<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 March 31, 1999
-------------------------------------------------
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
incorporation or organization) Identification No.)
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 April 30, 1999: 133,833,799 shares of
common stock.
Page 1 of 36 pages
Exhibit index on page: 35
Page 1
<PAGE>
GOLDEN STATE BANCORP INC.
FIRST QUARTER 1999 REPORT ON FORM 10-Q
TABLE OF CONTENTS
<TABLE>
<CAPTION>
Page No.
PART I. FINANCIAL INFORMATION
<S> <C> <C>
Item 1. Consolidated Financial Statements
Unaudited Consolidated Balance Sheets
March 31, 1999 and December 31, 1998.................................3
Unaudited Consolidated Statements of Income
Three months ended March 31, 1999 and 1998...........................4
Unaudited Consolidated Statements of Comprehensive Income
Three months ended March 31, 1999 and 1998...........................5
Unaudited Consolidated Statement of Stockholders' Equity
Three months ended March 31, 1999....................................6
Unaudited Consolidated Statements of Cash Flows
Three months ended March 31, 1999 and 1998...........................7
Notes to Unaudited Consolidated Financial Statements.................9
Item 2. Management's Discussion and Analysis of
Financial Condition and Results of Operations.......................15
PART II. OTHER INFORMATION
Item 1. Legal Proceedings...................................................34
Item 2. Changes in Securities...............................................34
Item 3. Defaults Upon Senior Securities.....................................34
Item 4. Submission of Matters to a Vote of Security Holders.................34
Item 5. Other Information...................................................35
Item 6. Exhibits and Reports on Form 8-K....................................35
Signatures......................................................................36
</TABLE>
Page 2
<PAGE>
GOLDEN STATE BANCORP INC. AND SUBSIDIARIES
CONSOLIDATED BALANCE SHEETS
MARCH 31, 1999 AND DECEMBER 31, 1998
(Unaudited)
(dollars in thousands, except per share data)
<TABLE>
<CAPTION>
March 31, December 31,
Assets 1999 1998
------ ---- ----
<S> <C> <C>
Cash and amounts due from banks $ 568,681 $ 854,954
Interest-bearing deposits in other banks 25,009 52,671
Short-term investment securities 67,344 60,325
----------- -----------
Cash and cash equivalents 661,034 967,950
Securities available for sale, at fair value 1,199,731 770,747
Securities held to maturity 252,125 250,964
Mortgage-backed securities available for sale, at fair value 14,060,187 12,947,992
Mortgage-backed securities held to maturity 2,583,644 2,770,913
Loans held for sale, net 2,111,735 2,366,583
Loans receivable, net 30,719,920 30,280,944
Investment in Federal Home Loan Bank ("FHLB") System 1,096,888 1,000,147
Premises and equipment, net 343,777 336,874
Foreclosed real estate, net 70,197 80,068
Accrued interest receivable 320,308 317,455
Intangible assets (net of accumulated amortization of $130,867
at March 31, 1999 and $113,709 at December 31, 1998) 906,440 923,598
Mortgage servicing rights 1,024,793 943,581
Other assets 881,319 911,168
----------- -----------
Total assets $56,232,098 $54,868,984
=========== ===========
Liabilities, Minority Interest and Stockholders' Equity
-------------------------------------------------------
Deposits $23,798,962 $24,620,066
Securities sold under agreements to repurchase 4,650,291 4,238,395
Borrowings 24,166,147 22,375,557
Other liabilities 1,382,509 1,459,750
----------- -----------
Total liabilities 53,997,909 52,693,768
----------- -----------
Commitments and contingencies -- --
Minority interest 593,479 593,438
Stockholders' equity:
Common stock ($1.00 par value, 250,000,000 shares
authorized, 134,445,365 and 128,687,763 shares issued at
March 31, 1999 and December 31, 1998, respectively) 134,445 128,688
Additional paid-in capital 1,390,456 1,392,155
Accumulated other comprehensive (loss) income (10,000) 6,151
Retained earnings (substantially restricted) 127,347 56,471
Treasury stock (82,061 and 89,994 shares at March 31, 1999 and
December 31, 1998, respectively) (1,538) (1,687)
----------- -----------
Total stockholders' equity 1,640,710 1,581,778
----------- -----------
Total liabilities, minority interest and stockholders' equity $56,232,098 $54,868,984
=========== ===========
</TABLE>
See accompanying notes to unaudited consolidated financial statements.
Page 3
<PAGE>
GOLDEN STATE BANCORP INC. AND SUBSIDIARIES
CONSOLIDATED STATEMENTS OF INCOME
THREE MONTHS ENDED MARCH 31, 1999 AND 1998
(Unaudited)
(dollars in thousands, except per share data)
<TABLE>
<CAPTION>
Three Months Ended March 31,
----------------------------
1999 1998
---- ----
Interest income:
<S> <C> <C>
Loans receivable $ 567,273 $ 384,720
Mortgage-backed securities available for sale 204,054 81,502
Mortgage-backed securities held to maturity 50,429 24,857
Loans held for sale 34,648 27,336
Securities available for sale 18,424 13,723
Securities held to maturity 3,460 874
Interest-bearing deposits in other banks 1,039 410
Dividends on FHLB stock 13,556 7,007
--------- ---------
Total interest income 892,883 540,429
--------- ---------
Interest expense:
Deposits 221,996 178,175
Securities sold under agreements to repurchase 54,048 26,528
Borrowings 308,823 178,163
--------- ---------
Total interest expense 584,867 382,866
--------- ---------
Net interest income 308,016 157,563
Provision for loan losses 5,000 10,000
--------- ---------
Net interest income after provision for loan losses 303,016 147,563
--------- ---------
Noninterest income:
Loan servicing fees, net 35,968 36,962
Customer banking fees and service charges 44,746 25,346
Gain on sale of loans, net 15,589 14,505
Gain (loss) on sale of assets, net 174 (379)
Other income 8,691 6,337
--------- ---------
Total noninterest income 105,168 82,771
--------- ---------
Noninterest expense:
Compensation and employee benefits 103,011 62,981
Occupancy and equipment 39,793 21,483
Loan expense 12,178 9,595
Professional fees 14,038 8,710
Marketing 8,802 3,505
Data processing 5,712 2,840
Savings Association Insurance Fund deposit insurance premium 3,856 2,573
Foreclosed real estate operations, net (673) (1,720)
Merger and integration costs 6,082 --
Amortization of intangible assets 17,158 11,089
Other 47,892 24,200
--------- ---------
Total noninterest expense 257,849 145,256
--------- ---------
Income before income taxes and minority interest 150,335 85,078
Income tax expense 70,292 13,890
--------- ---------
Income before minority interest 80,043 71,188
Minority interest 9,167 23,530
--------- ---------
Net income $ 70,876 $ 47,658
========= =========
Earnings per share:
Basic $ 0.53 $ 0.84
Diluted $ 0.50 $ 0.84
</TABLE>
See accompanying notes to unaudited consolidated financial statements.
Page 4
<PAGE>
GOLDEN STATE BANCORP INC. AND SUBSIDIARIES
CONSOLIDATED STATEMENTS OF COMPREHENSIVE INCOME
THREE MONTHS ENDED MARCH 31, 1999 AND 1998
(Unaudited)
(in thousands)
<TABLE>
<CAPTION>
Three Months Ended March 31,
----------------------------
1999 1998
---- ----
<S> <C> <C>
Net income $70,876 $47,658
Other comprehensive loss, net of tax:
Unrealized holding loss on securities available for sale:
Unrealized holding loss arising during the period (15,979) (3,855)
Less: reclassification adjustment for gain included
in net income (172) (148)
------- -------
Other comprehensive loss (16,151) (4,003)
------- -------
Comprehensive income $54,725 $43,655
======= =======
</TABLE>
See accompanying notes to unaudited consolidated financial statements.
Page 5
<PAGE>
GOLDEN STATE BANCORP INC. AND SUBSIDIARIES
CONSOLIDATED STATEMENT OF STOCKHOLDERS' EQUITY
THREE MONTHS ENDED MARCH 31, 1999
(Unaudited)
(dollars in thousands, except share data)
<TABLE>
<CAPTION>
Accumulated
Additional Other Common Stock Total
Common Stock Paid-in Comprehensive Retained in Treasury Stockholders'
Shares Amount Capital Income Earnings Shares Amount Equity
------ ------ ------- ------ -------- ------ ------ ------
<S> <C> <C> <C> <C> <C> <C> <C> <C>
Balance at December 31, 1998 128,687,763 $128,688 $1,392,155 $6,151 $ 56,471 (89,994) $(1,687) $1,581,778
Net income -- -- -- -- 70,876 -- -- 70,876
Change in net unrealized
holding gain/(loss) on -- -- -- (16,151) -- -- -- (16,151)
securities available for sale
Issuance of contingent shares 5,540,319 5,540 (5,540) -- -- -- -- --
Exercise of stock options 217,283 217 3,897 -- -- -- -- 4,114
Sale of common stock in
treasury -- -- (56) -- -- 7,933 149 93
----------- -------- ---------- -------- -------- -------- -------- ----------
Balance at March 31, 1999 134,445,365 $134,445 $1,390,456 $(10,000) $127,347 (82,061) $(1,538) $1,640,710
=========== ======== ========== ======== ======== ======== ======== ==========
</TABLE>
See accompanying notes to unaudited consolidated financial statements.
