will be asked
at the Special Meeting to consider and vote upon a proposal to create a holding
company (the "Holding Company") for the Bank through a merger of the Bank with a
wholly owned subsidiary created for that purpose (the "Reorganization"). As a
result of the Reorganization, common stockholders of the Bank will become the
sole common stockholders of the Holding Company. The Bank's Noncumulative
Preferred Stock, Series E, will become noncumulative preferred stock of the
Holding Company having equivalent terms, except that it will be convertible
solely into common stock of the Holding Company rather than of the Bank. The
Bank's outstanding common stock purchase warrants will similarly become warrants
to purchase common stock of the Holding Company.
The Board of Directors believes that the formation of a holding company will
provide valuable financial and operating flexibility to your company. The
accompanying Proxy Statement provides a detailed description of the
Reorganization. The Board of Directors has unanimously approved the
Reorganization and recommends that you vote in favor of it.
Your vote is very important, regardless of the amount of stock you own.
Please complete and sign each proxy card you receive and return it as soon as
possible in the postage-paid envelope provided even if you currently plan to
attend the Special Meeting. This will not prevent you from voting in person,
but will assure that your vote is counted if you are unable to attend the
meeting.
Thank you for your consideration of these matters and please vote today.
Sincerely,
Stephen J. Trafton
Chairman of the Board
IMPORTANT: IF YOUR GLENDALE FEDERAL STOCK IS HELD IN THE NAME OF A BROKERAGE
FIRM OR NOMINEE, ONLY THEY CAN EXECUTE A PROXY ON YOUR BEHALF. TO ENSURE THAT
YOUR STOCK IS VOTED, WE URGE YOU TO FOLLOW THE VOTING INSTRUCTIONS PROVIDED TO
YOU BY SUCH FIRM OR NOMINEE WITH THIS PROXY STATEMENT OR TO TELEPHONE THE
INDIVIDUAL RESPONSIBLE FOR YOUR ACCOUNT TODAY AND OBTAIN INSTRUCTIONS ON HOW TO
DIRECT HIM OR HER TO EXECUTE A PROXY.
IF YOU HAVE ANY QUESTIONS OR NEED HELP IN VOTING YOUR STOCK, PLEASE TELEPHONE
CORPORATE RELATIONS: (818) 500-2824, OR CALL OUR PROXY SOLICITOR, MCCORMICK AND
PRYOR: (800) [476-2508 (PIN NUMBER 4536)].
<PAGE>
GLENDALE FEDERAL BANK F.S.B.
414 NORTH CENTRAL AVENUE
GLENDALE, CALIFORNIA 91203
---------------------------
NOTICE OF SPECIAL MEETING OF STOCKHOLDERS
To be held on July 23, 1997
----------------------------
NOTICE IS HEREBY GIVEN that a Special Meeting of Stockholders of Glendale
Federal Bank, Federal Savings Bank, will be held in the Hoeft Center Auditorium,
located at 201 W. Lexington Drive, Glendale, California, on Wednesday, July 23,
1997, at 10:00 a.m., California time, to:
1. Approve the formation of a holding company for the Bank, to be named
"Golden State Bancorp Inc." pursuant to the Agreement and Plan of Reorganization
attached as Appendix A to and described in the accompanying Proxy Statement.
2. Transact such other business as may properly come before the Special
Meeting or any adjournment thereof and may properly be acted upon, including
adjournment of the Special Meeting, if necessary, to another time and date to
permit the solicitation of additional proxies or votes in favor of the above
proposal to be presented at the Special Meeting.
The Board of Directors has selected June 16, 1997 as the record date for the
Special Meeting. Only those stockholders of record at the close of business on
that date will be entitled to notice of and to vote at the Special Meeting or
any postponements or adjournments thereof.
By order of the Board of Directors
James R. Eller, Jr.
Secretary
Glendale, California
June __, 1997
<PAGE>
TABLE OF CONTENTS
<TABLE>
<CAPTION>
Page
----
<S> <C>
SUMMARY OF PROXY STATEMENT............................................... 3
VOTING AT THE SPECIAL MEETING............................................ 5
THE REORGANIZATION....................................................... 6
Reorganization Agreement............................................... 6
Recommendation of the Board of Directors............................... 6
Reasons for the Reorganization......................................... 6
Description of the Reorganization...................................... 6
Capitalization of Holding Company...................................... 8
Conditions to the Reorganization; Abandonment.......................... 8
Amendment.............................................................. 8
Effective Time......................................................... 8
Treatment of Stock and Warrant Certificates............................ 8
Effect of Reorganization on Stock Option and Other Employee Benefit
Plans................................................................ 9
Dissenters' Rights..................................................... 9
Board of Directors and Management of the Company....................... 9
Market for Company Common Stock, Preferred Stock and
Seven-Year Warrants; Anticipated Dividend Policy..................... 10
Regulation of the Company.............................................. 11
Description of Glendale Federal Securities............................. 12
GLENFED Debentures..................................................... 18
Description of Company Securities...................................... 18
Comparison of Stockholder Rights....................................... 19
Certain Federal Income Tax Consequences................................ 24
Accounting Treatment................................................... 26
ADDITIONAL INFORMATION................................................... 27
Appendix A - Agreement and Plan of Reorganization (contained in Exhibit 2.1 to
the Form S-3 Registration Statement.)
Appendix B - Certificate of Incorporation of Golden State Bancorp Inc.
Appendix C - Bylaws of Golden State Bancorp Inc.
</TABLE>
-2-
<PAGE>
SUMMARY OF PROXY STATEMENT
This summary is qualified in its entirety by the more detailed information
appearing elsewhere herein.
FORMATION OF HOLDING COMPANY
Golden State Bancorp Inc. (the "Company") was incorporated under Delaware law
by Glendale Federal Bank, Federal Savings Bank ("Glendale Federal" or the
"Bank") for the purpose of becoming the holding company for Glendale Federal.
The Company currently conducts no business. Upon completion of the holding
company formation transaction (the "Reorganization") further described herein,
the business activities of the Company will initially consist solely of the
ownership of Glendale Federal as its wholly owned savings bank subsidiary.
After the Reorganization, Glendale Federal will continue its current business
and operations as a federally chartered savings bank. See "The Reorganization -
- - Reorganization Agreement."
<TABLE>
<S> <C>
Reasons for
Reorganization................... The Reorganization will provide greater
financial and operating flexibility to
Glendale Federal, including facilitation of
future acquisitions, further development of
Glendale Federal's community banking
business and stock repurchase programs if
deemed advisable by the Board of Directors
in the future. See "The Reorganization --
Reasons for the Reorganization."
Description of
Reorganization................... The Company will become the holding company
for Glendale Federal pursuant to the
Reorganization Agreement described herein.
Under the Reorganization Agreement,
Glendale Interim Federal Savings Bank
("Interim") will be organized as a wholly
owned subsidiary of the Company and will
then be merged (the "Merger") into Glendale
Federal. In the Merger, all outstanding
Glendale Federal Common Stock not held by a
subsidiary of Glendale Federal will be
exchanged for Company Common Stock,
Glendale Federal's outstanding Five-Year
Warrants and Seven-Year Warrants will
become exercisable solely to purchase, and
such of the GLENFED Debentures as remain
outstanding will become convertible solely
into, Company Common Stock rather than
Glendale Federal Common Stock. The
Reorganization Agreement further provides
that the outstanding Glendale Federal
Preferred Stock, which is currently
convertible by the holders thereof into
Glendale Federal Common Stock, will be
exchanged in the Merger for an equal number
of shares of Company Preferred Stock having
equivalent terms except that the Company
Preferred Stock will be convertible solely
into Company Common Stock. Stockholders of
Glendale Federal will thus become the sole
stockholders of the Company in its form as
the holding company for Glendale Federal.
See "The Reorganization -- Description the
of Reorganization."
</TABLE>
-3-
<PAGE>
<TABLE>
<S> <C>
Tax Consequences of
Reorganization................... Stockholders will not recognize any income,
gain or loss for federal income tax
purposes upon the exchange of their
Glendale Federal common and preferred stock
for common and preferred stock of the
Company. See "The Reorganization -- Certain
Federal Income Tax Consequences" for a more
complete description of the tax effects of
the Reorganization, including possible tax
effects on holders of Glendale Federal's
outstanding warrants to purchase Glendale
Federal Common Stock.
Market for Company
Stock........................... The Company Common Stock and the Company
Preferred Stock received by Glendale
Federal stockholders in the Reorganization
will be listed on the New York Stock
Exchange ("NYSE"), with the respective
trading symbols "GSB" and "GSBprA",
effective as of the completion of the
Reorganization, thus enabling Glendale
Federal stockholders to trade their shares
without interruption. The Company Common
Stock will also be listed on the Pacific
Exchange. The Seven-Year Warrants will
continue to be quoted on the Nasdaq Small
Cap Market under the trading symbol
"GSBNW". See "The Reorganization -- Market
for Company Common Stock, Preferred Stock
and Warrants; Anticipated Dividend Policy."
Directors and Management of the
Company......................... The directors of the Company following the
Reorganization will be the same persons as
those serving as directors of Glendale
Federal immediately prior thereto. The
officers of the Company will be the senior
officers of Glendale Federal indicated
herein under "The Reorganization -- Board
of Directors and Management of the
Company."
Stockholder Vote Required
for Approval..................... Approval of the proposed Reorganization
described herein will require the
affirmative vote of a majority of the
outstanding shares of common stock of
Glendale Federal and of the holders of two-
thirds of the outstanding shares of
Glendale Federal Preferred Stock voting as
a separate class. See "Voting at the
Special Meeting."
</TABLE>
-4-
<PAGE>
VOTING AT THE SPECIAL MEETING
This Proxy Statement is furnished in connection with the solicitation of
proxies by the Board of Directors of Glendale Federal for use at the Special
Meeting of Stockholders of Glendale Federal to be held on July 23, 1997, and at
any postponements or adjournments thereof (the "Special Meeting"). The
approximate date of mailing of this Proxy Statement is June __, 1997.
The Board of Directors of Glendale Federal has selected June 16, 1997 as the
record date (the "Record Date") for the determination of stockholders entitled
to notice of and to vote at the Special Meeting. The only class of Glendale
Federal stock outstanding having general voting power and therefore entitled to
vote on all matters to be presented at the Special Meeting is Glendale Federal
Common Stock, of which ________ shares were issued and outstanding at the close
of business on the Record Date. Glendale Federal Preferred Stock, of which
_____ shares were issued and outstanding at the close of business on the Record
Date, will be entitled to vote as a separate class on the Reorganization that
will be presented for stockholder approval at the Special Meeting, but will not
be entitled to vote on any other matters.
The common stockholders entitled to vote at the Special Meeting will have one
vote per share on all matters to come before the Special Meeting. Holders of
Glendale Federal Preferred Stock will be entitled to one vote per share in
connection with the separate class vote of such shares on the Reorganization.
Abstentions will be treated as shares that are present and entitled to vote for
purposes of determining the presence of a quorum, but as unvoted for purposes of
determining the approval of any matter submitted for a vote of the stockholders.
If a broker indicates on its proxy that the broker does not have discretionary
authority to vote on a particular matter as to certain shares, those shares will
be counted for general quorum purposes but will not be considered as present and
entitled to vote with respect to that matter.
The approval of the Reorganization will require the affirmative vote of a
majority of the outstanding shares of Glendale Federal Common Stock (not
including shares held by any subsidiary of Glendale Federal) and the affirmative
vote of two-thirds or more of the outstanding shares of Glendale Federal
Preferred Stock. Glendale Federal has the right to seek such approval of the
holders of Glendale Federal Preferred Stock by written consent or at a separate
meeting as well.
All valid proxies received in response to this solicitation will be voted in
accordance with the instructions indicated thereon by the stockholders giving
such proxies. If no contrary instructions are given, such proxies will be voted
FOR approval of the Reorganization proposal described herein and adjournment of
the Special Meeting, if necessary, to another time and date to permit the
solicitation of additional proxies or votes to approve the Reorganization. Any
stockholder has the power to revoke his or her proxy at any time before it is
voted at the Special Meeting by giving written notice of such revocation to the
Secretary of Glendale Federal (which notice may be given by the filing of a duly
executed proxy bearing a later date) or by attending the Special Meeting and
voting in person.
The cost of this solicitation will be paid by Glendale Federal. Glendale
Federal has retained McCormick & Pryor to assist in the solicitation of proxies
for a fee of $8,500 and reimbursement of certain expenses. To the extent
necessary, proxies may also be solicited by personnel of Glendale Federal in
person, by telephone or through other forms of communication. Glendale Federal
personnel who participate in this solicitation will not receive any additional
compensation for such solicitation. Glendale Federal will request record
holders of shares beneficially owned by others to forward this proxy statement
and related materials to the beneficial owners of such shares and will reimburse
such record holders for their reasonable expenses incurred in doing so.
-5-
<PAGE>
THE REORGANIZATION
REORGANIZATION AGREEMENT
The Board of Directors of Glendale Federal has unanimously approved the
formation of a holding company for Glendale Federal, to be named Golden State
Bancorp Inc. (the "Company"), pursuant to the Agreement and Plan of
Reorganization (the "Reorganization Agreement"), dated as of May 28, 1997, by
and among Glendale Federal, the Company and Glendale Interim Federal Savings
Bank ("Interim") further described herein.
The Company was recently incorporated under Delaware law by Glendale Federal
for the purpose of completing the Reorganization and has no operating history.
The common stockholders of Glendale Federal immediately prior to the completion
of the Reorganization (other than Glendale Investment Corporation, a Glendale
Federal subsidiary that currently holds 200,686 shares of Glendale Federal
Common Stock) will become the Company's sole common stockholders. The
outstanding shares of Glendale Federal Preferred Stock will be converted into
Company Preferred Stock in the Reorganization. The Company Preferred Stock and
such of the GLENFED Debentures as remain outstanding will thereafter be
convertible solely into, and Glendale Federal's outstanding Five-Year Warrants
and Seven-Year Warrants will thereafter be exercisable only for, Company Common
Stock rather than Glendale Federal Common Stock. Glendale Federal will continue
its existing business and operations after the Reorganization under its existing
name but as a wholly owned subsidiary of the Company rather than as a publicly
held company. The consolidated capitalization, assets, liabilities, income,
financial statements and board of directors of the Company immediately following
the Reorganization will be substantially the same as those of Glendale Federal
immediately prior to the Reorganization.
The Reorganization Agreement is attached as Appendix A hereto and should be
read for a complete statement of the terms and conditions of the Reorganization.
The following discussion is qualified in its entirety by reference to the
Reorganization Agreement.
RECOMMENDATION OF THE BOARD OF DIRECTORS
The Board of Directors of Glendale Federal unanimously recommends that the
stockholders of Glendale Federal approve the Reorganization Agreement.
REASONS FOR THE REORGANIZATION
The Board of Directors believes that creation of a holding company will
provide valuable financial and operating flexibility that will better position
Glendale Federal to take advantage of favorable opportunities as they arise.
The holding company structure, which is used by most of Glendale Federal's
bank and thrift institution competitors, may be used to facilitate acquisitions
of financial institutions and other types of businesses. Such acquisitions
could include acquisitions of community-oriented commercial banks in furtherance
of Glendale Federal's consumer and small business banking strategies. The
holding company structure will also facilitate repurchases of outstanding
preferred or common stock should the Board determine in the future that such
repurchases would be beneficial to stockholders and to the Company. Repurchases
of stock directly by Glendale Federal in its current form as a savings bank
would subject it to "recapture" (taxation at current income tax rates) of
certain bad debt reserves it has previously taken pursuant to applicable
provisions of the Internal Revenue Code of 1986. A holding company would not
generally be subject to such recapture taxes with respect to repurchases of
stock issued by it. Repurchases of stock directly by Glendale Federal would
also be subject to certain limitations and prior approval requirements under the
regulations of the Office of Thrift Supervision ("OTS"), which is Glendale
Federal's primary federal regulator, that would not be applicable to stock
repurchases by a holding company.
DESCRIPTION OF THE REORGANIZATION
The Reorganization will be accomplished through the steps summarized below.
Descriptions of the classes of securities referred to below are set forth
elsewhere herein under the caption "The Reorganization -- Description of
Glendale Federal Securities" and " -- Description of Company Securities".
(1) The Company has been incorporated as a wholly owned subsidiary of Glendale
Federal, under the laws of the State of Delaware.
-6-
<PAGE>
(2) The Company will organize Interim as an interim federal savings bank that
will be a wholly owned subsidiary of the Company and will be used solely for the
purpose of completing the Reorganization.
(3) Interim will be merged (the "Merger") into Glendale Federal, with Glendale
Federal being the surviving corporation.
(4) As part of the Merger, the following stock exchanges, stock issuances and
effects will occur automatically by operation of law and pursuant to the
provisions of the Reorganization Agreement and the respective securities
referred to below:
(a) The shares of Glendale Federal Common Stock outstanding immediately
prior to the Merger (other than the shares of such stock currently held by
Glendale Investment Corporation) will be converted on a one-for-one basis
into shares of Company Common Stock, with the result that the holders of
such outstanding common stock of Glendale Federal will become the
Company's sole common stockholders. The shares of Glendale Federal Common
Stock held by Glendale Investment Corporation will continue to be shares
of Glendale Federal Common Stock after the Merger.
(b) The Five-Year Warrants previously issued by Glendale Federal with
respect to its Common Stock that remain outstanding immediately prior to
the Merger will become exercisable solely for the number of shares of
Company Common Stock that equals the number of shares of Glendale Federal
Common Stock for which they are currently exercisable, and on the same
terms as currently provided thereby. For a description of the Five-Year
Warrants, see "The Reorganization -- Description of Glendale Federal
Securities -- Five-Year Warrants."
(c) The Seven-Year Warrants previously issued by Glendale Federal with
respect to its Common Stock that remain outstanding immediately prior to
the Merger will become exercisable solely for the number of shares of
Company Common Stock that equals the number of shares of Glendale Federal
Common Stock for which they are currently exercisable, and on the same
terms and at the same exercise price as currently provided thereby. For a
description of the Seven-Year Warrants, see "The Reorganization --
Description of Glendale Federal Securities -- Seven-Year Warrants."
(d) The shares of Glendale Federal Preferred Stock outstanding immediately
prior to the Merger will be converted on a one-for-one basis into shares of
Company Preferred Stock, which will have substantially the same rights,
preferences, privileges and other terms as the Glendale Federal Preferred
Stock. For descriptions of the Glendale Preferred Stock and the Company
Preferred Stock, see "The Reorganization -- Description of Glendale Federal
Securities -- Glendale Federal Preferred Stock" and "-- Description of
Company Securities -- Company Preferred Stock."
