<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 June 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 Identification No.)
incorporation or organization)
135 Main Street, San Francisco, CA 94105
- --------------------------------------------------------------------------------
(Address of principal executive offices) (Zip Code)
415-904-1100
- --------------------------------------------------------------------------------
(Registrant's telephone number, including area code)
N/A
- --------------------------------------------------------------------------------
(Former name, former address and former fiscal year,
if changed since last report)
Indicate by check mark whether the registrant (1) has filed all reports
required to be filed by Section 13 or 15(d) of the Securities Exchange Act of
1934 during the preceding 12 months (or for such shorter period that the
registrant was required to file such reports), and (2) has been subject to such
filing requirements for the past 90 days. X Yes No
The number of shares outstanding of registrant's $1.00 par value common
stock, as of the close of business on July 31, 1999: 132,474,149 shares of
common stock.
Page 1 of 46 pages
Exhibit index on page 45
<PAGE>
GOLDEN STATE BANCORP INC.
SECOND QUARTER 1999 REPORT ON FORM 10-Q
TABLE OF CONTENTS
<TABLE>
<CAPTION>
Page No.
--------
<S> <C> <C>
PART I. FINANCIAL INFORMATION
Item 1. Consolidated Financial Statements
Unaudited Consolidated Balance Sheets
June 30, 1999 and December 31, 1998...........................................................3
Unaudited Consolidated Statements of Income
Six months ended June 30, 1999 and 1998.......................................................4
Unaudited Consolidated Statements of Income
Three months ended June 30, 1999 and 1998.....................................................5
Unaudited Consolidated Statements of Comprehensive Income
Six months ended June 30, 1999 and 1998.......................................................6
Unaudited Consolidated Statements of Comprehensive Income
Three months ended June 30, 1999 and 1998 ....................................................7
Unaudited Consolidated Statement of Stockholders' Equity
Six months ended June 30, 1999................................................................8
Unaudited Consolidated Statements of Cash Flows
Six months ended June 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................................................18
Item 3. Quantitative and Qualitative Disclosures about Market Risk ..................................43
PART II. OTHER INFORMATION
Item 1. Legal Proceedings............................................................................44
Item 2. Changes in Securities........................................................................44
Item 3. Defaults Upon Senior Securities..............................................................44
Item 4. Submission of Matters to a Vote of Security Holders..........................................44
Item 5. Other Information............................................................................45
Item 6. Exhibits and Reports on Form 8-K.............................................................45
Signatures...............................................................................................46
</TABLE>
Page 2
<PAGE>
GOLDEN STATE BANCORP INC. AND SUBSIDIARIES
CONSOLIDATED BALANCE SHEETS
JUNE 30, 1999 AND DECEMBER 31, 1998
(Unaudited)
(dollars in thousands, except per share data)
<TABLE>
<CAPTION>
June 30, December 31,
Assets 1999 1998
------ ---- ----
<S> <C> <C>
Cash and amounts due from banks $ 548,519 $ 854,954
Interest-bearing deposits in other banks 23 52,671
Short-term investment securities 73,951 60,325
----------- -----------
Cash and cash equivalents 622,493 967,950
Securities available for sale, at fair value 1,163,754 770,747
Securities held to maturity 253,026 250,964
Mortgage-backed securities available for sale, at fair value 13,912,271 12,947,992
Mortgage-backed securities held to maturity 2,402,271 2,770,913
Loans held for sale, net 2,143,127 2,366,583
Loans receivable, net 31,580,570 30,280,944
Investment in Federal Home Loan Bank ("FHLB") System 1,125,055 1,000,147
Premises and equipment, net 338,617 336,874
Foreclosed real estate, net 68,406 80,068
Accrued interest receivable 324,558 317,455
Intangible assets (net of accumulated amortization of $148,877
at June 30, 1999 and $113,709 at December 31, 1998) 939,197 923,598
Mortgage servicing rights 1,151,581 943,581
Other assets 810,379 911,168
----------- -----------
Total assets $56,835,305 $54,868,984
=========== ===========
Liabilities, Minority Interest and Stockholders' Equity
-------------------------------------------------------
Deposits $23,920,689 $24,620,066
Securities sold under agreements to repurchase 5,347,435 4,238,395
Borrowings 24,229,617 22,375,557
Other liabilities 1,271,557 1,459,750
----------- -----------
Total liabilities 54,769,298 52,693,768
----------- -----------
Commitments and contingencies -- --
Minority interest 532,749 593,438
Stockholders' equity:
Common stock ($1.00 par value, 250,000,000 shares authorized,
134,570,742 and 128,687,763 shares issued at June
30, 1999 and December 31, 1998, respectively) 134,571 128,688
Additional paid-in capital 1,392,504 1,392,155
Accumulated other comprehensive (loss) income (155,378) 6,151
Retained earnings (substantially restricted) 210,951 56,471
Treasury stock (2,145,552 and 89,994 shares at June 30, 1999 and
December 31, 1998, respectively) (49,390) (1,687)
----------- -----------
Total stockholders' equity 1,533,258 1,581,778
----------- -----------
Total liabilities, minority interest and stockholders' equity $56,835,305 $54,868,984
=========== ===========
</TABLE>
See accompanying notes to unaudited consolidated financial statements.