Page 6
<PAGE>
GOLDEN STATE BANCORP INC. AND SUBSIDIARIES
CONSOLIDATED STATEMENTS OF CASH FLOWS
THREE MONTHS ENDED MARCH 31, 1999 AND 1998
(Unaudited)
(in thousands)
<TABLE>
<CAPTION>
Three Months Ended March 31,
----------------------------
1999 1998
---- ----
<S> <C> <C>
Cash flows from operating activities:
Net income $ 70,876 $ 47,658
Adjustments to reconcile net income to net cash provided by (used in) operating
activities:
Amortization of intangible assets 17,158 11,089
Amortization (accretion) of purchase accounting premiums
and discounts, net 5,597 (2,239)
Accretion of discount on borrowings 245 186
Amortization of mortgage servicing rights 51,301 27,218
Provision for loan losses 5,000 10,000
(Gain) loss on sale of assets, net (174) 379
Loss on sale of branches -- 86
Gain on sale of foreclosed real estate (2,650) (3,812)
Loss on sale of loans, net 40,738 24,473
Depreciation and amortization of premises and equipment 9,430 5,469
Amortization of deferred debt issuance costs 1,785 2,159
FHLB stock dividends (13,556) (7,007)
Capitalization of originated mortgage servicing rights (56,328) (38,978)
Purchases and originations of loans held for sale (2,920,752) (2,267,462)
Net proceeds from the sale of loans held for sale 3,134,862 1,835,401
Decrease (increase) in other assets 27,966 (11,174)
Increase in accrued interest receivable (2,853) (7,852)
(Decrease) increase in other liabilities (99,274) 36,000
Minority interest 9,167 23,530
---------- ----------
Net cash provided by (used in) operating activities 278,538 (314,876)
---------- ----------
</TABLE>
See accompanying notes to unaudited consolidated financial statements.
(Continued)
Page 7
<PAGE>
GOLDEN STATE BANCORP INC. AND SUBSIDIARIES
CONSOLIDATED STATEMENTS OF CASH FLOWS
THREE MONTHS ENDED MARCH 31, 1999 AND 1998
(Unaudited)
(in thousands)
<TABLE>
<CAPTION>
Three Months Ended March 31,
----------------------------
1999 1998
---- ----
<S> <C> <C>
Cash flows from investing activities:
GSAC Acquisition $ -- $ (13,577)
Purchases of securities available for sale (734,574) (481,588)
Proceeds from maturities of securities available for sale 299,280 312,262
Purchases of securities held to maturity (1,641) (407)
Proceeds from maturities of securities held to maturity 564 282
Purchases of mortgage-backed securities available for sale (2,553,891) (1,052,098)
Principal payments on mortgage-backed securities available for sale 1,416,723 422,098
Proceeds from sales of mortgage-backed securities available for sale -- 3,195
Principal payments on mortgage-backed securities held to maturity 187,215 87,101
Proceeds from sale of loans 6,830 346
Net (increase) decrease in loans receivable (480,846) 411,675
Purchases of FHLB stock, net (83,185) (17,602)
Purchases of premises and equipment (58,202) (9,615)
Proceeds from disposal of premises and equipment 41,746 2,501
Proceeds from sales of foreclosed real estate 37,113 33,904
Purchases of mortgage servicing rights (76,185) (77,091)
---------- ----------
Net cash flows used in investing activities (1,999,053) (378,614)
---------- ----------
Cash flows from financing activities:
Net (decrease) increase in deposits (820,063) 201,008
Proceeds from additional borrowings 10,254,766 4,828,742
Principal payments on borrowings (8,428,080) (4,359,104)
Net increase in securities sold under agreements to repurchase 411,896 123,445
Redemption of FN Holdings Preferred Stock -- (25,000)
Dividends paid to minority stockholders, net of taxes (9,127) (23,648)
Exercise of stock options 4,114 --
Sale of treasury stock 93 --
---------- ----------
Net cash flows provided by financing activities 1,413,599 745,443
---------- ----------
Net change in cash and cash equivalents (306,916) 51,953
Cash and cash equivalents at beginning of period 967,950 412,311
---------- ----------
Cash and cash equivalents at end of period $ 661,034 $ 464,264
========== ==========
</TABLE>
See accompanying notes to unaudited consolidated financial statements.
Page 8
<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 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 months ended March 31,
1999 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
month period 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") as a result of the extinguishment of the Hunter's
Glen (as defined herein) minority interest, 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 voting common stock of California Federal Bank, A Federal Savings Bank
and its subsidiaries (the "Bank"). 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 (as defined
herein). On September 11, 1998, Glendale Federal Bank, Federal Savings Bank
("Glendale Federal") merged with and into the Bank pursuant to the Golden State
Merger. Unless the context otherwise indicates, "California Federal" or "Bank"
refers to California Federal as the surviving entity after the consummation of
the Golden State Merger.
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, in consideration of
their interests as stockholders of Parent Holdings and FN Holdings, 56,722,988
shares of Golden State common stock, par value $1.00 per share (the "Golden
State Common Stock"), that constituted, 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 net income,
minority interest and stockholders' equity amounts of prior periods have been
restated to reflect this change.
Minority interest as restated represents amounts attributable to (i) the
Bank Preferred Stock, (ii) the Preferred Stock ("REIT Preferred Stock") of
California Federal Preferred Capital Corporation, a wholly owned subsidiary of
the Bank, and (iii) that portion of stockholders' equity of Auto One Acceptance
Corporation ("Auto One"), a subsidiary of the Bank, 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 voting common stock of the Bank, and therefore,
activities for the consolidated entity are primarily carried out by the Bank and
its operating subsidiaries.
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 Golden State included in the Company's
Annual Report on Form 10-K for the year ended December 31, 1998. All terms used
but not defined elsewhere herein have meanings ascribed to them in the Company's
Annual Report on Form 10-K.
Page 9
<PAGE>
GOLDEN STATE BANCORP INC. AND SUBSIDIARIES
NOTES TO UNAUDITED CONSOLIDATED FINANCIAL STATEMENTS
(2) Acquisitions and Divestitures
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 contributed all of its assets (including all of the
voting common stock of California Federal) to GS Holdings (the "FN Holdings
Asset Transfer"), (ii) Parent Holdings, which then owned all of the common stock
of FN Holdings as a result of the extinguishment of the Hunter's Glen minority
interest, 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."
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 Golden State Acquisition was accounted for as a purchase of Golden
State by Parent Holdings and, accordingly, the purchase price was allocated to
the assets acquired and liabilities assumed in the transaction based on
estimates of fair value at the date of purchase. Since the date of purchase, the
results of operations related to such assets and liabilities have been included
in the Company's consolidated statements of income.
Merger and integration costs associated with the Golden State Merger
totalled $6.1 million for the three months ended March 31, 1999, including
severance for terminated California Federal employees, expenses for California
Federal branch closures, conversion and consolidation costs, as well as
transition expenses for duplicate personnel, facilities and computer systems
during the integration period.
In connection with the Glen Fed Merger, the Bank recorded liabilities
resulting from (i) branch consolidations due to duplicate facilities; (ii)
employee severance and termination benefits due to a planned reduction in force;
and (iii) expenses incurred under a contractual obligation to terminate services
provided by outside service providers (principally relating to data processing
expenses). During the three months ended March 31, 1999, the Bank recorded $2.3
million in additional liabilities related to branch closures. Additionally, $3.6
million, $3.6 million, and $8.5 million, respectively, were charged against
these liabilities. At March 31, 1999, the remaining liabilities totalled $28.5
million, $29.9 million and $3.3 million, respectively.
Other 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 250 shares of the common
stock of Auto One, par value $1.00 per share, representing a 20% interest in
Auto One. This interest is reflected in the Company's consolidated balance sheet
as minority interest.
On November 2, 1998, the Bank signed definitive agreements to acquire
twelve retail branches located in Nevada (with deposits of approximately $561
million as of March 31, 1999) from Norwest Bank, Nevada, a subsidiary of Norwest
Corporation, and Wells Fargo Bank, N.A. This transaction closed on April 16,
1999.
Page 10
<PAGE>
GOLDEN STATE BANCORP INC. AND SUBSIDIARIES
NOTES TO UNAUDITED CONSOLIDATED FINANCIAL STATEMENTS
(3) Cash, Cash Equivalents, and Statement of Cash Flows
Cash paid for interest on deposits and other interest-bearing liabilities
during the three months ended March 31, 1999 and 1998 was $560.4 million and
$341.2 million, respectively.
During the three months ended March 31, 1999, noncash activity consisted
of transfers of $25.5 million from loans receivable to foreclosed real estate
and $.9 million of loans made to facilitate sales of real estate owned.
During the three months ended March 31, 1998, noncash activity consisted
of transfers of $33.9 million from loans receivable to foreclosed real estate,
$4.4 million of loans made to facilitate sales of real estate owned and
transfers of $3.2 million from loans held for sale (at lower of cost or market)
to mortgage-backed securities classified as trading securities upon the
securitization of certain of the Bank's single-family loans. Noncash activity
also includes the retirement of FN Holdings Preferred Stock of $.8 million, the
issuance of additional FN Holdings Preferred Stock through preferred stock
dividends of $.1 million and dividends to parent of $1.3 million.
(4) Segment Reporting
Since the Company derives a significant portion of its revenues from
interest income, and interest expense is the most significant expense, the
segments are reported below using net interest income. Because the Company also
evaluates performance based on noninterest income and noninterest expense goals,
these measures of segment profit and loss are also presented. The Company does
not allocate income taxes to the segments.
