<PAGE>
UNITED STATES SECURITIES AND EXCHANGE COMMISSION
Washington, D.C. 20549
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, 1998
------------------
or
[ ] TRANSITION REPORT PURSUANT TO SECTION 13 OR 15(D) OF THE SECURITIES
EXCHANGE ACT OF 1934
For the transition period from N/A to N/A
--- ---
Commission File Number: 333-28037
---------
Golden State Bancorp Inc.
- -------------------------------------------------------------------------------
(exact name of registrant as specified in its charter)
Delaware 95-4642135
- -------------------------------- -----------------------------------
(State or other jurisdiction of (I.R.S. Employer Identification No.)
incorporation or organization)
135 Main Street, San Francisco, CA 94105
- ---------------------------------------- ---------------------------
(Address of principal executive offices) (Zip Code)
415-904-1100
---------------------------------------------------
(Registrant's telephone number, including area code)
N/A
- ------------------------------------------------------------------------------
(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. X Yes No
--- ---
The number of shares outstanding of registrant's $1.00 par value common stock,
as of the close of business on October 31, 1998: 128,655,138 shares of common
stock.
Page 1 of 51 pages
Exhibit index on page: 50
<PAGE>
GOLDEN STATE BANCORP INC.
THIRD QUARTER 1998 REPORT ON FORM 10-Q
TABLE OF CONTENTS
<TABLE>
<CAPTION>
Page No.
--------
<S> <C> <C>
PART I. FINANCIAL INFORMATION
---------------------
Item 1. Consolidated Financial Statements
Unaudited Consolidated Balance Sheets
September 30, 1998 and December 31, 1997...................................................3
Unaudited Consolidated Statements of Income
Nine months ended September 30, 1998 and 1997..............................................4
Unaudited Consolidated Statements of Income
Three months ended September 30, 1998 and 1997.............................................5
Unaudited Consolidated Statements of Comprehensive Income
Nine months ended September 30, 1998 and 1997..............................................6
Unaudited Consolidated Statements of Comprehensive Income
Three months ended September 30, 1998 and 1997.............................................7
Unaudited Consolidated Statement of Stockholders' Equity
Nine months ended September 30, 1998.......................................................8
Unaudited Consolidated Statements of Cash Flows
Nine months ended September 30, 1998 and 1997..............................................9
Notes to Unaudited Consolidated Financial Statements......................................11
Item 2. Management's Discussion and Analysis of
Financial Condition and Results of Operations.............................................15
PART II. OTHER INFORMATION
-----------------
Item 1. Legal Proceedings.........................................................................48
Item 2. Changes in Securities.....................................................................49
Item 3. Defaults Upon Senior Securities...........................................................49
Item 4. Submission of Matters to a Vote of Security Holders.......................................49
Item 5. Other Information.........................................................................49
Item 6. Exhibits and Reports on Form 8-K..........................................................50
</TABLE>
Page 2
<PAGE>
GOLDEN STATE BANCORP INC. AND SUBSIDIARIES
CONSOLIDATED BALANCE SHEETS
SEPTEMBER 30, 1998 AND DECEMBER 31, 1997
(Unaudited)
(dollars in thousands, except per share data)
<TABLE>
<CAPTION>
September 30, December 31,
1998 1997
------------- ------------
<S> <C> <C>
Assets
------
Cash and amounts due from banks $ 552,762 $ 350,214
Interest-bearing deposits in other banks 44,263 36,164
Short-term investment securities 591,947 25,933
----------- -----------
Cash and cash equivalents 1,188,972 412,311
Securities available for sale, at fair value 583,737 813,085
Securities held to maturity 251,960 58,299
Mortgage-backed securities available for sale, at fair value 11,502,002 5,076,598
Mortgage-backed securities held to maturity 2,950,503 1,337,877
Loans held for sale, net 1,479,686 1,483,466
Loans receivable, net 30,763,348 19,424,410
Investment in Federal Home Loan Bank ("FHLB") System 787,072 468,191
Office premises and equipment, net 309,919 159,349
Foreclosed real estate, net 91,690 76,997
Accrued interest receivable 309,956 188,203
Intangible assets (net of accumulated amortization of 940,731
$96,674 in 1998 and $60,294 in 1997) 675,927
Mortgage servicing rights 889,253 536,703
Other assets 973,543 650,740
----------- -----------
Total assets $53,022,372 $31,362,156
=========== ===========
Liabilities, Minority Interest and Stockholders' Equity
-------------------------------------------------------
Deposits $25,285,628 $16,202,605
Securities sold under agreements to repurchase 3,757,060 1,842,442
Borrowings 20,198,625 11,232,530
Other liabilities 1,334,166 702,959
----------- -----------
Total liabilities 50,575,479 29,980,536
----------- -----------
Commitments and contingencies -- --
Minority interest 775,529 1,012,136
Stockholders' equity:
Preferred stock, Series A, $1.00 par value and $25.00 3 --
liquidation preference (2,538 shares issued and outstanding)
Common stock, $1.00 par value, 250,000,000 shares 128,655 56,723
authorized, 128,655,138 and 56,722,988 shares issued and
outstanding at September 30, 1998 and December 31, 1997,
respectively
Additional paid-in capital 1,346,383 (44,527)
Accumulated other comprehensive income 41,280 35,162
Retained earnings (substantially restricted) 157,034 322,126
Treasury stock, at cost (106,180 shares in 1998) (1,991) --
----------- -----------
Total stockholders' equity 1,671,364 369,484
----------- -----------
Total liabilities, minority interest and stockholders' equity $53,022,372 $31,362,156
=========== ===========
</TABLE>
See accompanying notes to unaudited consolidated financial statements.
Page 3
<PAGE>
GOLDEN STATE BANCORP INC. AND SUBSIDIARIES
CONSOLIDATED STATEMENTS OF INCOME
NINE MONTHS ENDED SEPTEMBER 30, 1998 AND 1997
(Unaudited)
(dollars in thousands, except per share data)
<TABLE>
<CAPTION>
1998 1997
---- ----
<S> <C> <C>
Interest income:
Loans receivable $ 1,169,834 $ 1,166,028
Mortgage-backed securities available for sale 294,174 216,280
Mortgage-backed securities held to maturity 80,025 86,849
Loans held for sale 85,070 55,898
Securities available for sale 40,458 40,325
Securities held to maturity 2,727 1,672
Interest-bearing deposits in other banks 23,009 4,839
----------- -----------
Total interest income 1,695,297 1,571,891
----------- -----------
Interest expense:
Deposits 545,734 562,904
Securities sold under agreements to repurchase 106,386 104,863
Borrowings 586,239 447,364
----------- -----------
Total interest expense 1,238,359 1,115,131
----------- -----------
Net interest income 456,938 456,760
Provision for loan losses
30,000 59,850
----------- -----------
Net interest income after provision for loan losses 426,938 396,910
----------- -----------
Noninterest income:
Loan servicing fees, net 106,070 109,440
Customer banking fees and service charges 79,475 73,243
Management fees 1,746 5,309
Gain on sale of loans, net 49,989 16,123
Gain on sale of branches 108,825 1,069
Gain on sale of assets, net 235 14,845
Dividends on FHLB stock 22,463 18,367
Other income 15,257 17,737
----------- -----------
Total noninterest income 384,060 256,133
----------- -----------
Noninterest expense:
Compensation and employee benefits 200,753 190,370
Occupancy and equipment 65,143 61,423
Savings Association Insurance Fund deposit insurance premium 7,840 8,090
Loan expense 33,863 51,838
Marketing 12,009 10,378
Professional fees 30,811 33,467
Data processing 10,274 9,553
Foreclosed real estate operations, net (6,024) (2,081)
Amortization of intangible assets 36,380 36,805
Merger and integration costs 31,917 --
Other 74,294 80,283
----------- -----------
Total noninterest expense 497,260 480,126
=========== ===========
Income before income taxes, minority interest and extraordinary loss 313,738 172,917
Income tax (benefit) expense (151,845) 31,426
----------- -----------
Income before minority interest and extraordinary loss 465,583 141,491
Minority interest 82,598 77,174
----------- -----------
Income before extraordinary loss 382,985 64,317
Extraordinary loss, net
80,007 --
----------- -----------
Net income $ 302,978 $ 64,317
=========== ===========
Earnings per share:
Basic
Income before extraordinary loss $ 6.25 $ 1.13
Net income $ 4.94 $ 1.13
Diluted
Income before extraordinary loss $ 6.15 $ 1.13
Net income $ 4.87 $ 1.13
</TABLE>
See accompanying notes to unaudited consolidated financial statements
Page 4
<PAGE>
GOLDEN STATE BANCORP INC. AND SUBSIDIARIES
CONSOLIDATED STATEMENTS OF INCOME
THREE MONTHS ENDED SEPTEMBER 30, 1998 AND 1997
(Unaudited)
(dollars in thousands, except per share data)
<TABLE>
<CAPTION>
1998 1997
---- ----
<S> <C> <C>
Interest income:
Loans receivable $ 408,494 $ 386,365
Mortgage-backed securities available for sale 115,645 81,848
Mortgage-backed securities held to maturity 32,592 27,980
Loans held for sale 26,840 18,271
Securities available for sale 12,172 15,047
Securities held to maturity 1,155 743
Interest-bearing deposits in other banks 21,438 1,049
--------- ---------
Total interest income 618,336 531,303
--------- ---------
Interest expense:
Deposits 190,532 188,117
Securities sold under agreements to repurchase 49,337 32,077
Borrowings 217,088 160,074
--------- ---------
Total interest expense 456,957 380,268
--------- ---------
Net interest income 161,379 151,035
Provision for loan losses 10,000 19,950
--------- ---------
Net interest income after provision for loan losses 151,379 131,085
--------- ---------
Noninterest income:
Loan servicing fees, net 34,707 34,461
Customer banking fees and service charges 28,278 26,491
Management fees 442 1,220
Gain on sale of loans, net 13,865 4,765
Gain on sale of branches 108,911 --
Gain on sale of assets, net 416 15,059
Dividends on FHLB stock 7,901 6,392
Other income 4,806 6,458
--------- ---------
Total noninterest income 199,326 94,846
--------- ---------
Noninterest expense:
Compensation and employee benefits 73,179 62,868
Occupancy and equipment 23,814 20,579
Savings Association Insurance Fund deposit insurance premium 2,786 2,640
Loan expense 10,363 17,872
Marketing 2,142 2,694
Professional fees 11,242 11,269
Data processing 3,877 3,371
Foreclosed real estate operations, net (886) (1,224)
Amortization of intangible assets 13,151 12,210
Merger and integration costs 31,054 --
Other 23,821 22,479
--------- ---------
Total noninterest expense 194,543 154,758
--------- ---------
Income before income taxes, minority interest and extraordinary loss 156,162 71,173
Income tax expense 71,973 12,208
--------- ---------
Income before minority interest and extraordinary loss 84,189 58,965
Minority interest 36,406 25,938
--------- ---------
Income before extraordinary loss 47,783 33,027
Extraordinary loss, net 80,007 --
--------- ---------
Net (loss) income $ (32,224) $ 33,027
========= =========
Earnings per share:
Basic
Income before extraordinary loss $ 0.68 $ 0.58
Net income $ (0.46) $ 0.58
Diluted
Income before extraordinary loss $ 0.65 $ 0.58
Net income $ (0.44) $ 0.58
</TABLE>
See accompanying notes to unaudited consolidated financial statements.
Page 5
<PAGE>
GOLDEN STATE BANCORP INC. AND SUBSIDIARIES
CONSOLIDATED STATEMENTS OF COMPREHENSIVE INCOME
NINE MONTHS ENDED SEPTEMBER 30, 1998 AND 1997
(Unaudited)
(in thousands)
<TABLE>
<CAPTION>
1998 1997
---- ----
<S> <C> <C>
Net income $ 302,978 $ 64,317
Other comprehensive income, net of tax:
Unrealized holding gain on securities
available for sale:
Unrealized holding gain arising during
the period 6,654 14,924
Less: reclassification adjustment for gains
included in net (loss) gain (536) (90)
--------- ---------
Other comprehensive income 6,118 14,834
--------- ---------
Comprehensive income $ 309,096 $ 79,151
========= =========
</TABLE>
See accompanying notes to unaudited consolidated financial statements.
Page 6
<PAGE>
GOLDEN STATE BANCORP INC. AND SUBSIDIARIES
CONSOLIDATED STATEMENTS OF COMPREHENSIVE INCOME
THREE MONTHS ENDED SEPTEMBER 30, 1998 AND 1997
(Unaudited)
(in thousands)
<TABLE>
<CAPTION>
1998 1997
---- ----
<S> <C> <C>
Net (loss) income $(32,224) $ 33,027
Other comprehensive income, net of tax:
Unrealized holding gain on securities available for sale:
Unrealized holding gain arising during
the period 13,150 8,120
Less: reclassification adjustment for gains
included in net income 29 (86)
-------- --------
Other comprehensive income 13,179 8,034
-------- --------
Comprehensive (loss) income ($19,045) $ 41,061
======== ========
</TABLE>
See accompanying notes to unaudited consolidated financial statements.
Page 7
<PAGE>
GOLDEN STATE BANCORP INC. AND SUBSIDIARIES
CONSOLIDATED STATEMENT OF STOCKHOLDERS' EQUITY
NINE MONTHS ENDED SEPTEMBER 30, 1998
(Unaudited)
(in thousands, except number of shares)
<TABLE>
<CAPTION>
Preferred Stock Accumulated
Series A Common Stock Additional Other
--------------------- ------------------------ Paid-in Comprehensive Retained
Shares Amount Shares Amount Capital Income Earnings
-------- --------- ------------ ----------- ------------ -------------- ----------
<S> <C> <C> <C> <C> <C> <C> <C>
Balance at December 31, 1997 -- -- 56,722,988 $ 56,723 $( 44,527) $ 35,162 $ 322,126
Net income -- -- -- -- -- -- 302,978
Golden State Merger 4,183,599 4,184 61,880,950 61,881 1,400,332 -- --
Conversion of Series A
Preferred Stock (4,181,061) (4,181) 10,051,200 10,051 (5,870) -- --
Redemption of Additional
FN Holdings
Preferred Stock -- -- -- -- -- -- 786
Change in net unrealized
holding gains on securities
available for sale -- -- -- -- -- 6,118 --
Contingent liability
reflecting value
of Golden State Common
Stock to be distributed to
First Gibraltar and
Hunter's Glen in respect of
their proportionate
ownership of the California
Federal Goodwill
Litigation Asset -- -- -- -- -- -- (58,791)
Contingent liability
reflecting value of Golden
State Common Stock to be
distributed to First
Gibraltar and Hunter's Glen
upon use of Parent
Holdings' pre-merger tax
benefits -- -- -- -- -- -- (132,400)
GS Escrow Merger -- -- -- -- (3,535) -- --
Dividend of tax benefits to
parent due to
deconsolidation -- -- -- -- -- -- (267,900)
Pre-merger dividends to parent -- -- -- -- (28) -- (9,765)
Capital contribution -- -- -- -- 28 -- --
Sale of common stock in
treasury -- -- -- -- (17) -- --
----- -- ----------- -------- ----------- --------- ---------
Balance at September 30, 1998 2,538 $3 128,655,138 $128,655 $ 1,346,383 $ 41,280 $ 157,034
===== == =========== ======== =========== ========= =========
</TABLE>
<TABLE>
<CAPTION>
Common Stock
in Treasury Total
----------------------- Stockholders'
Shares Amount Equity
---------- --------- -----------
<S> <C> <C> <C>
Balance at December 31, 1997 -- $ -- $ 369,484
Net income -- -- 302,978
Golden State Merger (108,574) (2,036) 1,464,361
Conversion of Series A
Preferred Stock -- -- --
Redemption of Additional
FN Holdings
Preferred Stock -- -- 786
Change in net unrealized
holding gains on securities
available for sale -- -- 6,118
Contingent liability
reflecting value
of Golden State Common
Stock to be distributed to
First Gibraltar and
Hunter's Glen in respect of
their proportionate
ownership of the California
Federal Goodwill
Litigation Asset -- -- (58,791)
<PAGE>
Contingent liability
reflecting value of Golden
State Common Stock to be
distributed to First
Gibraltar and Hunter's Glen
upon use of Parent
Holdings pre-merger tax
benefits -- -- (132,400)
GS Escrow Merger -- -- (3,535)
Dividend of tax benefits to
parent due to
deconsolidation -- -- (267,900)
Pre-merger dividends to parent -- -- (9,793)
Capital contribution -- -- 28
Sale of common stock in
treasury 2,394 45 28
-------- ------- ----------
Balance at September 30, 1998 (106,180) $(1,991) $1,671,364
======== ======= ==========
</TABLE>
See accompanying notes to unaudited consolidated financial statements.
Page 8
<PAGE>
GOLDEN STATE BANCORP INC. AND SUBSIDIARIES
CONSOLIDATED STATEMENTS OF CASH FLOWS
NINE MONTHS ENDED SEPTEMBER 30, 1998 AND 1997
(Unaudited)
(in thousands)
<TABLE>
<CAPTION>
1998 1997
---- ----
<S> <C> <C>
Cash flows from operating activities:
Net income $ 302,978 $ 64,317
Adjustments to reconcile net income to net cash (used in)
provided by operating activities:
Amortization of intangible assets 36,380 36,805
Accretion of premiums and discounts, net (7,633) (14,705)
Accretion of discount on borrowings 547 --
Amortization of mortgage servicing rights 92,003 81,418
Provision for loan losses 30,000 59,850
Gain on sales of assets, net (235) (14,845)
Gain on sale of branches (108,825) (1,069)
Gain on sales of foreclosed real estate, net (11,331) (10,302)
Loss on sale of loans, net 88,514 72,917
Extraordinary loss on early extinguishment of debt, net 80,007 --
Depreciation and amortization of office premises and equipment 17,364 11,755
Amortization of deferred debt issuance costs 6,974 5,472
FHLB stock dividends (22,463) (18,367)
Capitalization of originated mortgage servicing rights (138,503) (89,040)
Purchases and originations of loans held for sale (6,391,601) (4,458,632)
Proceeds from the sale of loans held for sale 6,354,361 4,205,318
(Increase) decrease in other assets (169,859) 113,135
Increase in accrued interest receivable (10,131) (11,967)
Decrease in other liabilities (300,698) (68,678)
Minority interest
82,598 77,174
----------- -----------
Net cash (used in) provided by operating activities (69,553) 40,556
----------- -----------
</TABLE>
See accompanying notes to unaudited consolidated financial statements.