(e) The GLENFED Debentures that remain outstanding immediately prior to the
Merger will become convertible solely into Company Common Stock rather than
Bank Common Stock. For a description of the GLENFED Debentures, see "The
Reorganization -- Description of Glendale Federal Securities -- GLENFED
Debentures."
(5) The shares of common stock of the Company held by Glendale Federal
immediately prior to the Merger will be canceled in the Merger.
(6) The shares of common stock of Interim outstanding immediately prior to the
Merger will be converted into shares of Glendale Federal Common Stock and
Glendale Federal Series 1997-A Preferred Stock having equivalent rights,
preferences, privileges and other terms as the Glendale Federal Preferred Stock,
with the result that after the Merger all of the issued and outstanding stock of
Glendale Federal (other than the shares of such stock currently held by Glendale
Investment Corporation) will be owned by the Company. For a description of the
Glendale Federal Series 1997-A Preferred Stock, see "The Reorganization -
Description of Glendale Federal Securities - Glendale Federal Series 1997-A
Preferred Stock."
CAPITALIZATION OF HOLDING COMPANY
-7-
<PAGE>
Glendale Federal intends to declare and pay a dividend of $15 million to the
Company promptly after consummation of the Reorganization. It is currently
anticipated that such dividend will be used for general working capital purposes
and for payment of dividends on the Company Preferred Stock. Additional
financial resources may be available to the Company in the future through
borrowings, debt or equity financings, including amounts received on exercise of
outstanding Seven-Year Warrants in the event of exercise of such Seven-Year
Warrants by the holders thereof, or dividends paid to the Company by Glendale
Federal. For a discussion of regulatory limitations on the payment of dividends
by Glendale Federal to the Company, see "The Reorganization -- Market for
Company Common and Preferred Stock; Anticipated Dividend Policy."
Glendale Federal's capital currently exceeds applicable regulatory
requirements. At March 31, 1997, Glendale Federal's stockholders' equity was
$986.4 million, or approximately 6.4% of its total assets, and its regulatory
capital was in excess of the amounts required to be "well capitalized" pursuant
to the Federal Deposit Insurance Corporation Improvement Act of 1991, with core
capital exceeding the 5.00% requirement for such status by $160.8 million, Tier
1 risk based capital exceeding the 6% requirement for such status by $400.65
million and risk-based capital exceeding the 10% requirement for such status by
$155.9 million.
CONDITIONS TO THE REORGANIZATION; ABANDONMENT
The Reorganization Agreement sets forth several conditions which must be met
before the Reorganization will be completed, including the following: (i)
approval of the Reorganization Agreement by the affirmative vote of a majority
of the shares of Glendale Federal Common Stock eligible to be voted at the
Special Meeting and by the affirmative vote of at least two-thirds of the
outstanding shares of Glendale Federal Preferred Stock voting as a separate
class; (ii) receipt of an opinion of counsel acceptable in form and substance to
Glendale Federal, generally to the effect that the Reorganization will not be
treated as a taxable transaction for federal income tax purposes (counsel has
advised that it expects to be able to provide its opinion to such effect based
on current law, regulations and precedents; see "The Reorganization -- Certain
Federal Income Tax Consequences"); (iii) approval of the Reorganization by the
OTS; and (iv) receipt of all approvals, reviews and consents from any other
governmental agencies or other third parties which may be required for the
lawful completion of the Reorganization (no such governmental or third party
approvals, other than such as may be required under federal and state securities
laws, are currently anticipated to be required).
The Reorganization Agreement provides that it may be terminated at any time
prior to the Effective Time (as defined below) by the Board of Directors of
Glendale Federal, the Company or Interim.
AMENDMENT
The Boards of Directors of Glendale Federal, the Company and Interim may amend
the Reorganization Agreement if they determine for any reason that such
amendment would be advisable. Such amendment may occur at any time prior to the
completion of the Reorganization, whether before or after stockholder approval
of the Reorganization Agreement, except that after stockholder approval, the
Reorganization Agreement will not be amended in any respect deemed material and
adverse to the stockholders by such Boards of Directors.
EFFECTIVE TIME
The Reorganization will become effective on the date and time (the "Effective
Time") on which articles of combination pertaining to the Reorganization are
filed with and endorsed by the Secretary of the OTS. The Effective Time is
currently expected to occur shortly after the Special Meeting.
TREATMENT OF STOCK AND WARRANT CERTIFICATES
After the Effective Time, (i) Glendale Federal Common Stock certificates
(other than those representing shares held by Glendale Investment Corporation)
and Glendale Federal Preferred Stock certificates will represent, by operation
of law, the same number of shares of Company Common Stock or Company Preferred
Stock, respectively, as the number of shares of Glendale Federal Common Stock or
Glendale Federal Preferred Stock represented by such stock certificates
immediately prior to the Effective Time, and the holders of such certificates
will have all of the rights of holders of Company Common Stock or Company
Preferred Stock, as the case may be, and (ii) the Five-Year Warrants and the
Seven-Year Warrants will entitle the holders thereof solely to purchase the
number of shares of Company Common Stock that equals the number of shares of
Glendale Federal Common Stock for which
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such Five-Year Warrants and Seven-Year Warrants, respectively, were currently
exercisable immediately prior to the Effective Time, and on the same terms and
conditions and at the same exercise price, and the Company will assume all of
Glendale Federal's obligations with respect to such Five-Year Warrants and
Seven-Year Warrants.
After the Effective Time, stockholders will be entitled, but not required, to
exchange their Glendale Federal stock certificates for new certificates
evidencing the same number of shares of corresponding stock of the Company. The
NYSE and PSE will accept the delivery of existing Glendale Federal stock
certificates in transactions subsequent to the Effective Time as constituting
"good delivery" of shares of stock of the Company. New warrant certificates
will not be issued in exchange for outstanding Five-Year Warrants or Seven-Year
Warrants. ChaseMellon Shareholder Services, L.L.C. ("Chase Mellon"), 400 South
Hope Street, 4th Floor, Los Angeles, California 90071 is the principal Transfer
Agent and Registrar for Glendale Federal's Common and Preferred Stock and is the
Warrant Agent with respect to the Five-Year Warrants and the Seven-Year
Warrants. It will act in the same capacities for the Common Stock and Preferred
Stock of the Company and will continue as the Warrant Agent for the Five-Year
Warrants and the Seven-Year Warrants.
EFFECT OF REORGANIZATION ON STOCK OPTION AND OTHER EMPLOYEE BENEFIT PLANS
Upon completion of the Reorganization, stock options with respect to shares of
Glendale Federal Common Stock granted under the Glendale Federal 1993 Stock
Option and Long Term Incentive Plan (the "Stock Option Plan") and outstanding
prior to completion of the Reorganization will automatically become options to
purchase the same number of shares of Company Common Stock upon identical terms
and conditions and for an identical price. The Company will assume all of
Glendale Federal's obligations with respect to the Stock Option Plan and such
outstanding options.
All other employee benefit plans of Glendale Federal will be unchanged by the
Reorganization except that any plan, such as the Sheltered Pay Plan, which holds
Glendale Federal Common Stock will, following the completion of the
Reorganization, instead hold a corresponding number of shares of Company Common
Stock.
DISSENTERS' RIGHTS
Stockholders of Glendale Federal will not have any dissenters' rights with
respect to the Reorganization. Under the regulations of the OTS, the
stockholders of a federally chartered savings bank with stock which is listed on
the NYSE are not entitled to dissenters' rights in connection with a merger
involving such savings association if the stockholders are required to accept
only "Qualified Consideration" for the stock. "Qualified Consideration" is
defined to include cash, shares of stock of any savings association or bank or
corporation which at the effective date of the merger will be listed on a
national securities exchange or listed on the Nasdaq National Market or any
combination of such shares of stock and cash. The Glendale Federal Common Stock
and the Glendale Federal Preferred Stock are each listed on the NYSE and the
Company Common Stock and the Company Preferred Stock will be so listed at the
Effective Time.
BOARD OF DIRECTORS AND MANAGEMENT OF THE COMPANY
Board of Directors. Following consummation of the Reorganization, the Board
of Directors of the Company will be elected by the stockholders of the Company,
and the Board of Directors of Glendale Federal will be elected by the Company,
as the sole stockholder of Glendale Federal. The initial Board of Directors of
the Company consists of nine members, all of whom are current members of the
Board of Directors of Glendale Federal and will serve in the same classes of
directorships and will have the same unexpired terms as directors of the Company
as they have with Glendale Federal. Approval of the Reorganization by the
stockholders of Glendale Federal will be deemed to be approval of the initial
directors of the Company without further action and without changes in classes
and terms.
The Board of Directors of the Company has established executive and audit
committees, which have the same members as the current comparable committees of
the Board of Directors of Glendale Federal.
Management. Following consummation of the Reorganization, the executive
officers of the Company and Glendale Federal will be elected annually or
appointed by or under the direction of their respective Boards of Directors and
will hold office until their successors are elected and qualified. The
executive officers of the Company currently are as follows: Stephen J. Trafton,
Chairman of the Board, Chief Executive Officer and President; Richard
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A. Fink, Vice Chairman of the Board; John E. Haynes, Chief Financial Officer;
and James R. Eller, Jr., Secretary.
MARKET FOR COMPANY COMMON STOCK, PREFERRED STOCK AND SEVEN-YEAR WARRANTS;
ANTICIPATED DIVIDEND POLICY
Market for Company Common Stock. Glendale Federal Common Stock is currently
listed on the NYSE and the PSE and Glendale Federal Preferred Stock is currently
listed on the NYSE. The Company Common Stock and Company Preferred Stock,
respectively, that will be issued in exchange therefor in connection with the
Reorganization have also been approved for such listing by the NYSE and the PSE
upon official notice of issuance under the trading symbols "GSB" and "GSBprA,"
respectively. Accordingly, it is anticipated that stockholders will be able to
trade their shares on the NYSE and the PSE without interruption upon completion
of the Reorganization. The Seven-Year Warrants will continue to be quoted on the
Nasdaq Small Cap Market under the trading symbol "GSBNW."
Anticipated Dividend Policy. Holders of Company Common Stock will be entitled
to receive dividends when, as and if declared by the Board of Directors of the
Company out of funds legally available therefor. Consistent with Glendale
Federal's current policy, the Company's dividend policy will be primarily to
retain earnings for use in its business and therefore the Company has no present
plan to declare or pay a cash dividend with respect to Company Common Stock, but
does intend to pay regular dividends on the Company Preferred Stock to be issued
in the Reorganization. The timing and amount of future dividends will be within
the discretion of the Board of Directors of the Company and will depend on the
consolidated earnings, financial condition, liquidity and capital requirements
of the Company and its subsidiaries, applicable governmental statutes,
regulations and policies and other factors deemed relevant by the Board of
Directors.
After consummation of the Reorganization, dividends from Glendale Federal will
be the Company's primary source of funds for the payment of dividends because
initially the Company will have no source of income other than such dividends
and the capital contributed to the Company by Glendale Federal promptly after
consummation of the Reorganization. Under OTS regulations, the ability of a
savings association such as Glendale Federal to pay dividends and make other
"capital distributions" (such as repurchases of its stock) depends on its
classification in one of three categories based primarily on its regulatory
capital and supervisory status. Glendale Federal is currently a "Tier 1"
institution (the highest rating) for purposes of the OTS capital distributions
regulation. Tier 1 institutions, which meet fully phased-in capital
requirements and are subject only to "normal supervision," may, subject to 30
days prior notice to the OTS, pay the higher of (i) the sum of 100% of the
institution's net income to date during the calendar year and the amount that
would reduce by one-half the institution's surplus capital ratio at the
beginning of the calendar year or (ii) 75% of net income over the last four
quarters. The OTS may prohibit any otherwise permitted capital distribution if
the OTS determines that the making of the distribution would constitute an
unsafe or unsound practice. As of March 31, 1997, Glendale Federal would have
been limited to an aggregate capital distribution in the amount of approximately
$177.219 million under this regulation.
In addition, dividend distributions made by Glendale Federal to any holder of
its stock, including the Company, in excess of its current and accumulated
earnings and profits as calculated for federal income tax purposes, as well as
distributions in dissolution or in redemption or liquidation of stock, may
result in the "recapture" (recognition as taxable income) of Glendale Federal's
"tax bad debt reserves," and could result in additional tax liability to
Glendale Federal on a "gross up" basis pursuant to which both the amount of the
dividend or other distribution and the amount of tax occasioned thereby are
deemed to have come from the tax bad debt reserve and are therefore taxed at
current federal income tax rates. This may have an adverse effect on the
ability to Glendale Federal to pay dividends or to redeem stock.
The ability of Glendale Federal to make funds available to the Company also
will be subject to restrictions imposed by federal law on the ability of any
such savings association to extend credit to the Company and its non-bank
subsidiaries, to purchase the assets thereof, to issue a guarantee, acceptance
or letter of credit on their behalf (including an endorsement or standby letter
of credit) or to invest in the stock or securities thereof, or to take such
stock or securities as collateral for loans to any borrower. For additional
information, see "The Reorganization -- Regulation of the Company --
Transactions with Affiliates."
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REGULATION OF THE COMPANY
The references to law and regulations which are applicable to the Company and
Glendale Federal set forth below and elsewhere herein are brief summaries which
do not purport to be complete and are qualified in their entirety by reference
to such laws and regulations. In addition, from time to time various bills are
introduced in the United States Congress which could result in additional or in
less regulation of the business of the Company and Glendale Federal. It cannot
be predicted at this time whether any such legislation actually will be adopted
or how such adoption would affect the business of the Company or Glendale
Federal.
General. Upon consummation of the Reorganization, the Company will be a
savings and loan holding company and in such capacity will be required to
register with and will be subject to examination and supervision by the OTS.
A savings and loan holding company is prohibited by federal law, from (i)
acquiring control (as defined) of a savings association or holding company
thereof without prior OTS approval, (ii) acquiring more than 5% of the voting
shares of a "savings association" (which term includes federal savings banks) or
holding company thereof which is not a subsidiary without prior OTS approval,
subject to certain exceptions, (iii) acquiring through merger, consolidation or
purchase of assets, another savings association or holding company thereof
without prior OTS approval, or (iv) acquiring control of an uninsured
institution. No director or officer of a savings and loan holding company or
person owning or controlling more than 25% of such holding company's voting
shares may, except with the prior approval of the OTS, acquire control of any
savings association which is not a subsidiary of such holding company.
Transactions with Affiliates. Transactions between a savings association and
any affiliate are governed by Sections 23A and 23B of the Federal Reserve Act.
In a holding company context, the parent holding company of a savings
association (such as the Company will be after the Reorganization) and any
companies which are controlled by such parent holding company are affiliates of
the savings association. Generally, Sections 23A and 23B (i) limit the extent
to which the savings association or its subsidiaries may engage in "covered
transactions" with any one affiliate to an amount equal to 10% of such
association's capital stock and surplus, and impose an aggregate limit on all
such transactions with affiliates to an amount equal to 20% of such capital
stock and surplus, and (ii) require that all such transactions be on terms
substantially the same, or at least as favorable, to the association or
subsidiary as those provided to a non-affiliate. The term "covered transaction"
includes the making of loans, investments in securities issued by the affiliate,
purchases of assets, issuances of guarantees and other similar types of
transactions. In addition to the restrictions imposed by Sections 23A and 23B of
the Federal Reserve Act, other federal law provides that no savings association
may (i) loan or otherwise extend credit to an affiliate, except for any
affiliate which engages only in activities which are permissible for bank
holding companies, or (ii) purchase or invest in any stocks, bonds, debentures,
notes or similar obligations of any affiliate, except for affiliates which are
subsidiaries of the savings association.
In addition, Sections 22(h) and (g) of the Federal Reserve Act place
restrictions on loans to executive officers, directors and principal
stockholders. Under Section 22(h), loans to a director, to an executive officer
and to a greater than 10% stockholder of a savings association, and certain
affiliated interests of either thereof, may not exceed, together with all other
outstanding loans to such person and affiliated interests, the limit imposed on
association loans to one borrower (which generally equals 15% of the
association's unimpaired capital and surplus). Section 22(h) further requires
that loans to directors, executive officers and principal stockholders be made
on terms substantially the same as those offered in comparable transactions to
non-affiliated persons and also requires prior board approval for certain loans.
In addition, the aggregate amount of credit extended by a savings association to
all directors, executive officers and principal stockholders cannot exceed the
association's unimpaired capital and surplus. Section 22(g) places additional
restrictions on loans to executive officers.
Activities Limitations. So long as the Company owns only Glendale Federal,
and provided that Glendale Federal continues to comply with the "qualified
thrift lender" test described below, the Company will not be subject to any
general restrictions on the types of business activities in which it may engage,
either directly or through subsidiaries. In the event the Company were to
acquire an additional savings association subsidiary and thereby become a
"multiple savings and loan holding company" (as defined in applicable federal
law) or were to acquire a bank and thereby to become a "bank holding company,"
the Company would become subject to the respective types of activities
restrictions summarized below.
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<PAGE>
A multiple savings and loan holding company or subsidiary thereof which is not
an insured institution generally may not commence, or continue for more than 180
days after becoming a multiple savings and loan holding company or a subsidiary
thereof, any business activity other than (i) furnishing or performing
management services for a subsidiary savings association, (ii) conducting an
insurance agency or an escrow business, (iii) holding, managing or liquidating
assets owned by or acquired from a subsidiary savings association, (iv) holding
or managing properties used or occupied by a subsidiary savings association, (v)
acting as trustee under deeds of trust, (vi) those activities previously
directly authorized by the OTS by regulation as of March 5, 1987 to be engaged
in by multiple savings and loan holding companies or (vii) subject to prior
approval of the OTS, those activities authorized by the Board of Governors of
the Federal Reserve System (the "Federal Reserve Board") as permissible
investments for bank holding companies.
In order to acquire a commercial bank as a separate subsidiary the Company
would be required to file an application with the Federal Reserve Board for
approval to become a bank holding company. As a bank holding company, the
Company would be subject to regulation by the Federal Reserve Board and its
business activities (including its nonbank subsidiaries) would be limited to
activities which the Federal Reserve Board has determined to be sufficiently
closely related to banking and to meet certain other criteria. The currently
permitted activities are set forth in the Federal Reserve Board's Regulation Y
(12 CFR (S)225 et seq.). These activities limitations are similar to, but in
some respects more limiting than, those applicable to a multiple savings and
loan holding company.
If a savings association subsidiary of a "unitary" savings and loan holding
company (one that owns only one savings association) fails to meet its
"qualified thrift lender" test, the holding company becomes subject to the
activity restrictions applicable to multiple savings and loan holding companies
and must register as a bank holding company. The definition of savings
association qualified thrift investments ("QTIs") and the qualified thrift
lender test in combination require that QTIs represent 65% of portfolio assets.