Page 3
<PAGE>
GOLDEN STATE BANCORP INC. AND SUBSIDIARIES
CONSOLIDATED STATEMENTS OF INCOME
SIX MONTHS ENDED JUNE 30, 1999 AND 1998
(Unaudited)
(dollars in thousands, except per share data)
<TABLE>
<CAPTION>
Six Months Ended June 30,
---------------------------
1999 1998
---- ----
<S> <C> <C>
Interest income:
Loans receivable $1,134,778 $ 761,340
Mortgage-backed securities available for sale 423,616 178,529
Mortgage-backed securities held to maturity 95,900 47,433
Loans held for sale 67,692 58,230
Securities available for sale 38,114 28,286
Securities held to maturity 6,303 1,572
Interest-bearing deposits in other banks 2,300 1,571
Dividends on FHLB stock 28,184 14,562
---------- ----------
Total interest income 1,796,887 1,091,523
---------- ----------
Interest expense:
Deposits 444,058 355,202
Securities sold under agreements to repurchase 107,610 57,049
Borrowings 640,160 369,151
---------- ----------
Total interest expense 1,191,828 781,402
---------- ----------
Net interest income 605,059 310,121
Provision for loan losses 10,000 20,000
---------- ----------
Net interest income after provision for loan losses 595,059 290,121
---------- ----------
Noninterest income:
Loan servicing fees, net 70,290 71,363
Customer banking fees and service charges 91,367 51,197
Gain on sale of loans, net 20,453 36,124
Gain (loss) on sale of assets, net 15,109 (181)
Other income 15,301 11,669
---------- ----------
Total noninterest income 212,520 170,172
---------- ----------
Noninterest expense:
Compensation and employee benefits 202,658 127,574
Occupancy and equipment 71,696 41,329
Loan expense 22,140 23,500
Professional fees 27,269 19,569
Marketing 17,234 9,867
Data processing 11,982 6,397
Savings Association Insurance Fund deposit insurance premium 7,433 5,054
Foreclosed real estate operations, net (2,068) (5,138)
Merger and integration costs 7,747 863
Amortization of intangible assets 35,168 23,229
Other expense 80,821 50,473
---------- ----------
Total noninterest expense 482,080 302,717
---------- ----------
Income before income taxes and minority interest 325,499 157,576
Income tax expense (benefit) 151,112 (223,818)
---------- ----------
Income before minority interest 174,387 381,394
Minority interest 19,907 46,192
---------- ----------
Net income $ 154,480 $ 335,202
========== ==========
Earnings per share:
Basic $ 1.15 $ 5.91
Diluted 1.09 5.91
</TABLE>
See accompanying notes to unaudited consolidated financial statements.