(Continued)
Page 9
<PAGE>
GOLDEN STATE BANCORP INC. AND SUBSIDIARIES
CONSOLIDATED STATEMENTS OF CASH FLOWS
NINE MONTHS ENDED SEPTEMBER 30, 1998 AND 1997
(Unaudited)
(in thousands)
<TABLE>
<CAPTION>
1998 1997
----- ----
<S> <C> <C>
Cash flows from investing activities:
Acquisitions:
Cal Fed Acquisition $ 58,386 $ (161,196)
GSAC Acquisition (123,718) --
Auto One Acquisition -- (2,845)
Golden State Acquisition 782,233 --
Mortgage loan servicing rights and operations -- (34,260)
Purchases of securities available for sale (531,774) (916,571)
Proceeds from maturities of securities available for sale 803,296 490,797
Purchases of securities held to maturity (897) (58,833)
Proceeds from maturities of securities held to maturity 2,263 4,938
Purchases of mortgage-backed securities available for sale (6,099,674) (2,295,151)
Principal payments on mortgage-backed securities available for sale 1,933,451 670,837
Proceeds from sales of mortgage-backed securities available for sale 5,664 71,914
Principal payments on mortgage-backed securities held to maturity 289,026 208,467
Proceeds from sale of loans 8,433 17,909
Net decrease in loans receivable 1,365,571 805,915
Purchases of FHLB stock, net (79,459) --
Purchases of office premises and equipment (51,223) (45,350)
Proceeds from disposal of office premises and equipment 19,228 18,095
Proceeds from sales of foreclosed real estate 121,785 112,812
Purchases of mortgage servicing rights (68,203) (27,507)
Proceeds from sales of mortgage servicing rights -- 8,620
------------ ------------
Net cash flows used in investing activities (1,565,612) (1,131,409)
------------ ------------
Cash flows from financing activities:
Branch Sales (1,267,517) (21,683)
Net decrease in deposits (791,519) (803,685)
Proceeds from additional borrowings 17,098,354 13,040,268
Principal payments on borrowings (14,845,668) (12,578,053)
Net increase in securities sold under agreements to repurchase 1,464,311 684,212
GS Escrow Merger 1,970,285 --
Bank Preferred Stock Tender Offers (227,345) --
Debt Tender Offers (879,879) --
Sale of treasury stock 28 --
Proceeds from FN Escrow Merger -- 603,313
Issuance of REIT Preferred Stock, net -- 482,449
Dividends to Parent -- (6,678)
Redemption of FN Holdings/FN Escrow Preferred Stock -- (17,250)
Redemption of FN Holdings Preferred Stock (25,000) (93,750)
Dividends paid to minority stockholders, net of taxes (84,196) (87,115)
Issuance costs of FN Holdings Preferred Stock -- (650)
Capital contribution -- 49
Capital distribution to parent (28) (10)
------------ ------------
Net cash flows provided by financing activities 2,411,826 1,201,417
------------ ------------
Net change in cash and cash equivalents 776,661 110,564
Cash and cash equivalents at beginning of period 412,311 269,869
------------ ------------
Cash and cash equivalents at end of period $ 1,188,972 $ 380,433
============ ============
</TABLE>
See accompanying notes to unaudited consolidated financial statements.
Page 10
<PAGE>
GOLDEN STATE BANCORP INC. AND SUBSIDIARIES
Notes to Unaudited Consolidated Financial Statements
(1) Basis of Presentation
---------------------
The accompanying consolidated financial statements were prepared in
accordance with generally accepted accounting principles for interim financial
information and with the instructions for meeting the requirements of
Regulation S-X, Article 10 and therefore do not include all disclosures
necessary for complete financial statements. In the opinion of management, all
adjustments have been made that are necessary for a fair presentation of the
financial position and results of operations and cash flows as of and for the
periods presented. All such adjustments are of a normal recurring nature. The
results of operations for the three and nine months ended September 30, 1998
are not necessarily indicative of the results that may be expected for the
entire fiscal year or any other interim period. Certain amounts for the three
and nine month periods in the prior year have been reclassified to conform with
the current period's presentation.
On September 11, 1998, First Nationwide (Parent) Holdings Inc. ("Parent
Holdings"), which then owned all of the common stock of First Nationwide
Holdings Inc. ("FN Holdings"), merged with and into Golden State Bancorp Inc.
("Golden State"), pursuant to the Golden State Merger (as defined herein)
agreement.
The accompanying consolidated financial statements include the accounts of
Golden State or the 'Company', which indirectly owns all of the common stock of
Golden State Holdings Inc. ("GS Holdings?, formerly FN Holdings), which owns
all of the common stock of California Federal Bank, A Federal Savings Bank and
its subsidiaries. Unless the context otherwise indicates, "Golden State" or
"Company" refers to Golden State Bancorp Inc. as the surviving entity after the
consummation of the Golden State Acquisition. On September 11, 1998, Glendale
Federal Bank, Federal Savings Bank ("Glendale Federal") merged with and into
California Federal Bank, A Federal Savings Bank pursuant to the Golden State
Merger. On January 3, 1997, First Nationwide Bank, A Federal Savings Bank
merged with and into California Federal Bank, A Federal Savings Bank (the "Cal
Fed Acquisition"). Unless the context otherwise indicates, (i) ?Old California
Federal? refers to California Federal Bank, A Federal Savings Bank prior to the
consummation of the Cal Fed Acquisition and (ii) ?California Federal? or ?Bank?
refers to California Federal Bank, A Federal Savings Bank, as the surviving
entity after the consummation of the Cal Fed Acquisition, and to First
Nationwide and its predecessors for periods prior to the Cal Fed Acquisition.
All significant intercompany balances and transactions have been eliminated in
consolidation. These financial statements should be read in conjunction with
the consolidated financial statements of Parent Holdings included in the
Company's Annual Report on Form 10-K for the year ended December 31, 1997. All
terms used but not defined elsewhere herein have meanings ascribed to them in
the Company's Annual Report on Form 10-K.
Pursuant to the Golden State Merger agreement, First Gibraltar Holdings
Inc. ("First Gibraltar"), parent company of Parent Holdings, and Hunter's
Glen/Ford Ltd. ("Hunter's Glen"), a 20% minority shareholder of FN Holdings,
received at the closing of the Golden State Acquisition (as defined herein), in
consideration of their interests as stockholders of Parent Holdings and FN
Holdings, 56,722,988 shares of common stock, par value $1.00 per share (the
"Golden State Common Stock"), that constitute, in the aggregate, 47.9% of the
common stock outstanding, immediately after giving effect to the Golden State
Acquisition. In connection with the Golden State Merger, the Hunter's Glen
minority interest in FN Holdings was extinguished. Accordingly, the minority
interest and stockholders' equity amounts of prior periods have been restated
to reflect this change.
Minority interest represents amounts attributable to (i) the Bank
Preferred Stock, (ii) the Preferred Stock of FN Holdings, which was redeemed
during 1998, (iii) the Preferred Stock (?REIT Preferred Stock?) of California
Federal Preferred Capital Corporation, a wholly owned subsidiary of the Bank,
and (iv) that portion of stockholders? equity of Auto One Acceptance
Corporation, a subsidiary of the Bank (?Auto One?), attributable to 20% of its
common stock.
Golden State is a holding company whose only significant asset is its
indirect ownership of all of the common stock of the Bank, and therefore, all
activities for the consolidated entity are carried out by the Bank and its
operating subsidiaries.
Page 11
<PAGE>
GOLDEN STATE BANCORP INC. AND SUBSIDIARIES
Notes to Unaudited Consolidated Financial Statements
(2) Golden State Acquisition
------------------------
On September 11, 1998, Parent Holdings and Hunter's Glen completed the
merger with Golden State, the publicly traded parent company of Glendale
Federal, in a tax-free exchange of shares (the "Golden State Merger"),
accounted for under the purchase method of accounting. Pursuant to the Golden
State Merger agreement, (i) FN Holdings, parent company of the Bank,
contributed all of its assets (including all of the common stock of California
Federal) to GS Holdings (the "FNH Asset Transfer"), (ii) Parent Holdings, which
then owned all of the common stock of FN Holdings, merged with and into Golden
State, which indirectly owned 100% of the common stock of Glendale Federal,
(iii) FN Holdings merged with and into Golden State Financial Corporation ("GS
Financial"), which owned all of the common stock of Glendale Federal (the "FN
Holdings Merger", and together with the Golden State Merger, the "Holding
Company Mergers"), and (iv) Glendale Federal merged with and into California
Federal (the "Glen Fed Merger"). The FN Holdings Asset Transfer, the Holding
Company Mergers and the Glen Fed Merger are referred to collectively as the
"Golden State Acquisition."
Following the Golden State Merger at September 30, 1998, the combined
parent company, Golden State, has approximately 128.5 million common shares
outstanding and continues to be a publicly traded company. At September 11,
1998, Glendale Federal had total assets of approximately $18.9 billion and
deposits of $11.3 billion and operated 181 branches and 26 loan offices in
California.
The following is a summary of assets acquired and liabilities assumed in
connection with the Golden State Acquisition at September 11, 1998.
<TABLE>
<CAPTION>
Estimated
Remaining
Carrying Fair Value Fair Lives
Value Adjustments Value (in years)
-------- ----------- ----- ----------
(dollars in thousands)
<S> <C> <C> <C> <C>
Cash and cash equivalents $ 782,233 $ -- $ 782,233 --
Securities and mortgage-backed securities 2,354,263 16,015 2,370,278 1
Loans receivable, net 14,432,389 114,510 14,546,899 2-12
Office premises and equipment, net 158,446 (9,692) 148,754 3-10
Investment in FHLB System 314,591 -- 314,591 --
Foreclosed real estate, net 47,504 -- 47,504 --
Accrued interest receivable 115,165 -- 115,165 --
Mortgage servicing rights 230,764 (17,831) 212,933 --
Goodwill 271,743 (271,743) -- --
Other assets 204,372 62,972 267,344 2-5
Deposits (11,293,173) (10,547) (11,303,720) 1-8
Borrowings (5,877,574) (45,310) (5,922,884) 1-5
Other liabilities (399,737) (71,350) (471,087) 1-10
-------- ------- --------
$ 1,340,986 $ (232,976) 1,108,010
============ ============ =========
Purchase price 1,464,361
---------
Excess cost over fair value of net
assets acquired $ 356,351 15
============
</TABLE>
Page 12
<PAGE>
GOLDEN STATE BANCORP INC. AND SUBSIDIARIES
Notes to Unaudited Consolidated Financial Statements
The Golden State Acquisition was accounted for as a purchase and
accordingly, the purchase price was allocated to the assets and liabilities
assumed in the transaction based on estimates of fair value at the date of
purchase. Since the date of purchase, the results of operations related to such
assets and liabilities have been included in the Company's consolidated
statements of income for the three and nine months ended September 30, 1998.
(3) Issuance of Debt Securities
---------------------------
On August 6, 1998, GS Escrow Corp. ("GS Escrow"), an affiliate of GS
Holdings, issued $2 billion in debt securities consisting of (i) $250 million
aggregate principal amount of its Floating Rate Notes Due 2003 (the "Floating
Rate Notes"), (ii) $350 million aggregate principal amount of its 6-3/4% Senior
Notes due 2001 (the "2001 Notes"), (iii) $600 million aggregate principal
amount of its 7% Senior Notes Due 2003 (the "2003 Notes") and (iv) $800 million
aggregate principal amount of its 7-1/8% Senior Notes Due 2005 (the "2005
Notes" and, together with the 2001 Notes and the 2003 Notes, the "Fixed Rate
Notes" and, together with the Floating Rate Notes, the "GS Escrow Notes").
Interest on the Fixed Rate Notes is payable semi-annually in arrears on
February 1 and August 1 of each year, commencing on February 1, 1999. The
Floating Rate Notes bear interest at a rate equal to the three-month LIBOR plus
100 basis points per annum, except that the initial rate will be 6-3/4% per
annum, which is based on six-month LIBOR (which initial interest rate will be
reset on the first interest payment date, and, thereafter, reset on a quarterly
basis), and will mature on August 1, 2003. The first interest payment date for
the Floating Rate Notes will be February 1, 1999. Thereafter, interest will be
payable quarterly on each May 1, August 1, November 1 and February 1. The 2001
Notes will mature on August 1, 2001. The 2003 Notes will mature on August 1,
2003. The 2005 Notes will mature on August 1, 2005.
The GS Escrow Notes were issued to fund, in part, the Refinancing
Transactions (as defined herein) that occurred following the Golden State
Acquisition. Deferred issuance costs of $38.6 million related to the GS Escrow
Notes are included in Golden State's other assets and are being amortized over
the life of such notes.
(4) Refinancing Transactions
------------------------
On August 17, 1998, FN Holdings commenced cash tender offers (the "Bank
Preferred Stock Tender Offers") for each of the Bank's two outstanding series
of Bank Preferred Stock, which together had a total aggregate liquidation
preference of $473.2 million. The Bank Preferred Stock Tender Offers expired on
September 14, 1998, at which time 222,721 shares of the 10-5/8% Preferred Stock
and 995,437 shares of the 11-1/2% Preferred Stock were purchased for an
aggregate purchase price of $135.8 million. During September 1998, GS Holdings
continued to purchase Bank Preferred Stock through privately negotiated
transactions. At September 30, 1998, 384,990 additional shares of the 10-5/8%
Preferred Stock and 437,500 shares of the 11-1/2% Preferred Stock had been
purchased for an aggregate purchase price of $91.5 million. The net tender
premiums and expenses paid in connection with the Bank Preferred Stock Tender
Offers totalled $19.5 million and are reflected as minority interest expense on
the Company's consolidated statements of income for the three and nine months
ended September 30, 1998.
On September 14, 1998, GS Holdings commenced cash tender offers (the "Debt
Tender Offers" and, together with the Bank Preferred Stock Tender Offers and
the Parent Holdings Defeasance (as defined herein), the "Refinancing
Transactions") for the FN Holdings 12-1/4% Senior Notes, the FN Holdings 9-1/8%
Senior Sub Notes and the FN Holdings 10-5/8% Notes (collectively, the "FN
Holdings Notes"), which together had a total aggregate principal amount of $915
million. On September 17, 1998, GS Holdings purchased $735.8 million aggregate
principal amount of the FN Holdings Notes for an aggregate purchase price,
including accrued interest payable, of $902.5 million. The after-tax tender
premiums and expenses paid in connection with the Debt Tender Offers totalled
$80.0 million and are reflected as an extraordinary loss, net of taxes, on the
Company's consolidated statements of income for the three and nine months ended
September 30, 1998.
Concurrently with the closings of the Debt Tender Offers, GS Financial, as
the successor obligor, gave a 30-day notice of redemption for all of the
outstanding $455 million aggregate principal amount of the 12-1/2% Senior Notes
Due 2003 of Parent Holdings (the "Parent Holdings Notes"), and irrevocably
deposited in trust money or government obligations in an amount sufficient to
pay the redemption price therefor, together with any accrued and unpaid
interest to the date of redemption, for the purpose of defeasing the Parent
Holdings Notes (the "Parent Holdings Defeasance").
Page 13
<PAGE>
GOLDEN STATE BANCORP INC. AND SUBSIDIARIES
Notes to Unaudited Consolidated Financial Statements
Since September 30, 1998, $178.7 million of the FN Holdings Notes have
been purchased in connection with the Debt Tender Offers, with related
premiums, fees and other expenses totalling $18.2 million on an after-tax
basis. At November 4, 1998, only $0.2 million of the FN Holdings 12-1/4% Notes
and $0.3 million of the FN Holdings 10-5/8% Notes remain outstanding. In
addition, $51.0 million of the 10-5/8% Preferred Stock of the Bank was
purchased by GS Holdings to date in the fourth quarter of 1998, with related
expenses and premiums of $4.7 million. Further, the Parent Holdings Defeasance
was effected on October 14, 1998, with related premiums, taxes and other
expenses incurred totalling $50.6 million on an after-tax basis.
GS Holdings expects to purchase any outstanding Bank Preferred Stock not
acquired in the Bank Preferred Stock Tender Offers once it becomes redeemable
(April 1, 1999 in the case of the 10-5/8% Preferred Stock and September 1, 1999
in the case of the 11-1/2% Preferred Stock).
(5) GS Escrow Merger
----------------
On September 11, 1998 and upon the consummation of the Golden State
Merger, GS Escrow was merged with and into GS Holdings, pursuant to a merger
agreement by and between GS Escrow and GS Holdings (the "GS Escrow Merger"). In
connection therewith, GS Holdings acquired the net proceeds from the
Refinancing Transactions and became successor obligor on the GS Escrow Notes.
GS Escrow was a newly formed subsidiary of First Gibraltar, and had no
significant assets. GS Escrow had not engaged in any business operations,
acquired any assets or incurred any liabilities, other than in connection with
the issuance of the GS Escrow Notes.
(6) Acquisitions and Divestitures
-----------------------------
On February 4, 1998, Auto One acquired 100% of the partnership interests
in Gulf States Acceptance Company, a Delaware limited partnership (?GSAC?) and
its general partner, Gulf States Financial Services, Inc., a Texas corporation.
GSAC was liquidated and its assets and liabilities were transferred to Auto One
(the ?GSAC Acquisition?). The aggregate consideration paid in connection with
the GSAC Acquisition was approximately $13.6 million plus a 20% interest in the
common stock of Auto One.
On September 11, 1998, the Company consummated the sale of its Florida
bank franchise (consisting of 24 branches with deposits of $1.4 billion) to
Union Planters Bank of Florida, a wholly owned subsidiary of Union Planters
Corp. (the ?Florida Branch Sale?). The Company recorded a pre-tax gain of
approximately $108.9 million in connection with the Florida Branch Sale,
representing a deposit premium of approximately 7.92%.
The following pro forma financial information combines the historical
results of the Company as if the Golden State Acquisition and the issuance of
the GS Escrow Notes had occurred as of the beginning of the first period
presented (in thousands):
Nine months ended September 30,
1998 1997
---- ----
Net interest income $781,458 $754,092
Net income 508,481 119,918
Basic earnings per share:
Net income $4.53 $1.12
Diluted earnings per share:
Net income $3.85 $0.95
The pro forma results are not necessarily indicative of the results which
would have actually been obtained if the Golden State Acquisition or the
issuance of the GS Escrow Notes had been consummated in the past nor do they
project the results of operations in any future period.