Portfolio assets are defined as total assets less intangibles, property used by
a savings association in its business and liquidity investments in an amount not
exceeding 20% of the total assets. Generally, QTIs are residential housing
related assets. Glendale Federal's QTIs were substantially in excess of 65% of
Glendale Federal's portfolio assets as of March 31, 1997.
A savings association that does not meet its qualified thrift lender test must
either convert to a bank charter or comply with the following restrictions on
its operations: (i) the association may not engage in any new activity or make
any new investment, directly or indirectly, unless such activity or investment
is permissible for both a savings association and a national bank; (ii) the
branching powers of the association will be restricted to those of a national
bank; (iii) the association will not be eligible to obtain new advances from any
Federal Home Loan Bank ("FHLB"); and (iv) payment of dividends by the
association will be subject to the rules regarding payment of dividends by a
national bank. Upon the expiration of three years from the date the association
ceases to be a qualified thrift lender, it must cease any activity, and must not
retain any investment, that is not permissible for a national bank and
immediately repay any outstanding FHLB advances (subject to safety and soundness
considerations).
DESCRIPTION OF GLENDALE FEDERAL SECURITIES
General.
Glendale Federal's charter currently authorizes the issuance of 100,000,000
shares of Glendale Federal Common Stock and 50,000,000 shares of preferred
stock. As of April 30, 1997, 50,308,284 shares of Glendale Federal Common Stock
(excluding shares held by Glendale Investment Corporation) and 4,621,982 shares
of Glendale Federal Preferred Stock, Series E, were outstanding.
Glendale Federal Common Stock.
Shares of Glendale Federal Common Stock are entitled to share equally in the
assets available for distribution upon liquidation, subject to any prior rights
of the holders of any series of preferred stock of Glendale Federal then
outstanding. Holders of Glendale Federal Common Stock are entitled to receive
dividends when, as and if declared by the Board of Directors of Glendale Federal
out of assets of Glendale Federal legally available for payment, subject to the
superior rights of the holders of any series of preferred stock of Glendale
Federal that may be issued. The ability of Glendale Federal to pay dividends on
Glendale Federal Common Stock is contingent, among other things, upon whether
Glendale Federal meets applicable regulatory capital requirements. Each share
of Glendale Federal Common Stock is entitled to one vote, except as to the
cumulation of votes in the election of directors. There are no preemptive or
other rights to subscribe for any shares.
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Glendale Federal Preferred Stock.
The outstanding shares of Noncumulative Preferred Stock, Series E (which is
referred to elsewhere herein as the "Glendale Federal Preferred Stock")
currently constitute Glendale Federal's only outstanding series of preferred
stock.
Rank. The Glendale Federal Preferred Stock is subordinate to all indebtedness
of Glendale Federal, including, without limitation, customer deposit accounts.
The Glendale Federal Preferred Stock is, prior to conversion, superior and prior
in rank to Glendale Federal Common Stock and to all other Junior Stock. "Junior
Stock" is defined for this purpose to mean Glendale Federal Common Stock and any
other classes or series of equity securities of Glendale Federal not expressly
designated as being on a parity with, or senior to, the Glendale Federal
Preferred Stock. Glendale Federal has the power to create and issue additional
preferred stock or other classes of stock ranking on a parity with the Glendale
Federal Preferred Stock, or that constitute Junior Stock, without any approval
or consent of the holders of the Glendale Federal Preferred Stock.
Dividends. Holders of the Glendale Federal Preferred Stock are entitled to
receive, when, as, and if declared by the Board of Directors out of funds
legally available therefor, noncumulative cash dividends at an annual rate of
8.75% (expressed as a percentage of the per share liquidation preference of the
Glendale Federal Preferred Stock). Dividends on the Glendale Federal Preferred
Stock are payable in quarterly installments as of the first day of January,
April, July and October of each year to holders of record as of a date fixed by
the Board of Directors of Glendale Federal not less than 30 or more than 60 days
prior to the date such dividend is paid. Quarterly dividend periods (each a
"Preferred Stock Dividend Period") include December 1, March 1, June 1 and
September 1 of each year and end on and include the date preceding commencement
of the next following Preferred Stock Dividend Period. Dividends on the shares
of Glendale Federal Preferred Stock are noncumulative so that if a dividend on
the shares of Glendale Federal Preferred Stock with respect to any Preferred
Stock Dividend Period is not declared by the Board of Directors, then Glendale
Federal will not be obligated at any time to pay a dividend on the shares of
Glendale Federal Preferred Stock in respect of such Preferred Stock Dividend
Period, whether or not dividends are declared and paid in respect of any
subsequent dividend period.
Unless full cash dividends on the Glendale Federal Preferred Stock for a
Preferred Stock Dividend Period have been or are contemporaneously declared and
paid (or declared and a sum sufficient for the payment thereof set apart), no
full dividends may be declared or paid or set apart for payment on preferred
stock of Glendale Federal of any series ranking, as to dividends, on a parity
with the Glendale Federal Preferred Stock for any period. When cash dividends
are not paid in full (or declared and a sum sufficient for such full payment so
set apart) upon the preferred stock of Glendale Federal of any series ranking,
as to dividends, on a parity with the Glendale Federal Preferred Stock, no
dividends may be declared on any series of stock ranking, as to dividends,
junior to the Glendale Federal Preferred Stock and all dividends declared upon
shares of Glendale Federal Preferred Stock and any such parity stock will be
declared pro rata based upon the respective amounts that would have been paid
thereon had dividends been paid in full.
Unless (i) full cash dividends on the Glendale Federal Preferred Stock have
been declared and paid or set aside for payment for the four most recent
Preferred Stock Dividend Periods and (ii) Glendale Federal has declared a cash
dividend on the Glendale Federal Preferred Stock at the annual dividend rate for
the current Preferred Stock Dividend Period and sufficient funds have been set
apart for the payment of such cash dividend, Glendale Federal may not declare or
pay or set aside for payment any dividends (other than dividends payable in
Junior Stock) or make any other distribution upon Junior Stock or redeem,
purchase or otherwise acquire any Junior Stock for any consideration (and no
monies may be paid to or made available for a sinking fund for the redemption of
any shares of any such stock) except by conversion into or exchange for Junior
Stock.
As described herein, OTS regulations of general application impose limitations
upon certain capital distributions by savings institutions, including cash
dividends.
Conversion. The Glendale Federal Preferred Stock is convertible, at the
option of the holders thereof, into Glendale Federal Common Stock at a
conversion ratio of 2.404 shares of Glendale Federal Common Stock for each share
of Glendale Federal Preferred Stock, subject to adjustment in certain events as
described below.
The conversion right with respect to such shares terminates at the close of
business on the fifth day immediately preceding the date fixed for redemption
(as described under "Optional Redemption" below) of such shares, provided
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that no default by Glendale Federal in the payment of the applicable redemption
price (including any declared and unpaid dividends) shall have occurred and be
continuing on the date fixed for such redemption, unless a notice of conversion
shall have been received, and the certificate(s) representing the shares to be
converted shall have been surrendered, prior to that time.
The holder of record of a share of Glendale Federal Preferred Stock on a
record date with respect to the payment of a dividend declared on the Glendale
Federal Preferred Stock is entitled to receive such dividend on such share of
Glendale Federal Preferred Stock on the corresponding dividend payment date
notwithstanding the conversion thereof after such record date. No payment or
adjustment is to be made on conversion for dividends declared on the shares of
Glendale Federal Preferred Stock or for dividends on Glendale Federal Common
Stock issued on conversion.
The conversion price is subject to adjustment in certain events, including:
(i) the issuance of any capital stock of Glendale Federal as a dividend or
distribution on Glendale Federal Common Stock; (ii) the combination, subdivision
or reclassification of Glendale Federal Common Stock; (iii) the issuance to all
holders of Glendale Federal Common Stock of rights or warrants entitling them to
subscribe for or purchase Glendale Federal Common Stock at less than the then
current market price (as defined) of Glendale Federal Common Stock; (iv) the
distribution to all holders of Glendale Federal Common Stock of evidences of
Glendale Federal's indebtedness or other assets (including securities, but
excluding the dividends, distributions, rights and warrants, referred to in
clauses (i) and (iii) above, and any dividend or distribution paid in cash out
of surplus or retained earnings); or (v) the issuance, sale or exchange of
shares of Glendale Federal Common Stock for consideration having a fair market
value that is less than the current market value. No such adjustment of less
than 1% of the conversion rate will be required; provided, that any such
adjustment not made due to this limitation must be carried forward and taken
into account in any subsequent adjustment determination.
In the event of a consolidation or merger or similar transaction pursuant to
which the outstanding shares of Glendale Federal 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, there shall
be no adjustment to the conversion price by virtue thereof. The outstanding
shares of Glendale Federal Preferred Stock shall, in such case, be assumed by
and shall become preferred stock of any successor or resulting entity having in
respect of such entity, insofar as possible, the same powers, preferences, and
relative, participating, optional and other special rights, and qualifications,
limitations or restrictions, that the Glendale Federal Preferred Stock had
immediately prior to such transaction, except that after such transaction each
share of Glendale Federal Preferred Stock shall be convertible, otherwise on the
same terms and conditions, into the consideration so receivable by a holder of
the number of shares of Glendale Federal Common Stock into which such shares of
Glendale Federal 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.
Fractional shares of Glendale Federal Common Stock will not be delivered upon
conversion, but a cash adjustment will be paid in respect of such fractional
interests, based on the average of the closing sales prices of Glendale Federal
Common Stock on the NYSE for the five business days immediately preceding the
date of conversion. Glendale Federal shall at all times reserve a sufficient
number of shares of Glendale Federal Common Stock to effect the conversion of
all shares of Glendale Federal Preferred Stock then outstanding.
Optional Redemption. Subject to applicable laws or regulations, the shares of
Glendale Federal Preferred Stock are redeemable, in whole or in part, at the
option of Glendale Federal, on 20 to 45 days notice, from time to time at any
time on or after October 1, 1998 at the following per share redemption prices,
plus in each case an amount equal to any dividends that have been declared
thereon but remain unpaid as of the date of redemption, if redeemed during the
twelve-month period beginning October 1 of each of the following years:
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<TABLE>
<CAPTION>
Redemption Price
per share of Glendale
Year Federal Preferred Stock
---- -----------------------
<S> <C>
1998.................. $26.09375
1999.................. 25.87500
2000.................. 25.65625
2001.................. 25.43750
2002.................. 25.21875
2003 and thereafter... 25.00000
</TABLE>
The redemption of shares of Glendale Federal Preferred Stock is subject to
certain limitations imposed by OTS regulations of general application.
If a notice to convert shares of Glendale Federal Preferred Stock into shares
of Glendale Federal Common Stock, as described under "Conversion" above, shall
have been received by Glendale Federal and the certificates representing such
shares shall have been surrendered on or prior to the fifth day immediately
preceding the redemption date specified in the notice of redemption, such shares
may not be redeemed.
After a notice of redemption has been given, if on or before the redemption
date specified therein all funds necessary for such redemption have been set
aside by Glendale Federal separate and apart from its other funds or deposited
in trust for the account of the holders of the shares to be redeemed, on and
after such redemption date, notwithstanding that any certificate for shares of
the Glendale Federal Preferred Stock so called for redemption has not been
surrendered for cancellation, the shares represented thereby will be deemed no
longer to be outstanding, the dividends thereon will cease to accrue, and all
rights with respect to such shares so called for redemption will cease and
terminate, except only the right to receive such money set aside or deposited in
trust without interest.
Voting Rights. Except as described below or as otherwise required by law, the
holders of Glendale Federal Preferred Stock do not have any voting rights.
If Glendale Federal fails to pay cash dividends on the Glendale Federal
Preferred Stock with respect to any six Preferred Stock Dividend Periods the
number of directors of Glendale Federal will be increased by two and, subject to
compliance with any requirement for regulatory approval of (or nonobjection to)
persons serving as directors, the holders of Glendale Federal Preferred Stock,
together with any other holders of preferred stock of Glendale Federal having
similar voting rights, voting together as a single class, will have the right to
elect up to two members of the Board of Directors.
The holders of Glendale Federal Preferred Stock and such other holders may
only exercise such special class voting rights at the next annual meeting and
each subsequent annual meeting until dividends have been paid or declared and
set aside on the Glendale Federal Preferred Stock and such other Glendale
Federal preferred stock for four consecutive Preferred Stock Dividend Periods.
The term of directors elected by holders of Glendale Federal Preferred Stock and
such other holders shall terminate upon the payment or declaration and setting
aside for payment of full dividends on the shares held thereby for four
consecutive Preferred Stock Dividend Periods.
So long as any Glendale Federal Preferred Stock is outstanding and unless the
consent or approval of a greater number of shares is then required by law or
regulation, Glendale Federal may not, without the affirmative vote or consent of
the holders of two-thirds of all outstanding shares of Glendale Federal
Preferred Stock voting as a separate class, amend or otherwise alter or repeal
any provision of the Glendale Federal Charter, including any supplementary
charter section, which would materially and adversely affect the rights,
preferences, powers or privileges of the Glendale Federal Preferred Stock,
including any amendment which would (i) authorize, create, issue or increase the
authorized or issued amount of any class or series of any equity securities of
Glendale Federal, ranking prior thereto as to dividends or upon liquidation,
dissolution or winding up of Glendale Federal or (ii) authorize, create, issue
or increase any warrants, options or other rights convertible or exchangeable
into or evidencing a right to purchase any amount of any such class or series.
Liquidation Rights. Upon liquidation, dissolution or winding up of the
affairs of Glendale Federal, after payment or provision for payment of the debts
and other liabilities of Glendale Federal, the holders of Glendale Federal
Preferred Stock are entitled to receive in full out of the assets of Glendale
Federal, including its capital,
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$25.00 per share of Glendale Federal Preferred Stock, plus any dividends that
have been declared but remain unpaid as of such date, before any amount shall be
paid or distributed to the holders of Glendale Federal Common Stock or other
Junior Stock. If, upon any liquidation, dissolution or winding up of Glendale
Federal, the amounts payable with respect to the Glendale Federal Preferred
Stock and all other outstanding parity stock cannot be paid in full, the holders
of each series of such stock will share ratably in any such distribution of
assets in proportion to the full respective preferential amount to which they
are entitled. After payment of the full preferential amount to which they are
entitled upon any liquidation, dissolution or winding up, the holders of
Glendale Federal Preferred Stock will have no right or claim to any of the
remaining assets of Glendale Federal. The merger or consolidation of Glendale
Federal into or with any other company or the merger of any other company into
it, or the sale, lease or conveyance of all or part of the assets of Glendale
Federal, shall not be deemed to be a voluntary or involuntary dissolution,
liquidation, or winding up.
Effect of Reorganization. Pursuant to the Reorganization described herein,
(i) the shares of Glendale Federal Preferred Stock outstanding prior to the
Effective Time will be converted on a one-for-one basis into shares of Company
Preferred Stock and (ii) a number of shares of the new class of Glendale Federal
Series 1997-A Preferred Stock described below equal to the number of issued and
outstanding shares of Glendale Federal Preferred Stock immediately prior to the
Reorganization will be issued by Glendale Federal to the Company and will
thereupon constitute all of the issued and outstanding preferred stock of
Glendale Federal.
Glendale Federal Series 1997-A Preferred Stock.
Pursuant to the Reorganization described herein, a new class of Glendale
Federal preferred stock, to be named Noncumulative Preferred Stock, Series 1997-
A, par value $1.00 per share (the "Glendale Federal Series 1997-A Preferred
Stock"), will be created. The Glendale Federal Series 1997-A Preferred Stock
will have rights, preferences, privileges and terms that are equivalent as those
of the Glendale Federal Preferred Stock, as described above. Glendale Federal
may not, without the approval of the Company, authorize, create, issue or
increase the authorized or issued amount of any preferred stock of Glendale
Federal ranking prior to the Glendale Federal Series 1997-A Preferred Stock,
either as to dividend rights or rights on liquidation, dissolution or winding up
of Glendale Federal.
Five-Year Warrants.
Glendale Federal has a class of common stock purchase warrants outstanding
(the "Five-Year Warrants") that were originally issued pursuant to that certain
Warrant Agreement, dated as of February 23, 1993, entered into between Glendale
Federal and Chemical Trust Company of California ("Chemical") as Warrant Agent.
ChaseMellon has succeeded to Chemical's position as such Warrant Agent.
The Five-Year Warrants entitle the registered holder thereof (the "Five-Year
Warrant Holder") to receive from Glendale Federal one share of Glendale Federal
Common Stock for every ten Five-Year Warrants (or such other number as may
result from adjustment as provided in the Warrant Agreement) at an exercise
price of zero ($0.00) per share, at any time after one year from the date of
issuance until the expiration of the Five-Year Warrant five years from the date
such Five-Year Warrants first became exercisable. The number of shares of
Glendale Federal Common Stock for which a Five-Year Warrant may be exercised is
subject to adjustment from time to time upon the occurrence of certain events,
including (i) dividends, subdivisions, combinations or reclassification of
shares of Glendale Federal Common Stock, (ii) certain issuances of options,
rights or warrants to all holders of shares of Glendale Federal Common Stock,
(iii) certain issuances of Glendale Federal Common Stock at less than then
current market value and (iv) certain distributions to all holders of Glendale
Federal Common Stock of other types of stock, evidences of indebtedness or
assets. Pursuant to the foregoing provisions, the number of shares issuable upon
exercise of the Five-Year Warrants was adjusted to reflect the one-for-ten
reverse stock split that was effected in connection with the recapitalization of
Glendale Federal that was completed in August 1993. Accordingly, each currently
outstanding Five-Year Warrant entitles the holder thereof to receive one-tenth
of the number of shares of Glendale Federal Common Stock that is stated in the
original form of such Five-Year Warrant.
Holders of Five-Year Warrants are not entitled, by virtue of being such
holders, to receive dividends, vote, receive notice of any meetings of
stockholders or otherwise have any rights of stockholders of Glendale Federal.
As of April 30, 1997 the Five-Year Warrants outstanding were exercisable for
an aggregate of 1,556 shares of Glendale Federal Common Stock. At the Effective
Time, each of the unexercised Five-Year Warrants then issued and outstanding
shall, in accordance with its original terms, automatically by operation of law,
and without necessity
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of any exchange by the holder thereof, become a Five-Year Warrant to purchase
the number of shares of Company Common Stock that equals the number of shares of
Glendale Federal Common Stock for which such Five-Year Warrant is currently
exercisable, on the same terms and conditions and at the same price, and the
Company shall assume all of Glendale Federal's obligations with respect to such
Five-Year Warrants.
Seven-Year Warrants.
