<PAGE>
UNITED STATES SECURITIES AND EXCHANGE COMMISSION
Washington, D.C. 20549
FORM 10-Q
(Mark one)
[X] QUARTERLY REPORT PURSUANT TO SECTION 13 OR 15(D) OF THE
SECURITIES EXCHANGE ACT OF 1934
For the quarterly period ended September 30, 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 October 31, 1999: 126,099,524 shares.
Page 1 of 51 pages
Exhibit index on page 50
<PAGE>
GOLDEN STATE BANCORP INC.
THIRD QUARTER 1999 REPORT ON FORM 10-Q
TABLE OF CONTENTS
PAGE NO.
--------
PART I. FINANCIAL INFORMATION
---------------------
Item 1. Consolidated Financial Statements
Unaudited Consolidated Balance Sheets
September 30, 1999 and December 31, 1998.............................3
Unaudited Consolidated Statements of Income
Nine months ended September 30, 1999 and 1998........................4
Unaudited Consolidated Statements of Income
Three months ended September 30, 1999 and 1998.......................5
Unaudited Consolidated Statements of Comprehensive Income
Nine months ended September 30, 1999 and 1998........................6
Unaudited Consolidated Statements of Comprehensive Income (Loss)
Three months ended September 30, 1999 and 1998.......................7
Unaudited Consolidated Statement of Stockholders' Equity
Nine months ended September 30, 1999.................................8
Unaudited Consolidated Statements of Cash Flows
Nine months ended September 30, 1999 and 1998........................9
Notes to Unaudited Consolidated Financial Statements................11
Item 2. Management's Discussion and Analysis of
Financial Condition and Results of Operations.......................21
Item 3. Quantitative and Qualitative Disclosures about Market Risk .........48
PART II. OTHER INFORMATION
-----------------
Item 1. Legal Proceedings ..................................................49
Item 2. Changes in Securities...............................................49
Item 3. Defaults Upon Senior Securities.....................................49
Item 4. Submission of Matters to a Vote of Security Holders.................49
Item 5. Other Information ..................................................49
Item 6. Exhibits and Reports on Form 8-K ...................................50
Signatures .................................................................51
Page 2
<PAGE>
GOLDEN STATE BANCORP INC. AND SUBSIDIARIES
Consolidated Balance Sheets
September 30, 1999 and December 31, 1998
(Unaudited)
(dollars in thousands, except per share data)
<TABLE>
<CAPTION>
September 30, December 31,
Assets 1999 1998
------ ---- ----
<S> <C> <C>
Cash and amounts due from banks $ 468,638 $ 854,954
Interest-bearing deposits in other banks 53 52,671
Short-term investment securities 73,947 60,325
----------- ----------
Cash and cash equivalents 542,638 967,950
Securities available for sale, at fair value 1,106,469 770,747
Securities held to maturity 213,892 250,964
Mortgage-backed securities available for sale, at fair value 13,735,096 12,947,992
Mortgage-backed securities held to maturity 2,265,838 2,770,913
Loans held for sale, net 819,383 2,366,583
Loans receivable, net 32,468,353 30,280,944
Investment in Federal Home Loan Bank ("FHLB") System 1,139,687 1,000,147
Premises and equipment, net 334,230 336,874
Foreclosed real estate, net 45,545 80,068
Accrued interest receivable 315,415 317,455
Intangible assets (net of accumulated amortization of $166,503
at September 30, 1999 and $113,709 at December 31, 1998) 874,418 923,598
Mortgage servicing rights 1,229,515 943,581
Other assets 715,330 911,168
----------- -----------
Total Assets $55,805,809 $54,868,984
=========== ===========
Liabilities, Minority Interest and Stockholders' Equity
-------------------------------------------------------
Deposits $23,675,979 $24,620,066
Securities sold under agreements to repurchase 5,963,925 4,238,395
Borrowings 22,969,455 22,375,557
Other liabilities 1,242,288 1,459,750
----------- -----------
Total liabilities 53,851,647 52,693,768
----------- -----------
Commitments and contingencies -- --
Minority interest 500,000 593,438
Stockholders' equity:
Common stock ($1.00 par value, 250,000,000 shares
authorized, 134,720,683 and 128,687,763 shares issued at
September 30, 1999 and December 31, 1998, respectively) 134,721 128,688
Additional paid-in capital 1,381,183 1,392,155
Accumulated other comprehensive (loss) income (199,498) 6,151
Retained earnings (substantially restricted) 308,092 56,471
Treasury stock (8,065,459 and 89,994 shares at September 30,
1999 and December 31, 1998, respectively) (170,336) (1,687)
----------- -----------
Total stockholders' equity 1,454,162 1,581,778
----------- -----------
Total liabilities, minority interest and stockholders' equity $55,805,809 $54,868,984
=========== ===========
See accompanying notes to unaudited consolidated financial statements.
</TABLE>
Page 3
<PAGE>
GOLDEN STATE BANCORP INC. AND SUBSIDIARIES
Consolidated Statements of Income
Nine Months Ended September 30, 1999 and 1998
(Unaudited)
(dollars in thousands, except per share data)
<TABLE>
<CAPTION>
Nine Months Ended September 30,
-------------------------------
1999 1998
---- ----
<S> <C> <C>
Interest income:
Loans receivable $1,721,858 $1,169,834
Mortgage-backed securities available for sale 645,539 294,174
Mortgage-backed securities held to maturity 137,810 80,025
Loans held for sale 95,958 85,070
Securities available for sale 57,513 40,459
Securities held to maturity 9,053 2,727
Interest-bearing deposits in other banks 3,851 23,009
Dividends on FHLB stock 43,143 22,463
----------- ----------
Total interest income 2,714,725 1,717,761
----------- ----------
Interest expense:
Deposits 667,387 545,734
Securities sold under agreements to repurchase 188,085 106,386
Borrowings 967,102 579,308
----------- -----------
Total interest expense 1,822,574 1,231,428
----------- -----------
Net interest income 892,151 486,333
Provision for loan losses 10,000 30,000
----------- -----------
Net interest income after provision for loan losses 882,151 456,333
----------- -----------
Noninterest income:
Loan servicing fees, net 108,358 106,070
Customer banking fees and service charges 138,820 79,475
Gain on sale of loans, net 25,385 49,989
Gain on sale of assets, net 18,296 235
Gain on sale of branches, net 2,343 108,825
Other income 21,792 16,045
----------- -----------
Total noninterest income 314,994 360,639
----------- -----------
Noninterest expense:
Compensation and employee benefits 300,489 200,605
Occupancy and equipment 110,224 65,085
Loan expense 29,249 33,863
Professional fees 39,894 30,812
Marketing 24,161 12,009
Data processing 17,786 10,274
Savings Association Insurance Fund deposit insurance premium 10,817 7,840
Foreclosed real estate operations, net (5,068) (6,024)
Merger and integration costs 7,747 31,917
Amortization of intangible assets 52,794 36,380
Other expense 116,169 80,473
----------- -----------
Total noninterest expense 704,262 503,234
----------- -----------
Income before income taxes, minority interest and extraordinary item 492,883 313,738
Income tax expense (benefit) 105,759 (151,845)
Minority interest: provision in lieu of income tax expense 122,684 --
Minority interest: other 28,338 82,598
----------- -----------
Income before extraordinary item 236,102 382,985
Extraordinary item - loss on early extinguishment of debt, net of tax -- 80,007
----------- -----------
Net income $ 236,102 $ 302,978
=========== ===========
Earnings per share:
Basic
Before extraordinary item $1.78 $6.25
Extraordinary item -- (1.31)
----- -----
Net income $1.78 $4.94
===== =====
Diluted
Before extraordinary item $1.67 $6.15
Extraordinary item -- (1.28)
----- -----
Net income $1.67 $4.87
===== =====
See accompanying notes to unaudited consolidated financial statements.
</TABLE>
Page 4
<PAGE>
GOLDEN STATE BANCORP INC. AND SUBSIDIARIES
Consolidated Statements of Income
Three Months Ended September 30, 1999 and 1998
(Unaudited)
(dollars in thousands, except per share data)
<TABLE>
<CAPTION>
Three Months Ended September 30,
-------------------------------
1999 1998
---- ----
<S> <C> <C>
Interest income:
Loans receivable $587,080 $ 408,494
Mortgage-backed securities available for sale 221,923 115,645
Mortgage-backed securities held to maturity 41,910 32,592
Loans held for sale 28,266 26,840
Securities available for sale 19,399 12,173
Securities held to maturity 2,750 1,155
Interest-bearing deposits in other banks 1,551 21,438
Dividends on FHLB stock 14,959 7,901
-------- ---------
Total interest income 917,838 626,238
-------- ---------
Interest expense:
Deposits 223,329 190,532
Securities sold under agreements to repurchase 80,475 49,337
Borrowings 326,942 210,157
-------- ---------
Total interest expense 630,746 450,026
-------- ---------
Net interest income 287,092 176,212
Provision for loan losses -- 10,000
-------- ---------
Net interest income after provision for loan losses 287,092 166,212
-------- ---------
Noninterest income:
Loan servicing fees, net 38,068 34,707
Customer banking fees and service charges 47,453 28,278
Gain on sale of loans, net 4,932 13,865
Gain on sale of assets, net 3,187 416
Gain on sale of branches, net 2,343 108,911
Other income 6,491 4,290
-------- ---------
Total noninterest income 102,474 190,467
-------- ---------
Noninterest expense:
Compensation and employee benefits 97,831 73,031
Occupancy and equipment 38,528 23,756
Loan expense 7,109 10,363
Professional fees 12,625 11,243
Marketing 6,927 2,142
Data processing 5,804 3,877
Savings Association Insurance Fund deposit insurance premium 3,384 2,786
Foreclosed real estate operations, net (3,000) (886)
Merger and integration costs -- 31,054
Amortization of intangible assets 17,626 13,151
Other expense 35,348 30,000
-------- ---------
Total noninterest expense 222,182 200,517
-------- ---------
Income before income taxes, minority interest and extraordinary item 167,384 156,162
Income tax (benefit) expense (45,353) 71,973
Minority interest: provision in lieu of income tax expense 122,684 --
Minority interest: other 8,431 36,406
-------- ----------
Income before extraordinary item 81,622 47,783
Extraordinary item - loss on early extinguishment of debt, net of tax -- 80,007
-------- ----------
Net income (loss) $ 81,622 $ (32,224)
======== =========
Earnings per share:
Basic
Before extraordinary item $ 0.63 $ 0.68
Extraordinary item -- (1.14)
------ ------
Net income (loss) $ 0.63 $(0.46)
====== ======
Diluted
Before extraordinary item $ 0.58 $ 0.65
Extraordinary item -- (1.09)
------ ------
Net income (loss) $ 0.58 $(0.44)
====== ======
</TABLE>
See accompanying notes to unaudited consolidated financial statements.
Page 5
<PAGE>
GOLDEN STATE BANCORP INC. AND SUBSIDIARIES
Consolidated Statements of Comprehensive Income
Nine Months Ended September 30, 1999 and 1998
(Unaudited)
(in thousands)
<TABLE>
<CAPTION>
Nine Months Ended September 30,
-------------------------------
1999 1998
---- ----
<S> <C> <C>
Net income $236,102 $302,978
Other comprehensive (loss) income, net of tax:
Unrealized holding (loss)gain on securities available for sale:
Unrealized holding (loss) gain arising during the period (204,906) 6,654
Less: reclassification adjustment for gain included
in net income (743) (536)
-------- --------
Other comprehensive (loss) income (205,649) 6,118
-------- --------
Comprehensive income $ 30,453 $309,096
======== ========
See accompanying notes to unaudited consolidated financial statements.
</TABLE>
Page 6
<PAGE>
GOLDEN STATE BANCORP INC. AND SUBSIDIARIES
Consolidated Statements of Comprehensive Income (Loss)
Three Months Ended September 30, 1999 and 1998
(Unaudited)
(in thousands)
<TABLE>
<CAPTION>
Three Months Ended September 30,
--------------------------------
1999 1998
---- ----
<S> <C> <C>
Net income (loss) $ 81,622 $(32,224)
Other comprehensive (loss) income, net of tax:
Unrealized holding (loss)gain on securities available for sale:
Unrealized holding (loss) gain arising during the period (43,571) 13,150
Less: reclassification adjustment for (gain) loss
included in net income (549) 29
-------- --------
Other comprehensive (loss) income (44,120) 13,179
-------- --------
Comprehensive income (loss) $ 37,502 $(19,045)
======== ========
See accompanying notes to unaudited consolidated financial statements.
</TABLE>
Page 7
<PAGE>
GOLDEN STATE BANCORP INC. AND SUBSIDIARIES
Consolidated Statement of Stockholders' Equity
Nine Months Ended September 30, 1999
(Unaudited)
(dollars in thousands)
<TABLE>
<CAPTION>
Accumulated Retained Common Stock
Common Stock Additional Other Earnings in Treasury Total
------------ Paid-in Comprehensive (Substantially ----------- Stockholders'
Shares Amount Capital Income (Loss) Restricted) 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 -- -- -- -- 236,102 -- -- 236,102
Change in net unrealized
holding gain (loss)on
securities available
for sale -- -- -- (205,649) -- -- -- (205,649)
Golden State Acquisition -
see note 2 -- -- (12,380) -- -- -- -- (12,380)
Adjustment to initial dividend
of tax benefits to former
parent due to deconsolidation -- -- -- -- 15,519 -- -- 15,519
Reclassification of
Litigation Tracking Warrants
owned by the Bank -- -- -- -- -- -- (1,987) (1,987)
Distribution of issuable shares 5,540,319 5,540 (5,540) -- -- -- -- --
Impact of restricted stock 56,908 57 181 -- -- -- -- 238
Purchase of treasury stock -- -- -- -- -- (8,048,700) (168,290) (168,290)
Sale of treasury stock -- -- (677) -- -- 73,235 1,628 951
Exercise of stock options 435,693 436 7,444 -- -- -- -- 7,880
----------- -------- ---------- ---------- -------- ---------- --------- ----------
Balance at September 30, 1999 134,720,683 $134,721 $1,381,183 $(199,498) $308,092 (8,065,459) $(170,336) $1,454,162
=========== ======== ========== ========= ======== ========== ========= ==========
See accompanying notes to unaudited consolidated financial statements.
</TABLE>
Page 8
<PAGE>
GOLDEN STATE BANCORP INC. AND SUBSIDIARIES
Consolidated Statements of Cash Flows
Nine Months Ended September 30, 1999 and 1998
(Unaudited)
(in thousands)
<TABLE>
<CAPTION>
Nine Months Ended September 30,
-------------------------------
1999 1998
---- ----
<S> <C> <C>
Cash flows from operating activities:
Net income $ 236,102 $ 302,978
Adjustments to reconcile net income to net cash provided by (used in)
operating activities:
Amortization of intangible assets 52,794 36,380
Amortization (accretion) of purchase accounting premiums and
discounts, net 8,902 (7,633)
Accretion of discount on borrowings 756 547
Amortization of mortgage servicing rights 157,782 92,003
Provision for loan losses 10,000 30,000
Gain on sale of assets, net (18,296) (235)
Gain on sale of branches, net (2,343) (108,825)
Gain on sale of foreclosed real estate (10,494) (11,331)
Loss on sale of loans, net 147,013 88,514
Capitalization of originated mortgage servicing rights (172,398) (138,503)
Extraordinary loss on early extinguishment of debt, net -- 80,007
Depreciation and amortization of premises and equipment 29,925 17,364
Amortization of deferred debt issuance costs 5,456 6,974
FHLB stock dividends (43,143) (22,463)
Purchases and originations of loans held for sale (7,217,334) (6,391,601)
Net proceeds from the sale of loans held for sale 8,509,343 6,354,361
Decrease (increase) in other assets 206,050 (169,859)
Decrease (increase) in accrued interest receivable 2,040 (10,131)
Decrease in other liabilities (49,713) (300,698)
Amortization of deferred compensation expense-restricted stock 238 --
Minority interest 28,338 82,598
---------- ----------
Net cash provided by (used in) operating activities $1,881,018 $ (69,553)
---------- ----------
See accompanying notes to unaudited consolidated financial statements.
(Continued)
</TABLE>
Page 9
<PAGE>
GOLDEN STATE BANCORP INC. AND SUBSIDIARIES
Consolidated Statements of Cash Flows (continued)
Nine Months Ended September 30, 1999 and 1998
(Unaudited)
(in thousands)
<TABLE>
<CAPTION>
Nine Months Ended September 30,
-------------------------------
1999 1998
---- ----
<S> <C> <C>
Cash flows from investing activities:
Nevada Purchase $ 458,943 $ --
GSAC Acquisition -- (13,577)
Cal Fed Acquisition -- 58,386
Golden State Acquisition -- 782,233
Purchases of securities available for sale (791,952) (531,774)
Proceeds from maturities of securities available for sale 390,328 803,296
Purchases of securities held to maturity (27,527) (897)
Proceeds from maturities of securities held to maturity 64,855 2,263
Purchases of mortgage-backed securities available for sale (4,140,171) (6,096,235)
Principal payments on mortgage-backed securities available for sale 3,088,120 1,921,973
Proceeds from sales of mortgage-backed securities available for sale 193,732 13,703
Principal payments on mortgage-backed securities held to maturity 504,968 289,026
Proceeds from sales of loans 16,820 8,433
Net (increase) decrease in loans receivable (2,386,785) 1,255,430
Purchases of FHLB stock, net (98,517) (79,459)
Purchases of premises and equipment (79,832) (51,223)
Proceeds from disposal of premises and equipment 47,002 19,228
Proceeds from sales of foreclosed real estate 114,938 121,785
Purchases of mortgage servicing rights (289,922) (68,203)
Proceeds from sales of mortgage servicing rights 30,616 --
----------- ------------
Net cash flows used in investing activities (2,904,384) (1,565,612)
----------- ------------
Cash flows from financing activities:
Branch Sales (69,340) (1,267,517)
Net decrease in deposits (1,412,908) (791,519)
Proceeds from additional borrowings 22,388,086 17,098,354
Principal payments on borrowings (21,751,828) (14,845,668)
Net increase in securities sold under agreements to repurchase 1,725,530 1,464,311
GS Escrow Merger -- 1,970,285
Bank Preferred Stock Tender Offers (97,621) (227,345)
Debt Tender Offers (253) (879,879)
Redemption of FN Holdings Preferred Stock -- (25,000)
Dividends paid to minority stockholders, net of taxes (24,153) (84,196)
Capital distribution to Parent -- (28)
Exercise of stock options 7,880 --
Purchase of treasury stock (168,290) --
Sale of treasury stock 951 28
----------- ------------
Net cash flows provided by financing activities 598,054 2,411,826
----------- ------------
Net change in cash and cash equivalents (425,312) 776,661
Cash and cash equivalents at beginning of period 967,950 412,311
----------- ------------
Cash and cash equivalents at end of period $ 542,638 $ 1,188,972
=========== ============
See accompanying notes to unaudited consolidated financial statements.
</TABLE>
Page 10
<PAGE>
GOLDEN STATE BANCORP INC. AND SUBSIDIARIES
Notes to Unaudited Consolidated Financial Statements
(1) BASIS OF PRESENTATION
The accompanying unaudited 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 and nine months ended September 30, 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 and nine month periods in the prior year
have been reclassified to conform with the current period's presentation.