<TABLE>
<CAPTION>
Three Months Ended
March 31, Community Banking Mortgage Banking Total
--------- ----------------- ---------------- -----
(in thousands)
<S> <C> <C> <C>
Net interest income: (1)
1999 $ 326,071 $ 11,595 $ 337,666
1998 166,754 10,995 177,749
Noninterest income: (2)
1999 $ 58,740 $ 58,147 $ 116,887
1998 51,414 38,871 90,285
Noninterest expense: (3)
1999 $ 209,631 $ 49,378 $ 259,009
1998 110,092 36,324 146,416
</TABLE>
- -------------
(1) Includes $29.7 million and $20.2 million for 1999 and 1998, respectively,
in earnings credit provided to FNMC by the Bank, primarily for custodial
bank account balances generated by FNMC. Also includes $61.4 million and
$42.9 million for 1999 and 1998, respectively, in interest income and
expense on intercompany loans.
(2) Includes $11.7 million and $7.5 million for 1999 and 1998, respectively, in
intercompany servicing fees.
(3) Includes $1.2 million in both 1999 and 1998 in intercompany noninterest
expense.
Page 11
<PAGE>
GOLDEN STATE BANCORP INC. AND SUBSIDIARIES
NOTES TO UNAUDITED CONSOLIDATED FINANCIAL STATEMENTS
The following reconciles the above table to the amounts shown on the
consolidated financial statements for the three months ended March 31, (in
thousands):
<TABLE>
<CAPTION>
1999 1998
---- ----
<S> <C> <C>
Net interest income:
Total net interest income for reportable segments $ 337,666 $ 177,749
Elimination of intersegment net interest income (29,650) (20,186)
--------- ---------
Total $ 308,016 $ 157,563
========= =========
Noninterest income:
Total noninterest income for reportable segments $ 116,887 $ 90,285
Elimination of intersegment servicing fees (11,719) (7,514)
--------- --------
Total $ 105,168 $ 82,771
========= ========
Noninterest expense:
Total noninterest expense for reportable segments $ 259,009 $146,416
Elimination of intersegment expense (1,160) (1,160)
--------- --------
Total $ 257,849 $145,256
========= ========
</TABLE>
(5) Minority Interest
On April 1, 1999, GS Holdings repurchased all of the remaining 607,299
outstanding shares of the Bank's 105/8% Preferred Stock not already owned by it
for $105.313 per share, for a total purchase price of $63.9 million. This
transaction reduced minority interest by $60.7 million on the Company's balance
sheet and resulted in a charge of $3.2 million to minority interest expense.
(6) Stockholders' Equity
Common Stock
At March 31, 1999, there were 134,363,304 shares of Golden State Common
Stock issued and outstanding (net of treasury stock). See note 10.
Stock Options
In connection with the Golden State Acquisition, the Bank assumed stock
option plans that provide for the granting of options of Golden State Common
Stock to employees and directors. Upon the consummation of the merger on
September 11, 1998, substantially all options outstanding became exercisable.
All these stock option plans have expired, as to the granting of additional
options. During the three months ended March 31, 1999, a total of 217,283
options were exercised and 86,000 options expired. At March 31, 1999, options to
exercise an equivalent of 1,685,254 shares remained outstanding under the plans.
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 the three months ended March 31, 1999 shares
totalling 7,933 were issued out of treasury in connection with options exercised
by holders related to an earlier acquisition by Golden State. At March 31, 1999,
the Company had 82,061 shares of its common stock in treasury at an aggregate
cost of $18.75 per share.
Page 12
<PAGE>
GOLDEN STATE BANCORP INC. AND SUBSIDIARIES
NOTES TO UNAUDITED CONSOLIDATED FINANCIAL STATEMENTS
Dividends
There were no dividends on common stock during the three months ended March
31, 1999 and 1998.
(7) Contingent Shares
During 1998, net tax benefits totalling $102.7 million were realized by
California Federal with respect to its gain from the Florida Branch Sale and the
receipt of federal income tax refunds in excess of the amount reflected on the
Company's consolidated balance sheets. Consistent with the terms of the Golden
State Merger agreement, a total of 5,687,996 shares of Golden State common stock
valued at $102.7 million became issuable to Mafco Holdings and Hunter's Glen as
contingent shares as a result of these benefits. On January 21, 1999, a total of
5,540,319 shares of Golden State common stock, valued at $100 million, were
issued (4,432,255 shares to Mafco Holdings and 1,108,064 shares to Hunter's
Glen). The remaining 147,677 common shares, valued at $2.7 million, are expected
to be issued at a future date. Such contingent shares are included, to the
extent appropriate, in the basic and diluted earnings per share calculations.
For the three months ended March 31, 1999, an additional 969,940 shares
were included in the calculation of diluted earnings per share. In accordance
with the Golden State Merger agreement, these shares are contingently issuable
to Mafco Holdings and Hunter's Glen. The number of shares is estimated based on
the anticipated use in 1999 of pre-merger net operating losses, and is subject
to change based upon actual 1999 earnings. See note 8.
(8) Earnings per Share Information
Earnings per share of common stock is based on the weighted average
number of common and common equivalent shares outstanding, net of common shares
in treasury, during the period presented. Information used to calculate basic
and diluted earnings per share is as follows (in thousands, except per share
data):
<TABLE>
<CAPTION>
Three Months Ended March 31,
------------------------------------------------
1999 1998
------------------ --------------------
Basic Diluted Basic Diluted
EPS EPS EPS EPS
<S> <C> <C> <C> <C>
Net income $70,876 $70,786 $47,658 $47,658
======= ======= ======= =======
Weighted average common
shares outstanding 132,911 132,911 56,723 56,723
Contingently issuable shares 1,379 2,348 -- --
------- ------- ------- -------
Basic weighted average
common shares outstanding (i) 134,290 135,259 56,723 56,723
Effect of dilutive securities:
Options and warrants (ii) -- 5,608 -- --
------- ------- ------- -------
Total 134,290 140,867 56,723 56,723
------- ------- ------- -------
Earnings per common share $ 0.53 $ 0.50 $ 0.84 $ 0.84
======= ======= ======= =======
</TABLE>
(i) 1999 basic shares include the effect of 5,540,319 contingent shares
issued and 147,677 contingent shares issuable to First Gibraltar and
Hunter's Glen for the net tax benefits realized by the Bank during
1998. 1999 diluted shares include an additional 969,940 shares
estimated to be contingently issuable to First Gibraltar and Hunter's
Glen based on the anticipated use of pre-merger net operating losses.
See note 7.
(ii) Golden State's diluted shares outstanding are not affected by the
LTW(TM)s until they become exercisable because the amount of the
proceeds from the Glendale Goodwill Litigation and the number of shares
of common stock to be issued cannot be determined until the LTW(TM)s
become exercisable.
Page 13
<PAGE>
GOLDEN STATE BANCORP INC. AND SUBSIDIARIES
NOTES TO UNAUDITED CONSOLIDATED FINANCIAL STATEMENTS
(9) Newly Issued Accounting Pronouncements
In June 1998, the FASB issued SFAS 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
SFAS 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 established a multi-disciplinary task force to
assess the statement's effect on the Bank's consolidated financial statements
and to coordinate its implementation.
(10) Subsequent Events
On April 9, 1999, the United States Court of Federal Claims (the
"Claims Court") ruled that the U.S. Government must compensate the Bank for
breach of contract in the Glendale Goodwill Litigation in the sum of $908.9
million. It is expected that this decision will be appealed.
On April 16, 1999, the Claims Court ruled that the U.S. Government must
compensate the Bank for breach of contract in the California Federal Litigation
in the sum of $23.0 million. The Company expects to appeal this decision.
The Goodwill Litigation Asset related to the Glendale Goodwill Litigation
was established based on its estimated fair value, net of federal income taxes,
at the time of the Golden State Merger. This asset is carried on the books of
the Company at the lower of cost or market, with market value being measured
based on the current market price of the underlying litigation securities at the
balance sheet date.
The Goodwill Litigation Asset related to the California Federal Litigation
was effectively distributed to First Gibraltar and Hunter's Glen on September
11, 1998 in connection with the Golden State Acquisition. As such, the impact to
the Company upon the final resolution of the California Federal Litigation is
not expected to be material.
During the fourth quarter of 1998, the board of directors of the Company
authorized a $150 million common stock repurchase program. During the second
quarter of 1999, this authorization was expanded to include up to $250 million
of all publicly traded securities issued by the Company and any of its
subsidiaries. No shares were repurchased under this program during the first
quarter of 1999; however, the board activated the repurchase program during the
second quarter of 1999.
Page 14
<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
Registration Statement on Form S-1 filed by Golden State Holdings Inc. with the
Securities and Exchange Commission on September 29, 1998 (File No. 333-64597)
and declared effective on November 12, 1998. 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 that provide retail consumers
and small businesses with deposit products such as demand, transaction and
savings accounts; investment products such as mutual funds, annuities and
insurance; and (ii) mortgage banking activities, including originating and
purchasing 1-4 unit residential loans for sale to various investors in the
secondary market and servicing loans for itself and others. To a lesser extent,
the Company originates and/or purchases certain commercial real estate,
commercial and consumer loans for investment. 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, general and administrative expenses consisting of compensation and
benefits, data processing, occupancy and equipment, communications, deposit
insurance assessments, advertising and marketing, professional fees and other
general and administrative expenses.
Net Income
Golden State reported net income for the three months ended March 31, 1999
of $70.9 million, or $.50 per diluted share, compared with net income of $47.7
million, or $.84 per diluted share, for the corresponding period in 1998. Net
income for the three months ended March 31, 1999 includes $6.1 million in merger
and integration costs (including severance, conversion and consolidation costs)
incurred in connection with the Golden State Acquisition.