Glendale Federal has a class of common stock purchase warrants outstanding
(the "Seven-Year Warrants") that were originally issued under that certain
Warrant Agreement, dated as of August 15, 1993, entered into between Glendale
Federal and Chemical. ChaseMellon has succeeded to Chemical's position as such
Warrant Agent. Each Seven-Year Warrant entitles the holder thereof to purchase
one share of Glendale Federal Common Stock for a purchase price of $12.00 per
share payable in cash (the "Exercise Price"), subject to adjustment as described
below.
Each Seven-Year Warrant became exercisable on August 27, 1994 and will expire
on August 28, 2000. No adjustment will be made for any cash dividends paid on
shares of Glendale Federal Common Stock issuable upon exercise of the Seven-Year
Warrants. The Seven-Year Warrants may be exercised only for whole shares of
Glendale Federal Common Stock.
The number of shares of Glendale Federal Common Stock or other securities
issuable upon exercise of each Seven-Year Warrant and the Exercise Price are
subject to adjustment upon the issuance of a stock dividend to holders of
Glendale Federal Common Stock, or a combination, subdivision or reclassification
of Glendale Federal Common Stock. The Exercise Price is subject to adjustment
upon the distribution by Glendale Federal to the holders of Glendale Federal
Common Stock generally of certain rights to subscribe for Glendale Federal
Common Stock at less than current market value, but the number of shares of
Glendale Federal Common Stock or other securities issuable upon exercise of each
Seven-Year Warrant will not be adjusted proportionately. No adjustment in the
Exercise Price or the number of shares of Glendale Federal Common Stock issuable
upon the exercise of Seven-Year Warrants of less than 1% will be required to be
made; provided, that any such adjustment not made must be carried forward and
taken into account in any subsequent adjustment determination until cumulative
adjustments reach 1%.
Notwithstanding the foregoing, in case of a consolidation, merger, sale or
conveyance of the property of Glendale Federal as an entirety or substantially
as an entirety, the holder of each outstanding Seven-Year Warrant shall continue
to have the right to exercise the Seven-Year Warrant for the kind and amount of
shares and other securities and property (including cash) receivable by a holder
of the number of shares of Glendale Federal Common Stock for which such Seven-
Year Warrants were exercisable immediately prior thereto.
The Warrant Agreement for the Seven-Year Warrants may be amended or
supplemented without the consent of the registered holders of the Seven-Year
Warrants to effect changes that are not inconsistent with the provisions of the
Seven-Year Warrants and that do not adversely affect the interests of the
holders of Seven-Year Warrants. The Warrant Agreement for the Seven-Year
Warrants may also be amended with the consent of the holders of more than 50% in
number of the Seven-Year Warrants then outstanding; provided, that no such
amendment may modify the terms on which the Seven-Year Warrants are exercisable
or change the percentage of holders of Seven-Year Warrants who must consent to
such amendments.
No holder of Seven-Year Warrants is entitled to vote or receive dividends or
be deemed for any purpose to be a holder of Glendale Federal Common Stock or any
other securities of Glendale Federal that may at any time be issuable upon the
exercise of the Seven-Year Warrants until the Seven-Year Warrants are properly
exercised as provided in the Warrant Agreement. The Seven-Year Warrants are
listed for trading on Nasdaq Small Cap Market.
As of April 30, 1997 the Seven-Year Warrants outstanding were exercisable for
an aggregate of 10,848,217 shares of Glendale Federal Common Stock. At the
Effective Time, each of the unexercised Seven-Year Warrants then issued and
outstanding shall, in accordance with its original terms, automatically by
operation of law, and without necessity of any exchange by the holder thereof,
become a warrant to purchase the number of shares of Company Common Stock that
equals the number of shares of Glendale Federal Common Stock for which such
warrant is currently exercisable, on the same terms and conditions and at the
same exercise price, and the Company shall assume all of Glendale Federal's
obligations with respect to the Seven-Year Warrants.
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GLENFED DEBENTURES
The GLENFED Debentures are subordinated, unsecured obligations of Glendale
Investment Corporation, a wholly owned subsidiary of Glendale Federal, that are
currently outstanding in the aggregate principal amount of $10.506 million, bear
interest at 7.75% per annum, mature on March 15, 2001 and are redeemable at the
option of Glendale Investment Corporation at 100% of their principal amount.
The GLENFED Debentures were originally issued by GLENFED Inc., the former
holding company for Glendale Federal, pursuant to an Indenture, dated as of
March 15, 1986, entered into between GLENFED Inc. and Manufacturers Hanover
Trust Company, as Trustee. The GLENFED Debentures became obligations solely of
Glendale Investment Corporation as a result of the merger of GLENFED Inc. into
Glendale Investment Corporation in connection with the recapitalization of
Glendale Federal accomplished in August 1993.
The GLENFED Debentures are currently convertible into shares of Glendale
Federal Common Stock at the conversion price of $706.25 per share, or 1.416
shares of Glendale Federal Common Stock for each $1,000 of principal amount
thereof. Upon completion of the Reorganization described herein the GLENFED
Debentures will be convertible solely into shares of Company Common Stock at
such conversion price and number of shares per $1,000 principal amount thereof.
Thereafter, the conversion price of the GLENFED Debentures will, in accordance
with their original terms, remain subject to adjustment in certain events
relating to the Company.
DESCRIPTION OF COMPANY SECURITIES
General.
The Certificate of Incorporation of the Company authorizes the issuance of
capital stock consisting of 150,000,000 shares of Company Common Stock and
50,000,000 shares of preferred stock, each with a par value of $1.00 per share.
Currently, no shares of common stock or preferred stock of the Company are
issued or outstanding. Prior to the Reorganization, 100 shares of Company Common
Stock will be issued to Glendale Federal. After the Reorganization is
consummated, such shares will be cancelled. The Company Common Stock, like the
Glendale Federal Common Stock, will represent nonwithdrawable capital, will not
be of an insurable type and will not be insured by the Federal Deposit Insurance
Corporation.
The Board of Directors of the Company is authorized to issue preferred stock
in one or more series and to establish the voting powers, designations,
preferences or other special rights of the shares of each such series of the
preferred stock and the qualifications, limitations and restrictions thereof.
The preferred stock may rank prior to Company Common Stock as to dividend
rights, liquidation preferences, or both, may have full or limited voting
rights, and may be convertible into Company Common Stock. The holders of any
class or series of preferred stock also may have the right to vote separately as
a class or series under the terms of such class or series or as may be otherwise
provided by Delaware law.
In the future, the authorized but unissued shares of Company Common Stock and
the authorized and unissued shares of preferred stock of the Company will be
available for issuance for general corporate purposes, including, but not
limited to, possible issuance (i) as stock dividends or stock splits, (ii) in
future mergers or acquisitions, (iii) pursuant to stock compensation plans of
the Company, (iv) in connection with the exercise of the Seven-Year Warrants,
(v) with respect to the conversion of the Company Preferred Stock, or (vi) in
future private placements or public offerings. The Company has no present plans
for the issuance of additional authorized shares of its capital stock, other
than in the Reorganization and pursuant to the Stock Option Plan. Except as may
otherwise be required to approve a merger or (to the extent stockholder approval
is required by applicable law or the regulations of the NYSE or by any exchange
on which the Company's capital stock may then be listed) any other corporate
transaction in which the additional authorized shares of Company Common Stock or
authorized shares of preferred stock of the Company would be issued, no
stockholder approval will be required for the issuance of additional shares of
capital stock of the Company.
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Company Common Stock.
Each share of Company Common Stock has the same relative rights as, and is
identical in all respects with, each other share of Company Common Stock. Each
share of Company Common Stock will entitle the holder thereof to one vote on all
matters upon which stockholders have the right to vote. Stockholders of the
Company will be entitled to cumulate their votes for the election of directors.
Subject to all of the rights of the Company Preferred Stock, the holders of
Company Common Stock will be entitled to dividends when, as and if declared by
the Company's Board of Directors out of funds legally available therefor.
Holders of shares of Company Common Stock will not be entitled to preemptive
rights with respect to any shares which may be issued. The Company Common Stock
will not be subject to call or redemption and, upon receipt by the Company of
the full purchase price therefor, each share of Company Common Stock will be
fully paid and non-assessable.
In the event of any liquidation or dissolution of the Company, the holders of
Company Common Stock will be entitled to receive, after payment or provision for
payment of all debts and liabilities of the Company, all assets of the Company
available for distribution, in cash or in kind. The holders of Company
Preferred Stock, if any Company Preferred Stock is then outstanding, will have a
priority over the holders of Company Common Stock in the event of liquidation or
dissolution.
Company Preferred Stock.
The Company will issue the Company Preferred Stock, which will be designated
as the Company's Noncumulative Convertible Preferred Stock, Series A, par value
$1.00 per share, solely in exchange for the Glendale Federal Preferred Stock in
the Reorganization. Each share of Company Preferred Stock will have the same
relative rights as, and will be identical in all respects with, each other share
of Company Preferred Stock.
The Company Preferred Stock will have substantially the same rights,
preferences, privileges and terms as the Glendale Federal Preferred Stock
described above, except that the Company Preferred Stock will be convertible
solely into shares of Company Common Stock rather than shares of Glendale
Federal Common Stock. In addition, and unlike the currently outstanding
Glendale Federal Preferred Stock, the Company will not, under the terms of the
Company Preferred Stock, be permitted to incur Indebtedness (as defined) that
would rank prior to the Company Preferred Stock without the affirmative vote or
consent of the holders of a majority of the outstanding shares of Company
Preferred Stock. The term "Indebtedness" is defined as indebtedness for money
borrowed, indebtedness evidenced by notes, debentures, bonds or other securities
and any renewals, deferrals, increases or extensions of any such indebtednes,
but does not include any of the foregoing types of indebtedness incurred by a
subsidiary of the Company or the proceeds of which are to be applied to redeem
or repurchase all then outstanding shares of the Company preferred stock.
So long as any Company Preferred Stock is outstanding and unless the consent
or approval of a greater number of shares is then required by law or regulation,
the Company may not, without the affirmative vote or consent of the holders of
two-thirds of the outstanding shares of Company Preferred Stock voting as a
separate class, amend or otherwise alter or repeal any provision of the
Company's Certificate of Incorporation which would materially and adversely
affect the rights, preferences, powers or privileges of the Company Preferred
Stock.
COMPARISON OF STOCKHOLDER RIGHTS
General. As a result of the Reorganization, the holders of Glendale Federal
Common Stock and Glendale Federal Preferred Stock will become stockholders of
the Company, a Delaware corporation. Although Glendale Federal believes that
the rights of the holders of Glendale Federal Common Stock and Glendale Federal
Preferred Stock and the stockholders of the Company are equivalent except as
described below, there are certain differences in stockholder rights arising
from distinctions between laws with respect to federally chartered savings
associations and the Delaware General Corporation Law (the "DGCL") and from
distinctions between Glendale Federal's Charter and Bylaws and the Company's
Certificate of Incorporation and Bylaws.
The following discussion is not intended to be a complete statement of the
differences between the rights of stockholders of Glendale Federal and the
Company, but rather summarizes what are believed to be the material similarities
and differences between the respective rights of such holders. Such discussion
is qualified in its entirety
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by reference to the Charter and Bylaws of Glendale Federal and Certificate of
Incorporation and Bylaws of the Company, which are attached as Appendix B and
Appendix C hereto, and to the applicable provisions of the DGCL. Stockholders
should read the entire Certificate of Incorporation and Bylaws of the Company
for a complete statement of provisions thereof that may be of particular
interest to them.
Authorized Capital Stock. The Company's authorized capital stock consists of
100,000,000 shares of Company Common Stock and 50,000,000 shares of preferred
stock. Glendale Federal's authorized capital stock consists of 100,000,000
shares of Glendale Federal Common Stock and 50,000,000 shares of preferred
stock.
Issuance of Capital Stock. Under the Charter of Glendale Federal, shares of
common stock may be issued as approved by its Board of Directors without the
approval of the stockholders, except that no shares of common stock (including
shares issuable upon conversion, exchange or exercise of other securities) may
be issued, directly or indirectly, to officers, directors or controlling persons
of Glendale Federal (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. Such restrictions are not contained in the
Certificate of Incorporation of the Company or the DGCL. The Bylaws of the
NYSE, however, generally require corporations with securities which are quoted
on the NYSE to obtain stockholder approval of most stock compensation plans for
directors, officers and key employees of the corporation. Moreover, although
generally not required, stockholder approval of stock-related compensation plans
may be sought in certain instances in order to qualify such plans for favorable
federal income tax law treatment under current laws and regulations.
Voting Rights. Each share of Company Common Stock and Glendale Federal Common
Stock is entitled to one vote per share except that Glendale Federal's Bylaws
and applicable OTS regulations and the Company's Certificate of Incorporation
authorize cumulative voting in elections of directors.
Glendale Federal's Charter permits, but does not require, the provision of
separate class voting rights for holders of preferred stock of Glendale Federal
only under specified circumstances, including (i) to approve any amendment,
alteration or repeal of the Charter that would materially and adversely affect
the rights, preferences, powers or privileges of the Glendale Federal Preferred
Stock, (ii) to permit such holders to elect up to two directors of the Board of
Directors of Glendale Federal in the event dividends have not been paid for six
dividend periods and (iii) to approve the authorization, creation, issuance or
increase in the authorized or issued amount of any class or series of any equity
securities of Glendale Federal, or any warrants, options or other rights
convertible or exchangeable into any class or series of any equity securities of
Glendale Federal ranking prior to the Glendale Federal Preferred Stock either as
to dividend rights or rights on liquidation, dissolution or winding up of
Glendale Federal. A merger, consolidation, reorganization or other business
combination in which Glendale Federal is not the surviving or successor entity,
or an amendment that increases the number of authorized shares of Glendale
Federal Preferred Stock or substitutes the surviving entity in a merger or
consolidation for Glendale Federal, is not deemed, for purposes of such general
Charter authorizations of separate class voting, a material and adverse change
requiring a vote of the holders of preferred stock of Glendale Federal. For a
description of the specific provisions of Glendale Federal Preferred Stock that
is currently outstanding, including the circumstances under which the holders
thereof are entitled to vote as a separate class, see "The Reorganization --
Description of Glendale Federal Securities -- Glendale Federal Preferred Stock."
The Certificate of Incorporation of the Company does not contain any
specification of or limitation on the circumstances under which separate class
voting rights may be provided to a particular class or series of Company
Preferred Stock.
Payment of Dividends. The ability of Glendale Federal to pay dividends on its
capital stock is restricted by OTS regulations and by federal income tax
considerations related to savings associations such as Glendale Federal. See
"The Reorganization -- Market for Company Common and Preferred Stock;
Anticipated Dividend Policy." Although the Company is not subject to these
restrictions as a Delaware corporation, such restrictions will indirectly affect
the Company because dividends from Glendale Federal will be the Company's
primary source of funds for the payment of dividends to stockholders of the
Company. In addition, the DGCL generally provides that, subject to any
restrictions in a corporation's certificate of incorporation, the board of
directors of a corporation may declare and pay dividends upon the shares of its
capital stock either (i) out of its surplus (as defined in the DGCL) or (ii) in
the event that there is no such surplus, out of its net profits for the fiscal
year in which the dividend is declared and/or the preceding fiscal year.
Board of Directors. Glendale Federal's Charter and Bylaws, on the one hand,
and the Certificate of Incorporation and Bylaws of the Company, on the other
hand, require the Board of Directors of Glendale Federal
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and the Company, respectively, to be divided into three classes as nearly equal
in number as possible. With respect to each entity, the members of each class of
directors are elected for terms of three years each and until their successors
are elected and qualified, with one class being elected annually.
The Charter of Glendale Federal provides that the number of directors shall be
not less than five nor more than fifteen, except when a greater number is
approved by the OTS. The Certificate of Incorporation of the Company provides
that the number of directors shall be not less than five nor more than fifteen.
In each case the exact number of directors is established by the Board of
Directors. The Company's Board of Directors currently consists of nine
directors, each of whom (including the class and term of each director) is
currently a Director of Glendale Federal. See "The Reorganization -- Board of
Directors and Management of the Company."
Under Glendale Federal's Bylaws, any vacancies in the Board of Directors of
Glendale Federal (including vacancies resulting from an increase in the number
of directors) may be filled by the affirmative vote of a majority of the
remaining directors, although less than a quorum of the Board of Directors, and
directors so chosen shall hold office for a term expiring at the next election
of directors by stockholders. Under the Company's Certificate of Incorporation,
any vacancy occurring in the Board of Directors of the Company, including any
vacancy created by reason of an increase in the number of directors, similarly
may be filled by a majority vote of the remaining directors or by the
stockholders entitled to vote at any Annual or Special Meeting. Any director so
chosen shall hold office until the next stockholders' meeting at which directors
are elected to the class to which such replacement director was elected by Board
action, and until his or her successor is elected and qualified.
Under Glendale Federal's Bylaws, at a meeting of the stockholders called
expressly for that purpose, any director may be removed for cause by the
affirmative vote of the holders of a majority of the shares then entitled to
vote at an election of directors, provided that 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 member. The Company's Certificate of Incorporation provides that
any director may be removed only for cause by the holders of a majority of the
outstanding shares of the Company entitled to vote at an election of directors.
The foregoing limitation on the removal of directors for cause with respect to
cumulative voting by Glendale Federal stockholders does not apply with respect
to the Company, and, thus, it may be less difficult to remove directors of the
Company for cause.
Indemnification of Directors, Officers and Employees; Limitation on Liability.
Neither Glendale Federal's Bylaws nor its Charter make specific provision for
indemnification of directors, officers or employees of Glendale Federal,
although applicable OTS regulations authorize such indemnification and the
advancement of litigation defense costs, subject to certain limitations and
approval requirements and the Board of Directors has adopted a resolution
implementing such authority.
The Company's Certificate of Incorporation and Bylaws provide that each person
who was or is made a party to or is threatened to be made a party to any
threatened, pending or completed action, suit or proceeding, whether civil,
criminal, administrative or investigative (other than an action by or in the
right of the Company) (a "Proceeding"), by reason of the fact that he or she is
or was a director, officer employee or agent of the Company, or is or was
serving at the request of the Company as a director, officer, employee or agent
of another corporation or of a partnership, joint venture, trust or other
enterprise shall be indemnified and held harmless by the Company to the fullest
extent authorized by the DGCL (or other applicable law), as the same exists or
may hereafter be amended, against all expense, liability and loss (including
attorneys' fees) reasonably incurred or suffered by such person in connection
with such Proceeding. Such director or officer shall be paid by the Company for
expenses incurred in defending any such Proceeding in advance of its final
disposition; provided, however, that the payment of such expenses in advance of
the final disposition of any such Proceeding shall be made only upon receipt by
the Company of an undertaking by or on behalf of such director or officer to
repay all amounts so advanced if it should be determined ultimately that he or
she is not entitled to be indemnified under the Certificate of Incorporation and
Bylaws or otherwise. Unlike Glendale Federal, there is no regulatory
supervision of the indemnification of officers or directors of the Company.