On September 11, 1998, First Nationwide (Parent) Holdings Inc. ("Parent
Holdings"), which then owned all of the common stock of First Nationwide
Holdings Inc. ("FN Holdings") 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 unaudited consolidated financial statements include the
accounts of Golden State or the "Company," which 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 Glen Fed
Merger. Unless the context otherwise indicates, "California Federal" or "Bank"
refers to California Federal Bank, A Federal Savings Bank as the surviving
entity after the consummation of the Glen Fed 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 represents amounts attributable to (i) the Bank
Preferred Stock that had not been acquired by GS Holdings, (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 11
<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, 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 Acquisition
totaled $7.7 million for the nine months ended September 30, 1999, including
severance for terminated California Federal employees, expenses for California
Federal branch closures, and conversion and consolidation costs, as well as
transition expenses for duplicate personnel, facilities and computer systems
during the integration period. No such expenses were incurred during the third
quarter of 1999.
During the third quarter of 1999, the Company recorded fair value and
other adjustments to reduce intangible assets in the Golden State Acquisition by
$16.6 million, $18.1 million and $12.4 million related to (i) previously accrued
severance and contract termination costs (which had not been utilized upon
completion of the integration plan), (ii) a "true-up" adjustment of the deferred
tax asset and (iii) the purchase price, 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 September 11, 1998, the Bank consummated the sale of its Florida bank
franchise (consisting of 24 branches with deposits of $1.4 billion) to Union
Planters Bank of Florida, a wholly owned subsidiary of Union Planters Corp. (the
"Florida Branch Sale").
On April 16, 1999, the Bank acquired twelve retail branches located in
Nevada with deposits of approximately $543 million from Norwest Bank, Nevada, a
subsidiary of Norwest Corporation, and Wells Fargo Bank, N.A. (the "Nevada
Purchase"). Intangible assets of $50.7 million were recorded in connection with
this acquisition, principally representing the deposit premium paid in the
transaction.
Page 12
<PAGE>
GOLDEN STATE BANCORP INC. AND SUBSIDIARIES
Notes to Unaudited Consolidated Financial Statements
During April 1999, First Nationwide Mortgage Corporation ("FNMC") sold
servicing rights for approximately 49,000 loans with an unpaid principal balance
of approximately $2.0 billion, recognizing a pre-tax gain of $16.3 million (the
"Servicing Sale").
(3) CASH, CASH EQUIVALENTS, AND STATEMENTS OF CASH FLOWS
Cash paid for interest on deposits and other interest-bearing liabilities
during the nine months ended September 30, 1999 and 1998 was $1.7 billion and
$1.2 billion, respectively.
During the nine months ended September 30, 1999, noncash activity
consisted of transfers of $227.1 million from loans receivable to
mortgage-backed securities upon the securitization of certain of the Bank's
single-family loans, transfers of $108.1 million from loans held for sale (at
lower of cost or market) to loans receivable, transfers of $81.0 million from
loans receivable and loans held for sale to foreclosed real estate and $8.4
million of loans made to facilitate sales of real estate owned.
Noncash activity during the nine months ended September 30, 1999 also
included (i) a reduction of $18.9 million in previously accrued severance and
contract termination costs, (ii) an $18.1 million "true-up" adjustment of the
deferred tax asset and $12.4 million in purchase price adjustments related to
the Golden State Acquisition, (iii) an increase of $181 thousand and $57
thousand in additional paid-in capital and common stock, respectively,
reflecting the impact of 56,908 shares of restricted common stock issued during
the quarter, (iv) an increase of $2.0 million in treasury stock reflecting the
after-tax effect of a reclassification by the Bank from other assets of the
value associated with Litigation Tracking Warrants ("LTW TMs") that have been
withdrawn by holders and (v) an increase of $15.5 million in retained earnings
related to an adjustment of the initial dividend of tax benefits due to First
Gibraltar and Hunter's Glen upon the Company's deconsolidation from its tax
reporting group as a result of the Golden State Acquisition.
During the nine months ended September 30, 1998, noncash activity
consisted of transfers of $85.3 million from loans receivable to foreclosed real
estate, $5.9 million of loans made to facilitate sales of real estate owned,
transfers of $3.2 million from loans held for sale (at lower of cost or market)
to mortgage-backed securities available for sale and $1.9 billion from loans
receivable to mortgage-backed securities held to maturity upon the
securitization of certain of the Bank's multi-family loans. Noncash activity
also included a $267.9 million dividend related to the Company's deconsolidation
from its tax reporting group as a result of the Golden State Acquisition, the
issuance of additional FN Holdings Preferred Stock through FN Holdings Preferred
Stock dividends of $0.6 million, and the retirement of FN Holdings Preferred
Stock of $25.0 million.
Page 13
<PAGE>
GOLDEN STATE BANCORP INC. AND SUBSIDIARIES
Notes to Unaudited Consolidated Financial Statements
(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>
Nine Months Ended September 30, Three Months Ended September 30,
----------------------------------- ----------------------------------
Community Mortgage Community Mortgage
Banking Banking Total Banking Banking Total
--------- -------- ----- --------- -------- -----
(in thousands)
<S> <C> <C> <C> <C> <C> <C>
Net interest income: (1)
1999 $ 936,245 $ 40,562 $ 976,807 $ 297,816 $ 16,710 $ 314,526
1998 521,727 36,286 558,013 188,629 13,606 202,235
Noninterest income: (2)
1999 $ 187,088 $ 164,678 $ 351,766 $ 67,405 $ 46,701 $ 114,106
1998 227,395 156,417 383,812 146,439 52,465 198,904
Noninterest expense: (3)
1999 $ 575,401 $ 132,341 $ 707,742 $ 182,449 $ 40,893 $ 223,342
1998 383,353 123,361 506,714 156,737 44,940 201,677
</TABLE>
- ----------
(1) Includes $84.7 million and $71.7 million for the nine months ended
September 30, 1999 and 1998 respectively, in earnings credit provided to
FNMC by the Bank, primarily for custodial bank account balances generated
by FNMC. Also includes $184.9 million and $140.5 million for the nine
months ended September 30, 1999 and 1998, respectively, in interest
income and expense on intercompany loans. Includes $27.4 million and
$26.0 million for the three months ended September 30, 1999 and 1998,
respectively, in earnings credit provided to FNMC by the Bank, primarily
for custodial bank account balances generated by FNMC. Also includes
$60.8 million and $46.4 million for the three months ended September 30,
1999 and 1998, respectively, in interest income and expense on
intercompany loans.
(2) Includes $36.8 million and $23.2 million for the nine months ended
September 30, 1999 and 1998 respectively, in intercompany servicing fees.
Includes $11.6 million and $8.4 million for the three months ended
September 30, 1999 and 1998, respectively, in intercompany servicing
fees.
(3) Includes $3.5 million in each of the nine-month periods ended September
30, 1999 and 1998 in intercompany noninterest expense. Includes $1.2
million in each of the three-month periods ended September 30, 1999 and
1998 in intercompany noninterest expense.
Page 14
<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 nine and three months ended September
30, 1999 and 1998 (in thousands):
<TABLE>
<CAPTION>
Nine Months Ended Three Months Ended
September 30, September 30,
---------------------- ----------------------
1999 1998 1999 1998
---- ---- ---- ----
<S> <C> <C> <C> <C>
Net interest income:
Total net interest income for reportable segments $976,807 $558,013 $314,526 $202,235
Elimination of intersegment net interest income (84,656) (71,680) (27,434) (26,023)
-------- -------- --------- --------
Total $892,151 $486,333 $287,092 $176,212
======== ======== ======== ========
Noninterest income:
Total noninterest income for reportable segments $351,766 $383,812 $114,106 $198,904
Elimination of intersegment servicing fees (36,772) (23,173) (11,632) (8,437)
-------- -------- -------- --------
Total $314,994 $360,639 $102,474 $190,467
======== ======== ======== ========
Noninterest expense:
Total noninterest expense for reportable segments $707,742 $506,714 $223,342 $201,677
Elimination of intersegment expense (3,480) (3,480) (1,160) (1,160)
-------- -------- -------- --------
Total $704,262 $503,234 $222,182 $200,517
======== ======== ======== ========
</TABLE>
(5) REDEMPTION OF FN HOLDINGS NOTES
On May 15, 1999, GS Holdings redeemed the remaining $225 thousand
aggregate principal amount of the FN Holdings 12 1/4% Senior Notes for an
aggregate redemption price, including accrued interest payable, of $252.6
thousand. The premium paid in connection with such redemption was not material.
(6) REFINANCING TRANSACTIONS
On August 6, 1998, GS Escrow Corp. ("GS Escrow"), an affiliate of GS
Holdings, issued $2 billion in debt securities, referred to as the GS Escrow
Notes. The GS Escrow Notes were issued to fund, in part, the cash tender offers,
discussed below, that occurred following the Golden State Acquisition. Deferred
issuance costs of $38.6 million related to the GS Escrow Notes are included in
Golden State's other assets and are being amortized over the life of such notes.
On August 17, 1998, FN Holdings commenced cash tender offers (the "Bank
Preferred Stock Tender Offers") for each of the Bank's two outstanding series of
Bank Preferred Stock, which together had a total aggregate liquidation
preference of $473.2 million. During the third quarter of 1998, 607,711 shares
of the 10 5/8% Preferred Stock and 1,432,937 shares of the 11 1/2% Preferred
Stock were purchased for an aggregate purchase price of $227.3 million. The net
tender premiums and expenses paid in connection with the Bank Preferred Stock
Tender Offers totaled $19.5 million and are reflected as minority interest
expense on the Company's consolidated statements of income for the three and
nine months ended September 30, 1998.
On September 14, 1998, GS Holdings commenced cash tender offers for the
FN Holdings Notes, which had an aggregate principal amount of $915 million. On
September 17, 1998, GS Holdings purchased $735.8 million aggregate principal
amount of the FN Holdings Notes for an aggregate purchase price, including
accrued interest payable, of $902.5 million. The after-tax tender premiums and
expenses paid in connection with the Debt Tender Offers totaled $80.0 million
and are reflected as an extraordinary loss, net of taxes, on the Company's
consolidated statements of income for the three and nine months ended September
30, 1998.
For additional information regarding the Refinancing Transactions, refer
to note 5 of the "Notes to Consolidated Financial Statements" in the Company's
1998 Form 10-K.
Page 15
<PAGE>
GOLDEN STATE BANCORP INC. AND SUBSIDIARIES
Notes to Unaudited Consolidated Financial Statements
(7) ACCRUED TERMINATION AND FACILITIES COSTS
In connection with the Golden State Acquisition, the Company 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). The merger and integration plan relative
to the Golden State Acquisition was in place on September 11, 1998. Certain of
these costs were included in the allocation of purchase price and others were
recognized in net income. The table below reflects a summary of the activity in
the liability for the costs related to such plan since December 31, 1998 (in
thousands):
<TABLE>
<CAPTION>
Severance and
Branch Termination Contract
Consolidations Benefits Termination Total
-------------- -------- ----------- -----
<S> <C> <C> <C> <C>
Balance at December 31, 1998 $ 29,870 $ 33,480 $ 11,815 $ 75,165
Additional liabilities recorded 2,322 -- -- 2,322
Charges to liability account (3,648) (3,626) (8,499) (15,773)
-------- -------- ------- --------
Balance at March 31, 1999 28,544 29,854 3,316 61,714
Additional liabilities recorded 2,573 -- -- 2,573
charges to liability account (3,873) -- (821) (4,694)
-------- -------- -------- --------
Balance at June 30, 1999 27,244 29,854 2,495 59,593
Additional liabilities recorded 4,356 56 -- 4,412
Charges to liability account (3,911) (458) (203) (4,572)
Reversal of accrual -- (16,641) (2,267) (18,908)
-------- -------- -------- --------
Balance at September 30, 1999 $ 27,689 $ 12,811 $ 25 $ 40,525
======== ======== ======== ========
</TABLE>
(8) INCOME TAXES
In connection with the Golden State Merger on September 11, 1998, the
Company deconsolidated from the Mafco Group. As a result, only the amount of the
net operating losses ("NOLs") of the Company not utilized by the Mafco Group on
or before December 31, 1998 are available to offset taxable income of the
Company thereafter.
Based upon the actual filing of the Mafco Group and Golden State 1998
consolidated federal income tax returns during the third quarter of 1999, tax
benefits of $122.7 million were recognized. The tax benefit is fully offset by
an increase in minority interest expense, since under the Golden State Merger
agreement, the tax benefits from any NOLs and other tax attributes of Parent
Holdings and its subsidiaries are retained by First Gibraltar and Hunter's Glen.
In addition, the Company recorded an adjustment of $15.5 million to
reduce the initial dividend of tax benefits to First Gibraltar and Hunter's Glen
due to its deconsolidation from the Mafco Group, which was recorded as an
increase to retained earnings during the third quarter of 1999.
(9) MINORITY INTEREST
On April 1, 1999, GS Holdings redeemed all of the remaining 607,299
outstanding shares of the Bank's 10 5/8% Preferred Stock not already owned by it
for $105.313 per share, for a total redemption price of $63.9 million. This
transaction reduced minority interest by $60.7 million on the Company's
consolidated balance sheet and resulted in a charge of $3.2 million to minority
interest expense.
On September 1, 1999, GS Holdings redeemed all of the remaining 318,341
outstanding shares of the Bank's 11 1/2% Preferred Stock not already owned by it
for $105.75 per share, for a total redemption price of $33.7 million. This
transaction reduced minority interest by $31.8 million on the Company's
consolidated balance sheet and resulted in a charge of $1.8 million to minority
interest expense.
Page 16
<PAGE>
GOLDEN STATE BANCORP INC. AND SUBSIDIARIES
Notes to Unaudited Consolidated Financial Statements
During the third quarter of 1999, minority interest expense of $122.7
million was recorded based upon changes to estimated pre-merger tax benefits
retained by Parent Holdings. This amount was fully offset by an income tax
benefit in the same period. See note 8.
(10) STOCKHOLDERS' EQUITY
COMMON STOCK
At September 30, 1999, there were 126,655,224 shares of Golden State
Common Stock issued and outstanding (net of treasury stock).
ADDITIONAL PAID-IN-CAPITAL
During the third quarter of 1999, the Company recorded an adjustment to
the purchase price in the Golden State Acquisition of $12.4 million. See note 2.
RETAINED EARNINGS
During the third quarter of 1999, the Company recorded a $15.5 million
increase in retained earnings representing an adjustment to reduce the initial
dividend of tax benefits to First Gibraltar and Hunter's Glen upon the Company's
deconsolidation from its tax reporting group on September 11, 1998. See note 8.
TREASURY STOCK
At September 30, 1999, the Company had 8,065,459 shares of its common
stock in treasury at an aggregate cost of $20.87 per share.
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 further expanded to include up to $250
million of all publicly traded securities issued by the Company and any of its
subsidiaries. During the three months ended September 30, 1999, the Company
repurchased 5,976,100 shares of common stock for an aggregate purchase price of
$120.3 million, or an average of $20.12 per share. During the nine months ended
September 30, 1999, the Company repurchased 8,048,700 shares of common stock for
an aggregate purchase price of $168.3 million, or an average of $20.91 per
share.
In connection with the Golden State Acquisition on September 11, 1998,
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 and nine
months ended September 30, 1999, shares totaling 56,193 and 73,235,
respectively, were issued out of treasury in connection with options exercised
by holders related to an earlier acquisition by the former Golden State prior to
the Golden State Acquisition.
During the third quarter of 1999, the Company recorded a $2.0 million
reduction in stockholders' equity representing a reclassification of the value
associated with LTW TMs that have been withdrawn by holders, net of tax, which
were previously recorded in other assets.
DIVIDENDS
There were no dividends on common stock during the three and nine month
periods ended September 30, 1999 and 1998.
Page 17
<PAGE>
GOLDEN STATE BANCORP INC. AND SUBSIDIARIES
Notes to Unaudited Consolidated Financial Statements
(11) EXECUTIVE AND STOCK COMPENSATION
In connection with the Golden State Acquisition, the Bank is
administering stock option plans that provided 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 pre-merger stock option plans have expired as to the granting
of additional options. During the three and nine months ended September 30,
1999, a total of 149,226 and 506,243 options, respectively, were exercised and
57,500 and 230,000 options, respectively, expired under these plans.
On May 17, 1999, the Golden State Bancorp Inc. Omnibus Stock Plan (the
"Stock Plan") was approved, providing for the granting of stock options, stock
appreciation rights and restricted stock to employees of Golden State and its
subsidiaries, non-employee directors and to consultants who provide significant
services to Golden State. The total number of shares available for grant through
March 15, 2009 under the Stock Plan is 7,000,000 shares, which may be issued
from treasury or from authorized but unissued shares.
On May 18, 1999, the Company granted to its employees non-qualified stock
options equivalent to 1,293,000 shares of common stock at a price of $23.50 per
share under the Stock Plan. During the three month period ending September 30,
1999, the Company granted additional non-qualified stock options equivalent to
59,000 shares of common stock at a price of $23.50 per share under the Stock
Plan. These shares generally vest over three years in one-third increments on
the anniversary of the grant date. The options generally expire 10 years from
the date of grant. No compensation cost was recognized by the Company for these
stock options during the three and nine months ended September 30, 1999, in
accordance with the intrinsic value accounting methodology prescribed in
Accounting Principles Board Opinion No. 25, ACCOUNTING FOR STOCK ISSUED TO
EMPLOYEES, whereby compensation expense to employees is determined based upon
the excess, if any, of the market price of the Company's common stock at the
measurement date over the exercise price of the award.
At September 30, 1999, options to exercise an equivalent of 2,609,544
shares remained outstanding under all plans.
On May 17, 1999, the Golden State Bancorp Inc. Executive Compensation
Plan (ECP) was approved, providing for performance-based incentive awards to
senior executives of the Company. Awards may be paid in cash; however up to 50%
may be payable in restricted stock granted under the Stock Plan discussed above.
On July 19, 1999, the Company awarded to certain of its employees 56,908
shares of restricted stock. The market value on the date of the award was $22.38
per share. These shares generally vest over two years in one-half increments on
the anniversary of the grant date, based upon the continued service of the
employee. The compensation expense related to this award is recognized on a
straight line basis over the vesting period for each tranche of the award with a
corresponding increase to additional paid-in capital. During the three and nine
months ended September 30, 1999, $0.2 million in compensation expense was
recognized related to such award. These restricted shares have full voting
rights and are included in common shares outstanding and in the calculation of
diluted earnings per share. See note 13.
(12) ISSUABLE SHARES
During 1998, net tax benefits totaling $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
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 a subsidiary of 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 issuable shares are included in the basic and
diluted earnings per share calculations.
Page 18
<PAGE>
GOLDEN STATE BANCORP INC. AND SUBSIDIARIES
Notes to Unaudited Consolidated Financial Statements
In accordance with the Golden State Merger agreement, an additional
4,877,853 and 6,611,070 shares became issuable during the three and nine months
ended September 30, 1999, respectively, to First Gibraltar and Hunter's Glen.
The number of shares is estimated based on the anticipated use in 1999 of
pre-merger net operating losses and other net deferred tax assets, and is
subject to change based upon actual 1999 earnings and the average share price
during the year. Such issuable shares are included in the calculation of diluted
earnings per share. See note 13.