Net interest income was $308.0 million for the three months ended March
31, 1999, compared to $157.6 million during the same period in 1998. The
increase in 1999 over 1998 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. The decline in the net
interest margin is principally due to the prepayment of higher rate
interest-earning assets that were replaced with interest-earning assets having
comparatively lower rates, reflecting current market conditions.
Page 15
<PAGE>
Year 2000
The remediation process for existing mission-critical systems was
completed by March 31, 1999, as well as the testing and certification of these
systems and applications. In addition, during February and March of 1999, the
Company participated in industry-wide Year 2000 integration testing sponsored by
the Mortgage Bankers Association. The Company has also assessed risks related to
the potential failure of material third parties to be ready for the year 2000.
At March 31, 1999, contingency plans have been completed for service
providers. The contingency plan for the critical supply vendors was completed
mid-February 1999. The support plan for applications maintained in-house will be
completed by September 30, 1999. In addition, contingency plans are being
developed by critical business areas to address customer communications and
operations issues surrounding the Year 2000 event.
It is currently expected that costs related to making the Company's
computer systems, applications and facilities Year 2000 compliant will total
approximately $16.5 million over the years 1997 to 2000. Of this amount, $12.1
million has been incurred since the inception of the Year 2000 project through
March 31, 1999. Noninterest expense for the three months ended March 31, 1999
included approximately $2.4 million in connection with the Company's Year 2000
efforts.
For additional information regarding the Year 2000 issue, refer to
"Management's Discussion and Analysis of Financial Condition and Results of
Operations -- Year 2000" in the Company's 1998 Form 10-K.
Financial Condition
During the three months ended March 31, 1999, consolidated total
assets increased $1.4 billion, to $56.2 billion from December 31, 1998, and
total liabilities increased from $52.7 billion to $54.0 billion.
During the three months ended March 31, 1999, stockholders' equity
increased $58.9 million to $1.6 billion. The increase in stockholders' equity is
the net result of $70.9 million in net income for the period, $4.1 million from
the exercise of stock options and $.1 million in proceeds from the sale of
treasury stock, offset by a $16.2 million decrease in the net unrealized gain on
securities available for sale.
Golden State's non-performing assets, consisting of non-performing loans,
net of purchase accounting adjustments, foreclosed real estate, net, and
repossessed assets, decreased to $292 million at March 31, 1999 compared with
$310 million at December 31, 1998. Total non-performing assets as a percentage
of the Bank's total assets decreased to 0.52% at March 31, 1999 from 0.57% at
December 31, 1998.
Page 16
<PAGE>
RESULTS OF OPERATIONS
Three months ended March 31, 1999 versus three months ended March 31, 1998
The following table sets forth 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 March 31, 1999
------------------------------------
Average Average
Balance Interest Rate
------- -------- ----
(dollars in millions)
ASSETS
Interest-earning assets (1):
<S> <C> <C> <C>
Securities and interest-bearing deposits in banks (2) $ 1,444 $ 23 6.35%
Mortgage-backed securities available for sale 12,993 204 6.28
Mortgage-backed securities held to maturity 2,643 50 7.63
Loans held for sale, net 2,139 35 6.48
Loans receivable, net 30,745 567 7.38
FHLB stock 1,043 14 5.27
------- ----
Total interest-earning assets 51,007 893 7.01
----
Noninterest-earning assets 4,373
-------
Total assets $55,380
=======
LIABILITIES, MINORITY INTEREST
AND STOCKHOLDERS' EQUITY
Interest-bearing liabilities:
Deposits $24,012 222 3.75
Securities sold under agreements to repurchase 4,319 54 5.01
Borrowings 22,873 309 5.48
------- ----
Total interest-bearing liabilities 51,204 585 4.63
----
Noninterest-bearing liabilities 1,972
Minority interest 590
Stockholders' equity 1,614
-------
Total liabilities, minority interest
and stockholders' equity $55,380
=======
Net interest income $308
====
Interest rate spread 2.38%
=====
Net interest margin 2.37%
=====
Return on average assets 0.51%
=====
Return on average common equity 17.57%
=====
Return on average total equity 17.57%
=====
Average equity to average assets 2.91%
=====
</TABLE>
Page 17
<PAGE>
<TABLE>
<CAPTION>
Three Months Ended March 31, 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) $ 955 $ 15 6.29%
Mortgage-backed securities available for sale 5,087 81 6.41
Mortgage-backed securities held to maturity 1,292 25 7.69
Loans held for sale, net 1,485 27 7.36
Loans receivable, net 19,744 385 7.79
FHLB stock 475 7 5.99
------- ---
Total interest-earning assets 29,038 540 7.44
---
Noninterest-earning assets 2,472
-------
Total assets $31,510
=======
LIABILITIES, MINORITY INTEREST
AND STOCKHOLDERS' EQUITY
Interest-bearing liabilities:
Deposits $16,133 178 4.48
Securities sold under agreements to repurchase 1,864 26 5.69
Borrowings (3) 11,110 178 6.50
------- ---
Total interest-bearing liabilities 29,107 382 5.33
---
Noninterest-bearing liabilities 1,015
Minority interest 1,084
Stockholders' equity 304
-------
Total liabilities, minority interest
and stockholders' equity $31,510
Net interest income ======= $158
====
Interest rate spread 2.11%
=====
Net interest margin 2.10%
=====
Return on average assets 0.60%
=====
Return on average common equity 62.82%
=====
Return on average total equity 62.82%
=====
Average equity to average assets 0.96%
=====
</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 18
<PAGE>
The following table presents certain information of the Company regarding
changes in interest income and interest expense 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) volume
(changes in average outstanding balances multiplied by the prior period's rate)
and (ii) 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 March 31, 1999 vs. 1998
Increase (Decrease) Due to
-----------------------------------------------------
Volume Rate Net
INTEREST INCOME: (in millions)
<S> <C> <C> <C>
Securities and interest-bearing deposits in banks $ 8 $ -- $ 8
Mortgage-backed securities available for sale 125 (2) 123
Mortgage-backed securities held to maturity 26 (1) 25
Loans held for sale, net 11 (3) 8
Loans receivable, net 201 (19) 182
FHLB stock 8 (1) 7
---- ---- ----
Total 379 (26) 353
---- ---- ----
INTEREST EXPENSE:
Deposits 66 (22) 44
Securities sold under agreements to repurchase 31 (3) 28
Borrowings 154 (23) 131
---- ---- ----
Total 251 (48) 203
---- ---- ----
Change in net interest income $128 $ 22 $150
==== ==== ====
</TABLE>
The volume variances in total interest income and total interest expense
for the three months ended March 31, 1999 compared to the corresponding period
in 1998 are largely due to increased purchases of mortgage-backed securities
funded with FHLB advances, the additional volume related to the Golden State
Acquisition and the assumption of debt securities from the GS Escrow Merger (the
"GS Holdings Notes"), partially offset by $1.4 billion in deposits sold in the
Florida Branch Sale. The positive total rate variance of $22 million is
primarily attributed to the lower cost of funds on deposits, lower interest
rates paid on new borrowings (including the Refinancing Transactions) 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 1999 and 1998, prepayments of higher rate interest-earning assets
and repricing of variable rate loans and mortgage-backed securities.
Interest Income. Total interest income was $892.9 million for the three
months ended March 31, 1999, an increase of $352.5 million from the three months
ended March 31, 1998. Total interest-earning assets for the three months ended
March 31, 1999 averaged $51.0 billion, compared to $29.0 billion for the
corresponding period in 1998. The yield on total interest-earning assets during
the three months ended March 31, 1999 decreased to 7.01% from 7.44% for the
three months ended March 31, 1998, primarily due to prepayments of higher rate
loans which were replaced with lower yielding originations, lower market rates
on new mortgage-backed securities purchased in 1999 and 1998 and repricing of
variable rate loans and mortgage-backed securities.
Golden State earned $567.3 million of interest income on loans receivable
for the three months ended March 31, 1999, an increase of $182.6 million from
the three months ended March 31, 1998. The average balance of loans receivable
was $30.7 billion for the three months ended March 31, 1999, compared to $19.7
billion for the same period in 1998. The weighted average rate on loans
receivable decreased to 7.38% for the three months ended March 31, 1999 from
7.79% for the three months ended March 31, 1998, primarily due to declining
market rates. The increase in the average volume is primarily due to the
addition of $14.6 billion in loans acquired in the Golden State Acquisition.
Page 19
<PAGE>
Golden State earned $34.6 million of interest income on loans held for sale
for the three months ended March 31, 1999, an increase of $7.3 million from the
three months ended March 31, 1998. The average balance of loans held for sale
was $2.1 billion for the three months ended March 31, 1999, an increase of $654
million from the comparable period in 1998, primarily due to increased
originations and longer holding periods for jumbo loans during the three months
ended March 31, 1999. The weighted average rate on loans held for sale decreased
to 6.48% for the three months ended March 31, 1999 from 7.36% for the three
months ended March 31, 1998, primarily due to declining market rates.
Interest income on mortgage-backed securities available for sale was $204.1
million for the three months ended March 31, 1999, an increase of $122.6 million
from the three months ended March 31, 1998. The average portfolio balances
increased $7.9 billion, to $13.0 billion, for the three months ended March 31,
1999 compared to the same period in 1998. The weighted average yield on these
assets decreased from 6.41% for the three months ended March 31, 1998 to 6.28%
for the three months ended March 31, 1999. The increase in the volume and
decrease in the weighted average yield is primarily due to purchases of
mortgage-backed securities and additions of $2.4 billion from the Golden State
Acquisition, partially offset by prepayments of higher rate mortgage-backed
securities since March 31, 1998. Repricing of variable rate mortgage-backed
securities also contributed to the decline in yield.