The rights of indemnification provided in the Company's Bylaws are not
exclusive of any other rights that may be available under the Company's Bylaws,
any insurance or other agreement, by vote of stockholders or disinterested
directors or otherwise. In addition, the Bylaws require the Company to maintain
insurance on behalf of any person who is or was a director, officer or employee
of the Company, whether or not the Company would have the power to provide
indemnification to such person.
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The above-described indemnification provisions have been included in the
Certificate of Incorporation and Bylaws of the Company in recognition of the
need to reduce in appropriate cases, the risks incident to serving as a director
or officer and to enable the Company to attract and retain the best personnel
available as directors, officers and employees. In light of the complexities
and pressures placed on directors, officers and employees of publicly-held
corporations, and especially companies involved in the complex and fast-changing
financial services industry, the Boards of Directors of Glendale Federal and the
Company believe that the time, efforts and talent of directors, officers and
employees of Glendale Federal and the Company should be directed to managing the
business of these entities, rather than being forced to act defensively out of
concern over costly personal litigation.
Insofar as indemnification for liabilities arising under the Securities Act of
1933 (the "Securities Act") may be permitted to directors, officers or persons
controlling the Company pursuant to the foregoing provisions, the Company has
been informed that in the opinion of the Securities and Exchange Commission such
indemnification is against public policy as expressed in the Securities Act and
is therefore unenforceable.
In addition to the above described provisions relating to indemnification, the
Company's Certificate of Incorporation provides that a director of the Company
shall not be personally liable for monetary damages for breach of fiduciary duty
as a director, except for any breach of the duty of loyalty to the Company or
its stockholders, acts or omissions not in good faith or which involve
intentional misconduct or a knowing violation of law, certain improper corporate
distributions in violation of Section 174 of the DGCL or any transaction from
which the director derived any improper personal benefit. This provision is
authorized under the current provisions of the DGCL. No comparable provisions
are contained in the Glendale Federal Charter. The Company's Certificate of
Incorporation further provides that if the DGCL is amended to further eliminate
or limit the personal liability of directors then the liability of directors of
the Company shall be limited or eliminated to the fullest extent then permitted
under the DGCL.
Special Meetings of Stockholders. Glendale Federal's Bylaws provide that
special meetings of the stockholders of Glendale Federal may be called by the
Chairman of the Board, a majority of the Board of Directors or upon the written
request of the holders of not less than ten percent of the outstanding capital
stock of Glendale Federal entitled to vote at the meeting. The Bylaws of the
Company also provide that special meetings of the stockholders of the Company
may be called by such persons.
Stockholder Action Without Meeting. Glendale Federal's Bylaws provide that
any action that is required or permitted to be taken by stockholders at any
annual or special meeting may be taken by a consent in writing signed by all of
the stockholders entitled to vote with respect to the subject matter. The
Certificate of Incorporation and Bylaws of the Company provide the same with
respect to stockholder action without a meeting.
Stockholder Nominations and Proposals. Glendale Federal's Bylaws contain a
provision which provides that stockholders may make nominations for election of
directors or proposals for new business if written notice thereof is filed with
the Secretary of Glendale Federal at least five days prior to the date of the
annual meeting. The Company's Bylaws contain similar provisions.
Mergers, Consolidations and Sales of Assets. Federal regulations generally
require the approval of two-thirds of the entire Board of Directors of Glendale
Federal and the holders of two-thirds of the outstanding stock of Glendale
Federal entitled to vote thereon to authorize mergers, consolidations and sales
of all or substantially all of Glendale Federal's assets. Such regulations
permit Glendale Federal to merge with another corporation without obtaining the
approval of its stockholders if: (i) it does not involve an interim savings
association; (ii) Glendale Federal's Charter is not changed; (iii) each share of
Glendale Federal stock outstanding immediately prior to the effective date of
the transaction is to be an identical outstanding share or a treasury share of
Glendale Federal after such effective date; and (iv) either: (A) no shares of
voting stock of Glendale Federal and no securities convertible into such stock
are to be issued or delivered under the plan of combination or (B) the
authorized unissued shares or the treasury shares of voting stock of Glendale
Federal to be issued or delivered under the plan of combination, plus those
initially issuable upon conversion of any securities to be issued or delivered
under such plan, do not exceed 15% of the total shares of voting stock of
Glendale Federal outstanding immediately prior to the effective date of the
transaction. Such transactions would also be subject to regulatory approval.
The DGCL generally requires the approval of the Board of Directors and of the
holders of a majority of the outstanding stock of each constituent corporation
to vote thereon to approve a merger consolidation or sale of substantially all
of the assets of a Delaware corporation. The DGCL provides that no vote of the
stockholders of
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a corporation surviving a merger shall be necessary to authorize the merger if:
(i) the agreement of merger does not amend in any respect the certificate of
incorporation of the surviving corporation, (ii) each share of such corporation
outstanding immediately prior to the effective date of the merger is to be an
identical share of the surviving corporation after the effective date of the
merger and (iii) either no shares of common stock of the surviving corporation
and no shares, securities or obligations convertible into such stock are to be
issued or delivered under the agreement of merger, or the authorized unissued
shares of common stock of the surviving corporation to be issued or delivered
under the plan of merger plus those initially issuable upon conversion of any
other shares, securities or obligations to be issued or delivered under such
plan do not exceed 20% of the shares of such corporation outstanding immediately
prior to the effective date of the merger. In addition, the DGCL provides that
no vote of stockholders of a constituent corporation shall be necessary to
authorize a merger or consolidation if no shares of the stock of such
corporation have been issued prior to the adoption by the board of directors of
the resolution approving the agreement of merger. The DGCL also permits the
Company to merge with a subsidiary without approval of the stockholders of
either corporation if the Company owns at least 90% or more of the outstanding
shares of each class of the corporation and if the Company is the surviving
corporation. Thus, there are more instances in which mergers, consolidations and
sales of all or substantially all assets may be authorized without a vote of the
stockholders with respect to the Company than with respect to Glendale Federal.
As the holder of the issued and outstanding Glendale Federal Common Stock
after consummation of the Reorganization, the Company will be able to authorize
certain mergers, consolidations or other business combinations involving
Glendale Federal without the approval of the stockholders of the Company.
Business Combinations with Interested Stockholders. Glendale Federal's
Charter generally requires the affirmative vote of the holders of at least two-
thirds of the Voting Stock (as defined) of Glendale Federal to for any "Business
Combination." A Business Combination includes certain types of transactions
entered into by Glendale Federal or one of its subsidiaries with, or upon a
proposal by, any person that is the direct or indirect beneficial owner of more
than 10% of the voting stock of Glendale Federal. Certain exceptions are
provided in the case of transactions approved by the Board of Directors or that
meet certain price and procedural criteria intended to provide equal treatment
to all stockholders.
The Company will also be subject to the limitations on business combinations
with interested stockholders imposed by Section 203 of the DGCL. In general,
subject to certain exceptions, Section 203 prohibits a Delaware corporation from
engaging in a "business combination" with an "interested stockholder" for a
period of three years following the time that such stockholder became an
interested stockholder, unless (i) prior to such time the board of directors of
the corporation approved either the business combination or the transaction
which resulted in the stockholder becoming an interested stockholder or (ii)
upon consummation of the transaction which resulted in the stockholder becoming
an interested stockholder, the interested stockholder owned at least 85% of the
voting stock of the corporation outstanding at the time the transaction
commenced (excluding for purposes of determining the number of shares
outstanding those shares owned by (x) persons who are directors and also
officers and (y) employee stock plans in which employee participants do not have
the right to determine confidentially whether shares held subject to the plan
will be tendered in a tender or exchange offer), or (iii) at or subsequent to
such time the business combination is approved by the board of directors and
authorized at an annual or special meeting of stockholders, and not by written
consent, by the affirmative vote of at least two-thirds of the outstanding
voting stock which is not owned by the interested stockholder. The term
"business combination" is defined broadly to cover a wide range of corporation
transactions, including mergers, sales of assets, issuance of stock,
transactions with subsidiaries and the receipt of disproportional financial
benefits. In addition, Section 203 defines an "interested stockholder" to
include any entity or person beneficially owning 15% or more of the outstanding
voting stock of the corporation and any entity or person affiliated with such an
entity or person.
The Boards of Directors of the Company and of Glendale Federal are not aware
of any current effort to acquire control of either the Company or Glendale
Federal.
Dissenters' Rights of Appraisal. Federal regulations applicable to Glendale
Federal generally provide that a stockholder of a federally chartered savings
association which engages in a merger or consolidation with another depository
institution, or sale of all or substantially all of its assets shall have the
right to demand payment from such association of the fair or appraised value of
his or her stock in the association, subject to specified procedural
requirements. The stockholders of a federally chartered savings association
with stock which is listed on a national securities exchange or quoted on the
Nasdaq National Market, however, are not entitled to dissenters' rights of
appraisal in connection with a merger involving such savings association if the
stockholders are required to accept
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only "Qualified Consideration" for their stock. "Qualified consideration" is
defined to include cash, shares of stock of any association or corporation which
at the effective date of the merger will be listed on a national securities
exchange or quoted on the Nasdaq National Market or any combination of such
shares of stock and cash.
After the Reorganization, the rights of appraisal of dissenting stockholders
of the Company will be governed by the DGCL. A stockholder of a Delaware
corporation generally has the right to dissent from any merger or consolidation
involving the corporation, subject to specified procedural requirements. A
stockholder exercising dissenters' rights is entitled to receive the fair value
of the shares exclusive of any element of value arising from the accomplishment
or expectation of the merger or consolidation, together with a fair rate of
interest, if any, to be paid upon the amount determined to be the fair value.
However, subject to certain exceptions, no dissenters' rights are available for
the shares of any class or series of stock which were, at the record date fixed
with respect to the approval of the merger or consolidation, either (i) listed
on a national securities exchange or quoted on the Nasdaq National Market or
(ii) held of record by more than 2,000 holders.
Amendment of Governing Instruments. No amendment of Glendale Federal's
Charter may be made unless it is first proposed by the Board of Directors of
Glendale Federal, then preliminarily approved by the OTS, and thereafter
approved by the holders of a majority of the total votes eligible to be cast at
a legal meeting. Amendments to the provisions of the Charter relating to
directors, including the number and election thereof, and to certain business
combinations may not be repealed or amended in any respect unless such repeal or
amendment is approved by the affirmative vote of not less than two-thirds of the
outstanding stock of Glendale Federal entitled to vote thereon. The Company's
Certificate of Incorporation provides that the Company may alter, amend, rescind
or repeal any provision contained therein in the manner now or hereafter
prescribed by statute, except that certain provisions thereof (those relating to
the classification and term of the Board of Directors, the higher vote required
for certain business combinations, special meetings of stockholders, amendment
of bylaws, action by written consent of stockholders, directors' liability and
indemnification provisions) may not be repealed or amended in any respect unless
such repeal or amendment is approved by the affirmative vote of not less than
two-thirds of the outstanding stock of the Company entitled to vote thereon. In
contrast to the Glendale Federal Charter, no regulatory approval of an amendment
of the Certificate of Incorporation of the Company will be required.
The Bylaws of Glendale Federal may be amended by a resolution adopted by a
majority of the directors then in office or by the vote of a majority of the
outstanding stock entitled to vote thereon, subject to OTS approval. The Bylaws
of the Company may be altered, amended or repealed in the same manner as the
Bylaws of Glendale Federal, except that no OTS approval will be required for
such amendments.
CERTAIN FEDERAL INCOME TAX CONSEQUENCES
The following general summary of the material United States federal income tax
consequences of the Reorganization to holders of Glendale Federal Common Stock,
Glendale Federal Preferred Stock, Five-Year Warrants and Seven-Year Warrants is
based on the Internal Revenue Code of 1986, as amended to the date hereof (the
"Code"), administrative pronouncements, judicial decisions and Treasury
regulations, all of which are subject to change, possibly with retroactive
effect, which changes could affect the tax consequences described herein. The
summary only applies to holders of Glendale Federal Common Stock, Glendale
Federal Preferred Stock, Five-Year Warrants or Seven-Year Warrants as capital
assets and does not address tax considerations which may affect the treatment of
certain special status taxpayers such as financial institutions, broker-dealers,
life insurance companies, tax-exempt organizations, investment companies,
foreign taxpayers, and persons who acquired such stock or warrants pursuant to
employee stock options or plans. In addition, this summary does not discuss the
consequences of the ownership of Company Common Stock, Company Preferred Stock,
Five-Year Warrants or Seven-Year Warrants, nor does this summary discuss the
consequences of the ownership of, or of the Reorganization to holders of,
GLENFED Debentures. Holders should be aware that the views expressed herein are
not binding on the Internal Revenue Service ("IRS") and there can be no
assurance that the IRS will not assert contrary positions. No rulings have been
sought from the IRS with respect to the Reorganization and it is not currently
expected that such rulings will be sought.
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EACH HOLDER SHOULD CONSULT HIS, HER OR ITS OWN TAX ADVISORS TO DETERMINE THE
SPECIFIC TAX CONSEQUENCES OF THE REORGANIZATION TO SUCH HOLDER.
General. Mayer, Brown & Platt, counsel to the Company and Glendale Federal,
is of the opinion that the formation of Interim and its merger with and into
Glendale Federal will be disregarded for federal income tax purposes, and that
the Reorganization will be treated as an exchange, governed by the provisions of
Section 351 of the Code, of Glendale Federal Common Stock for Company Common
Stock and Glendale Federal Preferred Stock for Company Preferred Stock. This
opinion is based on certain factual representations of the Company and Glendale
Federal. Except as provided below, the remainder of this summary assumes, in
accordance with this opinion, that the Reorganization will be treated as a
transaction to which Code Section 351 applies.
Holders of Glendale Federal Common Stock and Glendale Federal Preferred Stock.
No income, gain or loss will be recognized by Glendale Federal stockholders upon
the conversion pursuant to the Reorganization of their Glendale Federal Common
Stock into Company Common Stock, or of their Glendale Federal Preferred Stock
into Company Preferred Stock, respectively. The aggregate tax basis of Company
Common Stock received by a holder of Glendale Federal Common Stock and the
aggregate tax basis of Company Preferred Stock received by a holder of Glendale
Federal Preferred Stock, as the case may be, will be the same as the holder's
aggregate tax basis in the Glendale Federal Common Stock or Glendale Federal
Preferred Stock, as the case may be, for which such stock is received in the
Reorganization. If, however, the stockholder holds both Glendale Federal Common
Stock and Glendale Federal Preferred Stock and receives Company Common Stock and
Company Preferred Stock in the Reorganization, the holder's aggregate tax basis
in such Glendale Federal Common Stock and Glendale Federal Preferred Stock will
be allocated between the Company Common Stock and Company Preferred Stock
received in proportion to the fair market values of each. The holding period of
the Company Common Stock received by a holder of Glendale Federal Common Stock
and the holding period of the Company Preferred Stock received by a holder of
Glendale Federal Preferred Stock, as the case may be, will be the same as the
holder's holding period of the Glendale Federal Common Stock or Glendale Federal
Preferred Stock, as the case may be, for which such stock is received.
Holders of Five-Year Warrants and Seven-Year Warrants. Following the
Reorganization of Glendale Federal, the holders of Five-Year Warrants and Seven-
Year Warrants will be entitled, pursuant to their original terms, to receive
Company Common Stock rather than Glendale Federal Common Stock upon any exercise
of such Five-Year Warrants and Seven-Year Warrants. For U.S. federal income tax
purposes, with respect to holders of Seven-Year Warrants this alteration of
rights (an "Alteration") will be deemed to constitute a current taxable exchange
of "old" Seven-Year Warrants for "new" Seven-Year Warrants, if such Alteration
constitutes a modification of terms which results in "new" Seven-Year Warrants
that differ materially, either in kind or extent, from the "old" Seven-Year
Warrants. A similar analysis would apply to the alteration of rights of holders
of Five-Year Warrants (assuming that "new" Five-Year Warrants constitute, for
federal income tax purposes, Company Common Stock). (See the discussion in the
second succeeding paragraph below regarding the consequences to holders of Five-
Year Warrants if "new" Five-Year Warrants were determined to constitute Company
Common Stock.)
The law is unclear as to whether an Alteration with respect to either the
Seven-Year Warrants or the Five-Year Warrants would be treated as a taxable
exchange and there is no direct authority addressing the issue. The principles
of Treasury regulations which address the circumstances in which an alteration
of the terms of a debt instrument constitutes a taxable exchange may provide
some guidance as to whether the Alterations constitute taxable exchanges.
Although those regulations could imply that the Alterations would be treated as
taxable exchanges, those regulations specifically, by their terms, do not apply
to non-debt instruments such as the Five-Year Warrants or Seven-Year Warrants.
Prior precedents involving executory rights, which may be more relevant than
the principles of these debt modification regulations, suggest that the fruition
of executory rights present in the original terms of instruments like the Five-
Year Warrants and Seven-Year Warrants may not cause a taxable exchange. Such
argument appears most compelling where, as in the present case, the right is
nonelective as to the holder of the instrument, arises automatically on account
of the occurrence of an independently significant event outside the control of
the holder and results in holders having immediately after the event
substantially the same economic rights (i.e., rights to become equity owners of
essentially the same economic value). However, the promulgation of the
aforementioned Treasury regulations regarding the modification of debt
instruments raises doubt regarding the extent to which these precedents continue
to constitute authority for the view that the Alterations do not constitute
taxable exchanges. Holders of Five-Year Warrants and Seven-Year Warrants should
be aware that the IRS could on that basis (as well as on the basis of other
precedents) assert, and a court could sustain the assertion, that the
Alterations constitute taxable exchanges.
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Notwithstanding the authorities described in the preceding paragraph, holders
of Five-Year Warrants will be able to assert other precedents to support the
position that, because the Five-Year Warrants may be exercised at any time
without payment of any additional consideration, the benefits and burdens of
ownership of the Company Common Stock for which the Five-Year Warrants will be
exercisable immediately after the Reorganization will already have vested in
holders of the Five-Year Warrants at such time, and therefore, for federal
income tax purposes, the Five-Year Warrants will constitute Company Common
Stock. Under this view, the Five-Year Warrants would be considered Company
Common Stock that is received in the exchange governed by the provisions of
Section 351 of the Code for which the tax consequences to holders are described
above under "--Holders of Glendale Federal Common Stock and Glendale Federal
Preferred Stock". Treasury regulations, however, specifically exclude stock
warrants from the category of property that may be received in an exchange
governed by Section 351 of the Code without recognition of gain, and the IRS
could assert such regulations to support the view that such precedents do not
constitute authority for the position that "new" Five-Year Warrants are the
equivalent of Company Common Stock received in an exchange governed by Section
351 of the Code.