(13) EARNINGS PER SHARE INFORMATION
Earnings per share of common stock is based on the weighted average
number of common and common equivalent shares outstanding, which is net of
common shares in treasury, during the periods presented. Information used to
calculate basic and diluted earnings per share is as follows (in thousands,
except per share data):
<TABLE>
<CAPTION>
Nine Months Ended September 30, Three Months Ended September 30,
------------------------------------------- ------------------------------------------
1999 1998 1999 1998
------------------- --------------------- -------------------- --------------------
Basic Diluted Basic Diluted Basic Diluted Basic Diluted
EPS EPS EPS EPS EPS EPS EPS EPS
<S> <C> <C> <C> <C> <C> <C> <C> <C>
Income before extraordinary item $236,102 $236,102 $382,985 $382,985 $ 81,622 $ 81,622 $ 47,783 $ 47,783
Extraordinary item -- -- (80,007) (80,007) -- -- (80,007) (80,007)
-------- -------- -------- -------- -------- -------- -------- --------
Net income (loss) $236,102 $236,102 $302,978 $302,978 $ 81,622 $ 81,622 $(32,224) $(32,224)
======== ======== ======== ======== ======== ======== ======== ========
Weighted average common
shares outstanding (i) 132,137 132,137 61,204 61,204 129,806 129,806 70,018 70,018
Issuable shares 558 558 119 119 148 148 354 354
-------- -------- -------- -------- -------- -------- -------- --------
Total weighted average
common shares outstanding (ii) 132,695 132,695 61,323 61,323 129,954 129,954 70,372 70,372
Effects of dilutive securities:
Options and warrants (iii) -- 5,581 -- 404 -- 5,134 -- 1,200
Issuable shares -- 2,749 -- -- -- 5,545 -- --
Restricted stock -- 2 -- -- -- 6 -- --
Convertible Preferred Stock -- -- -- 519 -- -- -- 1,539
-------- -------- -------- -------- -------- -------- -------- --------
Total weighted average diluted
common shares outstanding 132,695 141,027 61,323 62,246 129,954 140,639 70,372 73,111
======== ======== ======== ======== ======== ======== ======== ========
Income before extraordinary item $ 1.78 $ 1.67 $ 6.25 $ 6.15 $ 0.63 $ 0.58 $ 0.68 $ 0.65
Extraordinary item -- -- (1.31) (1.28) -- -- (1.14) (1.09)
-------- -------- -------- -------- -------- -------- -------- --------
Earnings (loss) per common share $ 1.78 $ 1.67 $ 4.94 $ 4.87 $ 0.63 $ 0.58 $ (0.46) $ (0.44)
======== ======== ======== ======== ======== ======== ======== ========
</TABLE>
- ---------------------
(i) 1999 basic weighted average shares outstanding exclude the effect of
56,908 shares of restricted stock that were awarded to employees of the
Company on July 19, 1999, as these shares are subject to vesting. These
shares were included in diluted average shares outstanding. See note 11.
(ii) 1999 total basic weighted average shares outstanding include the effect
of 5,540,319 shares issued on January 21, 1999 and 147,677 shares
issuable to First Gibraltar and Hunter's Glen for net tax benefits
realized by the Bank during 1998.
1999 total diluted weighted average shares outstanding include the effect
of an additional 969,940 shares in the first quarter, 763,277 shares in
the second quarter and 4,877,853 shares in the third quarter estimated to
be issuable to First Gibraltar and Hunter's Glen based on the anticipated
use of pre-merger tax benefits. See note 12.
1998 total basic and diluted weighted average shares outstanding include
the effect of 1,711,879 shares issuable to First Gibraltar and Hunter's
Glen for net tax benefits realized during the third quarter of 1998.
(iii) 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.
(14) 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
Page 19
<PAGE>
GOLDEN STATE BANCORP INC. AND SUBSIDIARIES
Notes to Unaudited Consolidated Financial Statements
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, as amended by SFAS No. 137, ACCOUNTING FOR DERIVATIVE
INSTRUMENTS AND HEDGING ACTIVITIES DEFERRAL OF THE EFFECTIVE DATE OF FASB
STATEMENT NO. 133 - AN AMENDMENT OF FASB STATEMENT NO. 133, is effective for all
fiscal quarters of fiscal years beginning after June 15, 2000. 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 Company's consolidated
financial statements and to coordinate its implementation.
Page 20
<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 nine months ended September 30,
1999 of $236.1 million, or $1.67 per diluted share, compared with net income of
$303.0 million, or $4.87 per diluted share, for the corresponding period in
1998. Net income for the nine months ended September 30, 1999 includes a $16.3
million pre-tax gain from the Servicing Sale, $5.0 million in minority interest
expense related to the redemption of the Bank Preferred Stock and a $2.3 million
pre-tax gain from the sale of branches. Net income on a core basis, excluding
these items, totaled $230.3 million, or $1.63 per diluted share for the nine
months ended September 30, 1999. Net income for the nine months ended September
30, 1998 includes (i) a $250 million reduction of the valuation allowance
related to the Company's deferred tax asset, (ii) a $108.9 million pre-tax gain
from the Florida Branch Sale, (iii) $31.9 million in merger and integration
costs (including severance, conversion and consolidation costs) incurred in
connection with the Golden State Acquisition, (iv) an $80 million extraordinary
loss on early extinguishment of debt, net and (v) $19.5 million in minority
interest expense related to the Bank Preferred Stock Tender Offers. Without
consideration of these items, net income for the nine months ended September 30,
1998 would have been $108.0 million, or $1.73 per diluted share.
Page 21
<PAGE>
Golden State reported net income for the three months ended September 30,
1999 of $81.6 million, or $0.58 per diluted share, compared with net loss of
$32.2 million, or $(0.44) per diluted share, for the corresponding period in
1998. Net income for the three months ended September 30, 1999 includes a $2.3
million pre-tax gain from the sale of branches and $1.8 million in minority
interest expense related to the redemption of the 11 1/2% Bank Preferred Stock.
Net income on a core basis, excluding these items, totaled $82.0 million, or
$0.58 per diluted share for the three months ended September 30, 1999. The net
loss for the three months ended September 30, 1998 includes (i) a $108.9 million
pre-tax gain from the Florida Branch Sale, (ii) $31.1 million in merger and
integration costs (including severance, conversion and consolidation costs)
incurred in connection with the Golden State Acquisition, (iii) an $80 million
extraordinary loss on early extinguishment of debt, net and (iv) $19.5 million
in minority interest expense related to the Bank Preferred Stock Tender Offers.
Without consideration of these items, net income for the three months ended
September 30, 1998 would have been $22.2 million, or $0.30 per diluted share.
FINANCIAL CONDITION
During the nine months ended September 30, 1999, consolidated total
assets increased $.9 billion, to $55.8 billion from December 31, 1998, and total
liabilities increased from $52.7 billion to $53.9 billion.
During the nine months ended September 30, 1999, stockholders' equity
decreased $127.6 million to $1.5 billion. The decrease in stockholders' equity
is principally the net result of a $205.6 million net unrealized loss on
securities available for sale, $168.3 million in purchases of treasury stock and
a $12.4 million reduction in the purchase price of the Golden State Acquisition,
partially offset by $236.1 million in net income for the period, a $15.5 million
adjustment to reduce the initial dividend of tax benefits to parent due to
deconsolidation and $7.9 million from the exercise of stock options. See note
10.
The unrealized loss on securities available for sale is primarily a
result of a decline in the value of the Company's mortgage-backed securities
available for sale due to an increase in Treasury yields and wider spreads on
private label collateralized mortgage obligations. This unrealized loss reflects
general declines in the prices of fixed-rate instruments during the year as a
consequence of rising interest rates, which led to a slowing of prepayment
expectations and extended the expected lives of the mortgage-related securities
in the portfolio. This unrealized loss represents a decline in the total
mortgage-backed securities available for sale portfolio of less than 2%.
However, this adjustment does not take into account market changes in the value
of borrowings or deposits. At September 30, 1999, the market valuation
adjustment of the offsetting borrowings would have been a positive $197.5
million. This does not include any increase in the value of deposits.
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 $219 million at September 30, 1999 compared
with $310 million at December 31, 1998. Total non-performing assets as a
percentage of the Bank's total assets decreased to 0.39% at September 30, 1999
from 0.57% at December 31, 1998.
YEAR 2000
The Year 2000 remediation process for existing mission-critical systems
was completed in the first quarter of 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.
The contingency plan for the critical supply vendors was completed in
mid-February 1999 and contingency plans were completed for all other material
service providers by June 30, 1999. The Y2K weekend (January 1 and 2, 2000)
support plan for applications maintained in-house was completed by September 30,
1999. In addition, contingency plans for critical business areas to address
liquidity, customer communications, operations issues and potential failures
surrounding the Year 2000 event were completed by September 30, 1999.
Page 22
<PAGE>
It is currently expected that costs related to making the Company's
computer systems, applications and facilities Year 2000 compliant will total
approximately $17.6 million over the years 1997 to 2000. Of this amount, $15.9
million has been incurred since the inception of the Year 2000 project through
September 30, 1999. Noninterest expense for the three and nine months ended
September 30, 1999 included approximately $1.5 million and $6.1 million,
respectively, 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.
ACHIEVEMENT OF MERGER COST SAVINGS
In connection with the Golden State Acquisition, management pledged to
reduce operating expenses of the combined entity by $160.2 million, representing
a 44% reduction from historical levels of the acquired entities' noninterest
expense, by December 31, 1999. As of June 30, 1999, current operating expenses
were reduced to a level such that this goal has been achieved. Annualized
operating expenses for the month ended June 30, 1999 were approximately $162
million lower than comparable expenses (plus a 3.5% factor for inflation)
included in pro forma financial statements prepared in connection with the
Golden State Acquisition and included in the Company's proxy statement dated
July 15, 1998. During the three months ended September 30, 1999, the Company has
maintained operating expenses at this reduced level.
Page 23
<PAGE>
RESULTS OF OPERATIONS
Nine Months Ended September 30, 1999 versus Nine Months Ended September
30, 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>
Nine Months Ended September 30, 1999
---------------------------------------------
Average Average
Balance Interest Rate
------- -------- ----
(dollars in millions)
<S> <C> <C> <C>
ASSETS
Interest-earning assets (1):
Securities and interest-bearing deposits in banks (2) $ 1,571 $ 70 5.98%
Mortgage-backed securities available for sale 13,623 645 6.32
Mortgage-backed securities held to maturity 2,471 138 7.44
Loans held for sale, net 1,939 96 6.60
Loans receivable, net 31,427 1,722 7.31
FHLB stock 1,100 43 5.24
------- ------
Total interest-earning assets 52,131 2,714 6.94
------
Noninterest-earning assets 3,820
-------
Total assets $55,951
=======
LIABILITIES, MINORITY INTEREST
AND STOCKHOLDERS' EQUITY
Interest-bearing liabilities:
Deposits $24,052 667 3.71
Securities sold under agreements to repurchase (3) 4,826 188 5.14
Borrowings (3) 23,469 967 5.51
------- ------
Total interest-bearing liabilities 52,347 1,822 4.65
------
Noninterest-bearing liabilities 1,493
Minority interest 551
Stockholders' equity 1,560
-------
Total liabilities, minority interest
and stockholders' equity $55,951
=======
Net interest income $ 892
======
Interest rate spread 2.29%
=====
Net interest margin 2.27%
=====
Return on average assets 0.56%
=====
Return on average equity 20.19%
=====
Average equity to average assets 2.79%
=====
</TABLE>
Page 24
<PAGE>
<TABLE>
<CAPTION>
Nine Months Ended September 30, 1998
--------------------------------------------
Average Average
Balance Interest Rate
------- -------- ----
(dollars in millions)
<S> <C> <C> <C>
ASSETS
Interest-earning assets (1):
Securities and interest-bearing deposits in banks (2) $ 1,180 $ 66 7.48%
Mortgage-backed securities available for sale 6,661 294 5.89
Mortgage-backed securities held to maturity 1,396 80 7.64
Loans held for sale, net 1,585 85 7.16
Loans receivable, net 20,089 1,170 7.77
FHLB stock 519 22 5.78
------- ------
Total interest-earning assets 31,430 1,717 7.29
------
Noninterest-earning assets 3,331
-------
Total assets $34,761
=======
LIABILITIES, MINORITY INTEREST
AND STOCKHOLDERS' EQUITY
Interest-bearing liabilities:
Deposits $16,666 546 4.38
Securities sold under agreements to repurchase 2,510 106 5.59
Borrowings (3) 12,129 579 6.39
------- ------
Total interest-bearing liabilities 31,305 1,231 5.26
------
Noninterest-bearing liabilities 1,567
Minority interest 966
Stockholders' equity 923
-------
Total liabilities, minority interest
and stockholders' equity $34,761
=======
Net interest income $ 486
======
Interest rate spread 2.03%
=====
Net interest margin 2.05%
=====
Return on average assets 1.16%
=====
Return on average equity 43.78%
=====
Average equity to average assets 2.65%
=====
</TABLE>
- ----------
(1) Non-performing assets are included in the average balances for the
periods indicated.
(2) The information presented includes securities held to maturity,
securities available for sale and interest-bearing deposits in other
banks.
(3) Interest and average rate include the impact of interest rate swaps.
Page 25
<PAGE>
The following table presents certain information 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>
Nine Months Ended September 30, 1999 vs. 1998
Increase (Decrease) Due to
---------------------------------------------
Volume Rate Net
------ ---- ---
(in millions)
<S> <C> <C> <C>
INTEREST INCOME:
Securities and interest-bearing deposits in banks $ 10 $ (6) $ 4
Mortgage-backed securities available for sale 327 24 351
Mortgage-backed securities held to maturity 60 (2) 58
Loans held for sale, net 17 (6) 11
Loans receivable, net 617 (65) 552
FHLB stock 23 (2) 21
------ ------ ----
Total 1,054 (57) 997
------ ------ ----
INTEREST EXPENSE:
Deposits 184 (63) 121
Securities sold under agreements to repurchase 90 (8) 82
Borrowings 455 (67) 388
------ ------ ----
Total 729 (138) 591
------ ------ ----
Change in net interest income $ 325 $ 81 $406
====== ====== ====
</TABLE>
The volume variances in total interest income and total interest expense
for the nine months ended September 30, 1999 compared to the corresponding
period in 1998 are largely due to the additional volume related to the Golden
State Acquisition, increased purchases of mortgage-backed securities funded with
FHLB advances 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 and borrowings repurchased as part of the Refinancing
Transactions. The positive total rate variance of $81 million is primarily
attributed to the lower interest rates paid on new borrowings (including the
Refinancing Transactions), the lower cost of funds on deposits, the lower
costing liabilities assumed in the Golden State Acquisition, premium
amortization associated with prepayments of variable-rate mortgage-backed
securities in 1998 and higher market rates on mortgage-backed securities
purchased in 1999 and 1998, partially offset by prepayments of higher rate
interest-earning assets, primarily loans, in 1999.
INTEREST INCOME. Total interest income was $2.7 billion for the nine
months ended September 30, 1999, an increase of $997.0 million from the nine
months ended September 30, 1998. Total interest-earning assets for the nine
months ended September 30, 1999 averaged $52.1 billion, compared to $31.4
billion for the corresponding period in 1998, primarily as a result of the
Golden State Acquisition. The yield on total interest-earning assets during the
nine months ended September 30, 1999 decreased to 6.94% from 7.29% for the nine
months ended September 30, 1998, primarily due to prepayments of higher rate
loans which were replaced with lower yielding originations and the repricing of
variable-rate loans, partially offset by purchases of mortgage-backed securities
and additions from the Golden State Acquisition of mortgage-backed securities
with higher market yields.
Golden State earned $1.7 billion of interest income on loans receivable
for the nine months ended September 30, 1999, an increase of $552.0 million from
the nine months ended September 30, 1998. The average balance of loans
receivable was $31.4 billion for the nine months ended September 30, 1999,
compared to $20.1 billion for the same period in 1998. The weighted average rate
on loans receivable decreased to 7.31% for the nine months ended September 30,
1999 from 7.77% for the nine months ended September 30, 1998, primarily due to
comparatively
Page 26
<PAGE>
lower market rates in 1999. The increase in the average volume is primarily due
to the addition of $14.6 billion in loans acquired in the Golden State
Acquisition.
Golden State earned $96.0 million of interest income on loans held for
sale for the nine months ended September 30, 1999, an increase of $10.9 million
from the nine months ended September 30, 1998. The average balance of loans held
for sale was $1.9 billion for the nine months ended September 30, 1999, an
increase of $354 million from the comparable period in 1998, primarily due to
increased originations and longer holding periods for jumbo loans during the
nine months ended September 30, 1999. The weighted average rate on loans held
for sale decreased to 6.60% for the nine months ended September 30, 1999 from
7.16% for the nine months ended September 30, 1998, primarily due to declining
market rates.
Interest income on mortgage-backed securities available for sale was
$645.5 million for the nine months ended September 30, 1999, an increase of
$351.4 million from the nine months ended September 30, 1998. The average
portfolio balances increased $7.0 billion, to $13.6 billion, for the nine months
ended September 30, 1999 compared to the same period in 1998. The weighted
average yield on these assets increased from 5.89% for the nine months ended
September 30, 1998 to 6.32% for the nine months ended September 30, 1999. The
increase in the volume and the weighted average yield is primarily due to
premium amortization associated with prepayments of variable-rate securities in
1998, purchases of mortgage-backed securities and additions of $2.4 billion from
the Golden State Acquisition with higher market yields.
Interest income on mortgage-backed securities held to maturity was $137.8
million for the nine months ended September 30, 1999, an increase of $57.8
million from the nine months ended September 30, 1998. The average portfolio
balance increased $1.1 billion, to $2.5 billion, for the nine months ended
September 30, 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 September of 1998. The
weighted average rates for the nine months ended September 30, 1999 and 1998
were 7.44% and 7.64%, respectively.
Interest income on securities and interest-bearing deposits in other
banks was $70.4 million for the nine months ended September 30, 1999, an
increase of $4.2 million from the nine months ended September 30, 1998. The
average portfolio balance increased from $1.2 billion for the nine months ended
September 30, 1998 to $1.6 billion for the nine months ended September 30, 1999.
The decrease in the weighted average rate from 7.48% for the nine months ended
September 30, 1998 to 5.98% for the nine months ended September 30, 1999 is
primarily due to a decline in market interest rates, as well as $19.8 million in
interest income received in September 1998 on a $193.0 million federal income
tax refund related to Old California Federal.
Dividends on FHLB stock were $43.1 million for the nine months ended
September 30, 1999, an increase of $20.7 million from the nine months ended
September 30, 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 nine
months ended September 30, 1999 and 1998 was $1.1 billion and $.5 billion,
respectively. The weighted average rate on FHLB stock decreased to 5.24% for the
nine months ended September 30, 1999 from 5.78% for the nine months ended
September 30, 1998, reflecting lower dividends declared by the FHLB.
INTEREST EXPENSE. Total interest expense was $1.8 billion for the nine
months ended September 30, 1999, an increase of $591.1 million from the nine
months ended September 30, 1998. The increase is primarily the result of
additional borrowings under FHLB advances, the additional deposits and
borrowings assumed in the Golden State Acquisition, deposits assumed in the
Nevada Purchase and the net impact of the Refinancing Transactions, including
the assumption of the GS Holdings Notes.
Interest expense on customer deposits, including brokered deposits, was
$667.4 million for the nine months ended September 30, 1999, an increase of
$121.7 million from the nine months ended September 30, 1998. The average
balance of customer deposits outstanding increased from $16.7 billion for the
nine months ended September 30, 1998 to $24.1 billion for the nine months ended
September 30, 1999. The increase in the average balance is primarily 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. In
Page 27
<PAGE>
addition, $543 million in deposits at an average cost of 3.71% were assumed in
the Nevada Purchase, which was consummated in April 1999. The overall weighted
average cost of deposits declined to 3.71% for the nine months ended September
30, 1999 from 4.38% for the nine months ended September 30, 1998, primarily due
to lower market interest rates and a change in the Bank's certificate of deposit
pricing strategy, as well as the higher average balances of lower rate
transaction accounts in 1999 compared to 1998 and the lower cost of funds on
deposits assumed in the Golden State Acquisition and the Nevada Purchase.