Interest income on mortgage-backed securities held to maturity was $50.4
million for the three months ended March 31, 1999, an increase of $25.6 million
from the three months ended March 31, 1998. The average portfolio balance
increased $1.4 billion, to $2.6 billion, for the three months ended March 31,
1999 compared to the same period in 1998, primarily attributed to the addition
of $1.9 billion of the Bank's multi-family loans securitized with FNMA with a
weighted average rate of 7.39% during the third quarter of 1998. The weighted
average rates for the three months ended March 31, 1999 and 1998 were 7.63% and
7.69%, respectively.
Interest income on securities and interest-bearing deposits in other banks
was $22.9 million for the three month period ended March 31, 1999, an increase
of $7.9 million from the three month period ended March 31, 1998. The average
portfolio balance increased from $1.0 billion for the three months ended March
31, 1998 to $1.4 billion for the three months ended March 31, 1999. The increase
in the weighted average rate from 6.29% for the three months ended March 31,
1998 to 6.35% for the three months ended March 31, 1999 reflects interest earned
on the investment of proceeds from the assumption of the GS Holdings Notes.
Dividends on FHLB stock were $13.6 million for the three months ended
March 31, 1999, an increase of $6.5 million from the three months ended March
31, 1998, due to an increase in the amount of such stock owned by the Company as
a result of an increase in borrowings under FHLB advances as well as the Golden
State Acquisition. The average balance outstanding during the three months ended
March 31, 1999 and 1998 was $1.0 billion and $.5 billion, respectively. The
weighted average rate on FHLB stock decreased to 5.27% for the three months
ended March 31, 1999 from 5.99% for the three months ended March 31, 1998,
reflecting lower dividends declared by the FHLB.
Interest Expense. Total interest expense was $584.9 million for the three
months ended March 31, 1999, an increase of $202.0 million from the three months
ended March 31, 1998. The increase is primarily the result of additional
borrowings under FHLB advances, the additional deposits and borrowings assumed
in the Golden State Acquisition, and the assumption of the GS Holdings Notes.
Interest expense on customer deposits, including brokered deposits, was
$222.0 million for the three months ended March 31, 1999, an increase of $43.8
million from the three months ended March 31, 1998. The average balance of
customer deposits outstanding increased from $16.1 billion for the three months
ended March 31, 1998 to $24.0 billion for the three months ended March 31, 1999.
The increase in the average balance is a result of $11.3 billion in deposits
assumed in the Golden State Acquisition, partially offset by $1.4 billion in
deposits sold in the Florida Branch Sale, both of which occurred in the third
quarter of 1998. The overall weighted average cost of deposits declined to 3.75%
for the three months ended March 31, 1999 from 4.48% for the three months ended
March 31, 1998, primarily due to the higher average balances of lower rate
custodial transaction accounts in 1999 compared to 1998, the lower cost of funds
on deposits assumed in the Golden State Acquisition, lower market interest rates
and a change in the Bank's certificate of deposit pricing strategy.
Page 20
<PAGE>
Interest expense on securities sold under agreements to repurchase totalled
$54.0 million for the three months ended March 31, 1999, an increase of $27.5
million from the three months ended March 31, 1998. The average balance of such
borrowings for the three months ended March 31, 1999 and 1998 was $4.3 billion
and $1.9 billion, respectively; such increase is primarily attributed to the
Golden State Acquisition. The weighted average interest rate on these
instruments decreased to 5.01% for the three months ended March 31, 1999 from
5.69% for the three months ended March 31, 1998, primarily due to a decrease in
market rates on new borrowings in 1999 compared to 1998.
Interest expense on borrowings totalled $308.8 million for the three months
ended March 31, 1999, an increase of $130.7 million from the three months ended
March 31, 1998. The average balance outstanding for the three months ended March
31, 1999 and 1998 was $22.9 billion and $11.1 billion, respectively. The
weighted average interest rate on these instruments decreased to 5.48% for the
three months ended March 31, 1999 from 6.50% for the three months ended March
31, 1998, primarily due to lower prevailing market rates in 1999 and the net
impact of the Refinancing Transactions. The higher volume includes the net
impact of the Refinancing Transactions, the addition of $5.4 billion in FHLB
advances assumed in the Golden State Acquisition as well as the increase in FHLB
advances used to fund the purchases of mortgage-backed securities and to fund
the sale of deposits in the Florida Branch Sale.
Net Interest Income. Net interest income was $308.0 million for the three
months ended March 31, 1999, an increase of $150.5 million from the three months
ended March 31, 1998. The interest rate spread increased to 2.38% for the three
months ended March 31, 1999 from 2.11% for the three months ended March 31,
1998, primarily as a result of maturities and repayments of higher rate
interest-bearing liabilities being replaced with interest-bearing liabilities
having comparatively lower rates. The effect of lower rates on liabilities was
partially offset by lower yielding assets replenishing asset run-off in a
declining rate environment.
Noninterest Income. Total noninterest income, consisting primarily of loan
servicing fees, customer banking fees, gain on sales of loans and gain on sales
of assets, was $105.2 million for the three months ended March 31, 1999, an
increase of $22.4 million from the three months ended March 31, 1998.
Loan servicing fees, net of amortization of mortgage servicing rights, were
$36.0 million for the three months ended March 31, 1999, compared to $37.0
million for the three months ended March 31, 1998. Although the single-family
residential loan servicing portfolio, excluding loans serviced for the Bank,
increased from $46.7 billion at March 31, 1998 to $66.4 billion at March 31,
1999, loan servicing fees also reflected a $22.7 million increase in the
amortization of residential servicing rights in the first quarter of 1999
compared to the same period in 1998, primarily due to increased prepayments.
During the three months ended March 31, 1999, California Federal sold $3.2
billion in single-family mortgage loans originated for sale with servicing
rights retained as part of its ongoing mortgage banking operations compared to
$1.8 billion of such sales for the corresponding period in 1998.
Customer banking fees were $44.7 million for the three months ended March
31, 1999 compared to $25.3 million for the three months ended March 31, 1998.
The increase is primarily attributed to the impact of revenues from the retail
banking operations acquired in the Golden State Acquisition, partially offset by
the impact of the Florida Branch Sale. In addition, management has placed
increased emphasis on transaction account growth since the Golden State
Acquisition, which has generated additional fee income.
Other noninterest income was $8.7 million for the three months ended March
31, 1999 compared to $6.3 million for the three months ended March 31, 1998. The
increase in 1999 is primarily attributed to the receipt of a sales and use tax
refund.
Noninterest Expense. Total noninterest expense was $257.8 million for the
three months ended March 31, 1999, an increase of $112.6 million compared to the
three months ended March 31, 1998. The variance between the two periods is
primarily attributed to the Golden State Acquisition. Noninterest expense for
the three months ended March 31, 1999 included increases of $40.0 million in
compensation, $18.3 million in occupancy and equipment, $6.1 million in merger
and integration costs incurred in connection with the Golden State Acquisition
and an additional $23.7 million in other noninterest expense primarily as a
result of the Golden State Acquisition.
Page 21
<PAGE>
Compensation and employee benefits expense was $103.0 million for the three
months ended March 31, 1999, an increase of $40.0 million from the three months
ended March 31, 1998. The increase is primarily attributed to an additional
2,860 employees at March 31, 1999, compared to March 31, 1998, primarily due to
the Golden State Acquisition.
Occupancy and equipment was $39.8 million and $21.5 million for the three
months ended March 31, 1999 and 1998, respectively. This increase reflects the
effects of the Golden State Acquisition as well as $4.8 million of adjustments
to previously established accruals for vacant facilities that are not expected
to be recurring.
Loan expense was $12.2 million for the three months ended March 31, 1999,
an increase of $2.6 million from the three months ended March 31, 1998. The
increase is primarily attributed to the addition of loans and loan servicing
acquired in the Golden State Acquisition.
Merger and integration costs were $6.1 million for the three months ended
March 31, 1999, representing transition expenses, which include severance,
conversion and consolidation costs incurred in connection with the Golden State
Acquisition.
Other noninterest expense was $47.9 million in 1999 compared to $24.2
million in 1998, primarily attributed to increased operations as a result of the
Golden State Acquisition. In addition, results for the three months ended March
31, 1999 include $6.2 million in operating expenses related to back office
support; such charges are not expected to be recurring.
Provision for Income Tax. During the three months ended March 31, 1999 and
1998, Golden State recorded income tax expense of $70.3 million and $13.9
million, respectively. Golden State's effective Federal tax rate was 39% and 2%
during the three months ended March 31, 1999 and 1998, 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 nondeductible
goodwill amortization for both periods, and was partially offset by the
reduction in the deferred tax asset valuation allowance for the period ended
March 31, 1998. Golden State's effective state tax rate was 8% and 14% during
the three months ended March 31, 1999 and 1998, respectively.
Minority Interest. Dividends on the Bank Preferred Stock and the REIT
Preferred Stock totalling $.9 million and $11.4 million, respectively, were
recorded during the three months ended March 31, 1999. Minority interest
relative to the REIT Preferred Stock is reflected net of related income tax
benefit of $4.8 million which will inure to the Company as a result of the
deductibility of such dividends for income tax purposes. The reduction in
minority interest relative to the Bank Preferred Stock reflects the impact of
the $380.7 million in Bank Preferred Stock purchased by GS Holdings in
connection with the Refinancing Transactions in the third and fourth quarters of
1998. Minority interest for the three months ended March 31, 1999 also includes
a $1.7 million benefit reversal 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.