Page 14
<PAGE>
GOLDEN STATE BANCORP INC. AND SUBSIDIARIES
Notes to Unaudited Consolidated Financial Statements
(7) Cash, Cash Equivalents, and Statement of Cash Flows
---------------------------------------------------
The Company uses the indirect method to present cash flows from operating
activities. Cash paid for interest for the nine months ended September 30, 1998
and 1997 was $1.2 billion and $1.0 billion, respectively.
During the nine months ended September 30, 1998, noncash activity
consisted of transfers of $85.3 million from loans receivable to foreclosed
real estate, $5.9 million of loans made to facilitate sales of real estate
owned, transfers of $3.2 million from loans held for sale (at lower of cost or
market) to mortgage-backed securities classified as trading securities and $1.9
billion from loans receivable to mortgage-backed securities held to maturity
upon the securitization of certain of the Bank's multi-family loans. Noncash
activity also includes a $267.9 million dividend related to the Company's
deconsolidation from its tax reporting group as a result of the Golden State
Acquisition, the retirement of Preferred Stock of $25.0 million and the
issuance of additional Preferred Stock through Preferred Stock dividends of
$0.6 million.
During the nine months ended September 30, 1997, noncash activity
consisted of transfers of $143.8 million from loans receivable and $1.2 million
from loans held for sale (at lower of cost or market) to foreclosed real
estate, $22.2 million of loans made to facilitate sales of real estate owned,
the issuance of additional Preferred Stock through Preferred Stock dividends of
$1.9 million and the forgiveness of a $19 million loan from an affiliate of FN
Holdings in exchange for the redemption of the FN Holdings/FN Escrow Preferred
Stock.
(8) Income Taxes
------------
In connection with the Golden State Merger, the Company deconsolidated
from the Mafco Group. As a result, only the amount of the net operating losses
("NOLs") of the Company not utilized by the Mafco Group on or before December
31, 1998 are available to offset taxable income of the Company thereafter. At
September 11, 1998, had the Company (i) been a party to the Tax Sharing
Agreement and (ii) filed a consolidated federal income tax return on behalf of
itself and its subsidiaries for each of the years since the formation of the
Company, it would have had regular NOL carryforwards for federal income tax
purposes of approximately $1.7 billion. Upon deconsolidation, the amount of the
regular NOLs available to offset taxable income of the Company is estimated to
be reduced by $1.0 billion. This reduction of NOLs and other tax attributes
resulted in a $267.9 million reduction in retained earnings. This amount may
change depending upon the actual operating earnings of the Mafco Group through
December 31, 1998. Furthermore, the NOLs are subject to review and potential
disallowance, in whole or in part, by the Internal Revenue Service.
(9) Minority Interest
-----------------
In connection with the GSAC Acquisition, Auto One issued 250 shares of its
common stock, par value $1.00 per share, representing a 20% interest in Auto
One. The carrying value of Auto One's common stockholders? equity attributable
to the minority stockholders at September 30, 1998 is $(1.1) million.
In connection with the Bank Preferred Stock Tender Offers, 607,711
shares of the 10-5/8% Preferred Stock and 1,432,937 shares of the 11-1/2%
Preferred Stock were purchased by the Company during the quarter ended
September 30, 1998. See Note 4.
(10) Stockholder's Equity
--------------------
Common Stock
The Company has 250 million shares of common stock authorized with a par
value of $1.00 per share. Pursuant to the Golden State Merger agreement, First
Gibraltar Holdings and Hunter's Glen received 56,722,988 shares of the Golden
State Common Stock, which represented 47.9% of the common stock outstanding as
of September 11, 1998, and provided for existing Golden State shareholders to
own 61,880,950 shares of the Golden State Common Stock. During September 1998,
an additional 10,051,200 shares were issued, resulting from conversions of the
Series A Preferred Stock. Holders of Golden State Common Stock are entitled to
receive dividends when, as and if declared by the Board of Directors of the
Company, subject to the superior rights of the holders of any series of
Preferred Stock that may be issued. At September 30, 1998, there were
128,655,138 shares of Golden State Common Stock issued and outstanding
(including treasury stock).
Page 15
<PAGE>
GOLDEN STATE BANCORP INC. AND SUBSIDIARIES
Notes to Unaudited Consolidated Financial Statements
Preferred Stock
In connection with the Golden State Acquisition, the Company acquired
4,183,599 shares of the Series A Preferred Stock, with par value of $1.00 per
share and a liquidation preference of $25 per share. The Series A Preferred
Stock provides for noncumulative dividends, when, as and if declared, at an
annual rate of 8.75% of its liquidation preference and is convertible, at the
option of the holders thereof, into common stock at any time at a conversion
ratio of $2.404 per share, subject to adjustment in certain events. During
September 30, 1998, 4,181,061 shares of the Company's Preferred Stock were
converted into 10,051,200 shares of the Company's common stock.
During September 1998, the Company announced its intention to redeem the
Series A Preferred Stock as the stated redemption price on that date of
$26.09375 per share plus 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 year beginning 1998.
At September 30, 1998, there were 2,538 shares of Series A Preferred Stock
issued and outstanding, which were redeemed on October 1, 1998.
Treasury Stock
In connection with the Golden State Acquisition, the Company acquired
108,574 shares of Golden State Common Stock held in treasury with an aggregate
cost of $2.0 million. During September 1998, 2,394 shares were issued out of
treasury in connection with options exercised by holders related to an earlier
acquisition by Golden State. At September 30, 1998, the Company had 106,180
shares of its common stock in treasury at an aggregate cost of $18.75 per
share.
Dividends
Dividends on common stock totalled $277.7 million during the nine months
ended September 30, 1998 and include a $267.9 million dividend related to the
Company's deconsolidation from its tax reporting group as a result of the
Golden State Merger. See Note 8. Dividends on common stock totalled $6.7
million during the nine months ended September 30, 1997.
(11) Extraordinary Item
-------------------
In connection with the Debt Tender Offers, the Company purchased $735.8
million aggregate principal amount of the FN Holdings Notes for an aggregate
purchase price of $902.5 million, resulting in an extraordinary loss of $80.0
million, net of income taxes, on the early extinguishment of such debt. See
Note 4.
(12) Contingent Shares
-----------------
During the third quarter of 1998, net tax benefits were realized by
California Federal with respect to its gain from the Florida Branch Sale and
the receipt of a federal income tax refund in excess of the amount reflected on
the Company's consolidated balance sheets. Consistent with the terms of the
Golden State Merger agreement, common stock valued at $106.2 million is
issuable to First Gibraltar and Hunter's Glen as result of the utilization of
net operating loss carryforwards to offset these benefits. Such contingent
shares are included, to the extent appropriate, in the basic and diluted
earnings per share calculations. See Note 13.
Page 16
<PAGE>
GOLDEN STATE BANCORP INC. AND SUBSIDIARIES
Notes to Unaudited Consolidated Financial Statements
(13) Earnings per Share Information
------------------------------
Net income per share of common stock is based on the weighted average
number of common and common equivalent shares outstanding, excluding common
shares in treasury, during the period presented. Information used to calculate
basic EPS and diluted EPS is as follows (in thousands, except per share data):
<TABLE>
<CAPTION>
Nine Months Ended September 30,
--------------------------------------------------------------------------------
1998 1997
-------------------------------------- --------------------------------------
Per Share Per Share
Earnings Shares (b) Amounts Earnings Shares Amounts
--------- ---------- ---------- -------- --------- ------------
<S> <C> <C> <C> <C> <C> <C>
BASIC EPS:
- ----------
Income before Extraordinary Loss (a) $ 382,985 61,323 $ 6.25 $ 64,317 56,723 $ 1.13
Extraordinary Loss (a) (80,007) 61,323 1.31 -- -- --
------- ---- --------- --------
Net Income (a) $ 302,978 61,323 $ 4.94 $ 64,317 56,723 $ 1.13
========= ====== ======== ========= ====== ========
DILUTED EPS:
- ------------
Income before Extraordinary Loss (a) $ 382,985 61,323 $ 6.25 $ 64,317 56,723 $ 1.13
Effect of Dilutive Securities:
Options and Warrants -- 404 -- -- -- --
Convertible Preferred Stock -- 519 -- -- -- --
--------- ------ --------- ------
Income before Extraordinary Loss (a) $ 382,985 62,246 $ 6.15 $ 64,317 56,723 $ 1.13
Extraordinary Loss (a) (80,007) 62,246 1.28 -- -- --
------- ---- --------- --------
Earnings Applicable to Common
Stockholders plus Assumed
Conversions $ 302,978 62,246 $ 4.87 $ 64,317 56,723 $ 1.13
========= ====== ======== ========= ====== ========
</TABLE>
<TABLE>
<CAPTION>
Three Months Ended September 30,
--------------------------------------------------------------------------------
1998 1997
-------------------------------------- --------------------------------------
Per Share Per Share
Earnings Shares (b) Amounts Earnings Shares Amounts
--------- ---------- ---------- -------- --------- ------------
<S> <C> <C> <C> <C> <C> <C>
BASIC EPS:
- ----------
Income before Extraordinary Loss (a) $47,783 70,372 $ 0.68 $33,027 56,723 $0.58
Extraordinary Loss (a) (80,007) 70,372 (1.14) -- -- --
-------- ------ ------- -----
Net (Loss) Income (a) ($32,224) 70,372 ($0.46) $33,027 56,723 $0.58
======== ====== ====== ======= ====== =====
DILUTED EPS:
- -----------
Income before Extraordinary Loss (a) $47,783 70,372 $ 0.68 $33,027 56,723 $0.58
Effect of Dilutive Securities:
Options and Warrants -- 1,200 -- -- -- --
Convertible Preferred Stock -- 1,539 -- -- -- --
-------- ------ ------- ------
Income before Extraordinary Loss (a) $47,783 73,111 $ 0.65 $33,027 56,723 $0.58
Extraordinary Loss (a) (80,007) 73,111 (1.09) -- -- --
-------- ------ ------- -----
Earnings Applicable to Common
Stockholders plus Assumed
Conversions ($32,224) 73,111 ($0.44) $33,027 56,723 $0.58
======== ====== ====== ======= ====== =====
</TABLE>
- -------------
(a) These figures agree with the related amounts in the consolidated statements
of income.
(b) Includes contingently issuable shares, as follows:
<PAGE>
<TABLE>
<CAPTION>
Nine Months Three Months
Ended Ended
9/30/98 9/30/98
----------- -------------
<S> <C> <C>
Weighted average common shares outstanding 61,204 70,018
Contingently issuable shares 119 354
-------- --------
Basic weighted average common shares outstanding 61,323 70,372
====== ======
Options and warrants 404 1,200
Convertible preferred stock 519 1,539
-------- -------
Diluted weighted average common shares outstanding 62,246 73,111
====== ======
</TABLE>
Page 17
<PAGE>
GOLDEN STATE BANCORP INC. AND SUBSIDIARIES
Notes to Unaudited Consolidated Financial Statements
(14) Newly Issued Accounting Pronouncements
--------------------------------------
In June 1997, the FASB issued Statement of Financial Accounting Standards
No. 131, ?Disclosures About Segments of an Enterprise and Related Information?
('sFAS No. 131?). SFAS No. 131 establishes standards for the way that public
business enterprises report information about operating segments in annual
financial statements and requires that those enterprises report selected
information about operating segments in interim financial reports issued to
shareholders. SFAS No. 131 also establishes standards for related disclosures
about products and services, geographic areas, and major customers. This
statement supersedes FASB Statement No. 14, Financial Reporting for Segments of
a Business Enterprise, but retains the requirement to report information about
major customers. It amends FASB Statement No. 94, Consolidation of All
Majority-Owned Subsidiaries, to remove the special disclosure requirements for
previously unconsolidated subsidiaries. This statement is effective for fiscal
years beginning after December 15, 1997. In the initial year of application,
comparative information for earlier years is to be restated. This statement
need not be applied to interim financial statements in the initial year of
application, but comparative information for interim periods in the initial
year of application is to be reported in financial statements for interim
periods in the second year of application. This statement has no impact on the
financial condition or results of operations of the Company, but will require
changes in the Company's disclosure requirements.
In February 1998, the FASB issued Statement of Financial Accounting
Standards No. 132, ?Employers? Disclosures about Pensions and Other
Postretirement Benefits? ('sFAS No. 132?), an amendment of Statements of
Financial Accounting Standards No. 87, No. 88 and No. 106. SFAS No. 132 revises
employers? disclosures about pension and other postretirement benefit plans. It
does not change the measurement or recognition of those plans. It standardizes
the disclosure requirements for pensions and other postretirement benefits to
the extent practicable, requires additional information on changes in the
benefit obligations and fair values of plan assets that will facilitate
financial analysis, and eliminates certain disclosures that are no longer
useful as they were when Statements No. 87, Employers? Accounting for Pensions,
No. 88, Employers? Accounting for Settlements and Curtailments of Defined
Benefit Pension Plans and for Termination Benefits, and No. 106, Employers?
Accounting for Postretirement Benefits Other Than Pensions, were issued. SFAS
No. 132 is effective for fiscal years beginning after December 15, 1997 and
requires restatement of disclosures for earlier periods provided for
comparative purposes, if available. It is not expected that the Company will
experience any material revision in its disclosures when SFAS No. 132 is
adopted.
In June 1998, the FASB issued Statement of Financial Accounting Standards
No. 133, ?Accounting for Derivative Instruments and Hedging Activities? ('sFAS
No. 133?). SFAS No. 133 establishes standards for derivative instruments and
for hedging activities, and requires that an entity recognize all derivatives
as either assets or liabilities in the balance sheet and measure those
instruments at fair value. Under SFAS No. 133, an entity that elects to apply
hedge accounting is required to establish at the inception of the hedge the
method it will use for assessing the effectiveness of the hedging derivative
and the measurement approach for determining the ineffective aspect of the
hedge. SFAS No. 133 applies to all entities and amends FASB Statement No. 107,
Disclosures About Fair Values of Financial Instruments, to include in Statement
107 the disclosure provisions about concentrations of credit risk from
Statement 105. SFAS No. 133 supersedes FASB Statements No. 80, Accounting for
Futures Contracts, No. 105, Disclosure of Information about Financial
Instruments with Off-Balance Sheet Risk and Financial Instruments with
Concentrations of Credit Risk, and No. 119, Disclosure about Derivative
Financial Instruments and Fair Value of Financial Instruments. SFAS No. 133
also nullifies or modifies the consensuses reached in a number of issues
addressed by the Emerging Issues Task Force. SFAS No. 133 is effective for all
fiscal quarters of fiscal years beginning after June 15, 1999. Initial
application of this statement should be as of the beginning of an entity's
fiscal quarter; on that date, hedging relationships must be designated anew and
documented pursuant to the provisions of this statement. Earlier application of
all of the provisions of SFAS No. 133 is encouraged, but is permitted only as
of the beginning of any fiscal quarter that begins after issuance of this
statement. SFAS No. 133 should not be applied retroactively to financial
statements of prior periods. Management has not yet completed its analysis of
SFAS No. 133 and is unable to determine the effect, if any, implementation may
have on the Company's consolidated financial statements.
Page 18
<PAGE>
GOLDEN STATE BANCORP INC. AND SUBSIDIARIES
Notes to Unaudited Consolidated Financial Statements
In October 1998, the FASB issued Statement of Financial Accounting
Standards No. 134, "Accounting for Mortgage-Backed Securities Retained after
the Securitization of Mortgage Loans Held for Sale by a Mortgage Banking
Enterprise" ("SFAS No. 134"), an amendment of Statement of Financial Accounting
Standards No. 65. SFAS No. 65, as amended by SFAS No. 115, requires that after
the securitization of a mortgage loan held for sale, an entity engaged in
mortgage banking activities classify the resulting mortgage-backed security as
a trading security. SFAS No. 134 further amends SFAS No. 65 to require that
after the securitization of mortgage loans held for sale, an entity engaged in
mortgage banking activities classify the resulting mortgage-backed securities
or other retained interests based on its ability to sell or hold those
investments. SFAS No. 134 conforms the subsequent accounting for securities
retained after the securitization of mortgage loans by a mortgage banking
enterprise with the subsequent accounting for securities retained after the
securitization of other types of assets by a nonmortgage banking enterprise.
SFAS No. 134 is effective for the first fiscal quarter after December 15, 1998.
Early application is encouraged and is permitted as of the issuance of this
statement. Management does not expect that adoption of SFAS No. 134 will have a
material impact on the financial condition or results of operations of the
Company.
(15) Subsequent Event
----------------
On November 2, 1998, the Bank signed a definitive agreement to
acquire twelve retail branches located in Nevada (with deposits of
approximately $637 million) from Norwest Bank Nevada, a subsidiary of Norwest
Corporation, and Wells Fargo Bank N.A. This transaction is subject to
regulatory approvals and is expected to close in April 1999.
Page 19
<PAGE>
ITEM 2. MANAGEMENT's DISCUSSION AND ANALYSIS OF FINANCIAL CONDITION AND RESULTS
OF OPERATIONS
The statements contained in this Report on Form 10-Q that are not purely
historical are forward-looking statements within the meaning of Section 27A of
the Securities Act of 1933 and Section 21E of the Securities Exchange Act of
1934, including statements regarding the Company's expectations, intentions,
beliefs or strategies regarding the future. Forward-looking statements include
the Company's statements regarding liquidity, provision for loan losses,
capital resources and anticipated expense levels in "Management's Discussion
and Analysis of Financial Condition and Results of Operations." In addition, in
those and other portions of this document, the words "anticipate," "believe,"
"estimate," "expect," "intend," and other similar expressions, as they relate
to the Company or the Company's management, are intended to identify
forward-looking statements. Such statements reflect the current views of the
Company with respect to future events and are subject to certain risks,
uncertainties and assumptions. It is important to note that the Company's
actual results could differ materially from those described herein as
anticipated, believed, estimated or expected. Among the factors that could
cause results to differ materially are: (i) changes in levels of market
interest rates, (ii) changes in the California economy or California real
estate values, (iii) changes in the level of mortgage loan prepayments, (iv)
changes in federal banking laws and regulations, (v) difficulties, delays, or
unanticipated costs related to addressing Year 2000 issues, including those
arising from the Company's customers and suppliers, (vi) actions by the
Company's competitors, and (vii) the risks described in the "Risk Factors"
section included in the Company's Registration Statement on Form S-1 filed with
the Securities and Exchange Commission on April 25, 1996 (File No. 333-4026)
and declared effective on May 15, 1996. The Company assumes no obligation to
update any such forward-looking statement.