Interest expense on securities sold under agreements to repurchase
totaled $188.1 million for the nine months ended September 30, 1999, an increase
of $81.7 million from the nine months ended September 30, 1998. The average
balance of such borrowings for the nine months ended September 30, 1999 and 1998
was $4.8 billion and $2.5 billion, respectively; such increase is primarily
attributed to the Golden State Acquisition. The weighted average interest rate
on these instruments decreased to 5.14% for the nine months ended September 30,
1999 from 5.59% for the nine months ended September 30, 1998, primarily due to a
decrease in market rates on new borrowings in 1999 compared to 1998.
Interest expense on borrowings totaled $967.1 million for the nine months
ended September 30, 1999, an increase of $387.8 million from the nine months
ended September 30, 1998. The average balance outstanding for the nine months
ended September 30, 1999 and 1998 was $23.5 billion and $12.1 billion,
respectively. The weighted average interest rate on these instruments decreased
to 5.51% for the nine months ended September 30, 1999 from 6.39% for the nine
months ended September 30, 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 and 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 $892.2 million for the nine
months ended September 30, 1999, an increase of $405.8 million from the nine
months ended September 30, 1998, primarily due to an increase in net
interest-earning assets resulting from the Golden State Acquisition and an
increase in the net interest margin. The interest rate spread increased to 2.29%
for the nine months ended September 30, 1999 from 2.03% for the nine months
ended September 30, 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 and gains on sales of assets, was
$315.0 million for the nine months ended September 30, 1999, representing an
increase of $60.8 million from the nine months ended September 30, 1998,
excluding non-recurring gains on the sale of branches in each of the periods.
Loan servicing fees, net of amortization of mortgage servicing rights,
were $108.4 million for the nine months ended September 30, 1999, compared to
$106.1 million for the nine months ended September 30, 1998. The single-family
residential loan servicing portfolio, excluding loans serviced for the Bank,
increased from $69.3 billion at September 30, 1998 to $72.3 billion at September
30, 1999. Incremental loan servicing fees were partially offset by amortization
related to higher average MSR (as defined herein) basis in the nine months ended
September 30, 1999. Servicing rights purchased in bulk transactions in prior
years with lower average MSR basis are being replaced with current production
which more closely approximates market rates which, when combined with recent
higher prepayment speeds, results in a decline in the average yield on the
portfolio.
Customer banking fees were $138.8 million for the nine months ended
September 30, 1999 compared to $79.5 million for the nine months ended September
30, 1998. The increase is primarily attributed to the impact of revenues from
the retail banking operations acquired in the Golden State Acquisition and
deposits assumed in the Nevada Purchase, 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.
Page 28
<PAGE>
Gain on sale of loans totaled $25.4 million for the nine months ended
September 30, 1999, a decrease of $24.6 million from the nine months ended
September 30, 1998. The decrease includes adjustments of $11.4 million recorded
during the second and third quarters of 1999 to reflect the lower of cost or
market valuation on residential loans held for sale during the nine months ended
September 30, 1999. In addition, gains attributed to early payoffs of commercial
loans with unamortized discounts were $3.7 million higher in 1998 compared to
1999. During the nine months ended September 30, 1999, California Federal sold
$8.7 billion in single-family mortgage loans originated for sale with servicing
rights retained as part of its ongoing mortgage banking operations compared to
$6.3 billion of such sales for the corresponding period in 1998.
Net gain on sale of assets totaled $18.3 million for the nine months
ended September 30, 1999, an increase of $18.1 million from the nine months
ended September 30, 1998, primarily attributed to the Servicing Sale.
Net gain on sale of branches was $2.3 million for the nine months ended
September 30, 1999 compared to $108.8 million for the same period in 1998. The
gain in 1999 relates to the sale of the Eureka and Ukiah branches (with deposits
of $70.1 million) to Humboldt Bank. The gain in 1998 is primarily attributed to
the Florida Branch Sale in the third quarter.
Other noninterest income was $21.8 million for the nine months ended
September 30, 1999 compared to $16.0 million for the nine months ended September
30, 1998. The increase in 1999 is primarily attributed to the receipt of a sales
and use tax refund and an increase in disbursement float income.
NONINTEREST EXPENSE. Total noninterest expense was $704.3 million for the
nine months ended September 30, 1999, an increase of $201.0 million compared to
the nine months ended September 30, 1998. The variance between the two periods
is primarily attributed to the Golden State Acquisition. Noninterest expense for
the nine months ended September 30, 1999 included increases of $100.0 million in
compensation, $45.1 million in occupancy and equipment, $16.4 million in
goodwill amortization attributed to the Golden State Acquisition and the Nevada
Purchase, and an additional $35.7 million in other noninterest expense, all
primarily as a result of the Golden State Acquisition. These increases were
partially offset by a $24.2 million decrease in merger and integration costs
incurred in connection with the Golden State Acquisition, as the majority of
these costs were incurred in 1998.
Compensation and employee benefits expense was $300.5 million for the
nine months ended September 30, 1999, an increase of $100.0 million from the
nine months ended September 30, 1998. The increase is primarily attributed to
the Golden State Acquisition.
Occupancy and equipment expense was $110.2 million and $65.1 million for
the nine months ended September 30, 1999 and 1998, respectively. This increase
reflects the effects of the Golden State Acquisition as well as $8.6 million of
adjustments in 1999 to previously established accruals for vacant facilities
that are not expected to be recurring.
Loan expense was $29.2 million for the nine months ended September 30,
1999, a decrease of $4.6 million from the nine months ended September 30, 1998.
The decrease is primarily attributed to an increase in FAS 91 deferred
origination costs due to higher loan production activity during the nine months
ended September 30, 1999 compared to the same period in 1998.
Professional fees were $39.9 million and $30.8 million for the nine
months ended September 30, 1999 and 1998, respectively. The increase was
primarily a result of the Golden State Acquisition.
Marketing expense was $24.2 million and $12.0 million for the nine months
ended September 30, 1999 and 1998, respectively. The increase was primarily a
result of the Golden State Acquisition.
Data processing fees were $17.8 million for the nine months ended
September 30, 1999, an increase of $7.5 million from the nine months ended
September 30, 1998. The increase is primarily attributed to expenses incurred in
connection with the Year 2000 project.
Page 29
<PAGE>
Merger and integration costs were $7.7 million and $31.9 million for the
nine months ended September 30, 1999 and 1998, respectively, representing
transition expenses, which include severance, conversion and consolidation costs
incurred in connection with the Golden State Acquisition. The majority of such
costs were incurred in 1998 and management does not expect to incur any
significant additional merger and integration costs from this transaction.
Amortization of intangible assets was $52.8 million for the nine months
ended September 30, 1999, an increase of $16.4 million from the nine months
ended September 30, 1998, primarily attributed to the goodwill recorded in
connection with the Golden State Acquisition and the Nevada Purchase.
Other noninterest expense was $116.2 million in 1999 compared to $80.5
million in 1998, primarily attributed to increased operations as a result of the
Golden State Acquisition. In addition, results for the nine months ended
September 30, 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 nine months ended September 30, 1999
and 1998, Golden State recorded income tax expense of $105.8 million and an
income tax benefit of $151.8 million, respectively. Golden State's effective
Federal tax rate was 14% and (59)% during the nine months ended September 30,
1999 and 1998, respectively, while its statutory Federal tax rate was 35% during
both periods. For the period ended September 30, 1999, the difference between
the effective and statutory rates was primarily the result of adjustments
related to pre-merger tax benefits, in the form of net operating loss carryovers
and other items, which are retained by the previous owners of FN Holdings. To
the extent these tax benefits are recognized, there is a reduction in income tax
expense, which is offset by an increase in minority interest: provision in lieu
of income tax expense. Accordingly, during the nine months ended September 30,
1999, a tax benefit of $122.7 million was recognized, and a corresponding
increase to minority interest was recorded. These adjustments resulted from 1998
tax filings late in the third quarter of 1999. For the nine month period ended
September 30, 1998, the difference between the effective and statutory rates was
primarily the result of a $250 million reduction in the deferred tax asset
valuation allowance. Golden State's effective state tax rate was 8% and 11%
during the nine months ended September 30, 1999 and 1998, respectively.
MINORITY INTEREST. Minority interest for the nine months ended September
30, 1999 includes a $122.7 million provision in lieu of income taxes,
representing pre-merger tax benefits retained by the previous owners of FN
Holdings (see note 8), and $5.0 million in net premiums paid in connection with
the redemption of the Bank Preferred Stock. Dividends on the Bank Preferred
Stock that had not been acquired by GS Holdings and the REIT Preferred Stock
totaling $1.8 million and $34.2 million, respectively, were also recorded during
the nine months ended September 30, 1999. Minority interest relative to the REIT
Preferred Stock is reflected net of related income tax benefit of $14.4 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, as well as the $60.7
million redeemed on April 1, 1999 and the $31.8 million redeemed on September 1,
1999. Minority interest for the nine months ended September 30, 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 nine months ended September 30, 1998 includes
$19.5 million in net premiums and expenses paid in connection with the Bank
Preferred Stock Tender Offers. During the nine months ended September 30, 1998,
minority interest includes dividends on the Bank Preferred Stock, the FN
Holdings Preferred Stock and the REIT Preferred Stock of $37.7 million, $.6
million and $34.2 million, respectively. Minority interest relative to the REIT
Preferred Stock is reflected net of related income tax benefit of $7.7 million,
which will inure to the Company as a result of the deductibility of such
dividends for income tax purposes. Minority interest also includes a $1.7
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 30
<PAGE>
THREE MONTHS ENDED SEPTEMBER 30, 1999 VERSUS THREE MONTHS ENDED SEPTEMBER
30, 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 September 30, 1999
-----------------------------------------
Average Average
Balance Interest Rate
------- -------- -------
(dollars in millions)
<S> <C> <C> <C>
ASSETS
Interest-earning assets (1):
Securities and interest-bearing deposits in banks (2) $ 1,623 $ 24 5.84%
Mortgage-backed securities available for sale 13,918 222 6.38
Mortgage-backed securities held to maturity 2,303 42 7.28
Loans held for sale, net 1,635 28 6.91
Loans receivable, net 32,390 587 7.25
FHLB Stock 1,137 15 5.22
------- ----
Total interest-earning assets 53,006 918 6.92
----
Noninterest-earning assets 3,310
-------
Total assets $56,316
=======
LIABILITIES, MINORITY INTEREST
AND STOCKHOLDERS' EQUITY
Interest-bearing liabilities:
Deposits $24,011 223 3.69
Securities sold under agreements to repurchase (3) 5,840 80 5.39
Borrowings (3) 23,292 328 5.57
------- ----
Total interest-bearing liabilities 53,143 631 4.71
----
Noninterest-bearing liabilities 1,205
Minority interest 518
Stockholders' equity 1,450
-------
Total liabilities, minority interest
and stockholders' equity $56,316
=======
Net interest income $287
====
Interest rate spread 2.21%
=====
Net interest margin 2.20%
=====
Return on average assets 0.58%
=====
Return on average equity 22.51%
=====
Average equity to average assets 2.58%
=====
</TABLE>
Page 31
<PAGE>
<TABLE>
<CAPTION>
Three Months Ended September 30, 1998
-----------------------------------------
Average Average
Balance Interest Rate
------- -------- -------
(dollars in millions)
<S> <C> <C> <C>
ASSETS
Interest-earning assets (1):
Securities and interest-bearing deposits in banks (2) $ 1,375 $ 35 10.11%
Mortgage-backed securities available for sale 8,554 116 5.41
Mortgage-backed securities held to maturity 1,713 32 7.60
Loans held for sale, net 1,455 27 7.38
Loans receivable, net 21,361 408 7.67
FHLB Stock 569 8 5.50
------- ----
Total interest-earning assets 35,027 626 7.15
----
Noninterest-earning assets 5,282
-------
Total assets $40,309
=======
LIABILITIES, MINORITY INTEREST
AND STOCKHOLDERS' EQUITY
Interest-bearing liabilities:
Deposits $17,989 190 4.20
Securities sold under agreements to repurchase 3,459 49 5.58
Borrowings 13,377 211 6.23
------- ----
Total interest-bearing liabilities 34,825 450 5.13
----
Noninterest-bearing liabilities 3,623
Minority interest 949
Stockholders' equity 912
-------
Total liabilities, minority interest
and stockholders' equity $40,309
=======
Net interest income $176
====
Interest rate spread 2.02%
======
Net interest margin 2.05%
======
Return on average assets (0.32)%
======
Return on average equity (14.13)%
======
Average equity to average assets 2.26%
======
</TABLE>
- ----------
(1) Non-performing assets are included in the average balances for the
periods indicated.
(2) The information presented includes securities held to maturity,
securities available for sale and interest-bearing deposits in other
banks.
(3) Interest and average rate include the impact of interest rate swaps.
Page 32
<PAGE>
The following table presents certain information 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 September 30, 1999 vs. 1998
Increase (Decrease) Due to
----------------------------------------------
Volume Rate Net
------ ---- ---
(in millions)
<S> <C> <C> <C>
INTEREST INCOME:
Securities and interest-bearing deposits in banks $ 7 $ (18) $ (11)
Mortgage-backed securities available for sale 82 24 106
Mortgage-backed securities held to maturity 11 (1) 10
Loans held for sale, net 3 (2) 1
Loans receivable, net 199 (20) 179
FHLB stock 7 -- 7
------ ------- ------
Total 309 (17) 292
------ ------- ------
INTEREST EXPENSE:
Deposits 51 (18) 33
Securities sold under agreements to repurchase 33 (2) 31
Borrowings 136 (19) 117
------ ------- ------
Total 220 (39) 181
------ ------- ------
Change in net interest income $ 89 $ 22 $ 111
====== ======= ======
</TABLE>
The volume variances in total interest income and total interest expense
for the three months ended September 30, 1999 compared to the corresponding
period in 1998 are largely due to the additional volume related to the Golden
State Acquisition, increased purchases of mortgage-backed securities funded with
FHLB advances, the deposits assumed in the Nevada Purchase and the assumption of
the GS Holdings Notes, partially offset by $1.4 billion in deposits sold in the
Florida Branch Sale and borrowings repurchased as part of the Refinancing
Transactions. The positive total rate variance of $22 million is primarily
attributed to lower interest rates paid on new borrowings (including the
Refinancing Transactions), the lower cost of funds on deposits, the lower
costing liabilities assumed in the Golden State Acquisition, higher market rates
on mortgage-backed securities purchased in 1999 and 1998, and premium
amortization associated with prepayments of variable-rate mortgage-backed
securities in 1998, partially offset by prepayments of higher rate
interest-earning assets, primarily loans, in 1999.
INTEREST INCOME. Total interest income was $917.8 million for the three
months ended September 30, 1999, an increase of $291.6 million from the three
months ended September 30, 1998. Total interest-earning assets for the three
months ended September 30, 1999 averaged $53.0 billion, compared to $35.0
billion for the corresponding period in 1998, primarily as a result of the
Golden State Acquisition. The yield on total interest-earning assets during the
three months ended September 30, 1999 decreased to 6.92% from 7.15% for the
three months ended September 30, 1998, primarily due to prepayments of higher
rate loans which were replaced with lower yielding originations and the
repricing of variable-rate loans, partially offset by purchases of
mortgage-backed securities and additions from the Golden State Acquisition of
mortgage-backed securities with higher market yields.
Golden State earned $587.1 million of interest income on loans receivable
for the three months ended September 30, 1999, an increase of $178.6 million
from the three months ended September 30, 1998. The average balance of loans
receivable was $32.4 billion for the three months ended September 30, 1999,
compared to $21.4 billion for the same period in 1998. The weighted average rate
on loans receivable decreased to 7.25% for the three
Page 33
<PAGE>
months ended September 30, 1999 from 7.67% for the three months ended September
30, 1998, primarily due to comparatively lower market rates in 1999. The
increase in the average volume is primarily due to the addition of $14.6 billion
in loans acquired in the Golden State Acquisition.
Golden State earned $28.3 million of interest income on loans held for
sale for the three months ended September 30, 1999, an increase of $1.4 million
from the three months ended September 30, 1998. The average balance of loans
held for sale was $1.6 billion for the three months ended September 30, 1999, an
increase of $180 million from the comparable period in 1998, primarily due to
increased originations and longer holding periods for jumbo loans during the
three months ended September 30, 1999. The weighted average rate on loans held
for sale decreased to 6.91% for the three months ended September 30, 1999 from
7.38% for the three months ended September 30, 1998.
Interest income on mortgage-backed securities available for sale was
$221.9 million for the three months ended September 30, 1999, an increase of
$106.3 million from the three months ended September 30, 1998. The average
portfolio balances increased $5.4 billion, to $13.9 billion, for the three
months ended September 30, 1999 compared to the same period in 1998. The
weighted average yield on these assets increased from 5.41% for the three months
ended September 30, 1998 to 6.38% for the three months ended September 30, 1999.
The increase in the volume and the weighted average yield is primarily due to
purchases of mortgage-backed securities and additions of $2.4 billion from the
Golden State Acquisition with higher market yields, and premium amortization
associated with prepayments of variable-rate securities in 1998.
Interest income on mortgage-backed securities held to maturity was $41.9
million for the three months ended September 30, 1999, an increase of $9.3
million from the three months ended September 30, 1998. The average portfolio
balance increased $590 million, to $2.3 billion, for the three months ended
September 30, 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 September 1998. The weighted
average rates for the three months ended September 30, 1999 and 1998 were 7.28%
and 7.60%, respectively.
Interest income on securities and interest-bearing deposits in other
banks was $23.7 million for the three months ended September 30, 1999, a
decrease of $11.1 million from the three months ended September 30, 1998. The
average portfolio balance increased from $1.4 billion for the three months ended
September 30, 1998 to $1.6 billion for the three months ended September 30,
1999. The decrease in the weighted average rate from 10.11% for the three months
ended September 30, 1998 to 5.84% for the three months ended September 30, 1999
is primarily due to $19.8 million in interest income received in September 1998
on a $193.0 million federal income tax refund related to Old California Federal.
Dividends on FHLB stock were $15.0 million for the three months ended
September 30, 1999, an increase of $7.1 million from the three months ended
September 30, 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 September 30, 1999 and 1998 was $1.1 billion and $.6 billion,
respectively. The weighted average rate on FHLB stock decreased to 5.22% for the
three months ended September 30, 1999 from 5.50% for the three months ended
September 30, 1998, reflecting lower dividends declared by the FHLB.
INTEREST EXPENSE. Total interest expense was $630.7 million for the three
months ended September 30, 1999, an increase of $180.7 million from the three
months ended September 30, 1998. The increase is primarily the result of
additional borrowings under FHLB advances, the additional deposits and
borrowings assumed in the Golden State Acquisition, deposits assumed in the
Nevada Purchase and the net impact of the Refinancing Transactions, including
the assumption of the GS Holdings Notes.