Minority interest for the three months ended March 31, 1998 includes
dividends on the Bank Preferred Stock, the FN Holdings Preferred Stock and the
REIT Preferred Stock of $13.2 million, $.6 million and $11.4 million,
respectively. Minority interest relative to the REIT Preferred Stock is
reflected net of related 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. Minority interest also includes a $.2 million benefit 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.
Page 22
<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 losses inherent in the loan portfolio. The allowance for loan losses is
increased by provisions for loan losses as well as by balances acquired through
acquisitions and is decreased by charge-offs (net of recoveries). 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 recorded provisions for loan losses of $5.0 million and $10.0 million
during the three months ended March 31, 1999 and 1998, respectively.
The decrease in the provision for loan losses during the three months ended
March 31, 1999 compared to the same period in 1998 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 that may affect the borrower's ability to repay, the estimated
value of underlying collateral and economic conditions.
Activity in the allowance for loan losses during the three months ended
March 31, 1999 and 1998 is as follows (in thousands):
1999 1998
---- ----
Balance - January 1 $588,533 $418,674
Provision for loan losses 5,000 10,000
Charge-offs (10,304) (11,399)
Recoveries 655 1,855
Reclassification (670) --
-------- --------
Balance - March 31 $583,214 $419,130
======== ========
Although management believes that the allowance for loan losses is
adequate, it will continue to review its loan portfolio to determine the extent
to which any changes in economic conditions or loss experience may require
further provisions in the future.
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. A key element of the banking business is the monitoring
and management of liquidity risk and interest rate risk. 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. The Company measures the interest rate sensitivity of its 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 ("ARM")
products for its portfolio. Where possible, the Company seeks to originate real
estate and other loans that reprice frequently and that on the whole adjust in
accordance with the repricing of its liabilities. At March 31, 1999,
approximately 75% of the Company's loan portfolio consisted of ARMs.
Page 23
<PAGE>
ARMs have, from time to time, been offered with low initial interest rates
as marketing inducements. In addition, 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 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 now 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.
One of the most important sources of a financial institution's net income
is net interest income, which is the difference between the combined yield
earned on interest-earning assets and the combined rate 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
the same period. A gap is considered positive when the amount of 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 24
<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 of assets and
liabilities). 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 March 31, 1999 is as
follows:
<TABLE>
<CAPTION>
Maturity/Rate Sensitivity
----------------------------------------------------------
Over
Within 1-5 5 Noninterest
1 Year Years Years Bearing Total
------- ------- ------- ------- -------
(dollars in millions)
INTEREST-EARNING ASSETS:
<S> <C> <C> <C> <C> <C>
Securities held to maturity, interest-bearing
deposits in other banks and short-term
investment securities(1)(2) $ 93 $ -- $ 252 $ -- $ 345
Securities available for sale (3) 1,200 -- -- -- 1,200
Mortgage-backed securities
available for sale (3) 14,060 -- -- -- 14,060
Mortgage-backed securities
held to maturity (1)(4) 2,524 26 28 -- 2,578
Loans held for sale, net (3)(5) 2,097 -- -- -- 2,097
Loans receivable, net (1)(6) 18,949 7,760 4,394 -- 31,103
Investment in FHLB 1,097 -- -- -- 1,097
------- ------- ------- ------- -------
Total interest-earning assets 40,020 7,786 4,674 -- 52,480
Noninterest-earning assets -- -- -- 3,752 3,752
------- ------- ------- ------- -------
$40,020 $ 7,786 $ 4,674 $ 3,752 $56,232
======= ======= ======= ======= =======
INTEREST-BEARING LIABILITIES:
Deposits (7) $22,007 $ 1,786 $ 6 $ -- $23,799
Securities sold under agreements to
repurchase (1) 4,650 -- -- -- 4,650
FHLB advances (1) 10,130 11,908 -- -- 22,038
Other borrowings (1) 22 1,207 899 2,128
------- ------- ------- ------- -------
Total interest-bearing liabilities 36,809 14,901 905 -- 52,615
Noninterest-bearing liabilities -- -- -- 1,383 1,383
Minority interest -- -- -- 593 593
Stockholders' equity -- -- -- 1,641 1,641
------- ------- ------- ------- -------
$36,809 $14,901 $ 905 $ 3,617 $56,232
======= ======= ======= ======= =======
Gap $ 3,211 $(7,115) $ 3,769 $ (135)
======= ======= ======= =======
Cumulative gap $ 3,211 $(3,904) $ (135) $ (135)
======= ======= ======= =======
Gap as a percentage of total assets 5.71% (12.65)% 6.70% (0.24)%
======= ======= ======= =======
Cumulative gap as a percentage of total assets 5.71% (6.94)% (0.24)% (0.24)%
======= ======= ======= =======
- -------------------------
</TABLE>
Page 25
<PAGE>
(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 March 31, 1999. The actual
maturity and rate sensitivity of these assets could vary substantially if future
prepayments differ from prepayment estimates.
(2) Consists of $252 million of securities held to maturity, $25 million of
interest-bearing deposits in other banks and $67 million of short-term
investment securities.
(3) As securities and mortgage-backed securities available for sale and
loans held for sale may be sold within one year, they are considered to be
maturing within one year.
(4) Excludes underlying non-performing loans of $5 million.
(5) Excludes non-performing loans of $14 million.
(6) Excludes allowance for loan losses of $583 million and non-performing
loans of $200 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 March 31, 1999, interest-bearing liabilities of Golden State exceeded
interest-earning assets by $135 million. At December 31, 1998, interest-bearing
liabilities of Golden State exceeded interest-earning assets by approximately
$373 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. Being at a 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 to measure the stability of earnings, 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 major source of funding for Golden State on an unconsolidated basis is
distributions from its subsidiary, GS Holdings, which receives most of its
funding from distributions of the Bank's earnings and tax sharing payments. Net
income generated by the Bank is used to meet its cash flow needs, including
paying dividends on its preferred stock and may be distributed, subject to
certain restrictions, to GS Holdings. In turn, GS Holdings uses distributions
received from the Bank primarily to meet debt service requirements, pay any
expenses it may incur, and make distributions to Golden State, subject to
certain restrictions. For more information on dividend restrictions for the Bank
and GS Holdings, refer to "Business - Dividend Policy of the Bank," "Business -
Regulation of the Bank" and note 28 of the "Notes to Consolidated Financial
Statements" in the Company's 1998 Form 10-K.
The Company anticipates that on a consolidated basis, 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 $661.0 million at March 31, 1999, the
Company has substantial additional borrowing capacity with the FHLB and other
sources.
Interest on the GS Holdings Notes approximates $138.9 million per year.
Although GS Holdings expects that distributions and tax sharing payments from
the Bank will be sufficient to pay interest when due and the principal
Page 26
<PAGE>
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.
On a consolidated basis, 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
customer and 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.
The consolidated 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 and the repayment
of borrowings. Certificates of deposit scheduled to mature during the twelve
months ending March 31, 2000 aggregate $10.6 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 March 31, 1999, Golden State had FHLB advances, securities sold
under agreements to repurchase and other borrowings aggregating $14.8 billion
maturing or repricing within twelve months. The Company may elect to pay off
such debt or to replace such borrowings with additional FHLB advances,
securities sold under agreements to repurchase or other borrowings at prevailing
rates.
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 three months ended March 31, 1999 were $10.3 billion in
proceeds from additional borrowings, $3.1 billion in proceeds from sales of
loans held for sale, $1.6 billion from principal payments on mortgage backed
securities available for sale and held to maturity, a $411.9 million net
increase in securities sold under agreements to repurchase, and $299.8 million
from maturities of securities available for sale and held to maturity. The
primary uses of funds were $8.4 billion in principal payments on borrowings,
$3.3 billion in purchases of securities and mortgage-backed securities available
for sale, $2.9 billion in purchases and originations of loans held for sale,
$820 million from a net decrease in deposits, and a net increase in loans
receivable of $480.8 million.
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. The OTS established a minimum
liquidity requirement for the Bank of 4.00%. California Federal has been in
compliance with the liquidity regulations during the three months ended March
31, 1999 and the year ended December 31, 1998.
PROBLEM AND POTENTIAL PROBLEM ASSETS
The Company considers a loan to be impaired when, based upon current
information and events, it is "probable" that it will be unable to collect all
amounts due (i.e., both principal and interest) according to the contractual
terms of the loan agreement. Any insignificant delay or insignificant shortfall
in amount of payments will not cause a loan to be considered impaired. In
determining impairment, the Company considers large non-homogeneous loans
including nonaccrual loans, troubled debt restructurings, and performing loans
that exhibit, among other characteristics, high LTV ratios, low debt-coverage
ratios or other indications that the borrowers are experiencing increased levels
of financial difficulty. In addition, loans collectively reviewed for impairment
by the Company include all business banking loans, single-family loans and
performing multi-family and commercial real estate loans under $500,000,
excluding loans which have entered the work-out process.
The measurement of impairment may be based on (i) the present value of the
expected future cash flows of the impaired loan discounted at the loan's
original effective interest rate, (ii) the observable market price of the
impaired loan, or (iii) the fair value of the collateral of a
collateral-dependent loan. The Company bases the
Page 27
<PAGE>
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. Large groups of smaller balance homogeneous
loans are collectively evaluated for impairment.