OVERVIEW
The principal business of Golden State, through California Federal,
consists of (i) operating retail deposit branches to serve consumers in
California and, to a lesser extent, in Nevada, (ii) originating and/or
purchasing, on a nationwide basis, 1-4 unit residential loans and, to a lesser
extent, certain commercial real estate, commercial and consumer loans, for
investment and (iii) mortgage banking activities, including originating and
servicing 1-4 unit residential loans for others. Revenues are derived primarily
from interest earned on loans, interest received on government and agency
securities and mortgage-backed securities, gains on sales of loans and other
investments and fees received in connection with loan servicing, securities
brokerage and other customer service transactions. Expenses primarily consist
of interest on customer deposit accounts, interest on short-term and long-term
borrowings, provisions for losses, general and administrative expenses
consisting of compensation and benefits, advertising and marketing, premises
and equipment, loan expenses, deposit insurance assessments, data processing
and other general and administrative expenses.
Acquisitions and Sales
On February 4, 1998, Auto One consummated the GSAC Acquisition. The
aggregate consideration paid was approximately $13.6 million plus a 20%
interest in the common stock of Auto One.
On September 11, 1998, the Bank sold its Florida branch franchise to Union
Planters Bank for a pre-tax gain of $108.9 million representing a deposit
premium of 7.92%.
On September 11, 1998, the Golden State Acquisition was consummated. The
carrying values of the assets acquired and liabilities assumed were $18.9
billion and $17.7 billion, respectively. The transaction was accounted for as a
purchase. The Company's results of operations reflect the impact of the Golden
State Acquisition for the period September 11, 1998 to September 30, 1998.
Net Income
Golden State reported net income for the nine months ended September 30,
1998 of $303.0 million, or $4.87 per diluted share, compared with net income of
$64.3 million, or $1.13 per diluted share, for the corresponding period in
1997. Net income for the nine months ended September 30, 1998 includes (i) a
$250 million reduction of the valuation allowance related to the Company's
deferred tax asset, (ii) a $108.9 million pre-tax gain from the Florida Branch
Sale, (iii) $31.9 million in merger and integration costs (including severance,
conversion and consolidation costs) incurred in connection with the Golden
State Acquisition, (iv) an $80 million extraordinary loss on early
extinguishment of debt, net and (v) $19.5 million in minority interest expense
related to the Bank Preferred Stock Tender Offers. Without consideration of
these items, net income for the nine months ended September 30, 1998 would
have been $108.0 million, or $1.73 per diluted share, a result that is $43.6
million, or 68%, higher than the same period in 1997.
Page 20
<PAGE>
Net interest income was $456.9 million for the nine months ended September
30, 1998, compared to $456.8 million during the same period in 1997. The
increase in 1998 over 1997 is primarily due to an increase in net
interest-earning assets resulting from the Golden State Acquisition, partially
offset by a reduction in the net interest margin, principally resulting from
prepayments of higher rate interest-earning assets being replaced with
interest-earning assets having comparatively lower rates, reflecting the
relatively low level of interest rates in 1997 and 1998.
Golden State Bancorp reported a net loss for the three months ended
September 30, 1998 of $32.2 million, or $(0.44) per diluted share, compared
with net income of $33.0 million, or $0.58 per diluted share, for the
corresponding period in 1997. The net loss for the three months ended September
30, 1998 includes (i) a $108.9 million pre-tax gain from the Florida Branch
Sale, (ii) $31.1 million in merger and integration costs (including severance,
conversion and consolidation costs) incurred in connection with the Golden
State Acquisition, (iii) an $80 million extraordinary loss on early
extinguishment of debt, net and (iv) $19.5 million in minority interest expense
related to the Bank Preferred Stock Tender Offers. Without consideration of
these items, net income for the three months ended September 30, 1998 would
have been $22.2 million, or $0.30 per diluted share.
Year 2000
During the year ended December 31, 1997, the Company finalized its plan to
address issues related to required changes in computer systems for the year
2000 ("Year 2000"). Issues arise because computer systems and related software
may have been designed to recognize only dates that relate to the 20th century.
Accordingly, if no changes are implemented, some computer systems would
interpret "1/1/00" as January 1, 1900 instead of January 1, 2000. Additionally,
some equipment, being controlled by microprocessor chips, may not deal
appropriately with a year "00."
The Company has developed and is currently executing a comprehensive plan
to make its computer systems, applications and facilities Year 2000 ready. The
plan covers four stages including (i) inventory, (ii) assessment, (iii)
remediation and (iv) testing and certification. At year end 1997, the Company
had completed virtually all of the inventory and assessment stages for its
Company owned systems and applications. The remediation process is currently
underway and the Company is utilizing both internal and external resources to
reprogram, or replace where necessary, and test the software for Year 2000
modifications. The remediation process is targeted to be substantially complete
by year end 1998, and to be complete by March 31, 1999, while testing and
certification of these systems and applications are currently targeted for
completion by March 31, 1999. The Company is currently assessing risks related
to the potential failure of material third parties to be ready for Year 2000.
The Company has completed its inventory and assessment of electrical and
electronic equipment which may be controlled by microprocessor chips, including
automatic teller machines, telecommunications systems, building management
systems, security equipment and systems, telecommunications equipment, vehicles
and office equipment. All such equipment and systems not certified as Year 2000
ready are planned to be upgraded, discarded or replaced by March 31, 1999. In
addition, the Company has completed its inventory of business forms to identify
those containing a preprinted "19__". All such forms have been redesigned and
replacement supplies have been ordered.
It is currently expected that costs related to Year 2000 will total
approximately $15.8 million over the years 1997 to 2000. Of this, $6.8 million
has been incurred since the inception of the Year 2000 project through
September 30, 1998. Historically, cost estimates and actuals by year for Year
2000 are as follows:
(Costs in $ millions)
1997 1998
---- ----
Estimates $1.2 $8.8 (full year)
Actual $1.2 $5.6 (September 30, 1998 year-to-date)
Of the total Year 2000 project costs, $6.4 million are incremental third
party expenses, which will be funded through operating cash flows. However, an
increase in reprogramming costs would adversely affect this cost estimate.
Expenditures in 1998 represent 17.9% of the total Information and Technology
Services ("ITS") budget. No ITS projects have been deferred as a result of the
Year 2000 efforts. Instead, incremental resources including consultants,
Page 21
<PAGE>
contractors, software utilities and hardware were obtained from outside the
Company to supplement existing staff. The Company is currently unaware of any
asserted or unasserted claims of breach of contract or warranty, and, at the
present time, does not anticipate any assertion of such claims in the future.
Golden State has initiated communications with its critical external
relationships to determine the extent to which the Company may be vulnerable to
such parties' failure to remediate their own Year 2000 issues. From its
critical service providers, the Company has obtained written statements
indicating they will be Year 2000-ready. However, through the testing and
certification stage, the Company will continue to assess and attempt to
mitigate its risks with respect to the failure of these entities to be Year
2000-ready. The effect, if any, on the Company's results of operations from the
failure of such parties to be Year 2000 ready is not reasonably estimable.
The Company has completed its risk assessment of each of its loan
portfolios and identified material borrowers which are most likely to
experience Year 2000 related problems. In an effort to educate borrowers and
further assess Year 2000 preparedness, material borrowers have been contacted
through questionnaires, surveys, or loan officer phone calls and visits.
Educational materials have been sent to the majority of borrowers not
categorized as material customers for Year 2000 purposes. Ongoing efforts to
mitigate potential Year 2000 problems in higher-risk portfolios include
incorporating Year 2000 compliance requirements in loan documents and assessing
Year 2000 readiness in the Company's underwriting process for new loans and
renewals.
Year 2000 is the highest priority project within the ITS unit of the
Company. Management believes there is no material risk that the Company will
fail to address Year 2000 issues in a timely manner, and little possibility of
material changes in its estimates of reserves, allowances for capitalized
software costs, litigation and deferred revenue. In light of normal ongoing
field visits by Bank regulatory examiners, there is little chance of
enforcement action on the Company's Year 2000 project. The Company does not
anticipate material loan losses or acceleration of prepayments due to Year
2000. However, the amount of potential liability and lost revenue, if any,
cannot be reasonably estimated at this time nor can the Company identify
specifically the most likely worst case scenario.
The Company is currently developing a contingency plan which will be
completed by December 31, 1998 to address a plan of action in the unlikely
event that the Company or its vendors and/or business partners are not ready
for Year 2000.
Financial Condition
During the nine months ended September 30, 1998, consolidated total
assets increased $21.7 billion, to $53.0 billion, from December 31, 1997, and
total liabilities increased from $30.0 billion to $50.6 billion, primarily as a
result of $18.8 billion in assets acquired and $17.6 billion in liabilities
assumed in the Golden State Acquisition and the issuance of the GS Escrow
Notes. In connection with the Golden State Acquisition, approximately $356.4
million in goodwill was recorded by the Company, which amount represents the
excess of purchase price over the fair value of net assets acquired.
During the nine months ended September 30, 1998, minority interest
decreased by $236.6 million, primarily as a result of $204.1 million of Bank
Preferred Stock that was tendered in the Bank Preferred Stock Tender Offers and
the redemption of $25.7 million of FN Holdings Preferred Stock in the first
quarter of 1998. The Company recorded minority interest expense of $19.5
million representing the net tender premiums paid in connection with the
purchase of Bank Preferred Stock.
During the nine months ended September 30, 1998, stockholders' equity
increased $1.3 billion. The increase in stockholders' equity is the net result
of $1.5 billion related to the Golden State Acquisition, $303.0 million in net
income for the period and a $6.1 million increase in the net unrealized gain on
securities available for sale, partially offset by $277.7 million in common
stock dividends, which include a $267.9 million dividend related to the
Company's deconsolidation from its tax reporting group as a result of the
Golden State Acquisition, a reduction of $191.2 million in retained earnings
relative to establishing liabilities reflecting the value of Golden State
Common Stock to be distributed to First Gibraltar and Hunter's Glen in respect
of their proportionate ownership of the California Federal Goodwill Litigation
Asset and Parent Holdings' pre-merger tax benefits, and a $3.5 million
reduction in equity resulting from the GS Escrow Merger.
Page 22
<PAGE>
Golden State's non-performing assets, consisting of non-performing loans, net
of purchase accounting adjustments and specific allowances for loan losses,
foreclosed real estate, net, and repossessed assets, increased to $323 million
at September 30, 1998 compared with $272 million at December 31, 1997,
primarily as a result of assets acquired in the Golden State Acquisition.
However, total non-performing assets as a percentage of the Bank's total assets
decreased to 0.62% at September 30, 1998 from 0.87% at December 31, 1997.
Page 23
<PAGE>
RESULTS OF OPERATIONS
Nine Months Ended September 30, 1998 versus Nine Months Ended
September 30, 1997
The following table sets forth, for the periods and at the dates
indicated, information regarding the Company's consolidated average balance
sheets, together with the total dollar amounts of interest income and interest
expense and the weighted average interest rates for the periods presented.
Average balances are calculated on a daily basis. The information presented
represents the historical activity of the Company.
<TABLE>
<CAPTION>
Nine months ended
September 30, 1998
------------------------------------------
Average Average
Balance Interest Rate
------- -------- -------
(dollars in millions)
<S> <C> <C> <C>
ASSETS
Interest-earning assets (1):
Securities and interest-bearing deposits in banks (2) $ 1,180 $ 66 7.48%
Mortgage-backed securities available for sale 6,661 294 5.89
Mortgage-backed securities held to maturity 1,396 80 7.64
Loans held for sale, net 1,585 85 7.16
Loans receivable, net 20,089 1,170 7.77
------- ------- -----
Total interest-earning assets 30,911 1,695 7.31%
------- ------- -----
Noninterest-earning assets 3,850
-------
Total assets $34,761
=======
LIABILITIES, MINORITY INTEREST
AND STOCKHOLDERS' EQUITY
Interest-bearing liabilities:
Deposits $16,666 546 4.38%
Securities sold under agreements to repurchase 2,510 106 5.59
Borrowings (3) 12,129 586 6.46
------- ------- -----
Total interest-bearing liabilities 31,305 1,238 5.29%
------- ------- -----
Noninterest-bearing liabilities 1,567
Minority interest 966
Stockholders' equity 923
-------
Total liabilities, minority interest and
stockholders' equity $34,761
=======
Net interest income $ 457
======
Interest rate spread 2.02%
====
Net interest margin 1.96%
====
Average equity to average assets 2.65%
====
</TABLE>
Page 24
<PAGE>
<TABLE>
<CAPTION>
Nine months ended
September 30, 1997
------------------------------------------
Average Average
Balance Interest Rate
------- -------- -------
(dollars in millions)
<S> <C> <C> <C>
ASSETS
Interest-earning assets (1):
Securities and interest-bearing deposits in banks (2) $ 1,025 $ 47 6.09%
Mortgage-backed securities available for sale 4,292 216 6.72
Mortgage-backed securities held to maturity 1,517 87 7.63
Loans held for sale, net 1,051 56 7.09
Loans receivable, net 19,900 1,166 7.81
------- ------ ----
Total interest-earning assets 27,785 1,572 7.54%
----- ----
Noninterest-earning assets 2,882
------
Total assets $30,667
=======
LIABILITIES, MINORITY INTEREST
AND STOCKHOLDERS' EQUITY
Interest-bearing liabilities:
Deposits $16,832 563 4.47%
Securities sold under agreements to repurchase 2,442 105 5.66
Borrowings (3) 8,923 447 6.70
------- ------ ----
Total interest-bearing liabilities 28,197 1,115 5.29%
------ ----
Noninterest-bearing liabilities 1,111
Minority interest 1,034
Stockholder's equity 335
-------
Total liabilities, minority interest
and stockholders' equity $30,667
=======
Net interest income $ 457
======
Interest rate spread 2.25%
====
Net interest margin 2.18%
====
Average equity to average assets 0.58%
====
</TABLE>
- ---------
(1) Non-performing assets are included in the average balances for the periods
indicated.
(2) The information presented includes securities held to maturity, securities
available for sale and interest-bearing deposits in other banks.
(3) Interest and average rate include the impact of interest rate swaps.
Page 25
<PAGE>
The following table presents certain information regarding changes in
interest income and interest expense of the Company during the periods
indicated. The dollar amount of interest income and interest expense fluctuates
depending upon changes in the respective interest rates and upon changes in the
respective amounts (volume) of the Company's interest-earning assets and
interest-bearing liabilities. For each category of interest-earning assets and
interest-bearing liabilities, information is provided on changes attributable
to (i) changes in volume (changes in average outstanding balances multiplied by
the prior period's rate) and (ii) changes in rate (changes in average interest
rate multiplied by the prior period's volume). Changes attributable to both
volume and rate have been allocated proportionately.
<TABLE>
<CAPTION>
Nine months ended September 30, 1998 vs. 1997
-----------------------------------------------------
Increase (Decrease) Due
to
-----------------------------------------------------
Volume Rate Net
(in millions)
<S> <C> <C> <C>
INTEREST INCOME:
Securities and interest-bearing deposits in banks $ 7 $12 $ 19
Mortgage-backed securities available for sale 101 (23) 78
Mortgage-backed securities held to maturity (7) -- (7)
Loans held for sale, net 28 1 29
Loans receivable, net 9 (5) 4
---- --- ----
Total 138 (15) 123
---- --- ----
INTEREST EXPENSE:
Deposits (6) (11) (17)
Securities sold under agreements to repurchase 2 (1) 1
Borrowings 154 (15) 139
---- --- ----
Total 150 (27) 123
---- --- ----
Change in net interest income $(12) $12 $ --
==== === ====
</TABLE>
The volume variances in total interest income and total interest expense
for the nine months ended September 30, 1998 compared to the corresponding
period in 1997 are largely due to increased purchases of mortgage-backed
securities funded with FHLB advances and the additional volume related to the
Golden State Acquisition and the issuance of the GS Escrow Notes, partially
offset by $1.4 billion in deposits sold in the Florida Branch Sale. The
positive total rate variance of $12 million is primarily attributed to the
lower cost of funds on deposits, lower interest rates paid on new borrowings
and the lower costing liabilities assumed in the Golden State Acquisition,
partially offset by the comparatively lower market rates on mortgage-backed
securities purchased in 1998 and 1997 and prepayments of higher rate
interest-earning assets.
Interest Income. Total interest income was $1.7 billion for the nine
months ended September 30, 1998, an increase of $123.4 million from the nine
months ended September 30, 1997. Total interest-earning assets for the nine
months ended September 30, 1998 averaged $30.9 billion, compared to $27.8
billion for the corresponding period in 1997. The yield on total
interest-earning assets during the nine months ended September 30, 1998
decreased to 7.31% from 7.54% for the nine months ended September 30, 1997,
primarily due to the lower market rates on new mortgage-backed securities
purchased in 1998 and 1997 and prepayments of higher rate interest-earning
assets.
Golden State earned $1.2 billion of interest income on loans receivable
for the nine months ended September 30, 1998, an increase of $3.8 million from
the nine months ended September 30, 1997. The average balance of loans
receivable was $20.1 billion for the nine months ended September 30, 1998,
compared to $19.9 billion for the same period in 1997. The weighted average
rate on loans receivable decreased to 7.77% for the nine months ended September
30, 1998 from 7.81% for the nine months ended September 30, 1997. The increase
in the average volume is primarily due to the addition of $14.5 billion in
loans acquired in the Golden State Acquisition.
Page 26
<PAGE>
Golden State earned $85.1 million of interest income on loans held for
sale for the nine months ended September 30, 1998, an increase of $29.2 million
from the nine months ended September 30, 1997. The average balance of loans
held for sale was $1.6 billion for the nine months ended September 30, 1998, an
increase of $534 million from the comparable period in 1997, primarily due to
increased originations and longer holding periods prior to sale for jumbo loans
during the nine months ended September 30, 1998. The weighted average rate on
loans held for sale increased to 7.16% for the nine months ended September 30,
1998 from 7.09% for the nine months ended September 30, 1997, primarily due to
the higher percentage of comparatively higher fixed-rate held for sale
portfolio in 1998 compared to 1997.
Interest income on mortgage-backed securities available for sale was
$294.2 million for the nine months ended September 30, 1998, an increase of
$77.9 million from the nine months ended September 30, 1997. The average
portfolio balances increased $2.4 billion, to $6.7 billion, during the nine
months ended September 30, 1998 compared to the same period in 1997. The
weighted average yield on these assets decreased from 6.72% for the nine months
ended September 30, 1997 to 5.89% for the nine months ended September 30, 1998.