Interest expense on customer deposits, including brokered deposits, was
$223.3 million for the three months ended September 30, 1999, an increase of
$32.8 million from the three months ended September 30, 1998. The average
balance of customer deposits outstanding increased from $18.0 billion for the
three months ended September 30, 1998 to $24.0 billion for the three months
ended September 30, 1999. The increase in the average
Page 34
<PAGE>
balance is primarily 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. In
addition, $543 million in deposits at an average cost of 3.71% were assumed in
the Nevada Purchase, which was consummated in April 1999. The overall weighted
average cost of deposits declined to 3.69% for the three months ended September
30, 1999 from 4.20% for the three months ended September 30, 1998, primarily due
to lower market interest rates and a change in the Bank's certificate of deposit
pricing strategy, as well as the higher average balances of lower rate
transaction accounts in 1999 compared to 1998 and the lower cost of funds on
deposits assumed in the Golden State Acquisition.
Interest expense on securities sold under agreements to repurchase
totaled $80.5 million for the three months ended September 30, 1999, an increase
of $31.1 million from the three months ended September 30, 1998. The average
balance of such borrowings for the three months ended September 30, 1999 and
1998 was $5.8 billion and $3.5 billion, respectively; such increase is primarily
attributed to the Golden State Acquisition. The weighted average interest rate
on these instruments decreased to 5.39% for the three months ended September 30,
1999 from 5.58% for the three months ended September 30, 1998, primarily due to
a decrease in market rates on new borrowings in 1999 compared to 1998.
Interest expense on borrowings totaled $326.9 million for the three
months ended September 30, 1999, an increase of $116.8 million from the three
months ended September 30, 1998. The average balance outstanding for the three
months ended September 30, 1999 and 1998 was $23.3 billion and $13.4 billion,
respectively. The weighted average interest rate on these instruments decreased
to 5.57% for the three months ended September 30, 1999 from 6.23% for the three
months ended September 30, 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 and 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 $287.1 million for the three
months ended September 30, 1999, an increase of $110.9 million from the three
months ended September 30, 1998. The interest rate spread increased to 2.21% for
the three months ended September 30, 1999 from 2.02% for the three months ended
September 30, 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 and gains on sales of assets, was
$102.5 million for the three months ended September 30, 1999, representing an
increase of $18.6 million from the three months ended September 30, 1998,
excluding non-recurring gains on the sale of branches in each of the periods.
Loan servicing fees, net of amortization of mortgage servicing rights,
were $38.1 million for the three months ended September 30, 1999, compared to
$34.7 million for the three months ended September 30, 1998. The single-family
residential loan servicing portfolio, excluding loans serviced for the Bank,
increased from $69.3 billion at September 30, 1998 to $72.3 billion at September
30, 1999. Incremental loan servicing fees were partially offset by amortization
related to higher average MSR basis in the three months ended September 30,
1999. Servicing rights purchased in bulk transactions in prior years with lower
average MSR basis are being replaced with current production, which more closely
approximates market rates which, when combined with recent higher prepayment
speeds, results in a decline in the average yield on the portfolio.
Customer banking fees were $47.5 million for the three months ended
September 30, 1999 compared to $28.3 million for the three months ended
September 30, 1998. The increase is primarily attributed to the impact of
revenues from the retail banking operations acquired in the Golden State
Acquisition and deposits assumed in the Nevada Purchase, 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.
Page 35
<PAGE>
Gain on sale of loans totaled $4.9 million for the three months ended
September 30, 1999, a decrease of $8.9 million from the three months ended
September 30, 1998. The decrease includes an adjustment of $2.6 million recorded
during the third quarter of 1999 to reflect the lower of cost or market
valuation on residential loans held for sale during the quarter ended September
30, 1999. In addition, gains attributed to early payoffs of commercial loans
with unamortized discounts were $3.1 million higher in 1999 compared to 1998.
During the three months ended September 30, 1999, California Federal sold $2.9
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.
Net gain on sale of assets totaled $3.2 million for the three months
ended September 30, 1999, an increase of $2.8 million from the three months
ended September 30, 1998.
Net gain on sale of branches was $2.3 million for the three months ended
September 30, 1999 compared to $108.9 million for the same period in 1998. The
gain in 1999 relates to the sale of the Eureka and Ukiah branches (with deposits
of $70.1 million) to Humboldt Bank. The gain in 1998 is primarily attributed to
the Florida Branch Sale in the third quarter.
NONINTEREST EXPENSE. Total noninterest expense was $222.2 million for the
three months ended September 30, 1999, an increase of $21.7 million compared to
the three months ended September 30, 1998. The variance between the two periods
is primarily attributed to the Golden State Acquisition. Noninterest expense for
the three months ended September 30, 1999 included increases of $24.8 million in
compensation, $14.8 million in occupancy and equipment, $4.5 million in goodwill
amortization attributed to the Golden State Acquisition and the Nevada Purchase,
and an additional $5.3 million in other noninterest expense, all primarily as a
result of the Golden State Acquisition. This increase was partially offset by a
decline of $31.1 million in merger and integration costs incurred in 1998 in
connection with the Golden State Acquisition.
Compensation and employee benefits expense was $97.8 million for the
three months ended September 30, 1999, an increase of $24.8 million from the
three months ended September 30, 1998. The increase is primarily attributed to
the Golden State Acquisition.
Occupancy and equipment expense was $38.5 million and $23.8 million for
the three months ended September 30, 1999 and 1998, respectively. This increase
reflects the effects of the Golden State Acquisition, as well as $3.8 million of
adjustments in 1999 to previously established accruals for vacant facilities .
Merger and integration costs were $31.1 million for the three months
ended September 30, 1998, representing transition expenses, which include
severance, conversion and consolidation costs incurred in connection with the
Golden State Acquisition. Such costs were not incurred during the third quarter
of 1999.
Amortization of intangible assets was $17.6 million for the three months
ended September 30, 1999, an increase of $4.5 million from the three months
ended September 30, 1998, primarily attributed to the goodwill recorded in
connection with the Golden State Acquisition and the Nevada Purchase.
Other noninterest expense was $35.3 million in 1999 compared to $30.0
million in 1998, primarily attributed to increased operations as a result of the
Golden State Acquisition.
PROVISION FOR INCOME TAX. During the three months ended September 30,
1999 and 1998, Golden State recorded an income tax benefit of $45.4 million and
income tax expense of $72.0 million, respectively. Golden State's effective
Federal tax rate was (35)% and 38% during the three months ended September 30,
1999 and 1998, respectively, while its statutory Federal tax rate was 35% during
both periods. For the period ended September 30, 1999, the difference between
the effective and statutory rates was primarily the result of adjustments
related to pre-merger tax benefits, in the form of net operating loss carryovers
and other items, which are retained by the previous owners of FN Holdings. To
the extent these tax benefits are recognized, there is a reduction in income tax
expense, which is offset by an increase in minority interest: provision in lieu
of income tax expense. Accordingly, during the three months ended September 30,
1999, a tax benefit of $122.7 million was recognized, and a corresponding
Page 36
<PAGE>
increase to minority interest was recorded. These adjustments resulted from 1998
tax filings late in the third quarter of 1999. For the period ended September
30, 1998, the difference between the effective and statutory rates was primarily
a result of nondeductible goodwill amortization for both periods. Golden State's
effective state tax rate was 8% during the three months ended September 30, 1999
and 1998.
MINORITY INTEREST. Minority interest for the three months ended September
30, 1999 includes a $122.7 million provision in lieu of income taxes,
representing pre-merger tax benefits retained by the previous owners of FN
Holdings (see note 8), and $1.8 million in net premium paid in connection with
the redemption of the Bank's 11 1/2% Preferred Stock. Dividends on the REIT
Preferred Stock totaling $11.4 million were also recorded during the three
months ended September 30, 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, as well as the $60.7
million redeemed on April 1, 1999 and the $31.8 million redeemed on September 1,
1999.
Minority interest for the three months ended September 30, 1998 includes
$19.5 million in net premiums and expenses paid in connection with the Bank
Preferred Stock Tender Offers. During the three months ended September 30, 1998,
minority interest also includes dividends on the Bank Preferred Stock and the
REIT Preferred Stock totaling $11.2 million and $11.4 million, respectively.
Minority interest relative to the REIT Preferred Stock is reflected net of
related income tax benefit of $4.7 million, which will inure to the Company as a
result of the deductibility of such dividends for income tax purposes. Minority
interest also includes a $1.0 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.
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.
See -- "Problem and Potential Problem Assets" for a discussion of the
methodology used in determining the adequacy of the allowance for loan losses.
The Company recorded provisions for loan losses of $10 million and $30 million
during the nine months ended September 30, 1999 and 1998, respectively, and $10
million during the three months ended September 30, 1998. In light of continued
strong credit performance and the continued strength of the California real
estate market, the existing allowance for loan losses was considered adequate
and no loan loss provision was recorded in the third quarter of 1999.
The decrease in the provision for loan losses during the nine and three
month periods ended September 30, 1999 compared to the same periods 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.
Page 37
<PAGE>
Activity in the allowance for loan losses is as follows (in thousands):
<TABLE>
<CAPTION>
Nine Months Ended September 30, Three Months Ended September 30,
------------------------------- --------------------------------
1999 1998 1999 1998
---- ---- ---- ----
<S> <C> <C> <C> <C>
Balance - beginning of period $588,533 $418,674 $578,369 $420,665
Purchases & acquisitions, net -- 169,454 -- 169,454
Provision for loan losses 10,000 30,000 -- 10,000
Charge-offs (30,919) (38,650) (9,436) (18,147)
Recoveries 3,839 3,304 1,850 810
Reclassifications (670) -- -- --
-------- -------- -------- --------
Balance - end of period $570,783 $582,782 $570,783 $582,782
======== ======== ======== ========
</TABLE>
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.
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 single-family loans, business banking loans under
$100,000 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 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 September 30, 1999, the carrying value of loans that were considered
to be impaired totaled $126.2 million (of which $22.4 million were on
non-performing status). The average recorded investment in impaired loans during
the nine and three month periods ended September 30, 1999 was approximately
$141.0 million and $126.6 million, respectively. For the nine and three month
periods ended September 30, 1999, Golden State recognized interest income on
those impaired loans of $7.0 million and $2.2 million, respectively, which
included $1.6 million and $0.6 million, respectively, 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.
Page 38
<PAGE>
<TABLE>
<CAPTION>
September 30, 1999
-------------------------------------------------
Non-performing Impaired Restructured
-------------- -------- ------------
(in millions)
<S> <C> <C> <C>
Real Estate:
1-4 unit residential $143 $ -- $ 3
5+ unit residential 7 36 5
Commercial and other 10 71 19
Land -- 1 --
Construction -- -- --
---- ---- ---
Total real estate 160 108 27
Non-real estate 11 18 --
---- ---- ---
Total loans 171 (a) $126 (b) $27
==== ===
Foreclosed real estate, net 45
Repossessed assets 3
----
Total non-performing assets $219
====
</TABLE>
<TABLE>
<CAPTION>
December 31, 1998
-------------------------------------------------
Non-performing Impaired Restructured
-------------- -------- ------------
(in millions)
<S> <C> <C> <C>
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 (a) $135 (b) $32
==== ===
Foreclosed real estate, net 80
Repossessed assets 4
----
Total non-performing assets $310
====
</TABLE>
- ----------
(a) Includes loans securitized with recourse on non-performing status of $1.7
million and $6.0 million at September 30, 1999 and December 31, 1998,
respectively, and loans held for sale on non-performing status of $10.0
million and $17.0 million at September 30, 1999 and December 31, 1998,
respectively.
(b) Includes $22.4 million and $32.5 million of non-performing loans at
September 30, 1999 and December 31, 1998, respectively. Also includes $17.0
million and $16.4 million of loans classified as troubled debt
restructurings at September 30, 1999 and December 31, 1998, respectively.
There were no accruing loans contractually past due 90 days or more at
September 30, 1999 or December 31, 1998.
The Company's non-performing assets, consisting of nonaccrual loans,
repossessed assets and foreclosed real estate, net, decreased to $219 million at
September 30, 1999, from $310 million at December 31, 1998. Non-performing
assets as a percentage of the Bank's total assets decreased to 0.39% at
September 30, 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 commercial, multi-family
and other asset portfolios by applying asset management and risk evaluation
techniques that are consistent with the
Page 39
<PAGE>
Company's portfolio management strategy and regulatory requirements. In addition
to these asset management functions, the Company has a specialized credit risk
management group that is charged with the development of credit policies and
performing credit risk analyses for all asset portfolios.
The following table presents non-performing real estate assets by
geographic region of the country as of September 30, 1999:
<TABLE>
<CAPTION>
Total
Non-performing Foreclosed Non-performing
Real Estate Real Estate, Real Estate Geographic
Loans, Net (2) Net (2) Assets Concentration
-------------- -------- ------ -------------
(dollars in millions)
<S> <C> <C> <C> <C>
Region:
California $ 18 $ 6 $ 24 11%
Northeast (1) 97 28 125 61
Other Regions 45 11 56 28
---- --- ---- ---
Total $160 $45 $205 100%
==== === ==== ===
</TABLE>
- ----------
(1) Consists of Connecticut, Massachusetts, New Hampshire, New Jersey, New York,
Pennsylvania, Rhode Island, Delaware, Maine, and Vermont.
(2) Net of purchase accounting adjustments.
At September 30, 1999, the Company's largest non-performing asset was
approximately $4.0 million, and it had three non-performing assets over $2
million in size with balances averaging approximately $2.9 million. At September
30, 1999, the Company had 1,301 non-performing assets below $2 million in size,
including 1,223 non-performing 1-4 unit residential assets.
An allowance is maintained to absorb losses inherent in the loan
portfolio. The adequacy of the allowance is periodically evaluated and is based
on past loan loss experience, known and inherent risks in the loan portfolio,
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. Management's methodology for assessing the adequacy of the
allowance includes the evaluation of the following three key elements: the
formula allowance, specific allowances for identified problem loans and the
unallocated allowance.
The formula allowance is determined by applying loss factors against all
non-impaired loans. Loss factors may be adjusted for significant factors that,
in management's judgment, affect the collectibility of the portfolio as of the
evaluation date. Loss factors are calculated based on migration models that
estimate the probability that loans will become delinquent and ultimately result
in foreclosure, and the rates of loss that have been experienced on foreclosed
loans. The foreclosure migration and loss severity rates are then averaged over
the past eight years in order to capture experience across a period that
management believes approximates a business cycle. A contingency factor is then
added to provide for the modeling risk associated with imprecision in estimating
inherent loan losses.
The specific allowances are established against individual loans,
including impaired loans in accordance WITH SFAS NO. 114, ACCOUNTING BY
CREDITORS FOR IMPAIRMENT OF A LOAN, for which management has performed analyses
and concluded that there is a high probability that loss will be incurred based
on delinquency status or determination that borrower cash flow is inadequate for
debt repayment. The amount of specific allowance is determined by an estimation
of collateral deficiency, including consideration of costs that will likely be
incurred through the disposal of any repossessed collateral.
The unallocated allowance is established for inherent losses which may not
have been identified through the more objective processes used to derive the
formula and specific portions of the allowance. The unallocated portion is
necessarily more subjective and requires a high degree of management judgment
and experience. Management has identified several factors that impact the
potential for credit losses that are not considered in either the formula or the
specific allowance segments. These factors consist of industry and geographic
loan concentrations, changes
Page 40
<PAGE>
in the composition of loan portfolios through acquisitions and new business
strategies, changes in underwriting processes, and trends in problem loan and
loss recovery rates.
At September 30, 1999, the allowance for loan losses was $571 million,
consisting of a $371 million formula allowance, a $37 million specific allowance
and a $163 million unallocated allowance.
Although the 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:
<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 $251 $278 $60 $589
Provision for loan losses -- 4 1 5
Charge-offs (5) (2) (4) (11)
Recoveries -- -- 1 1
Reclassification -- -- (1) (1)
---- ---- --- ----
Balance - March 31, 1999 246 280 57 583
Provision for loan losses 2 1 2 5
Charge-offs (5) (3) (3) (11)
Recoveries -- -- 1 1
---- ---- --- ----
Balance - June 30, 1999 243 278 57 578
Provision for loan losses -- -- -- --
Charge-offs (4) (1) (4) (9)
Recoveries -- 1 1 2
---- ---- --- ----
Balance - September 30, 1999 $239 $278 $54 $571
==== ==== === ====
</TABLE>
The ratio of allowance for loan losses to non-performing loans at
September 30, 1999 and December 31, 1998 was 333.8% and 256.8%, respectively.
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
Page 41
<PAGE>
("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 September
30, 1999, approximately 76% of the Company's loan portfolio consisted of ARMs.
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 the Bank'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.
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 September 30, 1999 is as
follows:
Page 42
<PAGE>
<TABLE>
<CAPTION>
Maturity/Rate Sensitivity
--------------------------------------------------------------------
Within 1-5 Over 5 Noninterest
1 Year Years Years Bearing Total
------ ----- ----- ------- -----
(dollars in millions)
<S> <C> <C> <C> <C> <C>
INTEREST-EARNING ASSETS:
Securities held to maturity, interest-bearing
deposits in other banks and short-term
investment securities(1)(2) $ 203 $ (1) $ 86 $ -- $ 288
Securities available for sale (3) 1,107 -- -- -- 1,107
Mortgage-backed securities
available for sale (3) 13,735 -- -- -- 13,735
Mortgage-backed securities
held to maturity (1)(4) 2,222 15 27 -- 2,264
Loans held for sale, net (3)(5) 809 -- -- -- 809
Loans receivable, net (1)(6) 18,156 10,510 4,214 -- 32,880
Investment in FHLB 1,140 -- -- -- 1,140
------- ------- ------ ------ -------
Total interest-earning assets 37,372 10,524 4,327 -- 52,223
Noninterest-earning assets -- -- -- 3,583 3,583
------- ------- ------ ------ -------
$37,372 $10,524 $4,327 $3,583 $55,806
======= ======= ====== ====== =======
INTEREST-BEARING LIABILITIES:
Deposits (7) $20,755 $ 2,911 $ 10 $ -- $23,676
Securities sold under agreements to
repurchase (1) 5,964 -- -- -- 5,964
FHLB advances (1) 9,274 11,477 -- -- 20,751
Other borrowings (1) 363 963 892 -- 2,218
------- ------- ------ ------ -------
Total interest-bearing liabilities 36,356 15,351 902 -- 52,609
Noninterest-bearing liabilities -- -- -- 1,243 1,243
Minority interest -- -- -- 500 500
Stockholders' equity -- -- -- 1,454 1,454
------- ------- ------ ------ -------
$36,356 $15,351 $ 902 $3,197 $55,806
======= ======= ====== ====== =======
Gap before interest rate swap agreements $ 1,016 $(4,827) $3,425 $ (386)
Interest rate swap agreements 2,100 (1,500) (600) --
------- ------- ------ -------
Gap $ 3,116 $(6,327) $2,825 $ (386)
======= ======= ====== =======
Cumulative gap $ 3,116 $(3,211) $ (386) $ (386)
======= ======= ====== =======
Gap as a percentage of total assets 5.58% (11.33)% 5.06% (0.69)%
==== ====== ===== =====
Cumulative gap as a percentage of total assets 5.58% (5.75)% (0.69)% (0.69)%
==== ====== ===== =====
</TABLE>
- ----------
(1) Based upon (a) contractual maturity, (b) instrument repricing date, if
applicable, and (c) projected repayments and prepayments of principal, if
applicable. Prepayments were estimated generally by using the prepayment
rates forecast by various large brokerage firms as of September 30, 1999.
The actual maturity and rate sensitivity of these assets could vary
substantially if future prepayments differ from prepayment estimates.