Cash receipts on impaired loans not performing according to contractual
terms are generally used to reduce the carrying value of the loan, unless the
Company believes it will recover the remaining principal balance of the loan.
Impairment losses are included in the allowance for loan losses. Upon
disposition of an impaired loan, loss of principal, if any, is recorded through
a charge-off to the allowance for loan losses.
At March 31, 1999, the carrying value of loans that were considered to be
impaired totalled $140.9 million (of which $28.3 million were on non-performing
status). The average recorded investment in impaired loans during the three
months ended March 31, 1999 was approximately $141.3 million. For the three
months ended March 31, 1999, Golden State recognized interest income on those
impaired loans of $2.7 million, which included $.2 million of interest income
recognized using the cash basis method of income recognition. The following
table presents the carrying amounts 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. Purchased
auto loans are reflected as non-performing, impaired or restructured using each
individual loan's contractual unpaid principal balance.
<TABLE>
<CAPTION>
March 31, 1999
-----------------------------------------------------
Non-performing Impaired Restructured
-------------- -------- ------------
(in millions)
<S> <C> <C> <C>
Real Estate:
1-4 unit residential $184 $ -- $ 3
5+ unit residential 15 52 9
Commercial and other 12 87 19
Land -- 1 --
Construction 1 1 --
---- ---- ---
Total real estate 212 141 31
Non-real estate 7 -- --
---- ---- ---
Total loans 219 $141 (a) $31
==== ===
Foreclosed real estate, net 70
Repossessed assets 3
----
Total non-performing assets $292
====
December 31, 1998
-----------------------------------------------------
Non-performing Impaired Restructured
-------------- -------- ------------
(in millions)
Real Estate:
1-4 unit residential $190 $ -- $ 4
5+ unit residential 16 55 9
Commercial and other 10 78 19
Land -- 1 --
Construction 1 1 --
----- ---- ---
Total real estate 217 135 32
Non-real estate 9 -- --
----- ---- ---
Total loans 226 (b) $135 (a) $32
==== ===
Foreclosed real estate, net 80
Repossessed assets 4
----
Total non-performing assets $310
====
</TABLE>
- -------------------
(a) Includes $28.3 million and $32.5 million of non-performing loans at March
31, 1999 and December 31, 1998, respectively. Also includes $20.3 million
and $16.4 million of loans classified as troubled debt restructurings at
March 31, 1999 and December 31, 1998, respectively.
Page 28
<PAGE>
(b) Includes loans securitized with recourse on non-performing status of $6.0
million and loans held for sale on non-performing status of $17.0 million.
There were no accruing loans contractually past due 90 days or more at
March 31, 1999 or December 31, 1998.
The Company's non-performing assets, consisting of nonaccrual loans,
repossessed assets and foreclosed real estate, net, decreased to $292 million at
March 31, 1999, from $310 million at December 31, 1998. Non-performing assets as
a percentage of the Bank's total assets decreased to 0.52% at March 31, 1999,
from 0.57% at December 31, 1998.
Golden State, through the Bank, manages its credit risk by assessing the
current and estimated future performance of the real estate markets in which it
operates. The Company continues to place a high degree of emphasis on the
management of its asset portfolio. The Company has three distinct asset
management functions: performing loan asset management, problem loan asset
management and credit review. Each of these three functions is charged with the
responsibility of reducing the risk profile within the residential, commercial,
multi-family and other 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 March 31, 1999:
<TABLE>
<CAPTION>
Total
Non-performing Foreclosed Non-performing
Real Estate Real Estate, Real Estate Geographic
Loans, Net Net (2) Assets Concentration
-------------- ------------ -------------- -------------
(dollars in millions)
<S> <C> <C> <C> <C>
Region:
California $ 26 $ 5 $ 31 11%
Northeast (1) 132 45 177 63
Other regions 54 20 74 26
---- --- ---- ---
Total $212 $70 $282 100%
==== === ==== ===
</TABLE>
- --------------
(1) Consists of Connecticut, Massachusetts, New Hampshire, New Jersey, New
York, Pennsylvania, Rhode Island and Delaware.
(2) Net of purchase accounting adjustments.
At March 31, 1999, the Company's largest non-performing asset was
approximately $5.8 million, and it had four non-performing assets over $2
million in size with balances averaging approximately $3.6 million. At March 31,
1999, the Company had 1,725 non-performing assets below $2 million in size,
including 1,594 non-performing 1-4 unit residential assets.
Page 29
<PAGE>
Although the general loan loss allowance has been allocated by type of loan
for internal valuation purposes, all such allowance is available to support any
losses which may occur, regardless of type, in the Company's loan portfolio. A
summary of the activity in the total allowance for loan losses by loan type is
as follows for the three months ended March 31, 1999:
<TABLE>
<CAPTION>
5+ Unit
Residential
1-4 Unit and Commercial Consumer
Residential Real Estate and Other Total
----------- -------------- --------- -----
(in millions)
<S> <C> <C> <C> <C>
Balance - December 31, 1998 $250 $277 $62 $589
Provision for loan losses -- 4 1 5
Charge-offs (5) (2) (4) (11)
Recoveries -- 1 1
Reclassification -- -- (1) (1)
---- ---- --- ----
Balance - March 31, 1999 $245 $279 $59 $583
==== ==== === ====
</TABLE>
The ratio of allowance for loan losses to non-performing loans at March 31,
1999 and December 31, 1998 was 266.2% and 260.2%, respectively.
MORTGAGE BANKING OPERATIONS
The Company, through the Bank's wholly owned mortgage bank subsidiary,
First Nationwide Mortgage Corporation ("FNMC"), has significantly expanded its
mortgage banking operations. During the three months ended March 31, 1999 and
1998, FNMC acquired mortgage-servicing assets of $2.5 billion and $3.6 billion,
respectively, 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
(including loans subserviced for others and excluding loans serviced for the
Bank) totalled $66.4 billion at March 31, 1999, an increase of $1.0 billion and
$19.7 billion from December 31, 1998 and March 31, 1998, respectively. During
the three months ended March 31, 1999, the Bank, through FNMC, originated $4.7
billion and sold (generally with servicing retained) $3.2 billion of 1-4 unit
residential loans. Gross revenues from mortgage loan servicing activities for
the three months ended March 31, 1999 totalled $78.9 million, an increase of
$19.6 million from the three months ended March 31, 1998. Gross loan servicing
fees for the three months ended March 31, 1999 were reduced by $49.5 million of
amortization of servicing rights to arrive at net loan servicing fees of $29.4
million for FNMC.
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").
The Company owned several derivative instruments at March 31, 1999 which
were used to hedge against prepayment risk in its mortgage servicing portfolio.
These derivative instruments included Constant Maturity Swap interest rate floor
contracts, swaptions, principal only swaps, and prepayment-linked swaps. The
interest rate floor contracts had notional amounts of $2.1 billion, strike rates
between 5.2% and 5.6%, mature in the year 2003 and had an estimated fair value
of $12.8 million at March 31, 1999. Premiums paid to counterparties in exchange
for cash payments when the 10 year Constant Maturity Swap rate falls below the
strike rate are recorded as part of the MSR asset on the balance sheet. The
swaption contracts had notional amounts of $2.3 billion, strike rates between
5.3% and 5.9%, expire between August and November 2001 and had an estimated fair
value of $44.8 million at March 31, 1999. Premiums paid to counterparties in
exchange for the right to enter into an interest rate swap are recorded as part
of the MSR asset on the balance sheet. Principal only swap agreements had
notional amounts of $112.7 million and an estimated fair value of $5.2 million
at March 31, 1999. The prepayment-linked swaps had original notional amounts of
$1.1 billion and an estimated fair value of $0.6 million at March 31, 1999.
Page 30
<PAGE>
The following is a summary of activity in MSRs and the MSR Hedge for
the three months ended March 31, 1999 (in millions):
<TABLE>
<CAPTION>
Total MSR
MSRs MSR Hedge Balance
---- --------- ---------
<S> <C> <C> <C>
Balance at December 31, 1998 $ 922 $ 22 $ 944
Additions - bulk purchases 46 -- 46
Originated servicing 56 -- 56
Additions - other purchases 33 -- 33
Payments received from counterparties, net -- (3) (3)
Amortization (44) (7) (51)
------ ---- ------
Balance at March 31, 1999 $1,013 $ 12 $1,025
====== ==== ======
</TABLE>
Capitalized MSRs are amortized in proportion to, and over the period of,
estimated net servicing income. SFAS No. 125 requires enterprises to measure the
impairment of MSRs based on the difference between the carrying amount of the
MSRs and their current fair value. At March 31, 1999 and December 31, 1998, no
allowance for impairment of the MSRs 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" or "leverage capital" ratio) must be at least
4%. 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 requirement, 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. These capital requirements are
applicable to the Bank but not to Golden State. The Bank is not subject to any
such individual minimum regulatory capital requirement.