Page 4
<PAGE>
GOLDEN STATE BANCORP INC. AND SUBSIDIARIES
CONSOLIDATED STATEMENTS OF INCOME
THREE MONTHS ENDED JUNE 30, 1999 AND 1998
(Unaudited)
(dollars in thousands, except per share data)
<TABLE>
<CAPTION>
Three Months Ended June 30,
---------------------------
1999 1998
---- ----
<S> <C> <C>
Interest income:
Loans receivable $567,505 $ 376,620
Mortgage-backed securities available for sale 219,562 97,027
Mortgage-backed securities held to maturity 45,471 22,576
Loans held for sale 33,044 30,894
Securities available for sale 19,690 14,563
Securities held to maturity 2,843 698
Interest-bearing deposits in other banks 1,261 1,161
Dividends on FHLB stock 14,628 7,555
-------- ---------
Total interest income 904,004 551,094
-------- ---------
Interest expense:
Deposits 222,062 177,027
Securities sold under agreements to repurchase 53,562 30,521
Borrowings 331,337 190,988
-------- ---------
Total interest expense 606,961 398,536
-------- ---------
Net interest income 297,043 152,558
Provision for loan losses 5,000 10,000
-------- ---------
Net interest income after provision for loan losses 292,043 142,558
-------- ---------
Noninterest income:
Loan servicing fees, net 34,322 34,401
Customer banking fees and service charges 46,621 25,851
Gain on sale of loans, net 4,864 21,619
Gain on sale of assets, net 14,935 198
Other income 6,610 5,332
-------- ---------
Total noninterest income 107,352 87,401
-------- ---------
Noninterest expense:
Compensation and employee benefits 99,647 64,593
Occupancy and equipment 31,903 19,846
Loan expense 9,962 13,905
Professional fees 13,231 10,859
Marketing 8,432 6,362
Data processing 6,270 3,557
Savings Association Insurance Fund deposit insurance premium 3,577 2,481
Foreclosed real estate operations, net (1,395) (3,418)
Merger and integration costs 1,665 863
Amortization of intangible assets 18,010 12,140
Other expense 32,929 26,273
-------- ---------
Total noninterest expense 224,231 157,461
-------- ---------
Income before income taxes and minority interest 175,164 72,498
Income tax expense (benefit) 80,820 (237,708)
-------- ---------
Income before minority interest 94,344 310,206
Minority interest 10,740 22,662
-------- ---------
Net income $ 83,604 $ 287,544
======== =========
Earnings per share:
Basic $ 0.62 $ 5.07
Diluted 0.59 5.07
</TABLE>
See accompanying notes to unaudited consolidated financial statements.
Page 5
<PAGE>
GOLDEN STATE BANCORP INC. AND SUBSIDIARIES
CONSOLIDATED STATEMENTS OF COMPREHENSIVE INCOME
SIX MONTHS ENDED JUNE 30, 1999 AND 1998
(Unaudited)
(in thousands)
<TABLE>
<CAPTION>
Six Months Ended June 30,
--------------------------
1999 1998
---- ----
<S> <C> <C>
Net income $ 154,480 $335,202
Other comprehensive loss, net of tax:
Unrealized holding loss on securities available for sale:
Unrealized holding loss arising during the period (161,335) (6,496)
Less: reclassification adjustment for gain included
in net income (194) (565)
--------- --------
Other comprehensive loss (161,529) (7,061)
--------- --------
Comprehensive (loss) income $ (7,049) $328,141
========= ========
</TABLE>
See accompanying notes to unaudited consolidated financial statements.
Page 6
<PAGE>
GOLDEN STATE BANCORP INC. AND SUBSIDIARIES
CONSOLIDATED STATEMENTS OF COMPREHENSIVE INCOME
THREE MONTHS ENDED JUNE 30, 1999 AND 1998
(Unaudited)
(in thousands)
<TABLE>
<CAPTION>
Three Months Ended June 30,
---------------------------
1999 1998
---- ----
<S> <C> <C>
Net income $ 83,604 $287,544
Other comprehensive loss, net of tax:
Unrealized holding loss on securities available for sale:
Unrealized holding loss arising during the period (145,356) (2,641)
Less: reclassification adjustment for gain included
in net income (22) (417)
---------- --------
Other comprehensive loss (145,378) (3,058)
---------- --------
Comprehensive (loss) income $ (61,774) $284,486
========== ========
</TABLE>
See accompanying notes to unaudited consolidated financial statements.