If a taxable exchange of Five-Year Warrants or Seven-Year Warrants were deemed
to occur, a holder of a Five-Year Warrant or Seven-Year Warrant, as applicable,
would be required to recognize capital gain or loss at the Effective Time equal
to the difference between the fair market value of the "new" Five-Year Warrant,
or "new" Seven-Year Warrant, as applicable, and the holder's adjusted tax basis
in the corresponding "old" Five-Year Warrant, or "old" Seven-Year Warrant. If a
holder of a Five-Year Warrant or Seven-Year Warrant were required to treat the
relevant Alteration as a taxable exchange, the holder would treat the "new"
Five-Year Warrant, or "new" Seven-Year Warrant, as applicable, as having a tax
basis equal to the fair market value of such "new" Five-Year Warrant or "new"
Seven-Year Warrant, and in each case as having a holding period beginning at the
Effective Time. If the Alterations were not treated as taxable exchanges, a
holder of a Five-Year Warrant or Seven-Year Warrant would incur no federal
income tax consequences as a result of the relevant Alteration and would have
the same adjusted tax basis and holding period in a Five-Year Warrant or Seven-
Year Warrant, respectively, following such Alteration as it had immediately
before such Alteration.
Holders of Five-Year Warrants and Seven-Year Warrants should note that they
may avoid the uncertainties discussed above as to whether the Alterations
constitute taxable exchanges by exercising their Five-Year Warrants or Seven-
Year Warrants, respectively, and receiving Glendale Federal Common Stock prior
to the Reorganization, and then pursuant to the Reorganization receiving Company
Common Stock. In such case, both the exercise of a Five-Year Warrant or Seven-
Year Warrant and the exchange in the Reorganization of the Glendale Federal
Common Stock received for Company Common Stock would be tax-free transactions
for U.S. federal income tax purposes.
HOLDERS OF FIVE-YEAR WARRANTS AND SEVEN-YEAR WARRANTS ARE URGED TO CONTACT
THEIR OWN TAX ADVISORS REGARDING THE TREATMENT OF THE RELEVANT ALTERATION FOR
PURPOSES OF FEDERAL AND OTHER TAX LAWS.
The Company, Glendale Federal and Interim. No income, gain or loss will be
recognized by the Company, Glendale Federal or Interim as a result of the
Reorganization.
ACCOUNTING TREATMENT
The Reorganization will be accounted for in a manner similar to a "pooling of
interests" in accordance with Accounting Principles Board Opinion No. 16,
"Business Combinations." Opinion No. 16 applies to a business combination in
which the ownership of two or more companies are combined by the exchange of
equity securities. In general, the consolidated capitalization, assets,
liabilities, income and financial statements of the Company immediately
following the Effective Time of the Reorganization will be substantially the
same as those of Glendale Federal immediately prior to the Effective Time of the
Reorganization.
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<PAGE>
ADDITIONAL INFORMATION
Glendale Federal's 1996 Annual Report to Stockholders, which is included the
Annual Report on Form 10-K filed by Glendale Federal with the OTS for its fiscal
year ended June 30, 1996, has previously been sent to Glendale Federal
stockholders in connection with the 1996 Annual Meeting of Stockholders.
Glendale Federal will furnish a copy of the 1996 Annual Report, without charge,
upon the written request of any stockholder solicited hereby. Requests should be
addressed to Jeffrey Misakian, Director, Corporate Relations, Glendale Federal
Bank, Federal Savings Bank, 700 North Brand Boulevard, Glendale, California
91203.
By order of the Board of Directors
James R. Eller, Jr.
June __, 1997
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<PAGE>
APPENDIX B
CERTIFICATE OF INCORPORATION
OF
GOLDEN STATE BANCORP INC.
FIRST: The name of this corporation is "Golden State Bancorp Inc."
SECOND: The address of this corporation's registered office in the
State of Delaware is 1209 Orange Street in the City of Wilmington, County of New
Castle. The name of its registered agent at such address is Corporation Trust
Company.
THIRD: The purpose of this corporation is to engage in any lawful
act or activity for which corporations may be organized under the General
Corporation Law of the State of Delaware.
FOURTH: The total number of shares of all classes of stock which
this corporation shall have authority to issue is one hundred fifty million
(150,000,000), of which one hundred million (100,000,000) shall be common stock,
par value $1.00 per share, and fifty million (50,000,000) shall be serial
preferred stock, par value $1.00 per share.
The shares of preferred stock may be issued from time to time in one
or more series. The board of directors of this corporation shall have authority
to fix by resolution or resolutions the designations and the powers, preferences
and relative, participating, optional or other special rights and
qualifications, limitations or restrictions thereof, including without
limitation the voting rights, dividend rate, conversion rights, redemption price
and liquidation preference, of any series of shares of preferred stock, to fix
the number of shares constituting any such series, and to increase or decrease
the number of shares of any such series (but not below the number of shares
thereof then outstanding). In case the number of shares of any such series
shall be so decreased, the shares constituting such decrease shall resume the
status which they had prior to the adoption of the resolution or resolutions
originally fixing the number of shares of such series.
FIFTH: The name and mailing address of the incorporator of this
corporation is:
Glendale Federal Bank, Federal Savings Bank
414 North Central Avenue
Glendale, California 91203
SIXTH: The business and affairs of this corporation shall be under
the direction of a board of directors. The authorized number of directors shall
in no case be fewer than five nor more than fifteen. The exact number of
directors is hereby initially fixed at nine, but may
<PAGE>
be changed to different numbers from time to time by the board of directors
pursuant to resolutions adopted by the affirmative vote of a majority of the
entire board of directors.
A. Election of Directors. The directors of this corporation shall be
---------------------
divided into three classes, as nearly equal in number as possible: the
first class, the second class and the third class. Each director shall
serve for a term ending on the third annual meeting following the annual
meeting at which such director was elected; provided, however, that the
-------- -------
directors first elected to the first class shall serve for a term ending
upon the election of directors at the annual meeting next following the end
of the calendar year 1996, the directors first elected to the second class
shall serve for a term ending upon the election of directors at the second
annual meeting next following the end of the calendar year 1996, and the
directors first elected to the third class shall serve for a term ending
upon the election of directors at the third annual meeting next following
the end of the calendar year 1996.
At each annual election commencing at the first annual meeting of
stockholders, the successors to the class of directors whose term expires
at that time shall be elected by the stockholders to hold office for a term
of three years to succeed those directors whose term expires, so that the
term of one class of directors shall expire each year, unless, by reason of
any intervening changes in the authorized number of directors, the board of
directors shall have designated one or more directorships whose term then
expires as directorships of another class in order more nearly to achieve
equality of number of directors among the classes of directors.
Notwithstanding the requirement that the three classes of directors
shall be as nearly equal in number of directors as possible, in the event
of any change in the authorized number of directors, each director then
continuing to serve as such shall nevertheless continue as a director of
the class of which he or she is a member until the expiration of his or her
current term, or his or her prior resignation, disqualification, disability
or removal. Stockholders shall be entitled to cumulate votes in the
election of directors in the manner provided in Section 214 of the Delaware
General Corporation Law.
B. Newly Created Directorships and Vacancies. Any vacancies on 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, in the event of the
failure of the directors or sole remaining director so to act, by the
stockholders at the next election of directors; provided, that if the
holders of any class or classes of stock or series thereof of this
corporation, 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. Directors so chosen shall hold office for a
term expiring at the annual meeting of stockholders 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
<PAGE>
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. 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 in the number
of directors constituting the board of directors shall shorten the term of
any incumbent director.
C. Removal. A director may be removed only for cause as determined
-------
by the affirmative vote of the holders of at least a majority of the shares
then entitled to vote in an election of directors, which vote may only be
taken at a meeting of stockholders called expressly for that purpose.
Cause for removal shall be deemed to 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 by a court of competent jurisdiction to
be liable for gross negligence or misconduct in the performance of such
director's duty to the corporation and such adjudication is no longer
subject to direct appeal.
SEVENTH:
A. Higher Vote Required for Certain Business Combinations. In
------------------------------------------------------
addition to any affirmative vote of holders of a class or series of capital
stock of this corporation required by law or the provisions of this Certificate
of Incorporation and except as otherwise expressly provided in Paragraph B of
this Article SEVENTH, a Business Combination (as hereinafter defined) with or
upon a proposal by a Related Person (as hereinafter defined) shall be approved
only upon the affirmative vote of the holders of at least two-thirds of the
Voting Stock (as hereinafter defined) of this corporation voting together as a
single class. Such affirmative vote shall be required notwithstanding the fact
that no vote may be required, or that a lesser percentage may be specified, by
law or regulation.
B. When higher vote is not required. The provisions of Paragraph A
--------------------------------
of this Article SEVENTH 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 or any other provision of this
Certificate of Incorporation, if all of the conditions specified in any one of
the following Subparagraphs (i), (ii) or (iii) are met:
(i) Approval by Directors. The Business Combination has been
---------------------
approved by a vote of a majority of all the Continuing Directors (as
hereinafter defined); or
(ii) Combination with Subsidiary. The Business Combination is solely
---------------------------
between this corporation and a subsidiary of this corporation and such
Business Combination does
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<PAGE>
not have the direct or indirect effect set forth in Subparagraph C(ii)(e)
of this Article SEVENTH; 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 Person
before the Determination Date, or (y) the fair market value of the
common stock of the corporation (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
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 such class or series of preferred stock acquired by it, including
those shares acquired by the Related Person before the Determination
Date; (y) the fair market value of such class or series of preferred
stock of the corporation (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
corporation (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
-4-
<PAGE>
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.
(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) is mailed to public stockholders of the
corporation 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 need only be filed with
the Securities and Exchange Commission if a filing is required by such
Act or subsequent provisions) and shall contain at the front thereof
in a prominent place the recommendation, if any, of the Continuing
Directors as to the advisability or inadvisability of the Business
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 stockholders of the
corporation other than the Related Person.
C. Certain Definitions. For purposes of this Article SEVENTH:
-------------------
(i) The term "person" shall mean any individual, corporation,
partnership, limited liability company, bank, association, joint stock
company, trust, syndicate, unincorporated organization or similar company,
or a group of "persons" acting or agreeing to act together for the purpose
of acquiring, holding, voting or disposing of securities of the
corporation, including any group of "persons" seeking to combine or pool
their voting or other interests in the equity securities of the corporation
for a common purpose, pursuant to any contract, understanding,
relationship, agreement or other arrangement, whether written or otherwise.
(ii) "Business Combination" shall mean any of the following
transactions, when entered into by this corporation or a subsidiary of this
corporation with, or upon a proposal by, a Related Person:
(a) the acquisition, merger or consolidation of this corporation
or any subsidiary of this corporation; or
(b) the sale, lease, exchange, mortgage, pledge, transfer or
other disposition (in one or a series of transactions) of any assets
of this corporation or any
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<PAGE>
subsidiary of this corporation having an aggregate fair market value
of $25 million or more; or
(c) the issuance or transfer by this corporation or any
subsidiary of this corporation (in one or a series of transactions) of
securities of this corporation or that subsidiary having an aggregate
fair market value of $25 million or more; or
(d) the adoption of a plan or proposal for the liquidation or
dissolution of this corporation; or
(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 this corporation or any subsidiary of this corporation; or
(f) any agreement, contract or other arrangement providing
directly or indirectly for any of the foregoing or any amendment or
repeal of this Article SEVENTH.
(iii) "Related Person" shall mean any person (other than this
corporation, a subsidiary of this corporation, or any profit sharing,
employee stock ownership or other employee benefit plan of this corporation
or a subsidiary of this corporation 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 Securities Exchange Act of 1934, as in effect on January 1, 1997) of
more than ten percent (10%) of the outstanding Voting Stock of this
corporation, and any Affiliate or Associate of any such person.
(iv) "Continuing Director" shall mean any member of the board of
directors of this corporation who is not affiliated with a Related Person
and who was a member of the board of directors of this corporation
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 this corporation.
(v) "Affiliate" and "Associate" shall have the respective meanings
ascribed to such terms in Rule 12b-2 under the Securities Exchange Act of
1934, as in effect on January 1, 1997.
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<PAGE>
(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; or
(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); or
(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
stockholder) from any loans, advances, guarantees, pledges or other
financial assistance or any tax credits or other tax advantages
provided by this corporation or any subsidiary of this corporation,
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 Article SEVENTH, 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 this corporation entitled to vote generally in the
election of directors and each reference to a proportion of Voting Stock
shall refer to shares constituting 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 this
corporation survives, the phrase "consideration other than cash" as used in
Paragraphs B(iii)(a) and B(iii)(b) of this Article SEVENTH shall include
the shares of common stock and/or the shares of any class of preferred or
other stock retained by the holders of such shares.
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<PAGE>
D. No Effect on Fiduciary Obligations of Related Persons. Nothing
-----------------------------------------------------
contained in this Article SEVENTH shall be construed to relieve any Related
Person from any fiduciary obligation imposed by law.
EIGHTH: Special meetings of the stockholders may be called by the
Chairman of the Board of Directors of this Corporation or by a majority of the
directors then in office.
NINTH: This corporation reserves the right to amend, alter, change
or repeal any provision contained in this Certificate of Incorporation in the
manner now or hereafter prescribed by statute. Notwithstanding the foregoing,
the affirmative vote of the holders of at least two-thirds (or such greater
proportion as may otherwise be required pursuant to any specific provision of
this Certificate of Incorporation) of the total votes eligible to be cast at a
legal meeting shall be required to amend, repeal or adopt any provisions
inconsistent with Articles SIXTH, SEVENTH, EIGHTH, this Article NINTH and
Articles TENTH, ELEVENTH, TWELFTH, THIRTEENTH and FOURTEENTH of this Certificate
of Incorporation.
TENTH: Bylaws may be adopted, amended or repealed by the
affirmative vote of the holders of at least two-thirds of the total votes
eligible to be cast at a legal meeting of stockholders or by a resolution
adopted by a majority of the directors then in office.
ELEVENTH: Any action required to be taken or which may be taken at any
annual or special meeting of the stockholders of this corporation may be taken
by written consent without a meeting if a consent in writing, setting forth the
action so taken, shall be signed by all of the stockholders of this corporation
entitled to vote thereon.
TWELFTH: Stockholder nominations of persons for election as directors
of this corporation and stockholder proposals must, in order to be voted upon,
be made in writing and delivered to the secretary of this corporation at least
five days, or such other period as may be provided in the bylaws, prior to the
date of the meeting at which such nominations or proposals are proposed to be
voted upon.
THIRTEENTH: A director of this corporation shall not be personally
liable to the corporation or its stockholders for monetary damages for breach of
fiduciary duty as a director, except: (i) for any breach of the director's duty
of loyalty to the corporation or its stockholders, (ii) for acts or omissions
not in good faith or which involve intentional misconduct or a knowing violation
of law, (iii) under Section 174 of the Delaware General Corporation Law, or (iv)
for any transaction from which the director derived any improper personal
benefit. If the Delaware General Corporation Law is hereafter amended to
further eliminate or limit the personal liability of directors, then the
liability of a director of the corporation shall be eliminated or limited to the
fullest extent permitted by the Delaware General Corporation Law, as so amended.
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<PAGE>
Any repeal or modification of the foregoing paragraph by the
stockholders of the corporation shall not adversely affect any right or
protection of a director of the corporation existing at the time of such repeal
or modification.
FOURTEENTH: A. Actions, Suits or Proceedings Other than by or in the
-----------------------------------------------------
Right of the Corporation. The corporation shall indemnify any person who was or
- ------------------------
is a party or is threatened to be made a party to any threatened, pending or
completed action, suit or proceeding, whether civil, criminal, administrative or
investigative (other than an action by or in the right of the corporation) by
reason of the fact that he or she is or was or has agreed to become a director
or officer of the corporation, or is or was serving or has agreed to serve at
the request of the corporation as a director or officer of another corporation,
partnership, joint venture, trust or other enterprise, or by reason of any
action alleged to have been taken or omitted in such capacity, against costs,
charges, expenses (including attorneys' fees), judgments, fines and amounts paid
in settlement actually and reasonably incurred by him or her or on his or her
behalf in connection with such action, suit or proceeding and any appeal
therefrom, if he or she acted in good faith and in a manner he or she reasonably
believed to be within the scope of his or her authority and in, or not opposed
to, the best interests of the corporation, and, with respect to any criminal
action or proceeding, had no reasonable cause to believe his or her conduct was
unlawful. The termination of any action, suit or proceeding by judgment, order,
settlement, conviction, or upon a plea of nolo contendere or its equivalent,
---- ----------
shall not, of itself, create a presumption that the person did not act in good
faith and in a manner which he or she reasonably believed to be within the scope
of his or her authority and in, or not opposed to, the best interests of the
corporation or, with respect to any criminal action or proceeding, had
reasonable cause to believe that his or her conduct was unlawful.
B. Actions or Suits by or in the Right of the Corporation. The
------------------------------------------------------
corporation shall indemnify any person who was or is a party or is threatened to
be made a party to any threatened, pending or completed action or suit by or in
the right of the corporation to procure a judgment in its favor by reason of the
fact that he or she is or was or has agreed to become a director or officer of
the corporation, or is or was serving or has agreed to serve at the request of
the corporation as a director or officer of another corporation, partnership,
joint venture, trust or other enterprise, or by reason of any action alleged to
have been taken or omitted in such capacity, against costs, charges and expenses
(including attorneys' fees) actually and reasonably incurred by him or her or on
his or her behalf in connection with the defense or settlement of such action or
suit and any appeal therefrom, if he or she acted in good faith and in a manner
he or she reasonably believed to be within the scope of his or her authority and
in, or not opposed to, the best interests of the corporation, except that no
indemnification shall be made in respect of any claim, issue or matter as to
which such person shall have been adjudged to be liable to the corporation
unless and only to the extent that the Court of Chancery of Delaware or the
court in which such action or suit was brought shall determine upon application
that, despite the adjudication of such liability but in view of all the
circumstances of the case, such person is fairly and reasonably entitled to
indemnity for such costs, charges and expenses which the Court of Chancery or
such other court shall deem proper.
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<PAGE>
C. Indemnification for Costs, Charges and Expenses of Successful
-------------------------------------------------------------
Party. Notwithstanding the other provisions of this Article FOURTEENTH, to the
- -----
extent that a director or officer has been successful, on the merits or
otherwise, including, without limitation, the dismissal of an action without
prejudice, in defense of any action, suit or proceeding referred to in Sections
A and B of this Article FOURTEENTH, or in defense of any claim, issue or matter
therein, he or she shall be indemnified against all costs, charges and expenses
(including attorneys' fees) actually and reasonably incurred by him or her or on
his or her behalf in connection therewith.