Page 31
<PAGE>
At March 31, 1999, the Bank's regulatory capital levels exceeded the
minimum regulatory capital requirements, with tangible, core and risk-based
capital ratios of 5.29%, 5.29% and 11.87%, respectively. The following is a
reconciliation of the Bank's stockholders' equity to regulatory capital as of
March 31, 1999:
<TABLE>
<CAPTION>
Tangible Core Risk-based
Capital Capital Capital
-------- ------- ----------
(dollars in millions)
<S> <C> <C> <C>
Stockholders' equity of the Bank $3,735 $3,735 $3,735
Minority interest - REIT Preferred Stock 500 500 500
Unrealized holding gain on securities available for sale, net 12 12 12
Non-qualifying MSRs (103) (103) (103)
Non-allowable capital:
Intangible assets (906) (906) (906)
Goodwill Litigation Assets (160) (160) (160)
Investment in non-includable subsidiaries (58) (58) (58)
Excess deferred tax asset (131) (131) (131)
Supplemental capital:
Qualifying subordinated debentures -- -- 93
General loan loss allowance -- -- 349
Assets required to be deducted:
Land loans with more than 80% LTV ratio -- -- (18)
Equity in subsidiaries -- -- (12)
Low-level recourse deduction -- -- (12)
------ ------ ------
Regulatory capital of the Bank 2,889 2,889 3,289
Minimum regulatory capital requirement 820 2,185 2,217
------ ------ ------
Excess above minimum capital requirement $2,069 $ 704 $1,072
====== ====== ======
Regulatory capital of the Bank 5.29% 5.29% 11.87%
Minimum regulatory capital requirement 1.50 4.00 8.00
------ ------ ------
Excess above minimum capital requirement 3.79% 1.29% 3.87%
====== ====== ======
</TABLE>
The amount of adjusted total assets used for the tangible and leverage
capital ratios is $54.6 billion. Risk-weighted assets used for the risk-based
capital ratio amounted to $27.7 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 32
<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 March 31, 1999,
California Federal's capital levels were sufficient for it to be considered
"well capitalized," as presented below.
<TABLE>
<CAPTION>
Risk-based
Leverage --------------------------
Capital Tier 1 Total Capital
-------- ------ -------------
<S> <C> <C> <C>
Regulatory capital of the Bank 5.29% 10.38% 11.87%
"Well capitalized" ratio 5.00 6.00 10.00
---- ---- -----
Excess above "well capitalized" ratio 0.29% 4.38% 1.87%
==== ==== =====
</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 March 31, 1999, $131 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 March 31,
1999.
QUANTITATIVE AND QUALITATIVE DISCLOSURES ABOUT MARKET RISK
There have been no material changes in reported market risks faced by
Golden State since the Company's report in Item 7A of its Form 10-K for the year
ended December 31, 1998.
Page 33
<PAGE>
PART II - OTHER INFORMATION
ITEM 1. LEGAL PROCEEDINGS
Goodwill Litigation Against the Government
On April 9, 1999, the Claims Court issued its decision in a claim against
the United States Government (the "Government") in the lawsuit, Glendale Federal
Bank, Federal Savings Bank v. United States, No.90-772-C ("the Glendale Goodwill
Litigation"), ruling that the Government must compensate the Bank in the sum of
$908.9 million.
On April 16, 1999, the Claims Court issued its decision in a claim by the
Bank against the Government in the lawsuit, California Federal Bank v. United
States, Civil Action No. 92-138C (the "California Federal Litigation"), ruling
that the Government must compensate the Bank in the sum of $23.0 million.
In each of the Glendale Goodwill Litigation and 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 regulatory capital.
It is anticipated that both of these decisions will be appealed.
Other Litigation
In addition to the matters described above, Golden State and its
subsidiaries are involved in other 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 Golden
State, GS Holdings, or the Bank.
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.
Page 34
<PAGE>
ITEM 5. OTHER INFORMATION.
None.
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. (Incorporated by reference
to Exhibit 3.3 to the Registrant's Annual Report on Form 10-K for
the year ended December 31, 1998).
10.1 Amendment No. 1 to Litigation Management Agreement dated
effective March 15, 1999, by and among the Registrant, California
Federal Bank, A Federal Savings Bank, Stephen J. Trafton and
Richard A. Fink.
27.1 Financial Data Schedule.
(b) Reports on Form 8-K:
1. Filing dated January 27, 1999, reporting on Item 5, "Other Events"
and Item 7 "Financial Statements, Pro Forma Financial Information
and Exhibits." This filing reported on management's presentation
at the Salomon Smith Barney Financial Services Conference in New
York, New York on January 28, 1999. The filing included a copy of
the written materials to be distributed at the conference.
Page 35
<PAGE>
SIGNATURES
Pursuant to the requirements of the Securities Exchange Act of 1934, the
Registrant has duly caused this report to be signed on its behalf by the
undersigned thereunto duly authorized.
Golden State Bancorp Inc.
/s/ Richard H. Terzian
-----------------------------
By: Richard H. Terzian
Executive Vice President
and Chief Financial Officer
(Principal Financial Officer)
/s/ Renee Nichols Tucei
-----------------------------
By: Renee Nichols Tucei
Senior Vice President and Controller
(Principal Accounting Officer)
May 13, 1999
<PAGE>
AMENDMENT NUMBER ONE
TO LITIGATION MANAGEMENT AGREEMENT
THIS AMENDMENT NUMBER ONE, dated as of March 15, 1999 is made by and
among Golden State Bancorp Inc. ("GSB"), a Delaware corporation, California
Federal Bank, A Federal Savings Bank ("Cal Fed"), (including in its capacity as
successor by merger with Glendale Federal Bank, Federal Savings Bank ("Glen
Fed")), Stephen J. Trafton, and Richard A. Fink (collectively "the Parties") to
the Litigation Management Agreement (the "Agreement") dated as of February 4,
1998 by and among the Parties.
WHEREAS, in accordance with the provisions of Section 6.1 of the
Agreement the Parties desire to amend the Agreement as set for in this Amendment
Amendments
NOW, THEREFORE, in consideration of the foregoing, and intending to be
legally bound hereby, the Parties agree as follows:
1. Schedule 2.1(c)(ii) to the Agreement is amended by replacing the
amount of $325,000 appearing in the second line of the Paragraph 1. entitled
"Retirement Benefits" with the amount of $375,000.
2. Except as expressly amended by this Amendment, the Agreement is
hereby ratified and confirmed in all respects.
3. This Amendment may be executed in two or more counterparts, each of
which shall be deemed an original and all of which shall be considered one and
the same agreement, and shall become effective when counterparts have been
signed by each of the Parties and delivered to the other Parties, it being
understood that all Parties need not sign on the same counterpart.
4. This Amendment shall be governed and construed in accordance with
the provisions of the Agreement.
-1-
<PAGE>
IN WITNESS WHEREOF, the Parties have executed this Amendment or caused
this Amendment to be executed by their respective officers thereunto duly
authorized, as of the date first above written.
GOLDEN STATE BANCORP INC.
By: /s/ Richard H. Terzian
--------------------------------
Richard H. Terzian
Executive Vice President and
Chief Financial Officer
CALIFORNIA FEDERAL BANK,
A FEDERAL SAVINGS BANK
(including in its capacity as successor by merger to
Glendale Federal Bank, Federal Savings Bank)
By: /s/ Eric K. Kawamura
--------------------------------
Eric K. Kawamura
Senior Vice President
/s/ Stephen J. Trafton
--------------------------------
Stephen J. Trafton
/s/ Richard A. Fink
--------------------------------
Richard A. Fink
-2-
<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 three months ended
March 31, 1999.
</LEGEND>
<CIK> 0001019508
<NAME> Golden Sate Bancorp Inc.
<MULTIPLIER> 1,000
<CURRENCY> USD
<S> <C>
<PERIOD-TYPE> 3-MOS
<FISCAL-YEAR-END> DEC-31-1999
<PERIOD-START> JAN-01-1999
<PERIOD-END> MAR-31-1999
<EXCHANGE-RATE> 1
<CASH> 568,681
<INT-BEARING-DEPOSITS> 25,009
<FED-FUNDS-SOLD> 0
<TRADING-ASSETS> 0
<INVESTMENTS-HELD-FOR-SALE> 15,259,918
<INVESTMENTS-CARRYING> 2,835,769
<INVESTMENTS-MARKET> 2,893,417
<LOANS> 32,831,655<F1>
<ALLOWANCE> 583,214
<TOTAL-ASSETS> 56,232,098
<DEPOSITS> 23,798,962
<SHORT-TERM> 14,802,807
<LIABILITIES-OTHER> 1,382,509
<LONG-TERM> 14,013,631
0
0
<COMMON> 134,445
<OTHER-SE> 1,506,265
<TOTAL-LIABILITIES-AND-EQUITY> 56,232,098
<INTEREST-LOAN> 601,921
<INTEREST-INVEST> 290,962
<INTEREST-OTHER> 0
<INTEREST-TOTAL> 892,883
<INTEREST-DEPOSIT> 221,996
<INTEREST-EXPENSE> 584,867
<INTEREST-INCOME-NET> 308,016
<LOAN-LOSSES> 5,000
<SECURITIES-GAINS> 298
<EXPENSE-OTHER> 257,849
<INCOME-PRETAX> 150,335
<INCOME-PRE-EXTRAORDINARY> 70,876
<EXTRAORDINARY> 0
<CHANGES> 0
<NET-INCOME> 70,876
<EPS-PRIMARY> 0.53
<EPS-DILUTED> 0.50
<YIELD-ACTUAL> 7.01
<LOANS-NON> 219,050
<LOANS-PAST> 0
<LOANS-TROUBLED> 31,196
<LOANS-PROBLEM> 92,323
<ALLOWANCE-OPEN> 588,533
<CHARGE-OFFS> 10,304
<RECOVERIES> 655
<ALLOWANCE-CLOSE> 583,214
<ALLOWANCE-DOMESTIC> 16,943
<ALLOWANCE-FOREIGN> 0
<ALLOWANCE-UNALLOCATED> 566,271
<FN>
<F1> Tag 17 - Loans includes Loans held for sale of $2,111,735
and Allowance for loan losses of $583,214
</FN>
</TABLE>