Page 7
<PAGE>
GOLDEN STATE BANCORP INC. AND SUBSIDIARIES
CONSOLIDATED STATEMENT OF STOCKHOLDERS' EQUITY
SIX MONTHS ENDED JUNE 30, 1999
(Unaudited)
(dollars in thousands)
<TABLE>
<CAPTION>
Accumulated Retained
Common Stock Additional Other Earnings
------------------ Paid-in Comprehensive (Substantially
Shares Amount Capital Income Restricted)
------ ------ ------- ------ ----------
<S> <C> <C> <C> <C> <C>
Balance at December 31, 1998 128,687,763 $128,688 $1,392,155 $ 6,151 $ 56,471
Net income -- -- -- -- 154,480
Change in net unrealized holding
gain/(loss) on securities
available for sale -- -- -- (161,529) --
Issuance of contingent shares 5,540,319 5,540 (5,540) -- --
Purchase of treasury stock -- -- -- --
Exercise of stock options 342,660 343 6,026 -- --
Sale of common stock in treasury -- -- (137) -- --
----------- -------- ---------- --------- --------
Balance at June 30, 1999 134,570,742 $134,571 $1,392,504 $(155,378) $210,951
=========== ======== ========== ========= ========
<CAPTION>
Common Stock
in Treasury Total
------------------ Stockholders'
Shares Amount Equity
------ ------ ------
<S> <C> <C> <C>
Balance at December 31, 1998 (89,994) $ (1,687) $1,581,778
Net income -- -- 154,480
Change in net unrealized holding
gain/(loss) on securities
available for sale -- -- (161,529)
Issuance of contingent shares -- -- --
Purchase of treasury stock (2,072,600) (48,040) (48,040)
Exercise of stock options -- -- 6,369
Sale of common stock in treasury 17,042 337 200
----------- -------- ----------
Balance at June 30, 1999 (2,145,552) $(49,390) $1,533,258
=========== ======== ==========
</TABLE>
See accompanying notes to unaudited consolidated financial statements.
Page 8
<PAGE>
GOLDEN STATE BANCORP INC. AND SUBSIDIARIES
CONSOLIDATED STATEMENTS OF CASH FLOWS
SIX MONTHS ENDED JUNE 30, 1999 AND 1998
(Unaudited)
(in thousands)
<TABLE>
<CAPTION>
Six Months Ended June 30,
---------------------------
1999 1998
---- ----
<S> <C> <C>
Cash flows from operating activities:
Net income $ 154,480 $ 335,202
Adjustments to reconcile net income to net cash
provided by (used in) operating activities:
Amortization of intangible assets 35,168 23,229
Amortization (accretion) of purchase accounting premiums
and discounts, net 8,427 (3,675)
Accretion of discount on borrowings 501 372
Amortization of mortgage servicing rights 104,981 57,074
Provision for loan losses 10,000 20,000
(Gain) loss on sale of assets, net (15,109) 181
Loss on sale of branches -- 86
Gain on sale of foreclosed real estate (5,906) (8,403)
Loss on sale of loans, net 89,030 65,491
Capitalization of originated mortgage servicing rights (109,483) (101,615)
Depreciation and amortization of premises and equipment 19,274 11,225
Amortization of deferred debt issuance costs 3,619 4,351
FHLB stock dividends (28,184) (14,562)
Purchases and originations of loans held for sale (5,570,641) (4,847,904)
Net proceeds from the sale of loans held for sale 5,704,949 4,537,939
Decrease (increase) in other assets 122,969 (335,037)
Increase in accrued interest receivable (7,103) (18,649)
(Decrease) increase in other liabilities (85,878) 31,358
Minority interest 19,907 46,192
----------- -----------
Net cash provided by (used in) operating activities $ 451,001 $ (197,145)
----------- -----------
</TABLE>
See accompanying notes to unaudited consolidated financial statements.