The increase in the volume and decrease in the weighted average yield is
primarily due to purchases of $6.1 billion of mortgage-backed securities,
additions of $2.3 billion from the Golden State Acquisition and $316.8 million
purchased during the last three months of 1997 at comparatively lower market
rates, as well as prepayments of higher rate mortgage-backed securities since
September 30, 1997. Additionally, the Company recorded a $19.8 million
writedown to the carrying value of mortgage-backed securities determined to
have an other than temporary impairment.
Interest income on mortgage-backed securities held to maturity was $80.0
million for the nine months ended September 30, 1998, a decrease of $6.8
million from the nine months ended September 30, 1997. The average portfolio
balance decreased $121 million, to $1.4 billion, during the nine months ended
September 30, 1998, primarily attributed to an increase in principal payments.
The weighted average rates for the nine months ended September 30, 1998 and
1997 were 7.64% and 7.63%, respectively.
Interest income on securities and interest-bearing deposits in other banks
was $66.2 million for the period ended September 30, 1998, an increase of $19.4
million from the period ended September 30, 1997. The average portfolio balance
increased from $1.0 billion for the period ended September 30, 1997 to $1.2
billion for the period ended September 30, 1998, primarily due to the proceeds
received from the GS Escrow Notes, and used to fund the Refinancing
Transactions during the third and fourth quarters of 1998. The increase in the
weighted average rate from 6.09% for the nine months ended September 30, 1997
to 7.48% for the nine months ended September 30, 1998 is primarily due to $19.8
million in interest income received on a $193.0 million federal income tax
refund related to Old California Federal.
Interest Expense. Total interest expense was $1.2 billion for the nine
months ended September 30, 1998, an increase of $123.2 million from the nine
months ended September 30, 1997. The increase is primarily the result of
additional borrowings related to the GS Escrow Notes, $5.4 billion in
additional FHLB advances and deposits of $11.3 billion assumed in the Golden
State Acquisition, and other new borrowings, partially offset by $1.4 billion
in deposits sold in the Florida Branch Sale.
Interest expense on customer deposits, including Brokered Deposits, was
$545.7 million for the nine months ended September 30, 1998, a decrease of
$17.2 million from the nine months ended September 30, 1997. The average
balance of customer deposits outstanding decreased from $16.8 billion to $16.7
billion for the nine months ended September 30, 1997 and 1998, respectively.
The decrease in the average balance is a result of the net deposit run-off
expected following the Cal Fed Acquisition. The overall weighted average cost
of deposits was 4.38% for the nine months ended September 30, 1998 and 4.47%
for the nine months ended September 30, 1997, primarily due to the higher
average balances of lower rate custodial transaction accounts in 1998 and lower
cost of funds on deposits assumed in the Golden State Acquisition.
Page 27
<PAGE>
Interest expense on securities sold under agreements to repurchase
totalled $106.4 million for the nine months ended September 30, 1998, an
increase of $1.5 million from the nine months ended September 30, 1997. The
average balance of such borrowings for the nine months ended September 30, 1998
and 1997 was $2.5 billion and $2.4 billion, respectively. The weighted average
interest rate on these instruments decreased to 5.59% during the nine months
ended September 30, 1998 from 5.66% for the nine months ended September 30,
1997, primarily due to a decrease in rates on new borrowings compared to such
borrowings during 1997.
Interest expense on borrowings totalled $586.2 million for the nine months
ended September 30, 1998, an increase of $138.9 million from the nine months
ended September 30, 1997. The average balance outstanding for the nine months
ended September 30, 1998 and 1997 was $12.1 billion and $8.9 billion,
respectively. The weighted average interest rate on these instruments decreased
to 6.46% during the nine months ended September 30, 1998 from 6.70% for the
nine months ended September 30, 1997, primarily due to the lower rates and the
net impact of the Refinancing Transactions. The increase in the volume includes
the net impact of the Refinancing Transactions, the addition of $5.4 billion in
FHLB advances assumed in the Golden State Acquisition and the increase in FHLB
advances used to fund the purchases of mortgage-backed securities and the
Florida Branch Sale.
Net Interest Income. Net interest income was $456.9 million for the nine
months ended September 30, 1998, an increase of $.2 million from the nine
months ended September 30, 1997. The interest rate spread decreased to 2.02%
for the nine months ended September 30, 1998 from 2.25% for the nine months
ended September 30, 1997, primarily as a result of prepayments of higher rate
interest-earning assets being replaced with interest-earning assets having
comparatively lower yields.
Noninterest Income. Total noninterest income, consisting primarily of loan
servicing fees, customer banking fees, gains on sales of loans and assets, gain
on sale of branches and dividends on FHLB stock, was $384.1 million for the
nine months ended September 30, 1998, an increase of $127.9 million from the
nine months ended September 30, 1997. Income for the nine months ended
September 30, 1998 reflects a $108.9 million gain on sales of branches
attributed to the Florida Branch Sale. Income for the nine months ended
September 30, 1997 includes a $14.0 million gain from the Servicing Sale.
Loan servicing fees, net of amortization of mortgage servicing rights,
were $106.1 million for the nine months ended September 30, 1998, compared to
$109.4 million for the nine months ended September 30, 1997. The single-family
residential loan servicing portfolio, excluding loans serviced for the Bank,
increased from $49.8 billion at September 30, 1997 to $69.3 billion at
September 30, 1998. During the nine months ended September 30, 1998, California
Federal sold $6.3 billion in single-family mortgage loans originated for sale
as part of its ongoing mortgage banking operations compared to $4.2 billion of
such sales for the corresponding period in 1997.
Customer banking fees were $79.5 million for the nine months ended
September 30, 1998 compared to $73.2 million for the nine months ended
September 30, 1997. The increase is primarily attributed to the impact of
increased revenues from the retail banking operations acquired in the Golden
State Acquisition, partially offset by the impact of the Florida Branch Sale.
Gain on sale of branches was $108.8 million for the nine months ended
September 30, 1998 compared to $1.1 million in 1997. The increase is primarily
attributed to the Florida Branch Sale.
Gain on sale of loans was $50.0 million for the nine months ended
September 30, 1998, compared to $16.1 million for the nine months ended
September 30, 1997. The increase in 1998 is primarily attributed to early
payoffs of commercial loans with unamortized discounts ($11.8 million) and
$22.1 million in additional gains from residential loan sales.
Gain on sale of assets was $.2 million for the nine months ended September
30, 1998, compared to a gain of $14.8 million for the nine months ended
September 30, 1997. The gain in 1997 is primarily attributed to a $14.0 million
gain related to the Servicing Sale.
Page 28
<PAGE>
Dividends on FHLB stock were $22.5 million for the nine months ended
September 30, 1998, an increase of $4.1 million from the nine months ended
September 30, 1997, representing an increase in the amount of such stock owned
by the Company, as a result of an increase in borrowings under FHLB advances.
There were no material variances between the nine months ended September
30, 1998 and the comparable period in 1997 with respect to management fees and
other noninterest income.
Noninterest Expense. Total noninterest expense was $497.3 million for the
nine months ended September 30, 1998, an increase of $17.1 million from the
nine months ended September 30, 1997. The variance between the two periods is
primarily attributed to $31.9 million in merger and integration costs incurred
in connection with the Golden State Acquisition and increases of $10.3 million
in compensation, $3.7 million in occupancy and equipment, $1.7 million in
marketing costs, and $1.3 million in other net changes primarily as a result of
the Golden State Acquisition and the Auto One and GSAC Acquisitions, partially
offset by a $29.0 million provision for unreimbursable costs related to the
foreclosure of single-family loans serviced for others (reflected as loan
expense and professional fees) also recorded during the nine months ended
September 30, 1997.
Compensation and employee benefits expense was $200.8 million for the nine
months ended September 30, 1998, an increase of $10.4 million from the nine
months ended September 30, 1997. The increase is primarily attributed to 3,287
additional employees at September 30, 1998 compared to September 30, 1997,
primarily due to additional employees from the Auto One and GSAC Acquisitions,
and the Golden State Acquisition.
Loan expense was $33.9 million for the nine months ended September 30,
1998, a decrease of $18.0 million from the nine months ended September 30,
1997. The decrease is primarily attributed to a $25.0 million provision for
unreimbursable costs related to the foreclosure of single-family loans serviced
for others recorded during the nine months ended September 30, 1997.
Merger and integration costs were $31.9 million for the nine months ended
September 30, 1998, attributed to transition expenses, which include severance,
conversion and consolidation costs, incurred in connection with the Golden
State Acquisition.
There were no material variances between the nine months ended September
30, 1998 and the comparable period in 1997 with respect to occupancy and
equipment, professional fees, data processing and other noninterest expense.
Provision for Income Tax. During the nine months ended September 30, 1998
and 1997, Golden State recorded an income tax benefit of $151.8 million and
income tax expense of $31.4 million, respectively. Based on resolutions of
federal income tax audits and favorable future earnings expectations during the
second quarter of 1998, management changed its judgment about the realizability
of Golden State's deferred tax asset and reduced its valuation allowance by
$250 million in addition to the amount used to offset income during the period.
For the nine months ended September 30, 1998 and 1997, Golden State's valuation
allowance was reduced by $301.6 million and $58.7 million, respectively. Golden
State's effective Federal tax rate was (59)% and 2% during the nine months
ended September 30, 1998 and 1997, respectively, while its statutory Federal
tax rate was 35% during both periods. The difference between the effective and
statutory rates was primarily the result of the reductions in the deferred tax
asset valuation allowance, partially offset by nondeductible goodwill
amortization. Golden State's effective state tax rate was 11% and 16% during
the nine months ended September 30, 1998 and 1997, respectively. Effective July
1, 1998, the Company's marginal tax rate for future periods increased to 42%.
Minority Interest. Minority interest for the nine months ended September
30, 1998 includes $19.5 million in net premiums and expenses paid in connection
with the Bank Preferred Stock Tender Offers. Dividends on the Bank Preferred
Stock, the FN Holdings Preferred Stock and the REIT Preferred Stock totalling
$37.7 million, $.6 million and $34.2 million, respectively, were also recorded
during the nine months ended September 30, 1998. Minority interest relative to
the REIT Preferred Stock is reflected net of the income tax benefit of $7.7
million which will inure to the Company as a result of the deductibility of
such dividends for income tax purposes. Minority interest also includes a
benefit of $1.7 million representing that portion of Auto One's loss (from
February 4, 1998 through September 30, 1998) attributable to the 20% interest
in the common stock of Auto One that was issued as part of the GSAC
Acquisition.
Page 29
<PAGE>
During the nine months ended September 30, 1997, minority interest in
income includes dividends on the Bank Preferred Stock, the FN Holdings
Preferred Stock and the REIT Preferred Stock of $39.6 million, $11.0 million
and $30.5 million, respectively. Minority interest relative to the REIT
Preferred Stock is reflected net of the income tax benefit of $3.9 million
which will inure to the Company as a result of the deductibility of such
dividends for income tax purposes.
Extraordinary Item. During the nine months ended September 30, 1998, the
Company purchased $735.8 million aggregate principal amount of the FN Holdings
Notes in the Debt Tender Offers for an aggregate purchase price, including
accrued interest payable, of $902.5 million. The amount of expenses and tender
premiums paid in connection with such purchase totalled $80.0 million, net of
income taxes, and is reflected as an extraordinary loss on the early
extinguishment of debt on Golden State's consolidated statements of income for
the nine months ended September 30, 1998.
Page 30
<PAGE>
Three Months Ended September 30, 1998 versus Three Months Ended
September 30, 1997
The following table sets forth, for the periods and at the dates
indicated, information regarding the Company's consolidated average balance
sheets, together with the total dollar amounts of interest income and interest
expense and the weighted average interest rates for the periods presented.
Average balances are calculated on a daily basis. The information presented
represents the historical activity of the Company.
<TABLE>
<CAPTION>
Three months ended
September 30, 1998
------------------------------------------
Average Average
Balance Interest Rate
------- -------- -------
(dollars in millions)
<S> <C> <C> <C>
ASSETS
Interest-earning assets (1):
Securities and interest-bearing deposits in banks (2) $ 1,375 $ 35 10.11%
Mortgage-backed securities available for sale 8,554 116 5.41
Mortgage-backed securities held to maturity 1,713 32 7.60
Loans held for sale, net 1,455 27 7.38
Loans receivable, net 21,361 408 7.67
------- ----- -----
Total interest-earning assets 34,458 618 7.19%
----- -----
Noninterest-earning assets 5,851
-------
Total assets $40,309
=======
LIABILITIES, MINORITY INTEREST
AND STOCKHOLDERS' EQUITY
Interest-bearing liabilities:
Deposits $17,989 190 4.20%
Securities sold under agreements to repurchase 3,459 49 5.58
Borrowings 13,377 218 6.44
------- ----- -----
Total interest-bearing liabilities 34,825 457 5.21%
--- ----
Noninterest-bearing liabilities 3,623
Minority interest 949
Stockholder's equity 912
-------
Total liabilities, minority interest and
stockholders' equity $40,309
=======
Net interest income $161
====
Interest rate spread 1.98%
====
Net interest margin 1.93%
====
Average equity to average assets 2.26%
====
Page 31
<PAGE>
Three months ended
September 30, 1998
------------------------------------------
Average Average
Balance Interest Rate
------- -------- -------
(dollars in millions)
ASSETS
Interest-earning assets (1):
Securities and interest-bearing deposits in
banks (2) 1,068 $ 17 6.31%
Mortgage-backed securities available for sale 4,970 82 6.59
Mortgage-backed securities held to maturity 1,452 28 7.71
Loans held for sale, net 1,021 18 7.16
Loans receivable, net 19,704 386 7.84
------- ---- ----
Total interest-earning assets 28,215 531 7.53%
------- ---- ----
Noninterest-earning assets 2,740
-------
Total assets $30,955
=======
LIABILITIES, MINORITY INTEREST
AND STOCKHOLDERS' EQUITY
Interest-bearing liabilities:
Deposits $16,806 188 4.44%
Securities sold under agreements to repurchase 2,233 32 5.62
Borrowings (3) 9,589 160 6.62
------- ---- ----
Total interest-bearing liabilities 28,628 380 5.27%
------- ---- ----
Noninterest-bearing liabilities 929
Minority interest 1,043
Stockholders' equity 355
-------
Total liabilities, minority interest
and stockholders' equity $30,955
=======
Net interest income $151
====
Interest rate spread 2.26%
====
Net interest margin 2.19%
====
Average equity to average assets 0.63%
====
</TABLE>
- ----------------
(1) Non-performing assets are included in the average balances for the periods
indicated.
(2) The information presented includes securities held to maturity, securities
available for sale and interest-bearing deposits in other banks.
(3) Interest and average rate include the impact of interest rate swaps.
Page 32
<PAGE>
The following table presents certain information regarding changes in
interest income and interest expense of the Company during the periods
indicated. The dollar amount of interest income and interest expense fluctuates
depending upon changes in the respective interest rates and upon changes in the
respective amounts (volume) of the Company's interest-earning assets and
interest-bearing liabilities. For each category of interest-earning assets and
interest-bearing liabilities, information is provided on changes attributable
to (i) changes in volume (changes in average outstanding balances multiplied by
the prior period's rate) and (ii) changes in rate (changes in average interest
rate multiplied by the prior period's volume). Changes attributable to both
volume and rate have been allocated proportionately.
<TABLE>
<CAPTION>
Three months ended September 30, 1998 vs. 1997
Increase (Decrease) Due to
---------------------------------------------------
Volume Rate Net
------ ---- ---
(in millions)
<S> <C> <C> <C>
INTEREST INCOME:
Securities and interest-bearing deposits in banks $ 6 $ 12 $18
Mortgage-backed securities available for sale 46 (12) 34
Mortgage-backed securities held to maturity 4 -- 4
Loans held for sale, net 8 1 9
Loans receivable, net 31 (9) 22
---- --- ---
Total 95 (8) 87
---- --- ---
INTEREST EXPENSE:
Deposits 12 (10) 2
Securities sold under agreements to repurchase 17 -- 17
Borrowings 62 (4) 58
---- --- ---
Total 91 (14) 77
---- --- ---
Change in net interest income $ 4 $ 6 $10
==== === ===
</TABLE>
The volume variances in total interest income and total interest expense
for the three months ended September 30, 1998 compared to the corresponding
period in 1997 are largely due to average balance increases of $5.6 billion in
interest-earning assets and $6.0 billion in interest-bearing liabilities
related to the Golden State Acquisition, the net impact of the Refinancing
Transactions and increased purchases of mortgage-backed securities funded with
FHLB advances. The positive total rate variance of $6 million is primarily
attributed to the lower cost of funds on deposits, lower interest rates paid on
new borrowings and the lower costing liabilities assumed in the Golden State
Acquisition, partially offset by comparatively lower market rates on
mortgage-backed securities purchased in 1998 and 1997 and prepayments of higher
rate interest-earning assets.
Interest Income. Total interest income was $618.3 million for the three
months ended September 30, 1998, an increase of $87.0 million from the three
months ended September 30, 1997. Total interest-earning assets for the three
months ended September 30, 1998 averaged $34.5 billion, compared to $28.2
billion for the corresponding period in 1997. The yield on total
interest-earning assets during the three months ended September 30, 1998
decreased to 7.19% compared to 7.53% for the three months ended September 30,
1997, primarily due to lower market rates on new mortgage-backed securities
purchased in 1998 and 1997, prepayments of higher rate interest-earning assets,
and the addition of assets from the Golden State Acquisition generally having
lower yields.
Golden State earned $408.5 million of interest income on loans receivable
for the three months ended September 30, 1998, an increase of $22.1 million
from the three months ended September 30, 1997. The average balance of loans
receivable increased to $21.4 billion during the three months ended September
30, 1998 from $19.7 billion for the three months ended September 30, 1997. The
weighted average yield on loans receivable decreased to 7.67% for the three
months ended September 30, 1998 from 7.84% for the same period in 1997. The
increase in the average volume is mainly due to the addition of $14.5 billion
in loans related to the Golden State Acquisition.