(2) Consists of $214 million of securities held to maturity, $74 million of
short-term investment securities and less than $0.1 million of
interest-bearing deposits in other banks.
(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 $2 million.
(5) Excludes non-performing loans of $10 million.
(6) Excludes allowance for loan losses of $571 million and non-performing loans
of $159 million.
(Footnotes continued on next page)
Page 43
<PAGE>
(7) Fixed rate deposits and deposits with fixed pricing intervals are reflected
as maturing in the year of contractual maturity or first repricing date.
Money market deposit accounts, demand deposit accounts and passbook
accounts are reflected as maturing within one year.
At September 30, 1999, interest-bearing liabilities of Golden State
exceeded interest-earning assets by $386 million. At December 31, 1998,
interest-bearing liabilities of Golden State exceeded interest-earning assets by
$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 $542.6 million at September 30, 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 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, 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
Page 44
<PAGE>
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 September 30, 2000 aggregate $9.5 billion. The Company may renew
these certificates, attract new replacement deposits, replace such funds with
other borrowings, or it may elect to reduce the size of the balance sheet. In
addition, at September 30, 1999, Golden State had FHLB advances, securities sold
under agreements to repurchase and other borrowings aggregating $15.6 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 nine months ended September 30, 1999 were $22.4 billion in
proceeds from additional borrowings, $8.5 billion in proceeds from sales of
loans held for sale, $3.6 billion from principal payments on mortgage-backed
securities available for sale and held to maturity, a $1.7 billion net increase
in securities sold under agreements to repurchase, $458.9 million from the
Nevada Purchase, and $455.2 million from maturities of securities available for
sale and held to maturity. The primary uses of funds were $21.8 billion in
principal payments on borrowings, $7.2 billion in purchases and originations of
loans held for sale, $4.9 billion in purchases of securities and mortgage-backed
securities available for sale, a net increase in loans receivable of $2.4
billion, and $1.4 billion from a net decrease in deposits.
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 nine months ended September
30, 1999 and the year ended December 31, 1998.
MORTGAGE BANKING OPERATIONS
The Company, through the Bank's wholly owned mortgage bank subsidiary,
FNMC, has significantly expanded its mortgage banking operations. During the
nine months ended September 30, 1999 and 1998, FNMC acquired mortgage-servicing
rights on loan portfolios of $12.9 billion and $3.6 billion, respectively, as a
result of bulk servicing acquisitions and flow purchases, and sold servicing
rights during the nine months ended September 30, 1999 on a portfolio of
approximately $2.1 billion and 50,700 loans. With these acquisitions, the
acquisition of additional 1-4 unit residential loan servicing portfolios in the
Golden State Acquisition, the originated servicing and the Servicing Sale, the
1-4 unit residential loans serviced for others (including loans sub-serviced for
others and excluding loans serviced for the Bank) totaled $72.3 billion at
September 30, 1999, an increase of $6.9 billion and $3.0 billion from December
31, 1998 and September 30, 1998, respectively. During the nine months ended
September 30, 1999, the Bank, through FNMC, originated $12.9 billion and sold
(generally with servicing retained) $8.7 billion of 1-4 unit residential loans.
Gross revenues from mortgage loan servicing activities for the nine months ended
September 30, 1999 totaled $206.1 million, an increase of $54.3 million from the
nine months ended September 30, 1998. Gross loan servicing fees for the nine
months ended September 30, 1999 were reduced by $154.4 million of amortization
of servicing rights to arrive at net loan servicing fees of $51.7 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
Page 45
<PAGE>
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 September 30, 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 a notional amount of $485 million,
strike rates of 5.50% and 5.55%, mature in the year 2004 and had an estimated
fair value of $5.3 million at September 30, 1999. Premiums paid to
counter-parties 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 $479 million,
a strike rate of 6.75%, expire in the year 2002 and had an estimated fair value
of $13.4 million at September 30, 1999. Premiums paid to counter-parties 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 $133.0 million and an estimated fair value of $(7.3) million
at September 30, 1999. The prepayment-linked swaps had original notional amounts
of $203.3 million and an estimated fair value of $0.3 million at September 30,
1999.
The following is a summary of activity in MSRs and the MSR Hedge for the
nine months ended September 30, 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 205 -- 205
Additions - other purchases 89 -- 89
Originated servicing 164 -- 164
Premiums paid -- 41 41
Servicing Sale (19) -- (19)
Swaption sales 29 (58) (29)
Interest rate floor sales 19 (32) (13)
Payments made to counterparties, net 6 -- 6
Amortization (142) (16) (158)
------ ----- ------
Balance at September 30, 1999 $1,273 $ (43) $1,230
====== ===== ======
</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 September 30, 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
Page 46
<PAGE>
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 regulatory capital
requirement that is higher than the minimum.
At September 30, 1999, the Bank's regulatory capital levels exceeded the
minimum regulatory capital requirements, with tangible, core and risk-based
capital ratios of 5.90%, 5.90% and 13.10%, respectively. The following is a
reconciliation of the Bank's stockholder's equity to regulatory capital as of
September 30, 1999:
<TABLE>
<CAPTION>
Tangible Core Risk-based
Capital Capital Capital
------- ------- -------
(dollars in millions)
<S> <C> <C> <C>
Stockholder's equity of the Bank $3,644 $3,644 $3,644
Minority interest - REIT Preferred Stock 500 500 500
Unrealized holding loss on securities available for sale, net 200 200 200
Non-allowable capital:
Intangible assets (875) (875) (875)
Goodwill Litigation Assets (160) (160) (160)
Investment in non-includable subsidiaries (58) (58) (58)
Supplemental capital:
Qualifying subordinated debentures -- -- 93
General loan loss allowance -- -- 353
Assets required to be deducted:
Land loans with more than 80% LTV ratio -- -- (2)
Equity in subsidiaries -- -- (5)
Low-level recourse deduction -- -- (11)
------ ------ ------
Regulatory capital of the Bank 3,251 3,251 3,679
Minimum regulatory capital requirement 826 2,203 2,247
------ ------ ------
Excess above minimum capital requirement $2,425 $1,048 $1,432
====== ====== ======
Regulatory capital of the Bank 5.90% 5.90% 13.10%
Minimum regulatory capital requirement 1.50 4.00 8.00
---- ---- -----
Excess above minimum capital requirement 4.40% 1.90% 5.10%
==== ==== =====
</TABLE>
The amount of adjusted total assets used for the tangible and leverage
capital ratios is $55.1 billion. Risk-weighted assets used for the risk-based
capital ratio amounted to $28.1 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 47
<PAGE>
To be considered "well capitalized," a savings association must generally
have a leverage capital ratio of at least 5.00%, a Tier 1 (core capital)
risk-based capital ratio of at least 6.00%, and a total risk-based capital ratio
of at least 10.00%. An association is deemed to be "critically undercapitalized"
if it has a tangible equity ratio of 2.00% or less. At September 30, 1999,
California Federal's capital levels were sufficient for it to be considered
"well capitalized," as presented below.
<TABLE>
<CAPTION>
Leverage Risk-based
--------------------------
Capital Tier 1 Total Capital
------- ------ -------------
<S> <C> <C> <C>
Regulatory capital of the Bank 5.90% 11.54% 13.10%
"Well capitalized" ratio 5.00 6.00 10.00
---- ------ -----
Excess above "well capitalized" ratio 0.90% 5.54% 3.10%
==== ====== =====
</TABLE>
OTS capital regulations allow a savings association to include a net
deferred tax asset in regulatory capital, subject to certain limitations. To the
extent that the realization of a deferred tax asset depends on a savings
association's future taxable income, such deferred tax asset is limited for
regulatory capital purposes to the lesser of the amount that can be realized
within one year or 10 percent of core capital. At September 30, 1999, none 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, no amount
has been excluded from the Bank's regulatory capital at September 30, 1999.
ITEM 3. 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 48
<PAGE>
PART II - OTHER INFORMATION
ITEM 1. LEGAL PROCEEDINGS.
GOODWILL LITIGATION AGAINST THE GOVERNMENT
On April 9, 1999, the Claims Court issued its decision on a claim by the
Bank against the United States Government (the "Government") in the lawsuit,
GLENDALE FEDERAL BANK, FEDERAL SAVINGS BANK V. UNITED STATES, Civil Action No.
90-772-C (the "Glendale Goodwill Litigation"), ruling that the Government must
compensate the Bank in the sum of $908.9 million. This decision has been
appealed by the Government and the Bank.
On April 16, 1999, the Claims Court issued its decision on 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. This
decision has been appealed by the Government and the Bank.
In each of the Glendale Goodwill Litigation and the California Federal
Litigation, it is alleged, among other things, that the United States breached
certain contractual commitments regarding the computation of its regulatory
capital for which each of Glendale Federal and California Federal seek damages
and restitution. The claims arose from changes made by the Financial
Institutions Reform, Recovery and Enforcement Act of 1989 and its implementing
regulations ("FIRREA") with respect to the rules for computing regulatory
capital.
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.
ITEM 5. OTHER INFORMATION.
On September 28, 1999, John A. Moran was elected a Director of the
Company, filling the vacancy created by the death of The Honorable Bob Bullock
on June 18, 1999.
Mr. Moran is the retired Chairman of the Dyson-Kissner-Moran Corporation.
Dyson-Kissner-Moran is a private holding company headquartered in New York City
whose portfolio of companies has included businesses engaged in manufacturing,
distribution, financial services, and real estate development. Mr. Moran served
as President and Chief Executive Officer from 1975 and as Chairman of the Board
from 1984 until his retirement.
Page 49
<PAGE>
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.
10.1 Employment Agreement dated as of August 1, 1999, between California
Federal Bank, A Federal Savings Bank, and Christie S. Flanagan.
10.2 Employment Agreement dated as of August 1, 1999, between California
Federal Bank, A Federal Savings Bank, and Scott A. Kisting.
27.1 Financial Data Schedule.
(b) Reports on Form 8-K:
None.
Page 50
<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
Executive Vice President and Controller
(Principal Accounting Officer)
November 9, 1999
Page 51
BYLAWS OF GOLDEN STATE BANCORP INC.
-----------------------------------
Adopted June, 23, 1997
As Last Amended May 18, 1999
ARTICLE I
OFFICES
SECTION 1. REGISTERED OFFICE. Golden State Bancorp Inc. (hereinafter
referred to as the "Corporation") shall at all times maintain a registered
office in the State of Delaware, which, except as otherwise determined by the
Board of Directors of the Corporation (hereinafter referred to as the "Board"),
shall be in the City of Wilmington, County of New Castle.
SECTION 2. OTHER OFFICES. The Corporation may also have offices at such
other places within or without the State of Delaware as the Board shall from
time to time designate or the business of the Corporation shall require.
ARTICLE II
Stockholders
SECTION 1. PLACE OF MEETINGS. All annual and special meetings of
stockholders shall be held at such places within or without the State of
Delaware as may from time to time be designated by the Board and specified in
the notice of meeting.
SECTION 2. ANNUAL MEETING. The annual meeting of the stockholders of
the Corporation for the election of directors and for the transaction of any
other business of the Corporation shall be held on such date and time as shall
be designated from time to time by the Board and stated in the notice of the
meeting.
SECTION 3. SPECIAL MEETINGS. A special meeting of the stockholders may
be called by the Chairman of the Board of Directors of the Corporation or a
majority of the Board then in office, and shall be called by the Chairman of the
Board of Directors of the Corporation or by a majority of the Board of Directors
upon the written request of the holders of not less than 10% of the outstanding
capital stock of the Corporation entitled to vote at a meeting. Business to be
transacted at any special meeting of the stockholders called upon the written
request of stockholders in accordance with this Section 3 shall be limited to
the business set forth in such written request and any other business or
proposals as the Board of Directors shall determine and shall be set forth in
the notice of such meeting.
SECTION 4. CONDUCT OF MEETINGS. Annual and special meetings of the
stockholders shall be conducted in accordance with Delaware law unless otherwise
prescribed by the Bylaws. The Chairman of the Board, or in the absence of the
Chairman of the Board, the highest ranking officer of the Corporation who is
present, or such other person as the Board shall have designated, shall call to
order any meeting of the stockholders and act as chairman of the meeting. The
Secretary of the
1
<PAGE>
Corporation, if present at the meeting, shall be the secretary of the meeting.
In the absence of the Secretary of the Corporation, the secretary of the meeting
shall be such person as the chairman of the meeting shall appoint. The chairman
of any meeting of the stockholders, unless otherwise prescribed by law or
regulation or unless the Chairman of the Board has otherwise determined, shall
determine the order of business and the procedure at the meeting.
SECTION 5. NOTICE OF MEETINGS. Written notice stating the place, day
and hour of the meeting and the purpose or purposes for which the meeting of the
stockholders is called shall be delivered not less than ten nor more than sixty
days before the date of the meeting, either personally or by mail, by or at the
direction of the Chairman of the Board, the Secretary or the directors
requesting the meeting, to each stockholder of record entitled to vote at such
meeting. If mailed, such notice shall be deemed given when deposited in the
United States mail, postage prepaid, addressed to the stockholder at his or her
address as it appears on the stock transfer books or records of the Corporation
as of the record date prescribed in Section 6 of this Article II. When any
meeting of the stockholders either annual or special, is adjourned for more than
thirty days or if after adjournment, a new record date is fixed for the
adjourned meeting, notice of the adjourned meeting shall be given as in the case
of an original meeting. It shall not be necessary to give any notice of the time
and place of any other adjourned meeting of the stockholders, other than an
announcement at the meeting at which such adjournment is taken.
SECTION 6. FIXING OF RECORD DATE. For the purpose of determining
stockholders entitled to notice of or to vote at any meeting of the stockholders
or any adjournment thereof, or stockholders entitled to receive payment of any
dividend, or in order to make a determination of stockholders for any other
proper purpose under Delaware law, the Board may fix, in advance, a date as the
record date for any such determination of stockholders. Such date shall not be
more than sixty days and not less than ten days before the date of such meeting,
nor more than sixty days prior to any other action.
SECTION 7. VOTING LISTS. The Secretary of the Corporation, or other
officer or agent of the Corporation having charge of the stock transfer books
for shares of the capital stock of the Corporation, shall prepare and make, at
least ten days before each meeting of the stockholders, a complete list of the
stockholders entitled to vote at such meeting, or any adjournment thereof,
arranged in alphabetical order, with the address of and the number of shares
held by each stockholder. Such list shall be open to the examination of any
stockholder, for any purpose germane to the meeting, during ordinary business
hours, for a period of at least 10 days prior to the meeting as required by
applicable law. Such list shall also be produced and kept open at the time and
place of the meeting during the whole time thereof and shall be subject to the
inspection of any stockholder present at the meeting. The stock transfer books
shall be the only evidence as to who are the stockholders entitled to examine
the stock transfer books, or to vote in person or by proxy at any meeting of
stockholders.
SECTION 8. QUORUM. A majority of the outstanding shares of the
Corporation entitled to vote at a meeting of the stockholders, represented in
person or by proxy, shall constitute a quorum at a meeting. If less than a
majority of the outstanding shares are represented at a meeting, a majority of
the shares so represented may adjourn the meeting from time to time without
further notice. At
2
<PAGE>
such adjourned meeting at which a quorum shall be present or represented, any
business may be transacted which might have been transacted at the meeting as
originally called. The stockholders present at a duly organized meeting may
continue to transact business until adjournment, notwithstanding the withdrawal
of enough stock holders to leave less than a quorum.
SECTION 9. PROXIES. At any meeting of the stockholders, every
stockholder having the right to vote shall be entitled to vote in person, or by
proxy appointed by an instrument in writing and complying with the requirements
of Delaware law.
SECTION 10. VOTING BY THE CORPORATION. Neither treasury shares of its
own capital stock held by the Corporation, nor shares held by another
corporation, a majority of the shares of which entitled to vote for the election
of directors are held by the Corporation, shall be entitled to vote or be
counted for quorum purposes at any meeting of the stockholders; provided,
however, that the Corporation may vote shares of its capital stock held by it,
or by any such other corporation, if such shares of capital stock are held by
the Corporation or such other corporation in a fiduciary capacity.
SECTION 11. ADVANCE NOTICE OF NEW BUSINESS AT ANNUAL MEETINGS. At the
annual meeting of stockholders only such business shall be conducted that is
either (a) specified in the notice of meeting (or any supplement thereto) given
by or at the direction of the Board of Directors (or any duly authorized
committee thereof), (b) otherwise properly brought before the annual meeting by
or at the direction of the Board of Directors (or any duly authorized committee
thereof) or by the Chairman or (c) otherwise properly brought before the annual
meeting by any stockholder of the Corporation (i) who is a stockholder of record
on the date of the giving of the notice provided for in this Section 11 and on
the record date for the determination of stockholders entitled to vote at such
annual meeting and (ii) who complies with the notice procedures set forth in
this Section 11.
In addition to any other applicable requirements for business to be
properly brought before an annual meeting by a stockholder, such stockholder
must have given timely notice thereof in proper written form to the Secretary of
the Corporation.
To be timely, a stockholder's notice to the Secretary must be delivered
to or mailed and received at the principal executive offices of the Corporation
not less than ninety (90) days nor more than one-hundred twenty (120) days prior
to the anniversary date of the immediately preceding annual meeting of
stockholders; PROVIDED, HOWEVER, that in the event that the annual meeting is
called for a date that is not within thirty (30) days before or after such
anniversary date, notice by the stockholder in order to be timely must be so
received not later than the close of business on the tenth (10th) day following
the day on which such notice of the date of the annual meeting was mailed or
such public disclosure of the date of the annual meeting was made, whichever
first occurs.
To be in proper written form, a stockholder's notice to the Secretary
must set forth as to each matter such stockholder proposes to bring before the
annual meeting (i) a brief description of the business desired to be brought
before the annual meeting and the reasons for conducting such business at the
annual meeting, (ii) the name and record address of such stockholder, (iii) the
class or series and number of shares of capital stock of the Corporation which
are owned beneficially or
3
<PAGE>
of record by such stockholder, (iv) a description of all arrangements or
understandings between such stockholder and any other person or persons
(including their names) in connection with the proposal of such business by such
stockholder and any material interest of such stockholder in such business and
(v) a representation that such stockholder intends to appear in person or by
proxy at the annual meeting to bring such business before the meeting.
No business shall be conducted at the annual meeting of stockholders
except business brought before the annual meeting in accordance with the
procedures set forth in this Section 11, PROVIDED, HOWEVER, that, once business
has been properly brought before the annual meeting in accordance with such
procedures, nothing in this Section 11 shall be deemed to preclude discussion by
any stockholder of any such business. If the Chairman of an annual meeting
determines that business was not properly brought before the annual meeting in
accordance with the foregoing procedures, the Chairman shall declare to the
meeting that the business was not properly brought before the meeting and such
business shall not be transacted.
The provisions of this Section 11 shall not prevent the consideration
and approval or disapproval at the stockholders' meeting of reports of officers,
directors and committees of the Board of Directors, but, in connection with such
reports, no new business shall be acted upon at such meeting unless stated,
filed and received as herein provided.
The provisions of this Section shall not prevent the consideration and
approval or disapproval at the stockholders' meeting of reports of officers,
directors and committees of the Board of Directors, but, in connection with such
reports, no new business shall be acted upon at such meeting unless stated,
filed and received as herein provided.
SECTION 12. INFORMAL ACTION BY STOCKHOLDERS. Any action required to be
taken at a meeting of the stockholders, or any other action which may be taken
at a meeting of stockholders, may be taken without a meeting if consent in
writing, setting forth the action so taken, shall be signed by all of the
stockholders entitled to vote with respect to the subject matter of such action.