(Continued)
Page 9
<PAGE>
GOLDEN STATE BANCORP INC. AND SUBSIDIARIES
CONSOLIDATED STATEMENTS OF CASH FLOWS
SIX MONTHS ENDED JUNE 30, 1999 AND 1998
(Unaudited)
(in thousands)
<TABLE>
<CAPTION>
Six Months Ended June 30,
------------------------------
1999 1998
---- ----
<S> <C> <C>
Cash flows from investing activities:
Nevada Purchase $ 458,943 $ --
GSAC Acquisition -- (13,577)
Purchases of securities available for sale (791,189) (513,957)
Proceeds from maturities of securities available for sale 355,033 549,442
Purchases of securities held to maturity (3,066) (615)
Proceeds from maturities of securities held to maturity 1,173 357
Purchases of mortgage-backed securities available for sale (3,469,570) (4,080,424)
Principal payments on mortgage-backed securities available for sale 2,295,935 1,102,442
Proceeds from sales of mortgage-backed securities available for sale 193,732 4,686
Principal payments on mortgage-backed securities held to maturity 368,537 194,445
Proceeds from sales of loans 10,450 346
Net (increase) decrease in loans receivable (1,586,872) 728,254
Purchases of FHLB stock, net (98,517) (71,936)
Purchases of premises and equipment (67,467) (37,221)
Proceeds from disposal of premises and equipment 46,218 5,840
Proceeds from sales of foreclosed real estate 79,116 76,424
Purchases of mortgage servicing rights (245,711) (63,628)
Proceeds from sales of mortgage servicing rights 57,367 --
------------ ------------
Net cash flows used in investing activities (2,395,888) (2,119,122)
------------ ------------
Cash flows from financing activities:
Net decrease in deposits (1,241,887) (157,876)
Proceeds from additional borrowings 17,477,254 11,829,493
Principal payments on borrowings (15,614,925) (10,321,926)
Net increase in securities sold under agreements to repurchase 1,109,040 1,019,260
Bank Preferred Stock Tender Offers (63,957) --
Debt Tender Offers (253) --
Redemption of FN Holdings Preferred Stock -- (25,000)
Dividends paid to minority stockholders, net of taxes (24,371) (53,933)
Dividends to Parent -- (2,628)
Capital distribution to Parent -- (28)
Exercise of stock options 6,369 --
Purchase of treasury stock (48,040) --
Sale of treasury stock 200 --
------------ -------------
Net cash flows provided by financing activities 1,599,430 2,287,362
------------ ------------
Net change in cash and cash equivalents (345,457) (28,905)
Cash and cash equivalents at beginning of period 967,950 412,311
------------ ------------
Cash and cash equivalents at end of period $ 622,493 $ 383,406
============ ============
</TABLE>
See accompanying notes to unaudited consolidated financial statements.
Page 10
<PAGE>
GOLDEN STATE BANCORP INC. AND SUBSIDIARIES
NOTES TO UNAUDITED CONSOLIDATED FINANCIAL STATEMENTS
(1) Basis of Presentation
The accompanying 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 six months ended June 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 six 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 as restated represents amounts attributable to (i) the
Bank Preferred Stock that has 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
totalled $1.7 million and $7.7 million for the three and six months ended June
30, 1999, respectively, including severance for terminated California Federal
employees, expenses for California Federal branch closures, conversion and
consolidation costs, as well as transition expenses for duplicate personnel,
facilities and computer systems during the integration period.
In connection with the 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). During the six and three months ended
June 30, 1999, the Company recorded $4.9 million and $2.6 million, respectively,
in additional liabilities related to branch closures. During the six months
ended June 30, 1999, $7.5 million, $3.6 million and $9.3 million, respectively,
were charged against these liabilities. During the three months ended June 30,
1999, $3.9 million and $.8 million were charged against the liabilities for
branch consolidations and contract terminations, respectively. No amount was
charged against the liability for severance and termination benefits during the
three months ended June 30, 1999. At June 30, 1999, the remaining liabilities
totalled $27.3 million, $29.9 million and $2.5 million, respectively.
Other Acquisitions and Divestitures
On February 4, 1998, Auto One acquired 100% of the partnership interests in
Gulf States Acceptance Company, a Delaware limited partnership ("GSAC") and its
general partner, Gulf States Financial Services, Inc., a Texas corporation. GSAC
was liquidated and its assets and liabilities were transferred to Auto One (the
"GSAC Acquisition"). The aggregate consideration paid in connection with the
GSAC Acquisition was approximately $13.6 million plus 250 shares of the common
stock of Auto One, par value $1.00 per share, representing a 20% interest in
Auto One. This interest is reflected in the Company's consolidated balance sheet
as minority interest.
On 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").
Page 12
<PAGE>
GOLDEN STATE BANCORP INC. AND SUBSIDIARIES
NOTES TO UNAUDITED CONSOLIDATED FINANCIAL STATEMENTS
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.
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) 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.
(4) Cash, Cash Equivalents, and Statements of Cash Flows
Cash paid for interest on deposits and other interest-bearing liabilities
during the six months ended June 30, 1999 and 1998 was $1.1 billion and $775.7
million, respectively.
During the six months ended June 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 $63.1 million from loans receivable to foreclosed real estate and $1.7
million of loans made to facilitate sales of real estate owned.