Page 33
<PAGE>
Golden State earned $26.8 million of interest income on loans held for
sale for the three months ended September 30, 1998, an increase of $8.6 million
from the three months ended September 30, 1997. The average balance of loans
held for sale was $1.5 billion for the three months ended September 30, 1998,
an increase of $434 million from the same period in 1997, primarily due to
increased originations and longer holding periods before sales of jumbo loans
during the three months ended September 30, 1998. The weighted average rate on
loans held for sale increased to 7.38% for the three months ended September 30,
1998 from 7.16% for the three months ended September 30, 1997, primarily due to
the higher percentage of comparatively higher fixed-rate held for sale
portfolio in 1998 compared to 1997.
Interest income on mortgage-backed securities available for sale was
$115.6 million for the three months ended September 30, 1998, an increase of
$33.8 million from the three months ended September 30, 1997. The average
portfolio balance increased $3.6 billion, to $8.6 billion, during the three
months ended September 30, 1998 compared to the same period in 1997. The
weighted average yield on these assets decreased from 6.59% for the three
months ended September 30, 1997 to 5.41% for the three months ended September
30, 1998. The increase in the volume and decrease in the weighted average yield
is primarily due to the additions of $2.3 billion of mortgage-backed securities
acquired in the Golden State Acquisition, purchases of $3.9 billion in lower
rate mortgage-backed securities during the three months ended September 30,
1998 and $316.8 million during the last three months of 1997, as well as
prepayments of higher rate mortgage-backed securities since September 30, 1997.
Additionally, the Company recorded a $19.8 million writedown to the carrying
value of mortgage-backed securities determined to have an other than temporary
impairment.
Interest income on mortgage-backed securities held to maturity was $32.6
million for the three months ended September 30, 1998, an increase of $4.6
million from the three months ended September 30, 1997. The average portfolio
balance increased $262 million, to $1.7 billion, during the three months ended
September 30, 1998 compared to the same period in 1997. The weighted average
yield on these assets decreased from 7.71% for the three months ended September
30, 1997 to 7.60% for the three months ended September 30, 1998. The increase
in the volume is due to the addition of $1.9 billion of FNMA securitized
multi-family loans with a weighted average rate of 7.39% during September 1998.
The decrease in the weighted average yield is primarily due to downward rate
adjustments of adjustable-rate mortgage-backed securities.
Interest income on securities and interest-bearing deposits in banks was
$34.8 million for the three months ended September 30, 1998, an increase of
$17.9 million from the three months ended September 30, 1997. The average
portfolio balance increased $306 million, to $1.4 billion, during the three
months ended September 30, 1998 compared to the same period in 1997. The
weighted average yield on these assets increased from 6.31% for the three
months ended September 30, 1997 to 10.11% for the three months ended September
30, 1998. The increase in the weighted average yield is primarily due to $19.8
million in interest income received on a $193.0 million federal income tax
refund related to Old California Federal.
Interest Expense. Total interest expense was $457.0 million for the three
months ended September 30, 1998, an increase of $76.7 million from the three
months ended September 30, 1997. The increase is primarily the result of
increased borrowings under FHLB advances, the additional deposits and
borrowings assumed in the Golden State Acquisition and the issuance of the GS
Escrow Notes.
Interest expense on customer deposits, including Brokered Deposits, was
$190.5 million for the three months ended September 30, 1998, an increase of
$2.4 million from the three months ended September 30, 1997. The average
balance of customer deposits outstanding increased from $16.8 billion to $18.0
billion for the three months ended September 30, 1997 and 1998, respectively.
The increase in the average balance is primarily due to $11.3 billion in
deposits assumed in the Golden State Acquisition, partially offset by net
deposit run-off, anticipated following the Cal Fed Acquisition, and $1.4
billion in deposits sold in the Florida Branch Sale. The overall weighted
average cost of deposits decreased to 4.20% for the three months ended
September 30, 1998 from 4.44% for the three months ended September 30, 1997,
primarily due to higher average balances of lower rate custodial transaction
accounts and additions of lower-rate deposits acquired from Glendale Federal.
Page 34
<PAGE>
Interest expense on securities sold under agreements to repurchase
totalled $49.3 million for the three months ended September 30, 1998, an
increase of $17.3 million from the three months ended September 30, 1997. The
average balance of such borrowings for the three months ended September 30,
1998 and 1997 was $3.5 billion and $2.2 billion, respectively. The weighted
average interest rate on these instruments decreased to 5.58% during the three
months ended September 30, 1998 from 5.62% for the three months ended September
30, 1997, primarily due to a decrease in rates on new borrowings compared to
such borrowings during 1997.
Interest expense on borrowings totalled $217.1 million for the three
months ended September 30, 1998, an increase of $57.0 million from the three
months ended September 30, 1997. The average balance outstanding for the three
months ended September 30, 1998 and 1997 was $13.4 billion and $9.6 billion,
respectively. The weighted average interest rate on these instruments decreased
to 6.44% during the three months ended September 30, 1998 from 6.62% for the
three months ended September 30, 1997. The changes are attributed to the
Refinancing Transactions, additional FHLB advances used to fund the purchases
of mortgage-backed securities and the Florida Branch Sale, as well as an
additional $5.4 billion in advances assumed in the Golden State Acquisition
with a weighted average rate of 5.64%.
Net Interest Income. Net interest income was $161.4 million for the three
months ended September 30, 1998, an increase of $10.3 million from the three
months ended September 30, 1997. The interest rate spread decreased to 1.96%
for the three months ended September 30, 1998 from 2.26% for the three months
ended September 30, 1997, primarily as a result of prepayments of higher
interest-earning assets being replaced with interest-earning assets having
comparatively lower yields, reflecting the flattening of the yield curve during
the second half of 1997 and year to date in 1998.
Noninterest Income. Total noninterest income, consisting primarily of loan
servicing fees, customer banking fees, gains on sales of loans and assets, gain
on sale of branches, and dividends on FHLB stock, was $199.3 million for the
three months ended September 30, 1998, an increase of $104.5 million from the
three months ended September 30, 1997. Income for the three months ended
September 30, 1998 includes a $108.9 million gain from the Florida Branch Sale.
Income for the three months ended September 30, 1997 includes a $14.0 million
gain from the Servicing Sale.
Loan servicing fees, net of amortization of mortgage servicing rights,
were $34.7 million for the three months ended September 30, 1998, compared to
$34.5 million for the three months ended September 30, 1997. The single-family
residential loan servicing portfolio, excluding loans serviced for the Bank,
increased from $49.8 billion at September 30, 1997 to $69.3 billion at
September 30, 1998. During the three months ended September 30, 1998,
California Federal sold $1.8 billion in single-family mortgage loans originated
for sale as part of its ongoing mortgage banking operations compared to $1.2
billion of such sales for the corresponding period in 1997.
Gain on sale of branches was $108.9 million for the three months ended
September 30, 1998, attributed to the Florida Branch Sale.
Gain on sale of loans was $13.9 million for the three months ended
September 30, 1998, compared to $4.8 million for the three months ended
September 30, 1997. The increase is primarily attributed to early payoffs of
commercial loans with unamortized discounts ($1.0 million) and $8.1 million in
additional gains from residential loan sales during the third quarter of 1998.
Gain on sale of assets was $.4 million for the three months ended
September 30, 1998, compared to a gain of $15.1 million for the three months
ended September 30, 1997. The gain in 1997 is primarily attributed to a $14.0
million gain related to the Servicing Sale.
Dividends on FHLB stock were $7.9 million for the three months ended
September 30, 1998, an increase of $1.5 million from the three months ended
September 30, 1997, representing an increase in the volume of such stock owned
by the Company, as a result of an increase in borrowings under FHLB advances.
There were no material variances between the three months ended September
30, 1998 and the comparable period in 1997 with respect to customer banking
fees, management fees and other noninterest income.
Page 35
<PAGE>
Noninterest Expense. Total noninterest expense was $194.5 million for the
three months ended September 30, 1998, an increase of $39.8 million from the
three months ended September 30, 1997. The variance between the two periods is
primarily attributed to $31.1 million in merger and integration costs incurred
in connection with the Golden State Acquisition and $13.6 million in additional
operating expenses related to the Golden State Acquisition, partially offset by
the impact of the Florida Branch Sale.
Compensation and employee benefits expense was $73.2 million for the three
months ended September 30, 1998, an increase of $10.3 million from the three
months ended September 30, 1997. The increase in expense is primarily
attributed to 3,287 additional employees at September 30, 1998 compared to
September 30, 1997, primarily attributed to additional employees from the Auto
One and GSAC Acquisitions, and the Golden State Acquisition.
Loan expense was $10.4 million for the three months ended September 30,
1998, a decrease of $7.5 million from the three months ended September 30,
1997. The decrease is primarily attributed to an $8.9 million provision for
unreimbursable costs related to the foreclosure of single-family loans serviced
for others recorded during the three months ended September 30, 1997.
Merger and integration costs were $31.1 million for the three months ended
September 30, 1998, attributed to transition expenses, which include severance,
conversion and consolidation costs incurred in connection with the Golden State
Acquisition.
There were no material variances between the three months ended September
30, 1998 and the comparable period in 1997 with respect to occupancy and
equipment, professional fees, data processing and other noninterest expense.
Provision for Income Tax. During the three months ended September 30, 1998
and 1997, Golden State recorded income tax expense of $71.9 million and $12.2
million, respectively. For the quarter ended September 30, 1997, Golden State's
valuation allowance was reduced by $23.6 million, respectively. Golden State's
effective Federal tax rates were 38% and 2% during the three months ended
September 30, 1998 and 1997, respectively, while its statutory Federal tax rate
was 35% during both periods. The difference between the effective and statutory
rates was primarily the result of the reductions in the deferred tax asset
valuation allowance and nondeductible goodwill amortization. Golden State's
effective state tax rate was 8% and 15% during the three months ended September
30, 1998 and 1997, respectively. Effective July 1, 1998, the Company's marginal
tax rate for future periods increased to 42%.
Minority Interest. Minority interest for the three months ended September
30, 1998 includes $19.5 million in net premiums and expenses related to the
Bank Preferred Stock Tender Offers. Dividends on the Bank Preferred Stock and
the REIT Preferred Stock totaling $11.2 million and $11.4 million,
respectively, were also recorded during the three months ended September 30,
1998. Minority interest relative to the REIT Preferred Stock is reflected net
of the income tax benefit of $4.7 million which will inure to the Company as a
result of the deductibility of such dividends for income tax purposes. Minority
interest also includes a benefit of $1.0 million representing that portion of
Auto One's loss attributable to the 20% interest in the common stock of Auto
One that was issued as part of the GSAC Acquisition.
During the nine months ended September 30, 1997, minority interest in
income includes dividends on the Bank Preferred Stock, the FN Holdings
Preferred Stock and the REIT Preferred Stock of $13.2 million, $3.7 million and
$11.4 million, respectively. Minority interest relative to the REIT Preferred
Stock is reflected on the consolidated statements of income net of the income
tax benefit of $1.5 million which will inure to the Company as a result of the
deductibility of such dividends for income tax purposes.
Extraordinary Item. During the three months ended September 30, 1998, the
Company purchased $735.8 million aggregate principal amount of the FN Holdings
Notes in the Debt Tender Offers for an aggregate purchase price, including
accrued interest payable, of $902.5 million. The amount of expenses and tender
premiums paid in connection with such purchase totalled $80.0 million, net of
income taxes, and is reflected as an extraordinary loss on the early
extinguishment of debt on Golden State's consolidated statements of income for
the three months ended September 30, 1998.
Page 36
<PAGE>
PROVISION FOR LOAN LOSSES
The adequacy of the allowance for loan losses is periodically evaluated by
management in order to maintain the allowance at a level that is sufficient to
absorb expected loan losses. The Company charges current earnings with a
provision for estimated credit losses on loans receivable. The provision
considers both specifically identified problem loans as well as credit risks
not specifically identified in the loan portfolio. The Company established
provisions for loan losses of $30.0 million and $59.9 million during the nine
months ended September 30, 1998 and 1997, respectively. The decrease in the
provision for loan losses during the nine months ended September 30, 1998
compared to the same period in 1997 is the result of management's evaluation of
the adequacy of the allowance based on, among other things, past loan loss
experience and known and inherent risks in the portfolio, evidenced in part by
the continued decline in the Company's level of non-performing assets. In
addition, management's periodic evaluation of the adequacy of the allowance for
loan losses considers potential adverse situations that have occurred but are
not yet known, the estimated value of underlying collateral, and economic
conditions. The allowance for loan losses is increased by provisions for loan
losses and allowances on acquired loans, while it is decreased by charge-offs
(net of recoveries).
Activity in the allowance for loan losses during the nine months ended
September 30, 1998 and 1997 is as follows (in thousands):
1998 1997
---- ----
Balance - January 1 $418,674 $246,556
Purchase - Cal Fed Acquisition -- 143,820
Purchase - Golden State Acquisition 169,454 --
Allowance on acquired loans -- 1,596
Provision for loan losses 30,000 59,850
Charge-offs (37,832) (43,283)
Recoveries 2,486 2,028
-------- --------
Balance - September 30 $582,782 $410,567
======== ========
Although management believes that the allowance for loan losses is
adequate for its current portfolios, it will continue to review its loan
portfolio to determine the extent to which any changes in economic conditions
or loss experience may require additional provisions in the future.
Page 37
<PAGE>
ASSET AND LIABILITY MANAGEMENT
Banks and savings associations are subject to interest rate risk to the
degree that their interest-bearing liabilities, consisting principally of
deposits, securities sold under agreements to repurchase and FHLB advances,
mature or reprice more or less frequently, or on a different basis, than their
interest-earning assets. The process of planning and controlling asset and
liability mixes, volumes and maturities to influence the net interest spread is
referred to as asset and liability management. The objective of the Company's
asset and liability management is to maximize its net interest income over
changing interest rate cycles within the constraints imposed by prudent lending
and investing practices, liquidity needs and capital planning.
Golden State, through the Bank, actively pursues investment and funding
strategies intended to minimize the sensitivity of its earnings to interest
rate fluctuations while maintaining the flexibility required to execute its
business strategies. The Company measures the interest rate sensitivity of the
balance sheet through gap and duration analysis, as well as net interest income
and market value simulation, and, after taking into consideration both the
variability of rates and the maturities of various instruments, evaluates
strategies which may reduce the sensitivity of its earnings to interest rate
and market value fluctuations. An important decision is the selection of
interest-bearing liabilities and the generation of interest-earning assets
which best match relative to interest rate changes. In order to reduce interest
rate risk by increasing the percentage of interest sensitive assets, the
Company has continued its emphasis on the origination of adjustable rate
mortgage ("ARMs") products for its portfolio. The Company seeks to purchase
assets or originate real estate loans that reprice frequently or mature within
a relatively short period of time. At September 30, 1998, approximately 79% of
the Company's real estate loan portfolio consisted of ARMs.
Most ARMs are subject to periodic interest rate adjustment caps or floors.
In a period of rising interest rates, ARMs could reach a periodic adjustment
cap while still at a rate significantly below their contractual margin over
existing market rates. Since repricing liabilities are typically not subject to
such interest rate adjustment constraints, the Company's net interest margin
would most likely be negatively impacted in this situation. Certain ARMs
currently offered by the Company have a fixed monthly payment for a given
period, with any changes as a result of market interest rates reflected in the
unpaid principal balance through negative amortization. Alternatively, in a
period of declining interest rates, ARMs could reach a periodic adjustment
floor while still at a rate significantly higher than their contractual margin
over existing market rates, resulting in a positive impact to the Company's net
interest margin.
One of the most important sources of a financial institution's net income
is net interest income, which is the difference between the combined interest
earned on interest-earning assets and the combined interest paid on
interest-bearing liabilities. Net interest income is also dependent on the
relative balances of interest-earning assets and interest-bearing liabilities.
A traditional measure of interest rate risk within the savings industry is
the interest rate sensitivity gap, which is the sum of all interest-earning
assets minus the sum of all interest-bearing liabilities to be repriced within
given periods. A gap is considered positive when the interest rate sensitive
assets exceed interest rate sensitive liabilities, while the opposite results
in a negative gap. During a period of rising interest rates, a negative gap
would tend to adversely affect net interest income, and a positive gap would
tend to result in an increase in net interest income, while the opposite would
tend to occur in a period of falling rates.
Page 38
<PAGE>
The following table sets forth the projected maturities based upon
contractual maturities as adjusted for projected prepayments and "repricing
mechanisms" (provisions for changes in the interest rates), as of September 30,
1998. Prepayment rates are assumed in each period on substantially all of the
Company's loan portfolio based upon expected loan prepayments. Repricing
mechanisms on the Company's assets are subject to limitations such as caps on
the amount that interest rates and payments on its loans may adjust and,
accordingly, such assets may not respond in the same manner or to the same
extent to changes in interest rates as the Company's liabilities. In addition,
the interest rate sensitivity of the Company's assets and liabilities
illustrated in the table would vary substantially if different assumptions were
used or if actual experience differed from the assumptions set forth. The
Company's estimated interest rate sensitivity gap at September 30, 1998 is as
follows:
<TABLE>
<CAPTION>
Maturity/Rate Sensitivity
-----------------------------------------------------------
Within 1-5 Over 5 Non-interest
1 Year Years Years Bearing Total
------ ----- ------ ----------- ---------
(dollars in millions)
<S> <C> <C> <C> <C> <C>
INTEREST-EARNING ASSETS:
Securities held to maturity, interest-bearing
deposits in other banks and short-term
investment securities(1)(2) $ 636 $ $ 252 $ -- $ 888
Securities available for sale (3) 584 -- -- -- 584
Mortgage-backed securities
available for sale (3) 11,502 -- -- -- 11,502
Mortgage-backed securities
held to maturity (1)(4) 2,919 28 1 -- 2,948
Loans held for sale, net (3)(5) 1,464 -- -- -- 1,464
Loans receivable, net (1)(6) 21,491 7,410 2,235 -- 31,136
Investment in FHLB 787 -- -- -- 787
------- ------ ------ ------ -------
-- --
Total interest-earning assets 39,383 7,438 2,488 -- 49,309
Noninterest-earning assets -- -- -- 3,713 3,713
------- ------ ------ ------ -------
$39,383 $7,438 $2,488 $3,713 $53,022
======= ====== ====== ====== =======
INTEREST-BEARING LIABILITIES:
Deposits (7) $22,991 $2,300 $ (5) $ -- $25,286
Securities sold under agreements to
repurchase (1) 3,757 -- -- -- 3,757
FHLB advances (1) 9,141 4,307 3,899 -- 17,347
Other borrowings (1) 56 485 2,311 -- 2,852
------- ------ ------ ------ -------
Total interest-bearing liabilities 35,945 7,092 6,205 -- 49,242
Noninterest-bearing liabilities -- -- -- 1,334 1,334
Minority interest -- -- -- 775 775
Stockholders' equity -- -- -- 1,671 1,671
------- ------ ------ ------ -------
$35,945 $7,092 $6,205 $3,780 $53,022
======= ====== ====== ====== =======
Gap $3,438 $346 $(3,717) $67
====== ==== ======= ===
Cumulative gap $3,438 $3,784 $67 $67
====== ====== === ===
Gap as a percentage of total assets 6.5% (.6)% (7.0)% 0.1%
=== === ==== ===
Cumulative gap as a percentage of total assets 6.5% (7.1)% 0.1% 0.1%
=== ==== ==== ===
</TABLE>
- ----------
(1) Based upon (a) contractual maturity, (b) instrument repricing date, if
applicable, and (c) projected repayments and prepayments of principal, if
applicable. Prepayments were estimated generally by using the prepayment
rates forecast by various large brokerage firms as of September 30, 1998.