SECTION 13. INSPECTORS OF ELECTION. In advance of any meeting of
stockholders, the Board may appoint any persons other than nominees for office
as inspectors of election to act at such meeting or any adjournment thereof. If
inspectors of election be not so appointed, or if any persons so appointed fail
to appear or refuse to act, the presiding officer of any such meeting may, and
on the request of any stockholder or a stockholder's proxy shall, make such
appointment at the meeting. The number of inspectors shall be either one or
three. If appointed at a meeting on the request of one or more stockholders or
proxies, the majority of shares represented in person or by proxy shall
determine whether one or three inspectors are to be appointed. The duties of
such inspectors shall include: determining the number of shares of stock and the
voting power of each share, the shares of stock represented at the meeting, the
existence of a quorum, and the authenticity, validity and effect of the proxies;
receiving votes, ballots or consents; hearing and determining all challenges and
questions in any way arising in connection with the right to vote; counting and
tabulating all votes or consents; determining the result, and such acts as may
be proper to conduct the election or vote with fairness to all stockholders.
4
<PAGE>
ARTICLE III
BOARD OF DIRECTORS
SECTION 1. GENERAL POWERS. The business and affairs of the Corporation
shall be managed by or under the direction of the Board. The Board shall
annually elect a Chairman of the Board and a President, and may elect one or
more Vice Chairman from among its members, and shall designate, when present,
either the Chairman or the President or a Vice Chairman to preside at its
meeting.
SECTION 2. NUMBER. The Board shall consist of not less than five nor
more than fifteen members. The exact number of directors has been initially
fixed in the Corporation's Certificate of Incorporation at nine, but may be
changed from time to time by the Board pursuant to resolutions adopted by a
majority of the entire Board.
SECTION 3. ELECTION OF DIRECTORS. The Board shall be divided into three
classes, a nearly equal in number as possible: the first class, the second class
and the third class. Each director shall serve for a term ending on the third
annual meeting following the annual meeting of the stockholders at which such
director was elected; PROVIDED, HOWEVER, that the directors first elected to the
first class shall serve for a term ending upon the election of directors at the
annual meeting next following the end of the calendar year 1996, the directors
first elected to the second class shall serve for a term ending upon the
election of directors at the second annual meeting next following the end of the
calendar year 1996, and the directors first elected to the third class shall
serve for a term ending upon the election of directors at the third annual
meeting next following the end of calendar year 1996.
At each annual election commencing at the first annual meeting of the
stockholders, the successors to the class of directors whose term expires at
that time shall be elected by the stockholders to hold office for a term of
three years to succeed those directors whose term expires, so that the term of
one class of directors shall expire each year, unless, by reason of any
intervening changes in the authorized number of directors, the Board shall have
designated one or more directorships whose term then expires as directorships of
another class in order more nearly to achieve equality of number of directors
among the classes.
Notwithstanding the requirement that the three classes shall be as
nearly equal in number of directors as possible, in the event of any changes in
the authorized number of directors, each director then continuing to serve as
such shall nevertheless continue as a director of the class of which he or she
is a member until the expiration of his or her current term, or his or her prior
resignation, disqualification, disability or removal. Stockholders shall be
entitled to cumulate their votes in the election of directors in the manner
provided in Section 214 of the Delaware General Corporation Law.
SECTION 4. ADVANCE NOTICE FOR NOMINATION OF DIRECTORS. Only persons who
are nominated in accordance with the following procedures shall be eligible for
election as directors of the Corporation, except as may be otherwise provided in
the Certificate of Incorporation with respect to the right of holders of
preferred stock of the Corporation to nominate and elect a specified number of
directors in certain circumstances. Nominations of persons for election to the
Board of Directors may be made at any annual meeting of stockholders, or at any
special meeting of stockholders called
5
<PAGE>
for the purpose of electing directors, (a) by or at the direction of the Board
of Directors (or any duly authorized committee thereof) or (b) by any
stockholder of the Corporation (i) who is a stockholder of record on the date of
the giving of the notice provided for in this Section 4 and on the record date
for the determination of stockholders entitled to vote at such meeting and (ii)
who complies with the notice procedures set forth in this Section 4.
In addition to any other applicable requirements, for a nomination to
be made by a stockholder, such stockholder must have given timely notice thereof
in proper written form to the Secretary of the Corporation.
To be timely, a stockholder's notice to the Secretary must be delivered
to or mailed and received at the principal executive offices of the Corporation
(a) in the case of an annual meeting, not less than ninety (90) days nor more
than one hundred twenty (120) days prior to the anniversary date of the
immediately preceding annual meeting of stockholders; PROVIDED, HOWEVER, that in
the event that the annual meeting is called for a date that is not within thirty
(30) days before or after such anniversary date, notice by the stockholder in
order to be timely must be so received not later than the close of business on
the tenth (10th) day following the day on which such notice of the date of the
annual meeting was mailed or such public disclosure of the date of the annual
meeting was made, whichever first occurs; and (b) in the case of a special
meeting of stockholders called for the purpose of electing directors, not later
than the close of business on the tenth (10th) day following the day on which
notice of the date of the special meeting was mailed or public disclosure of the
date of the special meeting was made, whichever first occurs.
To be in proper written form, a stockholder's notice to the Secretary
must set forth (a) as to each person whom the stockholder proposes to nominate
for election as a director (i) the name, age, business address and residence
address of the person, (ii) the principal occupation or employment of the
person, (iii) the class or series and number of shares of capital stock of the
Corporation which are owned beneficially or of record by the person and (iv) any
other information relating to the person that would be required to be disclosed
in a proxy statement or other filings required to be made in connection with
solicitations of proxies for election of directors pursuant to Section 14 of the
Securities Exchange Act of 1934, as amended (the "Exchange Act"), and the rules
and regulations promulgated thereunder; and (b) as to the stockholder giving the
notice (i) the name and record address of such stockholder, (ii) the class or
series and number of shares of capital stock of the Corporation which are owned
beneficially or of record by such stockholder, (iii) a description of all
arrangements or understandings between such stockholder and each proposed
nominee and any other person or persons (including their names) pursuant to
which the nomination(s) are to be made by such stockholder, (iv) a
representation that such stockholder intends to appear in person or by proxy at
the meeting to nominate the persons named in its notice and (v) any other
information relating to such stockholder that would be required to be disclosed
in a proxy statement or other filings required to be made in connection with
solicitations of proxies for election of directors pursuant to Section 14 of the
Exchange Act and the rules and regulations promulgated thereunder. Such notice
must be accompanied by a written consent of each proposed nominee to being named
as a nominee and to serve as a director if elected.
6
<PAGE>
No person shall be eligible for election as a director of the
Corporation unless nominated in accordance with the procedures set forth in this
Section 4. If the Chairman of the meeting determines that a nomination was not
made in accordance with the foregoing procedures, the Chairman shall declare to
the meeting that the nomination was defective and such defective nomination
shall be disregarded.
SECTION 5. REGULAR MEETINGS. Meetings of the Board shall be held at
such time, and at such places within or without the State of Delaware, as shall
be fixed by the Board. No call shall be required for regular meetings for which
the time and place has been fixed.
Members of the Board of Directors may participate in regular meetings
by means of conference telephone or similar communications equipment by which
all persons participating in the meeting can hear each other.
SECTION 6. SPECIAL MEETINGS. Special Meetings of the Board may be
called by or at the request of the Chairman of the Board, the President or a
majority of the directors. The persons authorized to call special meetings of
the Board may fix any place as the place for holding any special meeting of the
Board called by such persons.
Members of the Board of Directors may participate in special meetings
by means of conference telephone or similar communications equipment by which
all persons participating in the meeting can hear each other.
SECTION 7. NOTICE. Written notice of any special meeting of the Board
shall be given to each director at least one day prior thereto delivered
personally, by facsimile or by telegram or at least 2 days prior thereto
delivered by a guaranteed overnight delivery service or at least five days prior
thereto delivered by mail at the last address given by the director to the
Corporation for such purpose. Such notice shall be deemed to be delivered when
deposited in the United States mail so addressed, with postage thereon prepaid,
if mailed, when deposited with the delivery service, if sent by guaranteed
overnight delivery, when the facsimile confirmation is received, if sent by
facsimile or when delivered to the telegraph company if sent by telegram. Any
director may waive notice of any meeting by a writing filed with the Secretary.
The attendance of a director at a meeting shall constitute a waiver of notice of
such meeting, except in the event a director attends a meeting for the express
purpose of objecting to the transaction of any business because the meeting is
not lawfully called or convened. Neither the business to be transacted at, nor
the purpose of, any meeting of the Board need be specified in the notice or
waiver of notice of such meeting.
SECTION 8. QUORUM. A majority of the number of directors fixed pursuant
to Section 2 of this Article II shall constitute a quorum for the transaction of
business at any meeting of the Board, but if less than such majority is present
at a meeting, a majority of the directors present may adjourn the meeting from
time to time. Notice of any adjourned meeting shall be given in the same manner
as prescribed by Section 6 of this Article III.
7
<PAGE>
SECTION 9. MANNER OF ACTING. The act of the majority of the directors
present at a meeting at which a quorum is present shall be the act of the Board.
SECTION 10. ACTION WITHOUT A MEETING. Any action required or permitted
to be taken by the Board at a meeting may be taken without a meeting if a
consent in writing, setting forth the action so taken, shall be signed by all of
the directors.
SECTION 11. RESIGNATION. Any director may resign at any time by sending
a written notice of such resignation to the Corporation addressed to the
Chairman of the Board, the President or the Board. Unless otherwise specified
therein, such resignation shall take effect upon receipt thereof.
SECTION 12. VACANCIES. Any vacancy occurring in the Board may be filled
in accordance with the Certificate of Incorporation.
SECTION 13. COMPENSATION. Directors, as such, may receive a stated
salary for their services. By resolution of the Board, a reasonable fixed sum,
and reasonable expenses of attendance, if any, may be allowed for actual
attendance at each regular or special meeting of the Board. Members of either
standing or special committees may be allowed such compensation for actual
attendance at committee meetings as the Board may determine. Directors may also,
subject to applicable law, be entitled to receive stock options and benefits
under a retirement plan.
SECTION 14. PRESUMPTION OF ASSENT. A director of the Corporation who is
present at a meeting of the Board at which action is taken shall be presumed to
have assented to the action taken unless his or her dissent or abstention shall
be entered in the minutes of the meeting or unless he or she shall file a
written dissent to such action with the person acting as the secretary of the
meeting before the adjournment thereof or shall forward such dissent by
registered mail to the secretary of the Corporation within five days after the
date a copy of the minutes of the meeting is received. Such right to dissent
shall not apply to a director who voted in favor of such action.
SECTION 15. REMOVAL. At a meeting of stockholders called expressly for
that purpose, a director may be removed only for cause as determined by the
affirmative vote of the holders of a majority of the shares then entitled to
vote in an election of directors, which vote may only be taken at a meeting of
stockholders called expressly for that purpose. Cause for removal shall be
deemed to exist only if the director whose removal is proposed has been
convicted of a felony by a court of competent jurisdiction or has been adjudged
by a court of competent jurisdiction to be liable for gross negligence or
misconduct in the performance of such director's duty to the Corporation and
such adjudication is no longer subject to direct appeal.
8
<PAGE>
ARTICLE IV
EXECUTIVE AND OTHER COMMITTEES
SECTION 1. APPOINTMENT. The Board, by resolution adopted by a majority
of the Board, may designate the Chief Executive Officer and two or more of the
other directors to constitute an Executive Committee. The designation of any
committee pursuant to this Article IV and the delegation of authority thereto
shall not operate to relieve the Board, or any director, of any responsibility
imposed by law or regulation, except to the extent provided by law.
SECTION 2. AUTHORITY. The Executive Committee, when the Board is not in
session, shall have and may exercise all of the authority of the Board except to
the extent, if any, that such authority shall be limited by the resolution
appointing the Executive Committee, or as otherwise expressly provided by law,
the Certificate of Incorporation or the Bylaws.
SECTION 3. TENURE. Subject to the provisions of Section 8 of this
Article IV, each member of the Executive Committee shall hold office until a
successor is designated as a member of the Executive Committee.
SECTION 4. MEETINGS. Regular meetings of the Executive Committee may be
held without notice at such times and places as the Executive Committee may fix
from time to time. Special meetings of the Executive Committee may be called by
any member thereof upon not less than one day's notice stating the place, date
and hour of the meeting, which notice may be written or oral. Any member of the
Executive Committee may waive notice of any meeting and no notice of any meeting
need be given to any member thereof who attends in person. The notice of a
meeting of the Executive Committee need not state the business proposed to be
transacted at the meeting.
Regular or special meetings may be held by means of conference
telephone or similar communications equipment by which all persons participating
in the meeting can hear each other.
SECTION 5. QUORUM. A majority of the members of the Executive Committee
shall constitute a quorum for the transaction of business at any meeting
thereof, and action of the Executive Committee must be authorized by the
affirmative vote of a majority of the members present at a meeting at which a
quorum is present.
SECTION 6. ACTION WITHOUT A MEETING. Any action required or permitted
to be taken by the Executive Committee at a meeting may be taken without a
meeting if a consent in writing, setting forth the action so taken, shall be
signed by all of the members of the Executive Committee.
SECTION 7. VACANCIES. Any vacancy in the Executive Committee may be
filled by resolution adopted by a majority of the Board.
9
<PAGE>
SECTION 8. RESIGNATIONS AND REMOVAL. Any member of the Executive
Committee may be removed at any time with or without cause by resolution adopted
by a majority of the Board. Any member of the Executive Committee may resign
from the Executive Committee at any time by giving written notice to the
Chairman of the Board, the President or the Board. Unless otherwise specified
thereon, such resignation shall take effect upon receipt. The acceptance of such
resignation shall not be necessary to make it effective.
SECTION 9. PROCEDURE. The Executive Committee shall elect a presiding
officer from its members and may fix its own rules of procedures which shall not
be inconsistent with the Bylaws. It shall keep regular minutes of its
proceedings and report the same to the Board for its information.
SECTION 10. OTHER COMMITTEES. The Board may by resolution establish any
of an audit committee, a nominating committee or such other committees composed
of directors as they may determine to be necessary or appropriate for the
conduct of the business of the Corporation and may prescribe the duties,
constitution and procedures thereof.
ARTICLE V
OFFICERS
SECTION 1. POSITIONS. The officers of the Corporation shall be a
Chairman of the Board, a Vice Chairman, a Chief Executive Officer, a President,
one or more Vice Presidents, a Secretary and a Treasurer or a Vice President in
charge of financial matters, each of whom shall be elected by the Board. Any
number of such offices may be held by the same person. The Board may designate
one or more Vice Presidents as Executive Vice President, Senior Vice President
or such other designation as the Board may determine. The Board may also elect
or authorize the appointment of such other officers as the business of the
Corporation may require. The officers shall have such authority and perform such
duties as the Board may from time to time authorize or determine. In the absence
of action by the Board, the officers shall have such powers and duties as
generally pertain to their respective offices.
SECTION 2. ELECTION AND TERM OF OFFICE. The officers of the
Corporation shall be elected annually at the first meeting of the Board held
after each annual meeting of the stockholders. If the election of officers is
not held at such meeting, such election shall be held as soon thereafter as
possible. Each officer shall hold office until his or her successor shall have
been duly elected and qualified or until his or her death, resignation or
removal in the manner hereinafter provided. Election or appointment of an
officer, employee or agent shall not by itself create any contractual rights.
The Board may authorize the Corporation to enter into an employment contract
with any officer, but no contract shall impair the right of the Board to remove
any officer at any time in accordance with Section 3 of this Article V.
SECTION 3. REMOVAL. Any officer may be removed by the Board whenever in
its judgment the best interests of the Corporation will be served thereby, but
such removal, other than for cause, shall be without prejudice to the contract
rights, if any, of the person so removed.
10
<PAGE>
SECTION 4. VACANCIES. A vacancy in any office because of death,
resignation, removal, disqualification or otherwise, may be filled by a majority
vote of the Board for the unexpired portion of the term.
SECTION 5. REMUNERATION. The remuneration of the officers shall be
fixed from time to time by the Board or its delegees.
ARTICLE VI
CONTRACTS, LOANS, CHECK AND DEPOSITS
SECTION 1. CONTRACTS. To the extent permitted by applicable law, the
Certificate of Incorporation or the Bylaws, the Board may authorize any officer,
employee or agent of the Corporation to enter into any contract or execute and
deliver any instrument in the name of and on behalf of the Corporation. Such
authority may be general or confined to specific instances.
SECTION 2. LOANS. No loans shall be contracted on behalf of the
Corporation and no evidence of indebtedness shall be issued in its name unless
authorized by the Board. Such authority may be general or confined to specific
instances.
SECTION 3. CHECKS, DRAFTS, ETC. All checks, drafts or other orders for
the payment of money, notes or other evidences of indebtedness issued in the
name of the Corporation shall be signed by one or more officers, employees or
agents of the Corporation in such manner as shall from time to time be
determined by the Board.
SECTION 4. DEPOSITS. All funds of the Corporation not otherwise
employed shall be deposited from time to time to the credit of the Corporation
in any duly authorized depositories as the Board may select.
ARTICLE VII
CERTIFICATES FOR SHARES AND THEIR TRANSFER
SECTION 1. CERTIFICATES FOR SHARES. Certificates representing shares of
capital stock of the Corporation shall be in such form as shall be determined by
the Board. Such certificates shall be signed by the Chairman of the Board, the
Chief Executive Officer or any other officer of the Corporation authorized by
the Board, attested by the Secretary or an Assistant Secretary, and sealed with
the corporate seal or a facsimile thereof. The signatures of such officers upon
a certificate may be facsimiles if the certificate is manually signed on behalf
of a transfer agent or a registrar other than the Corporation itself or one of
its employees. Each certificate for shares of capital stock shall be
consecutively numbered or otherwise identified. The name and address of the
person to whom the shares are issued, with the number of shares issued and date
of issue, shall be entered on the stock transfer books of the Corporation. All
Certificates surrendered to the Corporation for transfer shall be canceled and
no new certificate shall be issued until the former certificate for a like
number of
11
<PAGE>
shares shall have been surrendered and canceled, except that in the case of a
lost, stolen or destroyed certificate, a new certificate may be issued therefor
upon such terms and indemnity to the Corporation as the Board may prescribe as
sufficient to indemnify the Corporation against any claim that may be made
against it on account of such loss, theft or destruction.
SECTION 2. TRANSFER OF SHARES. Transfer of shares of capital stock of
the Corporation shall be made only on its stock transfer books. Authority for
such transfer shall be given only by the holder of record thereof or by his or
her legal representative, who shall furnish proper evidence of such authority,
or by his or her attorney thereunto duly authorized by power of attorney duly
executed and filed with the Corporation. Such transfer shall be made only on
surrender for cancellation of the certificate for such shares. The person in
whose name shares of capital stock stand on the books of the Corporation shall
be deemed by the Corporation to be the owner thereof for all purposes.
ARTICLE VIII
FISCAL YEAR, ANNUAL AUDIT
The fiscal year of the Corporation shall end on the 31st day of
December of each year. The Corporation shall be subject to an annual audit as of
the end of its fiscal year by independent public accountants appointed by and
responsible to the Board. The appointment of such accountants shall be subject
to annual ratification by the stockholders.