D. Determination of Right to Indemnification. Any indemnification
-----------------------------------------
under Sections A and B of this Article FOURTEENTH (unless ordered by a court)
shall be paid by the corporation unless a determination is made (i) by the board
of directors by a majority vote of the directors who were not parties to such
action, suit or proceeding, or if such majority of disinterested directors so
directs, (ii) by independent legal counsel in a written opinion, or (iii) by the
stockholders, that indemnification of the director or officer is not proper in
the circumstances because he or she has not met the applicable standard of
conduct set forth in Sections A and B of this Article FOURTEENTH.
E. Advance of Costs, Charges and Expenses. Costs, charges and
--------------------------------------
expenses (including attorneys' fees) incurred by a person referred to in
Sections A or B of this Article FOURTEENTH in defending a civil or criminal
action, suit or proceeding shall be paid by the corporation in advance of the
final disposition of such action, suit or proceeding; provided, however, that
-------- -------
the payment of such costs, charges and expenses incurred by a director or
officer in his or her capacity as a director or officer (and not in any other
capacity in which service was or is rendered by such person while a director or
officer) in advance of the final disposition of such action, suit or proceeding
shall be made only on receipt of an undertaking by or on behalf of the director
or officer to repay all amounts so advanced in the event that it shall
ultimately be determined that such director or officer is not entitled to be
indemnified by the corporation as authorized in this Article FOURTEENTH. Such
costs, charges and expenses incurred by other employees and agents may be so
paid upon such terms and conditions, if any, as the majority of the directors
deems appropriate. The majority of the directors may, in the manner set forth
above, and upon approval of such director or officer of the corporation,
authorize the corporation's counsel to represent such person, in any action,
suit or proceeding, whether or not the corporation is a party to such action,
suit or proceeding.
F. Procedure for Indemnification. Any indemnification under
-----------------------------
Sections A, B or C, or advance of costs, charges and expenses under Section E of
this Article FOURTEENTH shall be made promptly, and in any event within 60 days,
upon the written request of the director or officer. The right to
indemnification or advances as granted by this Article FOURTEENTH shall be
enforceable by the director or officer in any court of competent jurisdiction,
if the corporation denies such request, in whole or in part, or if no
disposition thereof is made within 60 days. Such person's costs and expenses
incurred in connection with successfully establishing his or her right to
indemnification, in whole or in part, in any such action shall also be
indemnified by the corporation. It shall be a defense to any such action (other
than an action brought to enforce a claim for the
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<PAGE>
advance of costs, charges and expenses under Section E of this Article
FOURTEENTH where the required undertaking, if any, has been received by the
corporation) that the claimant has not met the standard of conduct set forth in
Sections A or B of this Article FOURTEENTH, but the burden of proving such
defense shall be on the corporation. Neither the failure of the corporation
(including its board of directors, its independent legal counsel and its
stockholders) to have made a determination prior to the commencement of such
action that indemnification of the claimant is proper in the circumstances
because he or she has met the applicable standard of conduct set forth in
Sections A or B of this Article FOURTEENTH, or the fact that there has been an
actual determination by the corporation (including its board of directors, its
independent legal counsel and its stockholders) that the claimant has not met
such applicable standard of conduct, shall be a defense to the action or create
a presumption that the claimant has not met the applicable standard of conduct.
G. Settlement. The corporation shall not be obligated to reimburse
----------
the costs of any settlement to which it has not agreed. If in any action, suit
or proceeding, including any appeal, within the scope of Sections A or B of this
Article FOURTEENTH, the person to be indemnified shall have unreasonably failed
to enter into a settlement thereof offered or assented to by the opposing party
or parties in such action, suit or proceeding, then, notwithstanding any other
provision hereof, the indemnification obligation of the corporation to such
person in connection with such action, suit or proceeding shall not exceed the
total of the amount at which settlement could have been made and the expenses
incurred by such person prior to the time such settlement could reasonably have
been effected.
H. Subsequent Amendment. No amendment, termination or repeal of
--------------------
this Article FOURTEENTH or of relevant provisions of the Delaware General
Corporation Law or any other applicable laws shall affect or diminish in any way
the rights of any director or officer of the corporation to indemnification
under the provisions hereof with respect to any action, suit or proceeding
arising out of, or relating to, any actions, transactions or facts occurring
prior to the final adoption of such amendment, termination or repeal.
I. Other Rights: Continuation of Right to Indemnification. The
------------------------------------------------------
indemnification provided by this Article FOURTEENTH shall not be deemed
exclusive of any other rights to which a director, officer, employee or agent
seeking indemnification may be entitled under any law (common or statutory),
agreement, vote of stockholders or disinterested directors or otherwise, both as
to action in his or her official capacity and as to action in any other capacity
while holding office or while employed by or acting as agent for the
corporation, and shall continue as to a person who has ceased to be a director,
officer, employee or agent, and shall inure to the benefit of the estate, heirs,
executors and administrators of such person. Nothing contained in this Article
FOURTEENTH shall be deemed to prohibit, and the corporation is specifically
authorized to enter into, agreements with officers and directors providing
indemnification rights and procedures different from those set forth herein.
All rights to indemnification under this Article FOURTEENTH shall be deemed to
be a contract between the corporation and each director or officer of the
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<PAGE>
corporation who serves or served in such capacity at any time while this Article
FOURTEENTH is in effect. This Article FOURTEENTH shall be binding upon any
successor corporation to this corporation, whether by way of acquisition,
merger, consolidation or otherwise.
J. Savings Clause. If this Article FOURTEENTH or any portion hereof
--------------
shall be invalidated on any ground by any court of competent jurisdiction, then
the corporation shall nevertheless indemnify each director or officer of the
corporation as to any costs, charges, expenses (including attorneys' fees),
judgments, fines and amounts paid in settlement with respect to any action, suit
or proceeding, whether civil, criminal, administrative or investigative,
including an action by or in the right of the corporation, to the full extent
permitted by any applicable portion of this Article FOURTEENTH that shall not
have been invalidated and to the full extent permitted by applicable law.
K. Subsequent Legislation. If the Delaware General Corporation Law
----------------------
is hereafter amended to further expand the indemnification permitted to
directors and officers of the corporation, then the corporation shall indemnify
such persons to the fullest extent permitted by the Delaware General Corporation
Law, as so amended.
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<PAGE>
THE UNDERSIGNED, being the sole incorporator herein before named, for the
purpose of forming a corporation pursuant to the General Corporation Law of the
State of Delaware, does hereby make, file and record this Certificate of
Incorporation, hereby declaring and certifying that this is its act and deed and
that the facts stated herein are true this ______ day of May 1997.
GLENDALE FEDERAL BANK, FEDERAL
SAVINGS BANK
By____________________________
Name:
Title:
Attest:
Name:_________________________
Title:
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<PAGE>
APPENDIX C
BYLAWS OF GOLDEN STATE BANCORP INC.
May __, 1997
<PAGE>
EFFECTIVE MAY __, 1997
BYLAWS OF GOLDEN STATE BANCORP INC.
-----------------------------------
ARTICLE I
OFFICES
SECTION 1. Registered Office. Golden State Bancorp Inc. (hereinafter
-----------------
referred to as the "Corporation") shall at all times maintain a registered
office in the State of Delaware, which, except as otherwise determined by the
Board of Directors of the Corporation (hereinafter referred to as the "Board"),
shall be in the City of Wilmington, County of New Castle.
SECTION 2. Other Offices. The Corporation may also have offices at
-------------
such other places within or without the State of Delaware as the Board shall
from time to time designate or the business of the Corporation shall require.
ARTICLE II
Stockholders
SECTION 1. Place of Meetings. All annual and special meetings of
-----------------
stockholders shall be held at such places within or without the State of
Delaware as may from time to time be designated by the Board and specified in
the notice of meeting.
SECTION 2. Annual Meeting. A meeting of the stockholders of the
--------------
Corporation for the election of directors and for the transaction of any other
business of the Corporation shall be held annually at 10:00 a.m. on the fourth
Tuesday of October, if not a legal holiday, and if a legal holiday, then on the
next day following such day which is not a legal holiday, or at such other date
and time as the Board may determine and specify in the notice of the meeting.
SECTION 3. Special Meetings. A special meeting of the stockholders
----------------
may be called by the Chairman of the Board of Directors of the Corporation or a
majority of the Board then in office, and shall be called by the Chairman of the
Board of Directors of the Corporation or by a majority of the Board of Directors
upon the written request of the holders of not less than 10% of the outstanding
capital stock of the Corporation entitled to vote at a meeting. Business
transacted at any special meeting of the stockholders shall be confined to the
purpose or purposes stated in the notice of such meeting.
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<PAGE>
SECTION 4. Conduct of Meetings. Annual and special meetings of the
-------------------
stockholders shall be conducted in accordance with Delaware law unless otherwise
prescribed by the Bylaws. The Chairman of the Board, or in the absence of the
Chairman of the Board, the highest ranking officer of the Corporation who is
present, or such other person as the Board shall have designated, shall call to
order any meeting of the stockholders and act as chairman of the meeting. The
Secretary of the Corporation, if present at the meeting, shall be the secretary
of the meeting. In the absence of the Secretary of the Corporation, the
secretary of the meeting shall be such person as the chairman of the meeting
shall appoint. The chairman of any meeting of the stockholders, unless otherwise
prescribed by law or regulation or unless the Chairman of the Board has
otherwise determined, shall determine the order of business and the procedure at
the meeting.
SECTION 5. Notice of Meetings. Written notice stating the place, day
------------------
and hour of the meeting and the purpose or purposes for which the meeting of the
stockholders is called shall be delivered not less than ten nor more than sixty
days before the date of the meeting, either personally or by mail, by or at the
direction of the Chairman of the Board, the Secretary or the directors
requesting the meeting, to each stockholder of record entitled to vote at such
meeting. If mailed, such notice shall be deemed given when deposited in the
United States mail, postage prepaid, addressed to the stockholder at his or her
address as it appears on the stock transfer books or records of the Corporation
as of the record date prescribed in Section 6 of this Article II. When any
meeting of the stockholders, either annual or special, is adjourned for more
than thirty days or if, after adjournment, a new record date is fixed for the
adjourned meeting, 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 other adjourned meeting of the stockholders, other than an
announcement at the meeting at which such adjournment is taken.
SECTION 6. Fixing of Record Date. For the purpose of determining
---------------------
stockholders entitled to notice of or to vote at any meeting of the stockholders
or any adjournment thereof, or stockholders entitled to receive payment of any
dividend, or in order to make a determination of stockholders for any other
proper purpose under Delaware law, the Board may fix, in advance, a date as the
record date for any such determination of stockholders. Such date shall not be
more than sixty days and not less than ten days before the date of such meeting,
nor more than sixty days prior to any other action.
SECTION 7. Voting Lists. The Secretary of the Corporation, or other
------------
officer or agent of the Corporation having charge of the stock transfer books
for shares of the capital stock of the Corporation, shall prepare and make, at
least ten days before each meeting of the stockholders, a complete list of the
stockholders entitled to vote at such meeting, or any adjournment thereof,
arranged in alphabetical order, with the address of and the number of shares
held by each stockholder. Such list shall be open to the examination of any
stockholder, for any purpose germane to the meeting, during ordinary business
hours, for a period of at least 10 days prior to the meeting as required by
applicable law. Such list shall also be produced and kept open at the time and
place
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<PAGE>
of the meeting during the whole time thereof and shall be subject to the
inspection of any stockholder present at the meeting. The stock transfer books
shall be the only evidence as to who are the stockholders entitled to examine
the stock transfer books, or to vote in person or by proxy at any meeting of
stockholders.
SECTION 8. Quorum. A majority of the outstanding shares of the
------
Corporation entitled to vote at a meeting of the stockholders, represented in
person or by proxy, shall constitute a quorum at a meeting. If less than a
majority of the outstanding shares are 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 called. The stockholders present at a duly organized
meeting may continue to transact business until adjournment, notwithstanding the
withdrawal of enough stockholders to leave less than a quorum.
SECTION 9. Proxies. At any meeting of the stockholders, every
-------
stockholder having the right to vote shall be entitled to vote in person, or by
proxy appointed by an instrument in writing and complying with the requirements
of Delaware law.
SECTION 10. Voting by the Corporation. Neither treasury shares of its
-------------------------
own capital stock held by the Corporation, nor shares held by another
corporation, a majority of the shares of which entitled to vote for the election
of directors are held by the Corporation, shall be entitled to vote or be
counted for quorum purposes at any meeting of the stockholders; provided,
however, that the Corporation may vote shares of its capital stock held by it,
or by any such other corporation, if such shares of capital stock are held by
the Corporation or such other corporation in a fiduciary capacity.
SECTION 11. New Business. At any meeting of stockholders, only such
------------
business shall be conducted, and only such proposals shall be acted upon as
shall have been brought before the meeting (a) by, or at the direction of, the
majority of the Board of Directors, (b) by the Chairman or (c) by any
stockholder of the Corporation who complies with the notice procedures set forth
in this Section. For a proposal to be properly brought before the meeting by a
stockholder, the stockholder must have given timely notice thereof in writing to
the Secretary of the Corporation. To be timely, a stockholder's notice must be
delivered to, or mailed and received at, the principal executive offices of the
Corporation not less than five days prior to the scheduled annual meeting at
which the business or proposal is proposed to be presented, regardless of any
postponements or adjournments of that meeting to a later date.
The provisions of this Section shall not prevent the consideration and
approval or disapproval at the stockholders' meeting of reports of officers,
directors and committees of the Board of Directors, but, in connection with such
reports, no new business shall be acted upon at such meeting unless stated,
filed and received as herein provided.
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<PAGE>
SECTION 12. Informal Action by Stockholders. Any action required to
-------------------------------
be taken at a meeting of the stockholders, or any other action which may be
taken at a meeting of stockholders, may be taken without a meeting if consent in
writing, setting forth the action so taken, shall be signed by all of the
stockholders entitled to vote with respect to the subject matter of such action.
SECTION 13. Inspectors of Election. In advance of any meeting of
----------------------
stockholders, the Board may appoint any persons other than nominees for office
as inspectors of election to act at such meeting or any adjournment thereof. If
inspectors of election be not so appointed, or if any persons so appointed fail
to appear or refuse to act, the presiding officer of any such meeting may, and
on the request of any stockholder or a stockholder's proxy shall, make such
appointment at the meeting. The number of inspectors shall be either one or
three. If appointed at a meeting on the request of one or more stockholders or
proxies, the majority of shares represented in person or by proxy shall
determine whether one or three inspectors are to be appointed. The duties of
such inspectors shall include: determining the number of shares of stock and the
voting power of each share, the shares of stock represented at the meeting, the
existence of a quorum, and the authenticity, validity and effect of the proxies;
receiving votes, ballots or consents; hearing and determining all challenges and
questions in any way arising in connection with the right 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 stockholders.
ARTICLE III
BOARD OF DIRECTORS
SECTION 1. General Powers. The business and affairs of the
--------------
Corporation shall be managed by or under the direction of the Board. The Board
shall annually elect a Chairman of the Board and a President, and may elect one
or more Vice Chairmen of the Board from among its members, and shall designate,
when present, either the Chairman or the President or a Vice Chairman to preside
at its meetings.
SECTION 2. Number. The Board shall consist of not less than five nor
------
more than fifteen members. The exact number of directors has been initially
fixed in the Corporation's Certificate of Incorporation at nine, but may be
changed from time to time by the Board pursuant to resolutions adopted by a
majority of the entire Board.
SECTION 3. Election of Directors. The Board shall be divided into
---------------------
three classes, as nearly equal in number as possible: the first class, the
second class and the third class. Each director shall serve for a term ending
on the third annual meeting following the annual meeting of the stockholders at
which such director was elected; provided, however, that the directors first
-------- -------
elected to the first class shall serve for a term ending upon the election of
directors at the annual
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<PAGE>
meeting next following the end of the calendar year 1996, the directors first
elected to the second class shall serve for a term ending upon the election of
directors at the second annual meeting next following the end of the calendar
year 1996, and the directors first elected to the third class shall serve for a
term ending upon the election of directors at the third annual meeting next
following the end of the calendar year 1996.
At each annual election commencing at the first annual meeting of the
stockholders, the successors to the class of directors whose term expires at
that time shall be elected by the stockholders to hold office for a term of
three years to succeed those directors whose term expires, so that the term of
one class of directors shall expire each year, unless, by reason of any
intervening changes in the authorized number of directors, the Board shall have
designated one or more directorships whose term then expires as directorships of
another class in order more nearly to achieve equality of number of directors
among the classes.
Notwithstanding the requirement that the three classes shall be as
nearly equal in number of directors as possible, in the event of any change in
the authorized number of directors, each director then continuing to serve as
such shall nevertheless continue as a director of the class of which he or she
is a member until the expiration of his or her current term, or his or her prior
resignation, disqualification, disability or removal. Stockholders shall be
entitled to cumulate their votes in the election of directors in the manner
provided in Section 214 of the Delaware General Corporation Law.
SECTION 4. Nomination of Directors. Nominations of candidates for
-----------------------
election as directors at any meeting of stockholders may be made (i) by, or at
the direction of, a majority of the Board of Directors, or (ii) by any
stockholder entitled to vote at such annual meeting. Only persons nominated in
accordance with procedures set forth in this Section shall be eligible for
election as directors.
Nominations, other than those made by, or at the direction of, the
Board of Directors, shall be made pursuant to timely notice in writing to the
Secretary of the Corporation as set forth in this Section. To be timely, a
stockholder's notice shall be delivered to, or mailed and received at, the
principal executive offices of the Corporation not less than five days prior to
the scheduled date for meeting, regardless of any postponements or adjournments
of that meeting to a later date. The Board of Directors may reject any
nomination by a stockholder not timely made in accordance with the requirements
of this Section.
SECTION 5. Regular Meetings. Meetings of the Board shall be held at
----------------
such time, and at such places within or without the State of Delaware, as shall
be fixed by the Board. No call shall be required for regular meetings for which
the time and place has been fixed.
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<PAGE>
Members of the Board of Directors may participate in regular meetings
by means of conference telephone or similar communications equipment by which
all persons participating in the meeting can hear each other.
SECTION 6. Special Meetings. Special Meetings of the Board may be
----------------
called by or at the request of the Chairman of the Board, the President, a Vice
Chairman of the Board or a majority of the directors. The persons authorized to
call special meetings of the Board may fix any place as the place for holding
any special meeting of the Board 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 7. Notice. Written notice of any special meeting of the
------
Board shall be given to each director at least one day prior thereto delivered
personally, by facsimile or by telegram or at least 2 days prior thereto
delivered by a guaranteed overnight delivery service or at least five days prior
thereto delivered by mail at the last address given by the director to the
Corporation for such purpose. Such notice shall be deemed to be delivered when
deposited in the United States mail so addressed, with postage thereon prepaid,
if mailed, when deposited with the delivery service, if sent by guaranteed
overnight delivery, when the facsimile confirmation is received, if sent by
facsimile 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 in the event 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 purpose of, any meeting of the Board need be specified in the notice or
waiver of notice of such meeting.