The actual maturity and rate sensitivity of these assets could vary
substantially if future prepayments differ from the Company's prepayment
estimates.
Page 39
<PAGE>
(2) Consists of $252 million of securities held to maturity, $44 million of
interest-bearing deposits in other banks and $592 million of short-term
investment securities.
(3) As loans held for sale and securities and mortgage-backed securities
available for sale may be sold within one year, they are considered to be
maturing within one year.
(4) Excludes underlying non-performing loans of $2 million.
(5) Excludes non-performing loans of $16 million.
(6) Excludes allowance for loan losses of $583 million and non-performing
loans of $210 million.
(7) Fixed rate deposits and deposits with a fixed pricing interval are
reflected as maturing in the year of contractual maturity or first
repricing date. Money market deposit accounts, demand deposit accounts and
passbook accounts are reflected as maturing within one year.
At September 30, 1998, interest-earning assets of the Company exceeded
interest-bearing liabilities by approximately $67 million. At December 31,
1997, interest-bearing liabilities of the Company exceeded interest-earning
assets by approximately $309 million.
The maturity/rate sensitivity analysis is a static view of the balance
sheet with assets and liabilities grouped into certain defined time periods,
and thus only partially depicts the dynamics of the Company's sensitivity to
interest rate changes. Since it is measured at a single point in time, this
analysis may not fully describe the complexity of relationships between product
features and pricing, market rates and future management of the balance sheet
mix. The Company utilizes computer modeling, under various interest rate
scenarios, to provide a dynamic view of the effects of the changes in rates,
spreads, and yield curve shifts on net interest income.
The Company's risk management policies are established by the
Asset/Liability Management Committee ("ALCO") of the Bank. ALCO meets monthly
to formulate the Bank's investment and risk management strategies. The basic
responsibilities of ALCO include management of net interest income and market
value of portfolio equity, management of liquidity to provide adequate funding,
and the establishment of asset product priorities by formulating performance
evaluation criteria, risk evaluation techniques and a system to standardize the
analysis and reporting of originations, competitive trends, profitability and
risk. On a quarterly basis, the Board of Directors of the Bank is apprised of
ALCO strategies adopted and their impact on operations, and, at least annually,
the Board of Directors of the Bank reviews the Bank's interest rate risk
management policy statements.
LIQUIDITY
The standard measure of liquidity in the savings industry is the ratio of
cash and short-term U. S. government securities and other specified securities
to deposits and borrowings due within one year. Effective November 24, 1997,
the OTS established a minimum liquidity requirement for the Bank of 4.00%, a
reduction from 5.00%, which had been in effect prior to that date in 1997.
California Federal has been in compliance with the liquidity regulations during
1998 and 1997.
A major source of the Company's funding is expected to be the Bank's
retail deposit branch network, which management believes will be sufficient to
meet its long-term liquidity needs. The ability of the Company to retain and
attract new deposits is dependent upon the variety and effectiveness of its
customer account products, customer service and convenience, and rates paid to
customers. The Company also obtains funds from the repayment and maturities of
loans and mortgage-backed securities, while additional funds can be obtained
from a variety of other sources including Brokered Deposits, loan sales,
securities sold under agreements to repurchase, FHLB advances, and other
secured and unsecured borrowings. It is anticipated that FHLB advances and
securities sold under agreements to repurchase will continue to be important
sources of funding, and management expects there to be adequate collateral for
such funding requirements.
Page 40
<PAGE>
The Company's primary uses of funds are the origination or purchase of
loans, the purchase of mortgage-backed securities, the funding of maturing
certificates of deposit, demand deposit withdrawals, the repayment of
borrowings, and the payment of dividends with respect to the REIT Preferred
Stock and the Bank Preferred Stock. Certificates of deposit scheduled to mature
during the twelve months ending September 30, 1999 aggregate $12.1 billion. The
Company may renew these certificates, attract new replacement deposits, replace
such funds with other borrowings, or it may elect to reduce the size of the
balance sheet. In addition, at September 30, 1998, Golden State had securities
sold under agreements to repurchase, FHLB advances and other borrowings
aggregating $13.0 billion maturing within twelve months. The Company may elect
to pay off such debt or to replace such borrowings with additional FHLB
advances or other borrowings at prevailing rates.
Interest on the GS Escrow Notes approximates $140.9 million per year.
Although GS Holdings expects that distributions from the Bank will be
sufficient to pay interest when due and the principal amount of its long-term
debt at maturity, there can be no assurance that earnings from the Bank will be
sufficient to make such distributions to GS Holdings. In addition, there can be
no assurance that such distributions will be permitted by the terms of any debt
instruments of GS Holdings' subsidiaries then in effect, by the terms of any
class of Preferred Stock issued by the Bank or its subsidiaries, including the
REIT Preferred Stock and the Bank Preferred Stock, or under applicable federal
thrift laws.
Since September 30, 1998, $178.7 million of the FN Holdings Notes have
been purchased in connection with the Debt Tender Offers, with related
premiums, fees and other expenses totalling $18.2 million on an after-tax
basis. At November 4, 1998, only $0.2 million of the FN Holdings 12-1/4% Notes
and $0.3 million of the FN Holdings 10-5/8% Notes remain outstanding. In
addition, $51.0 million of the 10-5/8% Preferred Stock of the Bank was
purchased by GS Holdings to date in the fourth quarter of 1998, with related
expenses and premiums of $4.8 million. Further, the Parent Holdings Defeasance
was completed on October 14, 1998, with related premiums, fees and other
expenses incurred totalling $50.6 million on an after-tax basis.
The Company anticipates that cash and cash equivalents on hand, the cash
flow from assets as well as other sources of funds will provide adequate
liquidity for its operating, investing and financing needs and the Bank's
regulatory liquidity requirements for the foreseeable future. In addition to
cash and cash equivalents of $1.2 billion at September 30, 1998, the Company
has substantial additional borrowing capacity with the FHLB and other sources.
As presented in the accompanying unaudited consolidated statements of cash
flows, the sources of liquidity vary between periods. The primary sources of
funds during the nine months ended September 30, 1998 were net loan repayments
of $1.4 billion, proceeds from sales of loans held for sale of $6.4 billion,
$17.1 billion in additional borrowings, a $1.5 billion net increase in
securities sold under agreements to repurchase and $3.0 billion in proceeds
from principal payments and maturities of securities and mortgage-backed
securities available for sale and held to maturity. The primary uses of funds
were $14.8 billion in principal payments on borrowings, $6.1 billion in
purchases of securities and mortgage-backed securities available for sale, $6.4
billion in originations of loans, $735.1 million from a net decrease in
deposits, $227.3 million and $879.9 million for the Bank Preferred Stock and
Debt Tender Offers, respectively, and $84.2 million in dividend payments.
Page 41
<PAGE>
PROBLEM AND POTENTIAL PROBLEM ASSETS
The Company considers a loan to be impaired when, based upon current
information and events, it believes it is probable that the Company will be
unable to collect all amounts due according to the contractual terms of the
loan agreement. Any insignificant delay (i.e., 60 days or less) or
insignificant shortfall in amount of payments will not cause a loan to be
considered impaired. In determining impairment, the Company considers large
non-homogeneous loans including non-performing loans, troubled debt
restructurings, and performing loans which exhibit, among other
characteristics, high LTV ratios, low debt-coverage ratios or other indications
that the borrowers are experiencing increased levels of financial difficulty.
The Company bases the measurement of collateral-dependent impaired loans on the
fair value of the loan's collateral. The amount, if any, by which the recorded
investment of the loan exceeds the measure of the impaired loan's value is
recognized by recording a valuation allowance.
At September 30, 1998, the carrying value of loans that were considered to
be impaired totalled $163.5 million (of which $28.6 million were on
non-performing status). The average recorded investment in impaired loans
during the nine months ended September 30, 1998 was approximately $165.3
million. For the nine months ended September 30, 1998, Golden State recognized
interest income on those impaired loans of $6.1 million, which included $1.2
million of interest income recognized using the cash basis method of income
recognition. The following table presents the amounts, net of specific
allowances for loan losses and purchase accounting adjustments, of the
Company's non-performing loans, foreclosed real estate, repossessed assets,
troubled debt restructurings and impaired loans as of the dates indicated.
These categories are not mutually exclusive; certain loans are included in more
than one classification.
<TABLE>
<CAPTION>
September 30,1998
--------------------------------------------------
Non-performing Impaired Restructured
-------------- -------- ------------
(in millions)
<S> <C> <C> <C>
Real Estate:
1-4 unit residential $190 $ -- $ 4
5+ unit residential 19 77 11
Commercial and other 9 80 21
Construction 1 1 --
--- ---- ---
Total real estate 219 158 36
Non-real estate 9 5 --
--- ---- ---
Total loans, net 228 $163 (b) $36 (c)
==== ===
Foreclosed real estate, net 92
Repossessed assets 3
----
Total non-performing assets $323 (a)
====
</TABLE>
<TABLE>
<CAPTION>
December 31, 1997
----------------------------------------------------
Non-performing Impaired Restructured
-------------- -------- ------------
(in millions)
<S> <C> <C> <C>
Real Estate:
1-4 unit residential $165 $ -- $ 2
5+ unit residential 12 43 43
Commercial and other 6 67 26
Construction 2 -- --
------- ------- -----
Total real estate 185 110 71
Non-real estate 7 -- --
------- ------- -----
Total loans 192 $110 (b) $71 (c)
==== ===
Foreclosed real estate, net 77
Repossessed assets 3
-------
Total non-performing assets $272 (a)
=======
</TABLE>
- -----------
(a) Includes loans securitized with recourse on non-performing status of $2.3
million and $5.2 million at September 30, 1998 and December 31, 1997,
respectively, and loans held for sale on non-performing status of $16.1
million and $1.2 million at September 30, 1998 and December 31, 1997.
Page 42
<PAGE>
(b) Includes $28.6 million and $18.6 million of loans on non-performing status
at September 30, 1998 and December 31, 1997, respectively. Also includes
$38.3 million and $17.5 million of loans classified as troubled debt
restructurings at September 30, 1998 and December 31, 1997, respectively.
(c) Includes non-performing loans of $0.7 million and $2.1 million at
September 30, 1998 and December 31, 1997, respectively. At December 31,
1997, $1.7 million of these non-performing troubled debt restructurings
were also considered impaired.
There were no accruing loans contractually past due 90 days or more at
September 30, 1998 or December 31,
1997.
Golden State's non-performing assets, consisting of non-performing loans,
net of purchase accounting adjustments, foreclosed real estate, net, and
repossessed assets, increased to $323 million at September 30, 1998, from $272
million at December 31, 1997, primarily as a result of assets acquired in the
Golden State Acquisition. However, non-performing assets as a percentage of the
Bank's total assets decreased to 0.62% at September 30, 1998, from 0.87% at
December 31, 1997.
Golden State, through the Bank, manages its credit risk by regularly
assessing the current and estimated future performance of the real estate
markets in which it operates. The Company has three distinct asset management
functions: performing loan asset management, problem loan asset management and
credit review. These three functions are charged with the responsibility of
reducing the risk profile within the residential, commercial and multi-family
asset portfolios by applying asset management and risk evaluation techniques
that are consistent with the Company's portfolio management strategy and
regulatory requirements. In addition to these asset management functions, the
Company has a specialized credit risk management group that is charged with the
development of credit policies and performing credit risk analyses for all
asset portfolios.
The following table presents non-performing real estate assets by
geographic region of the country as of September 30, 1998:
<TABLE>
<CAPTION>
Total
Non-performing Foreclosed Non-performing
Real Estate Real Estate, Real Estate Geographic
Loans, Net (2) Net (2) Assets Concentration
-------------- -------- ------ -------------
(dollars in millions)
<S> <C> <C> <C> <C>
Region:
California $142 $63 $205 65.96%
Northeast (1) 27 9 36 11.42
Other regions 50 20 70 22.62
------ ---- ------ -------
Total $219 $92 $311 100.00%
==== === ==== ======
</TABLE>
- ----------------
(1) Includes Connecticut, Delaware, Maine, Maryland, Massachusetts, New
Hampshire, New Jersey, New York, Pennsylvania, Rhode Island and Vermont.
(2) Net of purchase accounting adjustments and specific allowances for losses.
Page 43
<PAGE>
At September 30, 1998, the Company's largest non-performing asset was
approximately $5.1 million, and it had four non-performing assets over $2
million in size with balances averaging approximately $3.4 million. The Company
has 1,815 non-performing assets below $2 million in size, including 1,677
non-performing 1-4 unit residential assets.A summary of the activity in the
allowance for loan losses by loan type is as follows for the nine months ended
September 30, 1998:
<TABLE>
<CAPTION>
5+ Unit
Residential
1-4 Unit and Commercial Consumer
Residential Real Estate and Other Total
----------- --------------- --------- -----
(dollars in millions)
<S> <C> <C> <C> <C>
Balance - December 31, 1997 $202 $198 $19 $419
Purchase - Golden State Acquisition 50 78 41 169
Provision for loan losses 19 7 4 30
Charge-offs (25) (7) (6) (38)
Recoveries 2 -- 1 3
------ ------- ----- -------
Balance - September 30, 1998 $248 $276 $59 $583
==== ==== === ====
</TABLE>
The ratio of allowance for loan losses to non-performing loans at
September 30, 1998 and December 31, 1997 was 255.7% and 217.8%, respectively.
MORTGAGE BANKING OPERATIONS
Since 1994, the Bank, through its wholly owned mortgage bank subsidiary,
First Nationwide Mortgage Corporation ("FNMC"), has significantly expanded its
mortgage banking operations. During January 1998, FNMC acquired
mortgage-servicing assets of $3.6 billion, as a result of bulk servicing
acquisitions. With the consummation of the bulk servicing acquisitions, the
acquisition of additional 1-4 unit residential loan servicing portfolios in the
Golden State Acquisition and the originated servicing, the 1-4 unit residential
loans serviced for others totalled $69.3 billion at September 30, 1998, an
increase of $21.8 billion and $21.9 billion from December 31, 1997 and
September 30, 1997, respectively. During the nine months ended September 30,
1998, the Bank, through FNMC, originated $6.4 billion and sold (with servicing
retained) $6.3 billion of 1-4 unit residential loans. Gross revenues from
mortgage loan servicing activities for the nine months ended September 30, 1998
totalled $192.8 million, an increase of $7.7 million from the nine months ended
September 30, 1997.
A decline in long-term interest rates generally results in an acceleration
of mortgage loan prepayments. Higher than anticipated levels of prepayments
generally cause the accelerated amortization of mortgage servicing rights
("MSRs"), and generally will result in a reduction in the market value of MSRs
and in the Company's servicing fee income. To reduce the sensitivity of its
earnings to interest rate and market value fluctuations, the Company hedged the
change in value of its MSRs based on changes in interest rates ("MSR Hedge").
At September 30, 1998, FNMC was a party to several interest rate floor
contracts maturing from August 2001 through January 2003. The Company paid
counterparties a premium in exchange for cash payments in the event that the
10-year Constant Maturity Treasury rate falls below negotiated prices. At
September 30, 1998, the notional amount of the interest rate floors was $1.3
billion and the strike prices were between 5.5% and 6.5%. In addition, FNMC was
a party to swap agreements related to principal-only mortgage-backed securities
and prepayment-linked swap agreements with a remaining notional amount of
$110.7 million and $818.2 million, respectively. At September 30, 1998, the
Company was also a party to options on swap agreements ("swaptions") with a
notional amount of $300.0 million. The estimated market values of interest rate
floor contracts, swaps and swaptions designated as hedges against MSRs at
September 30, 1998 were $52.0 million, $24.0 million and $12.7 million,
respectively.
Page 44
<PAGE>
The following is a summary of activity in MSRs and the MSR Hedge for the nine
months ended September 30, 1998 (in thousands):
<TABLE>
<CAPTION>
Total MSR
MSRs MSR Hedge Balance
---- --------- ---------
<S> <C> <C> <C>
Balance at December 31, 1997 $ 531,269 $ 5,434 $ 536,703
Additions - Glendale Federal 214,085 -- 214,085
Additions - bulk purchases 57,136 -- 57,136
Originated servicing 138,503 -- 138,503
Additions - other 40,338 -- 40,338
Additions to MSR Hedge -- 19,999 19,999
Sale of servicing rights (1,057) -- (1,057)
Payments received under interest rate floor contracts -- (6,296) (6,296)
Net payments made under principal-only agreements -- (19,809) (19,809)
Net payments made under futures contracts -- 1,654 1,654
Amortization (88,376) (3,627) (92,003)
--------- --------- ---------
Balance at September 30, 1998 $ 891,898 $ (2,645) $ 889,253
========= ========= =========
</TABLE>
Capitalized mortgage servicing rights are amortized in proportion to, and
over the period of, estimated future net servicing income. SFAS No. 125
requires enterprises to measure the impairment of servicing rights based on the
difference between the carrying amount of the servicing rights and their
current fair value. At September 30, 1998 and December 31, 1997, no allowance
for impairment of the mortgage servicing rights was necessary.