ARTICLE IX
DIVIDENDS
Subject to applicable law, the Certificate of Incorporation or the
Bylaws, the Board may, from time to time, declare and the Corporation may pay,
dividends on the outstanding shares of capital stock of the Corporation.
ARTICLE X
CORPORATE SEAL
The corporation seal of the Corporation shall be in such form as the
Board shall prescribe.
ARTICLE XI
AMENDMENTS
Bylaws may be adopted, amended or repealed by the vote of two thirds of
the outstanding stock of the Corporation entitled to vote thereon or by a
resolution adopted by a majority of the directors then in office.
12
<PAGE>
ARTICLE XII
INDEMNIFICATION
SECTION 1. ACTIONS, SUITS OR PROCEEDINGS OTHER THAN BY OR IN THE RIGHT
OF THE CORPORATION. The Corporation shall indemnify any person who was or is a
party or is threatened to be made a party to any threatened, pending or
completed action, suite or proceeding, whether civil, criminal, administrative
or investigative (other than an action by or in the right of the Corporation) by
reason of the fact that he or she is or was or has agreed to become a director
or officer of the Corporation, or is or was serving or has agreed to serve at
the request of the Corporation as a director or officer of another corporation,
partnership, limited liability company, limited liability partnership, joint
venture, trust or other enterprise, or by reason of any action alleged to have
been taken or omitted in such capacity, against costs, charges, expenses
(including attorneys' fees), judgments, fines and amounts paid in settlement
actually and reasonable incurred by him or her or on his or her behalf in
connection with such action, suit or proceeding and any appeal therefrom, if he
or she acted in good faith and in a manner he or she reasonably believed to be
in or not opposed to the best interests of the Corporation, and, with respect to
any criminal action or proceeding, had no reasonable cause to believe his or her
conduct was unlawful. The termination of any action, suit or proceeding by
judgment, order, settlement, conviction, or upon a plea of NOLO CONTENDERE or
its equivalent, shall not, of itself, create a presumption that the person did
not act in good faith and in a manner which he or she reasonably believed to be
within the scope of his or her authority and in, or not opposed to the best
interests of the Corporation, or, with respect to any criminal action or
proceeding, had reasonable cause to believe that his or her conduct was
unlawful.
SECTION 2. ACTIONS OR SUITS BY OR IN THE RIGHT OF THE CORPORATION. The
Corporation shall indemnify any person who was or is a party or is threatened to
be made a party to any threatened, pending or completed action or suit by or in
the right of the Corporation to procure a judgment in its favor by reason of the
fact that he or she is or was or has agreed to become a director or officer of
the Corporation, or is or was serving or has agreed to serve at the request of
the Corporation as a director or officer of another corporation, partnership,
limited liability company, limited liability partnership, joint venture, trust
or other enterprise, or by reason of any action alleged to have been taken or
omitted in such capacity, against costs, charges and expenses (including
attorneys' fees) actually and reasonably incurred by him or her or on his or her
behalf in connection with the defense or settlement of such action or suit and
any appeal therefrom, if he or she acted in good faith and in a manner he or she
reasonably believed to be in or not opposed to the best interest of the
Corporation except that no indemnification shall be made in respect of any
claim, issue or matter as to which such person shall have been adjudged to be
liable for gross negligence or misconduct in the performance of his or her duty
to the Corporation unless and only to the extent that the Court of Chancery of
Delaware or the court in which such action or suit was brought shall determine
upon application that, despite the adjudication of such liability but in view of
all the circumstances of the case, such person is fairly and reasonably entitled
to indemnity for such costs, charges and expenses which the Court of Chancery or
such other court shall deem proper.
13
<PAGE>
SECTION 3. INDEMNIFICATION FOR COSTS, CHARGES AND EXPENSES OF
SUCCESSFUL PARTY. Notwithstanding the other provisions of this Article XII, to
the extent that a director or officer has been successful, on the merits or
otherwise, including, without limitation, the dismissal of an action without
prejudice, in defense of any action, suite or proceeding referred to in Sections
1 and 2 of this Article XII, or in defense of any claim, issue or matter
therein, he or she shall be indemnified against all costs, charges and expenses
(including attorneys' fees) actually and reasonably incurred by him or her or on
his or her behalf in connection therewith.
SECTION 4. DETERMINATION OF RIGHT TO INDEMNIFICATION. Any
indemnification under Sections 1 and 2 of this Article XII (unless ordered by a
court) shall be paid by the Corporation unless a determination is made by (i)
the board of directors by a majority vote of the directors who were not parties
to such action, suit or proceeding, or if such majority of disinterested
directors so directs, (ii) by independent legal counsel in a written opinion, or
(iii) by the stockholders, that indemnification of the director or officer is
not proper in the circumstances because he or she has not met the applicable
standard of conduct set forth in Sections 1 and 2 of this Article XII.
SECTION 5. ADVANCE OF COSTS, CHARGES AND EXPENSES. Costs, charges and
expenses (including attorneys' fees) incurred by a person referred to in
Sections 1 or 2 of this Article XII in defending a civil or criminal action,
suit or proceeding shall be paid by the Corporation in advance of the final
disposition of such action, suit or proceeding; PROVIDED, HOWEVER, that the
payment of such costs, charges and expenses incurred by a director or officer in
his or her capacity as a director or officer (and not in any other capacity in
which service was or is rendered by such person while a director or officer) in
advance of the final disposition of such action, suit or proceeding shall be
made only upon receipt of an undertaking by or on behalf of the director or
officer to repay all amounts so advanced in the event that it shall ultimately
be determined that such director or officer is not entitled to be indemnified by
the Corporation as authorized in this Article XII. Such costs, charges and
expenses incurred by other employees and agents may be so paid upon such terms
and conditions, if any, as the majority of the directors deems appropriate. The
majority of the directors may, in the manner set forth above, and upon approval
of such director or officer of the Corporation, authorize the Corporation's
counsel to represent such person, in any action, suit or proceeding, whether or
not the Corporation is a party to such action, suit or proceeding.
SECTION 6. PROCEDURE FOR INDEMNIFICATION. Any indemnification under
Sections 1, 2 and 3, or advance of costs, charges and expenses under Section 5
of this Article XII shall be made promptly, and in any event within 60 days,
upon the written request of the director or officer. The right to
indemnification or advances as granted by this Article XII shall be enforceable
by the director or officer in any court of competent jurisdiction, if the
Corporation denies such request, in whole or in part, or if no disposition
thereof is made within 60 days. Such person's costs and expenses incurred in
connection with successfully establishing his or her right to indemnification,
in whole or in part, in any such action shall also be indemnified by the
Corporation. It shall be a defense to any such action (other than an action
brought to enforce a claim for the advance of costs, charges and expenses under
Section 5 of this Article XII where the required undertaking, if any, has been
received by the Corporation) that the claimant has not met the standard of
conduct set forth in Sections 1 or 2 of this
14
<PAGE>
Article XII, but the burden of proving such defense shall be on the Corporation.
Neither the failure of the Corporation (including its board of directors, its
independent legal counsel and its stockholders) to have made a determination
prior to the commencement of such action that indemnification of the claimant is
proper in the circumstances because he or she as met the applicable standard of
conduct set forth in Sections 1 or 2 of this Article XII, nor the fact that
there has been an actual determination by the Corporation (including its board
of directors, its independent legal counsel and its stockholders) that the
claimant has not met such applicable standard of conduct, shall be a defense to
the action or create a presumption that the claimant has not met the applicable
standard of conduct.
SECTION 7. SETTLEMENT. The Corporation shall not be obligated to
reimburse the costs of any settlement to which it has not agreed. If in any
action, suit or proceeding, including any appeal, within the scope of Sections 1
or 2 of this Article XII, the person to be indemnified shall have unreasonably
failed to enter into a settlement thereof, then, notwithstanding any other
provision hereof, the indemnification obligation of the Corporation to such
person in connection with such action, suit or proceeding shall not exceed the
total of the amount at which settlement could have been made and the expenses
incurred by such person prior to the time such settlement could reasonably have
been effected.
SECTION 8. SUBSEQUENT AMENDMENT. No amendment, termination or repeal of
this Article XII or of relevant provisions of the Delaware General Corporation
Law or any other applicable laws shall affect or impair in any way the rights of
any director or officer of the Corporation to indemnification under the
provisions hereof with respect to any action, suit or proceeding arising out of,
or relating to, any actions, transactions or facts occurring prior to the final
adoption of such amendment, termination or appeal.
SECTION 9. OTHER RIGHTS; CONTINUATION OF RIGHT TO INDEMNIFICATION. The
indemnification provided by this Article XII shall not be deemed exclusive of
any other rights to which a director, officer, employee or agent seeking
indemnification may be entitled under any law (common or statutory), agreement,
vote of stockholders or disinterested directors or otherwise, both as to action
in his or her official capacity and as to action in another capacity while
holding office or while employed by or acting as agent for the Corporation, and
shall continue as to a person who has ceased to be a director, officer, employee
or agent, and shall inure to the benefit of the estate, heirs, executors and
administrators of such person. Nothing contained in this Article XII shall be
deemed to prohibit, and the Corporation is specifically authorized to enter
into, agreements with officers and directors providing indemnification rights
and procedures different from those set forth herein. All rights to
indemnification under this Article XII shall be deemed to be a contract between
the Corporation and each director or officer of the Corporation who serves or
served in such capacity at any time while this Article XII is in effect. Any
repeal or modification of this Article XII or any repeal or modification of
relevant provisions of the Delaware General Corporation Law or any other
applicable laws shall not in any way diminish any rights to indemnification of a
director, officer, employee or agent or the obligations of the Corporation
arising hereunder. This Article XII shall be binding upon any successor
Corporation to this Corporation, whether by way of acquisition, merger,
15
<PAGE>
consolidation or otherwise.
SECTION 10. INSURANCE. The Corporation shall purchase and maintain
insurance on behalf of any person who is or was or has agreed to become a
director, officer, employee or agent of the Corporation, or is or was serving at
the request of the Corporation as a director, officer, employee or agent of
another corporation, partnership, limited liability company, limited liability
partnership, joint venture, trust or other enterprise against any liability
asserted against him or her and incurred by him or her or on his or her behalf
in any such capacity, or arising out of his or her status as such, whether or
not the Corporation would have the power to indemnify him or her against such
liability under the provisions of this Article XII; PROVIDED, that such
insurance is available on acceptable terms, which determination shall be made by
a vote of a majority of the directors.
SECTION 11. SAVINGS CLAUSE. If this Article XII or any portion hereof
shall be invalidated on any ground by any court of competent jurisdiction, then
the Corporation shall nevertheless indemnify each director or officer of the
Corporation as to costs, charges and expenses (including attorneys' fees),
judgments, fine and amounts paid in settlement with respect to any action, suit
or proceeding, whether civil, criminal, administrative or investigative,
including an action by or in the right of the Corporation, to the full extent
permitted by any applicable portion of this Article XII that shall not have been
invalidated and to the full extent permitted by applicable law.
SECTION 12. SUBSEQUENT LEGISLATION. If the Delaware General Corporation
Law is amended after approval by the stockholders of this Article to further
expand the indemnification permitted to directors and officers of the
Corporation, then the corporation shall indemnify such persons to the fullest
extent permitted by the Delaware General Corporation Law, as so amended.
16
<PAGE>
CHRISTIE S. FLANAGAN - EMPLOYMENT AGREEMENT SUMMARY
<TABLE>
<CAPTION>
- ------------------------------ -------------------------------------------------------------------------------------
SUBJECT PROVISION
- ------------------------------ -------------------------------------------------------------------------------------
<S> <C>
Term 8/1/99 through 7/31/02; automatic one year renewals (subject to 45 days notice).
- ------------------------------ -------------------------------------------------------------------------------------
Base Salary $700,000
- ------------------------------ -------------------------------------------------------------------------------------
Renewal Payment $60,000
- ------------------------------ -------------------------------------------------------------------------------------
Executive Compensation Participation in Executive Compensation Plan
(including stock options, restricted stock,
annual bonus, long term incentive compensation, and stock purchase).
- ------------------------------ -------------------------------------------------------------------------------------
Fringe Benefits Per company policies for an EVP.
Annual medical exam.
Five weeks PTO.
Luxury automobile.
One country club and one social club.
Split dollar life insurance ($1.4 million).
Benefits continue for executive and spouse for
three years following termination.
- ------------------------------ -------------------------------------------------------------------------------------
Location Dallas, TX, subject to reasonable travel requirements.
- ------------------------------ -------------------------------------------------------------------------------------
Termination for Cause Agreement terminates and company has no further
obligations.
- ------------------------------ -------------------------------------------------------------------------------------
Termination for Disability Disability means incapacitated for six consecutive months or 180 days in any 12
month period. Executive receives 60% of base salary for balance of term and
medical benefits until age 70.
- ------------------------------ -------------------------------------------------------------------------------------
Termination for Death Executive receives 60% of base salary for balance of term.
- ------------------------------ -------------------------------------------------------------------------------------
Termination w/o cause by Good reason means:
company or for "good reason" (a) change in duties responsibilities, or status w/o consent.
by Executive. (b) reduction in base salary.
(c) change in location, or failure to provide relocation
assistance if employee agrees to move.
(d) discontinuation of benefits or compensation plan.
(e) failure of successor company to assume agreement.
Executive receives:
(a) in a lump sum payment three times base plus
the higher of (i) current year target bonus or
(ii) the average of prior 3 years actual bonuses.
(b) use of automobile for three years (or until
reemployed).
(c) accelerated vesting of stock options and
restricted stock (per plans).
- ------------------------------ -------------------------------------------------------------------------------------
Termination upon a change of 24 month "reach in" period.
control.
Employee receives:
(a) lump sum payment of three times base salary plus the higher of (i) current
year target bonus or (ii) the average of prior 3
years actual bonuses - capped at 280(g) limit.
(b) outplacement services.
(c) cash in lieu of options.
- ------------------------------ -------------------------------------------------------------------------------------
</TABLE>
<PAGE>
SCOTT A. KISTING - EMPLOYMENT AGREEMENT SUMMARY
<TABLE>
<CAPTION>
- ------------------------------ -------------------------------------------------------------------------------------
SUBJECT PROVISION
- ------------------------------ -------------------------------------------------------------------------------------
<S> <C>
Term 8/1/99 through 7/31/02; automatic one year renewals (subject to 45 days notice).
- ------------------------------ -------------------------------------------------------------------------------------
Base Salary $800,000
- ------------------------------ -------------------------------------------------------------------------------------
Executive Compensation Participation in Executive Compensation Plan, subject to the following:
Annual bonus - target at 50% of base salary.
Stock options - 100,000 GSB shares to be granted by 1/31/2000, 3 year vesting.
(Note: 100,000 options have previously been granted in 1999.)
Restricted stock - 43,500 restricted GSB shares to be issued upon approval of
restricted stock plan agreement, one half vesting on first anniversary of
the date of grant, balance on the fourth anniversary.
Long term incentive cash payment - $4 million to be paid on 3/31/2003,
based on company achieving targeted average ROE
and net income goals during 1998-2002.
- ------------------------------ -------------------------------------------------------------------------------------
Fringe Benefits Per company policies for an EVP.
Annual medical exam.
Five weeks PTO.
Luxury automobile.
One country club or social club.
Benefits continue for executive and spouse for
three years following termination.
- ------------------------------ -------------------------------------------------------------------------------------
Location San Francisco, CA, subject to reasonable travel requirements.
- ------------------------------ -------------------------------------------------------------------------------------
Termination for Cause Agreement terminates and company has no further
obligations.
- ------------------------------ -------------------------------------------------------------------------------------
Termination for Disability Disability means incapacitated for six consecutive months or 180 days in any 12
month period. Executive receives 60% of base salary for balance of term and
medical benefits until age 70.
- ------------------------------ -------------------------------------------------------------------------------------
Termination for Death Executive receives 60% of base salary for balance of term.
- ------------------------------ -------------------------------------------------------------------------------------
Termination w/o cause by Good reason means:
company or for "good reason" (a) change in duties responsibilities, or status w/o consent.
by Executive. (b) reduction in base salary.
(c) change in location, or failure to provide relocation
assistance if employee agrees to move.
(d) discontinuation of benefits or compensation plan.
(e) failure of successor company to assume agreement.
Executive receives:
(a) in a lump sum payment three times base plus
the higher of (i) current year target bonus or
(ii) the average of prior three years actual
bonuses.
(b) use of automobile for three years
(or until reemployed).
(c) accelerated vesting of stock options and
restricted stock (per plans).
- ------------------------------ -------------------------------------------------------------------------------------
Termination upon a change of 24 month "reach in" period.
control.
Employee receives:
(a) lump sum payment of three times base salary plus the higher of (i) current
year target bonus or (ii) the average of prior 3
years actual bonuses - capped at 280(g) limit.
(b) outplacement services.
(c) cash in lieu of options.
------------------------------ -------------------------------------------------------------------------------------
</TABLE>
<TABLE> <S> <C>
<ARTICLE> 9
<LEGEND>
This schedule contains summary financial information extracted from the
consolidated balance sheets and statements of income found on page 3 and 4 of
the Company's unaudited financial statements for the nine months ended September
30, 1999.
</LEGEND>
<MULTIPLIER> 1,000
<S> <C>
<PERIOD-TYPE> 9-MOS
<FISCAL-YEAR-END> DEC-31-1999
<PERIOD-START> JAN-01-1999
<PERIOD-END> SEP-30-1999
<CASH> 468,638
<INT-BEARING-DEPOSITS> 53
<FED-FUNDS-SOLD> 0
<TRADING-ASSETS> 0
<INVESTMENTS-HELD-FOR-SALE> 14,841,565
<INVESTMENTS-CARRYING> 2,479,730
<INVESTMENTS-MARKET> 2,488,610
<LOANS> 33,287,736 <F1>
<ALLOWANCE> 570,783
<TOTAL-ASSETS> 55,805,809
<DEPOSITS> 23,675,979
<SHORT-TERM> 15,600,998
<LIABILITIES-OTHER> 1,242,288
<LONG-TERM> 13,332,382
0
0
<COMMON> 134,721
<OTHER-SE> 1,319,441
<TOTAL-LIABILITIES-AND-EQUITY> 55,805,809
<INTEREST-LOAN> 1,817,816
<INTEREST-INVEST> 896,909
<INTEREST-OTHER> 0
<INTEREST-TOTAL> 2,714,725
<INTEREST-DEPOSIT> 667,387
<INTEREST-EXPENSE> 1,822,574
<INTEREST-INCOME-NET> 892,151
<LOAN-LOSSES> 10,000
<SECURITIES-GAINS> 1,284
<EXPENSE-OTHER> 704,262
<INCOME-PRETAX> 492,883
<INCOME-PRE-EXTRAORDINARY> 236,102
<EXTRAORDINARY> 0
<CHANGES> 0
<NET-INCOME> 236,102
<EPS-BASIC> 1.78
<EPS-DILUTED> 1.67
<YIELD-ACTUAL> 6.94
<LOANS-NON> 170,970
<LOANS-PAST> 0
<LOANS-TROUBLED> 26,933
<LOANS-PROBLEM> 86,788
<ALLOWANCE-OPEN> 588,533
<CHARGE-OFFS> 30,919
<RECOVERIES> 3,839
<ALLOWANCE-CLOSE> 570,783
<ALLOWANCE-DOMESTIC> 36,962
<ALLOWANCE-FOREIGN> 0
<ALLOWANCE-UNALLOCATED> 533,821
<FN>
<F1> Loans includes loans held for sale of $819,383 and allowance for loan
losses of $570,783.
</FN>
</TABLE>