SECTION 8. Quorum. A majority of the number of directors fixed
------
pursuant to Section 2 of this Article III shall constitute a quorum for the
transaction of business at any meeting of the Board, 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 9. 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.
SECTION 10. Action Without a Meeting. Any action required or
------------------------
permitted to be taken by the Board 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.
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<PAGE>
SECTION 11. Resignation. Any director may resign at any time by
-----------
sending a written notice of such resignation to the Corporation addressed to the
Chairman of the Board, the President, a Vice Chairman of the Board or the Board.
Unless otherwise specified therein, such resignation shall take effect upon
receipt thereof.
SECTION 12. Vacancies. Any vacancy occurring in the Board may be
---------
filled in accordance with the Certificate of Incorporation.
SECTION 13. Compensation. Directors, as such, may receive a stated
------------
salary for their services. By resolution of the Board, 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. Members of either
standing or special committees may be allowed such compensation for actual
attendance at committee meetings as the Board may determine. Directors may
also, subject to applicable law, be entitled to receive stock options and
benefits under a retirement plan.
SECTION 14. Presumption of Assent. A director of the Corporation who
---------------------
is present at a meeting of the Board at which action is taken shall be presumed
to have assented to the action taken unless his or her dissent or abstention
shall be entered in the minutes of the meeting or unless he or she 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 Corporation 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 15. Removal. At a meeting of stockholders called expressly
-------
for that purpose, a director may be removed only for cause as determined by the
affirmative vote of the holders of a majority of the shares then entitled to
vote in an election of directors, which vote may only be taken at a meeting of
stockholders called expressly for that purpose. Cause for removal shall be
deemed to 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
by a court of competent jurisdiction to be liable for gross negligence or
misconduct in the performance of such director's duty to the Corporation and
such adjudication is no longer subject to direct appeal.
ARTICLE IV
EXECUTIVE AND OTHER COMMITTEES
SECTION 1. Appointment. The Board, by resolution adopted by a
-----------
majority of the Board, may designate 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
thereto shall not operate to relieve the Board, or any director, of any
responsibility imposed by law or regulation, except to the extent provided by
law.
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<PAGE>
SECTION 2. Authority. The Executive Committee, when the Board is not
---------
in session, shall have and may exercise all of the authority of the Board except
to the extent, if any, that such authority shall be limited by the resolution
appointing the Executive Committee, or as otherwise expressly provided by law,
the Certificate of Incorporation or the Bylaws.
SECTION 3. Tenure. Subject to the provisions of Section 8 of this
------
Article IV, each member of the Executive Committee shall hold office 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. 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 the Executive Committee need not state the business proposed to be
transacted at the meeting.
Regular or special meetings may be held by means of conference
telephone or similar communications equipment by which all persons participating
in the meeting can hear each other.
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 Board.
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 Board. Any member of the Executive Committee may resign
from the Executive Committee at any time by giving written notice to the
Chairman of the Board, the President, a Vice Chairman of the Board or the Board.
Unless otherwise specified thereon, such resignation shall take effect upon
receipt. The acceptance of such resignation shall not be necessary to make it
effective.
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<PAGE>
SECTION 9. Procedure. The Executive Committee shall elect a
---------
presiding officer from its members and may fix its own rules of procedures which
shall not be inconsistent with the Bylaws. It shall keep regular minutes of its
proceedings and report the same to the Board for its information.
SECTION 10. Other Committees. The Board may by resolution establish
----------------
any of an audit committee, a nominating committee or such other committees
composed of directors as they may determine to be necessary or appropriate for
the conduct of the business of the Corporation and may prescribe the duties,
constitution and procedures thereof.
ARTICLE V
OFFICERS
SECTION 1. Positions. The officers of the Corporation shall be a
---------
Chairman of the Board, a Vice Chairman of the Board, a Chief Executive Officer,
a President, one or more Vice Presidents, a Secretary and a Treasurer or a Vice
President in charge of financial matters, each of whom shall be elected by the
Board. Any number of such offices may be held by the same person. The Board may
designate one or more Vice Presidents as Executive Vice President, Senior Vice
President or such other designation as the Board may determine. The Board may
also elect or authorize the appointment of such other officers as the business
of the Corporation may require. The officers shall have such authority and
perform such duties as the Board may from time to time authorize or determine.
In the absence of action by the Board, 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
---------------------------
Corporation shall be elected annually at the first meeting of the Board held
after each annual meeting of the stockholders. 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 his successor shall have been
duly elected and qualified or until his death, resignation or removal in the
manner hereinafter provided. Election or appointment of an officer, employee or
agent shall not by itself create any contractual rights. The Board may authorize
the Corporation to enter into an employment contract with any officer, but no
contract shall impair the right of the Board 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 whenever
-------
in its judgment the best interests of the Corporation will be served thereby,
but such removal, other than for cause, shall be without prejudice to the
contract 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 a majority
vote of the Board for the unexpired portion of the term.
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<PAGE>
SECTION 5. Remuneration. The remuneration of the officers shall be
------------
fixed from time to time by the Board or its delegees.
ARTICLE VI
CONTRACTS, LOANS, CHECKS AND DEPOSITS
SECTION 1. Contracts. To the extent permitted by applicable law, the
---------
Certificate of Incorporation or the Bylaws, the Board may authorize any officer,
employee or agent of the Corporation to enter into any contract or execute and
deliver any instrument in the name of and on behalf of the Corporation. Such
authority may be general or confined to specific instances.
SECTION 2. Loans. No loans shall be contracted on behalf of the
-----
Corporation and no evidence of indebtedness shall be issued in its name unless
authorized by the Board. 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 Corporation shall be signed by one or more officers, employees or
agents of the Corporation in such manner as shall from time to time be
determined by the Board.
SECTION 4. Deposits. All funds of the Corporation not otherwise
--------
employed shall be deposited from time to time to the credit of the Corporation
in any duly authorized depositories as the Board may select.
ARTICLE VII
CERTIFICATES FOR SHARES AND THEIR TRANSFER
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<PAGE>
SECTION 1. Certificates for Shares. Certificates representing shares
-----------------------
of capital stock of the Corporation shall be in such form as shall be determined
by the Board. Such certificates shall be signed by the Chairman of the Board,
the Chief Executive Officer or any other officer of the Corporation authorized
by the Board, 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 Corporation 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 issued and date
of issue, shall be entered on the stock transfer books of the Corporation. All
certificates surrendered to the Corporation for transfer shall be canceled and
no new certificate shall be issued until the former certificate for a like
number of shares shall have been surrendered and canceled, except that in the
case of a lost, stolen or destroyed certificate, a new certificate may be issued
therefor upon such terms and indemnity to the Corporation as the Board may
prescribe as sufficient to indemnify the Corporation against any claim that may
be made against it on account of such loss, theft or destruction.
SECTION 2. Transfer of Shares. Transfer of shares of capital stock
------------------
of the Corporation shall be made only on its stock transfer books. Authority for
such transfer shall be given only by the holder of record thereof or by his or
her legal representative, who shall furnish proper evidence of such authority,
or by his or her attorney thereunto duly authorized by power of attorney duly
executed and filed with the Corporation. 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 Corporation shall
be deemed by the Corporation to be the owner thereof for all purposes.
ARTICLE VIII
FISCAL YEAR, ANNUAL AUDIT
The fiscal year of the Corporation shall end on the 30th day of June
of each year. The Corporation 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. The appointment of such accountants shall be subject
to annual ratification by the stockholders.
ARTICLE IX
DIVIDENDS
Subject to applicable law, the Certificate of Incorporation or the
Bylaws, the Board may, from time to time, declare and the Corporation may pay,
dividends on the outstanding shares of capital stock of the Corporation.
ARTICLE X
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<PAGE>
CORPORATE SEAL
The corporate seal of the Corporation shall be in such form as the
Board shall prescribe.
ARTICLE XI
AMENDMENTS
Bylaws may be adopted, amended or repealed by the vote of two thirds
of the outstanding stock of the Corporation entitled to vote thereon or by a
resolution adopted by a majority of the directors then in office.
ARTICLE XII
INDEMNIFICATION
SECTION 1. Actions, Suits or Proceedings Other than by or in the
-----------------------------------------------------
Right of the Corporation. The Corporation shall indemnify any person who was or
- ------------------------
is a party or is threatened to be made a party to any threatened, pending or
completed action, suit or proceeding, whether civil, criminal, administrative or
investigative (other than an action by or in the right of the Corporation) by
reason of the fact that he or she is or was or has agreed to become a director
or officer of the Corporation, or is or was serving or has agreed to serve at
the request of the Corporation as a director or officer of another corporation,
partnership, limited liability company, limited liability partnership, joint
venture, trust or other enterprise, or by reason of any action alleged to have
been taken or omitted in such capacity, against costs, charges, expenses
(including attorneys' fees), judgments, fines and amounts paid in settlement
actually and reasonably incurred by him or her or on his or her behalf in
connection with such action, suit or proceeding and any appeal therefrom, if he
or she acted in good faith and in a manner he or she reasonably believed to be
in or not opposed to the best interests of the Corporation, and, with respect to
any criminal action or proceeding, had no reasonable cause to believe his or her
conduct was unlawful. The termination of any action, suit or proceeding by
judgment, order, settlement, conviction, or upon a plea of nolo contendere or
---- ----------
its equivalent, shall not, of itself, create a presumption that the person did
not act in good faith and in a manner which he or she reasonably believed to be
within the scope of his or her authority and in, or not opposed to the best
interests of the Corporation, or, with respect to any criminal action or
proceeding, had reasonable cause to believe that his or her conduct was
unlawful.
SECTION 2. Actions or Suits by or in the Right of the Corporation.
------------------------------------------------------
The Corporation shall indemnify any person who was or is a party or is
threatened to be made a party to any threatened, pending or completed action or
suit by or in the right of the Corporation to procure a judgment in its favor by
reason of the fact that he or she is or was or has agreed to become a director
or officer of the Corporation, or is or was serving or has agreed to serve at
the request of the Corporation as a director or officer of another corporation,
partnership, limited liability company,
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<PAGE>
limited liability partnership, joint venture, trust or other enterprise, or by
reason of any action alleged to have been taken or omitted in such capacity,
against costs, charges and expenses (including attorneys' fees) actually and
reasonably incurred by him or her or on his or her behalf in connection with the
defense or settlement of such action or suit and any appeal therefrom, if he or
she acted in good faith and in a manner he or she reasonably believed to be in
or not opposed to the best interest of the Corporation except that no
indemnification shall be made in respect of any claim, issue or matter as to
which such person shall have been adjudged to be liable for gross negligence or
misconduct in the performance of his or her duty to the Corporation unless and
only to the extent that the Court of Chancery of Delaware or the court in which
such action or suit was brought shall determine upon application that, despite
the adjudication of such liability but in view of all the circumstances of the
case, such person is fairly and reasonably entitled to indemnity for such costs,
charges and expenses which the Court of Chancery or such other court shall deem
proper.
SECTION 3. Indemnification for Costs, Charges and Expenses of
--------------------------------------------------
Successful Party. Notwithstanding the other provisions of this Article XII, to
- ----------------
the extent that a director or officer has been successful, on the merits or
otherwise, including, without limitation, the dismissal of an action without
prejudice, in defense of any action, suit or proceeding referred to in Sections
1 and 2 of this Article XII, or in defense of any claim, issue or matter
therein, he or she shall be indemnified against all costs, charges and expenses
(including attorneys' fees) actually and reasonably incurred by him or her or on
his or her behalf in connection therewith.
SECTION 4. Determination of Right to Indemnification. Any
-----------------------------------------
indemnification under Sections 1 and 2 of this Article XII (unless ordered by a
court) shall be paid by the Corporation unless a determination is made by (i)
the board of directors by a majority vote of the directors who were not parties
to such action, suit or proceeding, or if such majority of disinterested
directors so directs, (ii) by independent legal counsel in a written opinion, or
(iii) by the stockholders, that indemnification of the director or officer is
not proper in the circumstances because he or she has not met the applicable
standard of conduct set forth in Sections 1 and 2 of this Article XII.
SECTION 5. Advance of Costs, Charges and Expenses. Costs, charges
--------------------------------------
and expenses (including attorneys' fees) incurred by a person referred to in
Sections 1 or 2 of this Article XII in defending a civil or criminal action,
suit or proceeding shall be paid by the Corporation in advance of the final
disposition of such action, suit or proceeding; provided, however, that the
-------- -------
payment of such costs, charges and expenses incurred by a director or officer in
his or her capacity as a director or officer (and not in any other capacity in
which service was or is rendered by such person while a director or officer) in
advance of the final disposition of such action, suit or proceeding shall be
made only upon receipt of an undertaking by or on behalf of the director or
officer to repay all amounts so advanced in the event that it shall ultimately
be determined that such director or officer is not entitled to be indemnified by
the Corporation as authorized in this Article XII. Such costs, charges and
expenses incurred by other employees and agents may be so paid upon
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<PAGE>
such terms and conditions, if any, as the majority of the directors deems
appropriate. The majority of the directors may, in the manner set forth above,
and upon approval of such director or officer of the Corporation, authorize the
Corporation's counsel to represent such person, in any action, suit or
proceeding, whether or not the Corporation is a party to such action, suit or
proceeding.
SECTION 6. Procedure for Indemnification. Any indemnification
-----------------------------
under Sections 1, 2 and 3, or advance of costs, charges and expenses under
Section 5 of this Article XII shall be made promptly, and in any event within 60
days, upon the written request of the director or officer. The right to
indemnification or advances as granted by this Article XII shall be enforceable
by the director or officer in any court of competent jurisdiction, if the
Corporation denies such request, in whole or in part, or if no disposition
thereof is made within 60 days. Such person's costs and expenses incurred in
connection with successfully establishing his or her right to indemnification,
in whole or in part, in any such action shall also be indemnified by the
Corporation. It shall be a defense to any such action (other than an action
brought to enforce a claim for the advance of costs, charges and expenses under
Section 5 of this Article XII where the required undertaking, if any, has been
received by the Corporation) that the claimant has not met the standard of
conduct set forth in Sections 1 or 2 of this Article XII, but the burden of
proving such defense shall be on the Corporation. Neither the failure of the
Corporation (including its board of directors, its independent legal counsel and
its stockholders) to have made a determination prior to the commencement of such
action that indemnification of the claimant is proper in the circumstances
because he or she has met the applicable standard of conduct set forth in
Sections 1 or 2 of this Article XII, nor the fact that there has been an actual
determination by the Corporation (including its board of directors, its
independent legal counsel and its stockholders) that the claimant has not met
such applicable standard of conduct, shall be a defense to the action or create
a presumption that the claimant has not met the applicable standard of conduct.
SECTION 7. Settlement. The Corporation shall not be obligated to
----------
reimburse the costs of any settlement to which it has not agreed. If in any
action, suit or proceeding, including any appeal, within the scope of Sections 1
or 2 of this Article XII, the person to be indemnified shall have unreasonably
failed to enter into a settlement thereof, then, notwithstanding any other
provision hereof, the indemnification obligation of the Corporation to such
person in connection with such action, suit or proceeding shall not exceed the
total of the amount at which settlement could have been made and the expenses
incurred by such person prior to the time such settlement could reasonably have
been effected.
SECTION 8. Subsequent Amendment. No amendment, termination or
--------------------
repeal of this Article XII or of relevant provisions of the Delaware General
Corporation Law or any other applicable laws shall affect or impair in any way
the rights of any director or officer of the Corporation to indemnification
under the provisions hereof with respect to any action, suit or proceeding
arising out of, or relating to, any actions, transactions or facts occurring
prior to the final adoption of such amendment, termination or appeal.
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<PAGE>
SECTION 9. Other Rights; Continuation of Right to Indemnification.
------------------------------------------------------
The indemnification provided by this Article XII shall not be deemed exclusive
of any other rights to which a director, officer, employee or agent seeking
indemnification may be entitled under any law (common or statutory), agreement,
vote of stockholders or disinterested directors or otherwise, both as to action
in his or her official capacity and as to action in another capacity while
holding office or while employed by or acting as agent for the Corporation, and
shall continue as to a person who has ceased to be a director, officer, employee
or agent, and shall inure to the benefit of the estate, heirs, executors and
administrators of such person. Nothing contained in this Article XII shall be
deemed to prohibit, and the Corporation is specifically authorized to enter
into, agreements with officers and directors providing indemnification rights
and procedures different from those set forth herein. All rights to
indemnification under this Article XII shall be deemed to be a contract between
the Corporation and each director or officer of the Corporation who serves or
served in such capacity at any time while this Article XII is in effect. Any
repeal or modification of this Article XII or any repeal or modification of
relevant provisions of the Delaware General Corporation Law or any other
applicable laws shall not in any way diminish any rights to indemnification of a
director, officer, employee or agent or the obligations of the Corporation
arising hereunder. This Article XII shall be binding upon any successor
Corporation to this Corporation, whether by way of acquisition, merger,
consolidation or otherwise.
SECTION 10. Insurance. The Corporation shall purchase and maintain
---------
insurance on behalf of any person who is or was or has agreed to become a
director, officer, employee or agent of the Corporation, or is or was serving at
the request of the Corporation as a director, officer, employee or agent of
another corporation, partnership, limited liability company, limited liability
partnership, joint venture, trust or other enterprise against any liability
asserted against him or her and incurred by him or her or on his or her behalf
in any such capacity, or arising out of his or her status as such, whether or
not the Corporation would have the power to indemnify him or her against such
liability under the provisions of this Article XII; provided, that such
--------
insurance is available on acceptable terms, which determination shall be made by
a vote of a majority of the directors.
SECTION 11. Savings Clause. If this Article XII or any portion
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hereof shall be invalidated on any ground by any court of competent
jurisdiction, then the Corporation shall nevertheless indemnify each director or
officer of the Corporation as to costs, charges and expenses (including
attorneys' fees), judgments, fine and amounts paid in settlement with respect to
any action, suit or proceeding, whether civil, criminal, administrative or
investigative, including an action by or in the right of the Corporation, to the
full extent permitted by any applicable portion of this Article XII that shall
not have been invalidated and to the full extent permitted by applicable law.
SECTION 12. Subsequent Legislation. If the Delaware General
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Corporation Law is amended after approval by the stockholders of this Article to
further expand the indemnification
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permitted to directors and officers of the Corporation, then the corporation
shall indemnify such persons to the fullest extent permitted by the Delaware
General Corporation Law, as so amended.
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