CAPITAL RESOURCES
OTS capital regulations require savings associations to satisfy three
minimum capital requirements: tangible capital, core (leverage) capital and
risk-based capital. In general, an association's tangible capital, which must
be at least 1.5% of adjusted total assets, is the sum of common stockholders'
equity (including retained earnings), noncumulative perpetual preferred stock
and minority interest in equity accounts of fully consolidated subsidiaries,
less disallowed intangibles. An association's ratio of core capital to adjusted
total assets (the "core capital ratio") must be at least 4%, recently amended
from 3% which had been in effect prior to March 1998. Core capital generally is
the sum of tangible capital plus certain qualifying intangibles. Under the
risk-based capital requirement, a savings association must have total capital
(core capital plus supplementary capital) equal to at least 8% of risk-weighted
assets (which equals assets plus the credit risk equivalent of certain
off-balance sheet items, each multiplied by the appropriate risk weight).
Supplementary capital, which may not exceed 100% of core capital for purposes
of the risk-based requirements, includes, among other things, certain permanent
capital instruments such as qualifying cumulative perpetual preferred stock, as
well as some forms of term capital instruments, such as qualifying subordinated
debt. The capital requirements are viewed as minimum standards by the OTS, and
most associations are expected to maintain capital levels well above the
minimum. In addition, the OTS regulations provide that minimum capital levels
higher than those provided in the regulations may be established by the OTS for
individual savings associations, depending upon their particular circumstances.
The Bank is not subject to any such individual minimum regulatory capital
requirement. These capital requirements are applicable to the Bank but not to
Golden State.
Page 45
<PAGE>
At September 30, 1998, the Bank's regulatory capital levels exceeded the
minimum regulatory capital requirements, with tangible, core and risk-based
capital ratios of 5.37%, 5.37% and 11.57%, respectively. The following is a
reconciliation of the Bank's stockholders' equity to regulatory capital as of
September 30, 1998:
<TABLE>
<CAPTION>
Tangible Core Risk-based
Capital Capital Capital
-------- ------- ---------
(dollars in millions)
<S> <C> <C> <C>
Stockholders' equity of the Bank at September 30, 1998 $ 3,607 $ 3,607 $ 3,607
Minority interest - REIT Preferred Stock 500 500 500
Unrealized (gain) loss on securities available for sale
debt securities (40) (40) (40)
Non-qualifying MSRs (89) (89) (89)
Non-allowable capital:
Intangible assets (941) (941) (941)
Goodwill Litigation Assets (160) (160) (160)
Investment in subsidiaries (69) (69) (69)
Excess deferred tax asset (68) (68) (68)
Supplemental capital:
Qualifying subordinated debt debentures -- -- 94
General loan loss allowance -- -- 342
Assets required to be deducted:
Low level recourse deduction -- -- (12)
Equity in subsidiaries -- -- (20)
Land loans with more than 80% LTV ratio
-- -- (2)
------- ------- -------
Regulatory capital of the Bank 2,740 2,740 3,142
Minimum regulatory capital requirement 765 2,040 2,173
------- ------- -------
Excess above minimum capital requirement $ 1,975 $ 700 $ 969
======= ======= =======
Regulatory capital of the Bank 5.37% 5.37% 11.57%
Minimum regulatory capital requirement 1.50 4.00 8.00
------- ------- -------
Excess above minimum capital requirement 3.87% 1.37% 3.57%
======= ======= =======
</TABLE>
The amount of adjusted total assets used for the tangible and core capital
ratios is $51.0 billion. Risk-weighted assets used for the risk-based capital
ratio amounted to $27.2 billion.
The Bank is also subject to the "prompt corrective action" standards
prescribed in the FDICIA and related OTS regulations, which, among other
things, define specific capital categories based on an association's capital
ratios. The capital categories, in declining order, are "well capitalized,"
"adequately capitalized," "undercapitalized," "significantly undercapitalized,"
and "critically undercapitalized." Associations categorized as
"undercapitalized" or worse are subject to certain restrictions, including the
requirement to file a capital plan with the OTS, prohibitions on the payment of
dividends and management fees, restrictions on executive compensation, and
increased supervisory monitoring, among other things. Other restrictions may be
imposed on the association either by the OTS or by the FDIC, including
requirements to raise additional capital, sell assets, or sell the entire
association. Once an association becomes "critically undercapitalized" it is
generally placed in receivership or conservatorship within 90 days.
Page 46
<PAGE>
To be considered "well capitalized," a savings association must generally
have a leverage capital ratio of at least 5.00%, a Tier 1 (core capital)
risk-based capital ratio of at least 6.00%, and a total risk-based capital
ratio of at least 10.00%. An association is deemed to be "critically
undercapitalized" if it has a tangible equity ratio of 2.00% or less. At
September 30, 1998, California Federal's capital levels were sufficient for it
to be considered "well capitalized:"
<TABLE>
<CAPTION>
Risk-based
Leverage --------------------------
Capital Tier 1 Total Capital
-------- ------ -------------
<S> <C> <C> <C>
Regulatory capital of the Bank 5.37% 10.09% 11.57%
"Well capitalized" ratio 5.00 6.00 10.00
---- ---- -----
Excess above "well capitalized" ratio 0.37% 4.09% 1.57%
==== ==== =====
</TABLE>
OTS capital regulations allow a savings association to include a net
deferred tax asset in regulatory capital, subject to certain limitations. To
the extent that the realization of a deferred tax asset depends on a savings
association's future taxable income, such deferred tax asset is limited for
regulatory capital purposes to the lesser of the amount that can be realized
within one year or 10 percent of core capital. At September 30, 1998, $68
million of the net tax benefit was determined to be attributable to the amount
of taxable income that may be realized in periods beyond one year. Accordingly,
such amount has been excluded from the Bank's regulatory capital at September
30, 1998.
DISCLOSURES ABOUT MARKET RISK
There have been no material changes in reported market risks faced by the
Company since Parent Holdings' report in Item 7A of its Form 10-K for the year
ended December 31, 1997.
Page 47
<PAGE>
PART II - OTHER INFORMATION
ITEM 1. LEGAL PROCEEDINGS
Goodwill Litigation Against the Government
The Bank is the plaintiff in a claim against the United States in the
lawsuit, California Federal Bank v. United States, Civil Action No. 92-138C
(the "California Federal Litigation"). In the California Federal Litigation,
the Bank alleges, among other things, that the United States breached certain
contractual commitments regarding the computation of its regulatory capital for
which the Bank seeks damages and restitution. The Bank's claims arose from
changes, mandated by the Financial Institutions Reform, Recovery and
Enforcement Act of 1989 ("FIRREA"), with respect to the rules for computing Old
California Federal's regulatory capital.
On July 1, 1996, the United States Supreme Court issued its opinion for
United States v. Winstar Corporation, No. 95-865, which affirmed the decisions
of the United States Court of Appeals for the Federal Circuit and the United
States Court of Federal Claims in various consolidated cases (the "Winstar
Cases") granting summary judgment to the plaintiff thrift institutions on the
liability portion of their breach of contract claims against the United States.
The Supreme Court held that the government breached certain express contracts
when Congress enacted FIRREA, and the Supreme Court remanded the proceedings
for a determination of the appropriate measure and amount of damages, which to
date have not been awarded.
On October 30, 1996, Old California Federal filed a motion for partial
summary judgment as to the Federal government's liability to the Bank for
breach of contract, which was opposed by the Federal government. In addition,
the government filed a cross-motion for partial summary judgment as to certain
liability issues. A hearing on the motions for partial summary judgment on
liability was held on August 7, 1997. On December 22, 1997, a U.S. Claims Court
Judge ruled in favor of this motion to establish the government's liability,
and a formal order in that regard was subsequently issued on July 16, 1998. On
November 12, 1998, a U.S. Claims Court Judge ruled that California Federal
cannot meet its burden for proving expectancy damages and ordered that the case
will proceed to trial beginning December 7, 1998 on the damages issue of
restitution and reliance.
In connection with the Glen Fed Merger, the Bank is a plaintiff in a claim
against the United States in the lawsuit, Glendale Federal Bank, Federal
Savings Bank v. United States, No. 90-772C ("the Glendale Goodwill
Litigation"). In the Glendale Goodwill Litigation, Glendale Federal 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 had merged with a Florida thrift
and was permitted to include the goodwill resulting from the merger in its
regulatory capital. In July 1992, the United States Court of Federal Claims
(the "Claims Court") found in favor of Glendale Federal's position, ruling that
the Government breached its express contractual commitment to permit Glendale
Federal to include supervisory goodwill in its regulatory capital and that
Glendale Federal is entitled to seek financial compensation.
The trial to determine damages commenced in the Claims Court on February
24, 1997 and the taking of testimony in the trial was completed on April 9,
1998. In lieu of traditional closing briefs, the Claims Court requested the
parties to respond to a series of written questions posed by the Court
regarding factual and legal issues raised in the damages trial. Responses to
those questions, as well as each party's reply to the other's responses, have
been filed with the Court and final oral arguments were held on September 11,
1998. California Federal anticipates a decision by the early 1999.
In connection with the Cal Fed Acquisition, the Company recorded as an
asset part of the estimated after-tax cash recovery from the California Federal
Litigation that will inure to the Company, net of amounts payable to holders of
the Litigation Interests and the Secondary Litigation Interests in any such
recovery (the "Goodwill Litigation Asset"). In connection with the Golden State
Acquisition, the Company recorded a second Goodwill Litigation Asset related to
the estimated after-tax cash recovery from the Glendale Goodwill Litigation
that will inure to the Company, net of amounts payable to holders of the
Litigation Tracking Warrants. The Goodwill Litigation Asset related to the
California Federal Litigation was recorded at its estimated fair value of $100
million, net of estimated tax liabilities, as of January 3, 1997. The Goodwill
Litigation Asset related to the Glendale Goodwill Litigation was recorded at
its estimated fair value of $60 million, net of estimated tax liabilities, as
of September 11, 1998. Both Goodwill Litigation Assets are included in the
consolidated balance sheet as of September 30, 1998.
Page 48
<PAGE>
Golden State Acquisition Litigation
Following the public announcement on February 5, 1998 of the Golden State
Merger agreement ("Merger Agreement") and the proposed mergers, several
separate purported class action lawsuits (collectively, the "Delaware
Litigation") were filed by certain stockholders of Golden State naming Golden
State, its individual directors and, in certain cases, FN Holdings and
MacAndrews & Forbes as defendants. The Delaware Litigation was consolidated
into one action in the Court of Chancery in Delaware captioned In re Golden
State Bancorp Inc. Shareholders Litigation, Consolidated C.A. No. 16175NC. The
plaintiffs in the Delaware Litigation have alleged, among other things, that
the individual members of Golden State's board of directors have breached their
fiduciary duties to Golden State's stockholders by entering into the Merger
Agreement. The plaintiffs are seeking, on behalf of themselves all similarly
situated stockholders of Golden State, among other things, (i) class
certification, (ii) an order enjoining, preliminarily and permanently, the
mergers, or, in the event the mergers are consummated prior to the entry of a
final order, rescission of the mergers and/or damages, including rescissory
damages, and (iii) costs and disbursements, including attorney's fees. In
addition, several purported class action complaints alleging substantially
similar claims, and seeking substantially similar relief, have been filed in
Los Angeles Superior Court in the State of California. The plaintiffs in such
actions have agreed to a stay of such actions pending disposition of the
Delaware Litigation. A settlement in principle has been reached among counsel
for the parties in both the Delaware Litigation and the California litigation,
subject to court approval and other conditions. The terms of the proposed
settlement provided, among other things, that Golden State supply certain
additional information to shareholders in the proxy statement disseminated in
connection with the special meeting of Golden State shareholders held on August
17, 1998 and such information was included. Defendants have agreed, in
connection with the contemplated settlement, not to oppose an award of
attorney's fees to plaintiffs' counsel in an amount provided for in the
agreement. Such amount is not material to Golden State.
Other Litigation
In addition to the matters described above, Golden State and California
Federal are involved in legal proceedings on claims incidental to the normal
conduct of their business. Although it is impossible to predict the outcome of
any outstanding legal proceedings, management believes that such legal
proceedings and claims, individually or in the aggregate, will not have a
material effect on the financial condition or results of operations of the
Company.
ITEM 2. CHANGES IN SECURITIES.
None.
ITEM 3. DEFAULTS UPON SENIOR SECURITIES.
None.
ITEM 4. SUBMISSION OF MATTERS TO A VOTE OF SECURITY HOLDERS.
None.
ITEM 5. OTHER INFORMATION.
None.
Page 49
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ITEM 6. EXHIBITS AND REPORTS ON FORM 8-K
(a) Exhibits:
3.1 Certificate of Incorporation of the Registrant, as amended.
(Incorporated by reference to Exhibits 3.1 and 3.2 to the
Registrant's Annual Report on Form 10-K for the year ended
June 30, 1998)
3.2 By-laws of the Registrant, as amended.
27.1 Financial Data Schedule
(b) Reports on Form 8-K:
During the quarter ended September 30, 1998, the Company made one
filing on Form 8-K:
1. Filing dated September 11, 1998, reporting on item 2,
"Acquisition or Disposition of Assets" and item 7, "Financial
Statements, Pro forma Financial Information and Exhibits." This
filing reported that Golden State Bancorp Inc. and its
subsidiaries consummated the transactions contemplated by the
Agreement and Plan of Reorganization, dated as of February 4,
1998, as amended (the "Agreement") by and among Golden State, GS
Financial, Parent Holdings, FN Holdings, First Gibraltar and
Hunter's Glen. Pursuant to the Agreement, FN Holdings merged with
and into GS Financial, Parent Holdings merged with and into
Golden State, and Glendale Federal merged with and into
California Federal. This filing included the following unaudited
financial statements:
Pro Forma Condensed Combined Statement of Financial Condition
as of June 30, 1998.
Pro Forma Condensed Combined Statement of Operations for the
six months ended June 30, 1998.
Pro Forma Condensed Combined Statement of Operations for the
year ended December 31, 1997.
Page 50
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SIGNATURES
Pursuant to the requirements of the Securities Exchange Act of 1934, the
Registrant has duly caused this report to be signed on its behalf by the
undersigned thereunto duly authorized.
Golden State Bancorp Inc.
/s/ Richard H. Terzian
---------------------------------------------------------
By: Richard H. Terzian
Executive Vice President and Chief Financial Officer
(Signing on behalf of the Registrant and as the
Principal Financial Officer)
/s/ Renee Nichols Tucei
---------------------------------------------------------
By: Renee Nichols Tucei
Senior Vice President and Controller
(Signing as the Principal Accounting Officer)
November 12, 1998
Page 51
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BYLAWS OF GOLDEN STATE BANCORP INC.
Adopted June 23, 1997
As Amended September 8, 1998
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. The annual 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 on such date and time as shall
be designated from time to time by the Board and stated 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.
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
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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 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
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originally called. The stockholders present at a duly organized meeting may
continue to transact business until adjournment, notwithstanding the withdrawal
of enough stock holders 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.
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
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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 Chairman from among its members, and shall designate, when present,
either the Chairman or the President or a Vice Chairman to preside at its
meeting.
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, a 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 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 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 changes in
the authorized number of directors, each director then continuing to serve as
such shall nevertheless continue as a director
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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.
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 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.
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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 II 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.
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 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
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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.
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.
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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 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 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.
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, 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 or her successor shall have
been duly elected and qualified or until his or her death, resignation or
removal in the manner hereinafter provided. Election or appointment of an
officer, employee or agent shall not by itself
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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.
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, CHECK 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
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
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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 31st day of
December 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
CORPORATE SEAL
The corporation seal of the Corporation shall be in such form as the
Board shall prescribe.
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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, suite 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 reasonable 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, 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
11
<PAGE>
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, suite 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 I 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
Section 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 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
12
<PAGE>
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 as met the applicable standard of conduct set forth in Sections I 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
I 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.
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
13
<PAGE>
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 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
Corporation Law is amended after approval by the stockholders of this Article
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.
14
<TABLE> <S> <C>
<PAGE>
<ARTICLE> 9
<LEGEND>
This schedule contains summary financial information extracted from the
consolidated balance sheets and statements of income found on pages 3 and 4 of
the Company's unaudited financial statements for the nine months ended September
30, 1998.
</LEGEND>
<CIK> 0001019508
<NAME> GOLDEN STATE BANCORP INC.
<MULTIPLIER> 1,000
<CURRENCY> USD
<S> <C>
<PERIOD-TYPE> 9-MOS
<FISCAL-YEAR-END> DEC-31-1998
<PERIOD-START> JAN-01-1998
<PERIOD-END> SEP-30-1998
<EXCHANGE-RATE> 1
<CASH> 552,762
<INT-BEARING-DEPOSITS> 44,263
<FED-FUNDS-SOLD> 0
<TRADING-ASSETS> 0
<INVESTMENTS-HELD-FOR-SALE> 12,085,739
<INVESTMENTS-CARRYING> 3,202,463
<INVESTMENTS-MARKET> 3,202,463
<LOANS> 32,243,034<F1>
<ALLOWANCE> 582,782
<TOTAL-ASSETS> 53,022,372
<DEPOSITS> 25,285,628
<SHORT-TERM> 11,207,642
<LIABILITIES-OTHER> 1,334,166
<LONG-TERM> 12,748,043
0
3
<COMMON> 128,655
<OTHER-SE> 1,542,706
<TOTAL-LIABILITIES-AND-EQUITY> 53,022,372
<INTEREST-LOAN> 1,254,904
<INTEREST-INVEST> 440,393
<INTEREST-OTHER> 0
<INTEREST-TOTAL> 1,695,297
<INTEREST-DEPOSIT> 545,734
<INTEREST-EXPENSE> 1,238,359
<INTEREST-INCOME-NET> 456,938
<LOAN-LOSSES> 30,000
<SECURITIES-GAINS> 928
<EXPENSE-OTHER> 497,260
<INCOME-PRETAX> 313,738
<INCOME-PRE-EXTRAORDINARY> 382,985
<EXTRAORDINARY> 80,007
<CHANGES> 0
<NET-INCOME> 302,978
<EPS-PRIMARY> 0
<EPS-DILUTED> 0
<YIELD-ACTUAL> 7.31
<LOANS-NON> 227,895
<LOANS-PAST> 0
<LOANS-TROUBLED> 35,573
<LOANS-PROBLEM> 96,579
<ALLOWANCE-OPEN> 418,674
<CHARGE-OFFS> 37,832
<RECOVERIES> 2,486
<ALLOWANCE-CLOSE> 582,782
<ALLOWANCE-DOMESTIC> 16,597
<ALLOWANCE-FOREIGN> 0
<ALLOWANCE-UNALLOCATED> 566,185
<FN>
<F1>Tag 17 - Loans includes Loans held for sale of $1,479,686 and Allowance for
loan losses of $582,782
</FN>
</TABLE>