During the six months ended June 30, 1998, noncash activity consisted of
transfers of $62.4 million from loans receivable to foreclosed real estate, $5.5
million of loans made to facilitate sales of real estate owned and transfers of
$3.2 million from loans held for sale (at lower of cost or market) to
mortgage-backed securities upon the securitization of certain of the Bank's
single-family loans. Noncash activity also includes the retirement of FN
Holdings Preferred Stock of $.8 million, the issuance of additional FN Holdings
Preferred Stock through preferred stock dividends of $.1 million and dividends
to parent of $2.7 million.
Page 13
<PAGE>
GOLDEN STATE BANCORP INC. AND SUBSIDIARIES
NOTES TO UNAUDITED CONSOLIDATED FINANCIAL STATEMENTS
(5) 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>
Six Months Ended June 30, Three Months Ended June 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 $638,429 $ 23,852 $662,281 $312,358 $ 12,257 $324,615
1998 333,098 22,680 355,778 166,344 11,685 178,029
Noninterest income: (2)
1999 $119,683 $117,977 $237,660 $ 60,943 $ 59,830 $120,773
1998 80,956 103,952 184,908 42,085 52,538 94,623
Noninterest expense: (3)
1999 $392,952 $ 91,448 $484,400 $183,321 $ 42,070 $225,391
1998 226,616 78,421 305,037 116,524 42,097 158,621
</TABLE>
(1) Includes $57.2 million and $45.7 million for the six months ended June 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 $124.0 million and $94.2 million for the six months ended June 30,
1999 and 1998, respectively, in interest income and expense on intercompany
loans. Includes $27.6 million and $25.5 million for the three months ended
June 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 $62.6 million and $51.2 million for the three months
ended June 30, 1999 and 1998, respectively, in interest income and expense
on intercompany loans.
(2) Includes $25.1 million and $14.7 million for the six months ended June 30,
1999 and 1998, respectively, in intercompany servicing fees. Includes $13.4
million and $7.2 million for the three months ended June 30, 1999 and 1998,
respectively, in intercompany servicing fees.
(3) Includes $2.3 million for each of the six month periods ended June 30, 1999
and 1998, in intercompany noninterest expense. Includes $1.2 million for
each of the three month periods ended June 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 six and three months ended June 30,
1999 and 1998 (in thousands):
<TABLE>
<CAPTION>
Six Months Ended June 30, Three Months Ended June 30,
------------------------- ---------------------------
1999 1998 1999 1998
---- ---- ---- ----
<S> <C> <C> <C> <C>
Net interest income:
Total net interest income for reportable segments $ 662,281 $ 355,778 $ 324,615 $ 178,029
Elimination of intersegment net interest income (57,222) (45,657) (27,572) (25,471)
--------- --------- --------- ---------
Total $ 605,059 $ 310,121 $ 297,043 $ 152,558
========= ========= ========= =========
Noninterest income:
Total noninterest income for reportable segments $ 237,660 $ 184,908 $ 120,773 $ 94,623
Elimination of intersegment servicing fees (25,140) (14,736) (13,421) (7,222)
--------- --------- --------- ---------
Total $ 212,520 $ 170,172 $ 107,352 $ 87,401
========= ========= ========= =========
Noninterest expense:
Total noninterest expense for reportable segments $ 484,400 $ 305,037 $ 225,391 $ 158,621
Elimination of intersegment expense (2,320) (2,320) (1,160) (1,160)
--------- --------- --------- ---------
Total $ 482,080 $ 302,717 $ 224,231 $ 157,461
========= ========= ========= =========
</TABLE>
(6) 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 balance
sheet and resulted in a charge of $3.2 million to minority interest expense.
(7) Stockholders' Equity
Common Stock
At June 30, 1999, there were 132,425,190 shares of Golden State Common Stock
issued and outstanding (net of treasury stock).
Treasury Stock
At June 30, 1999, the Company had 2,145,552 shares of its common stock in
treasury at an aggregate cost of $23.02 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 second quarter of 1999, the Company repurchased
2,072,600 shares of common stock for an aggregate purchase price of $48.0
million, or an average of $23.18 per share.
In connection with the Golden State Acquisition, the Company acquired
108,574 shares of Golden State common stock held in treasury with an aggregate
cost of $2.0 million. During the three and six months ended June 30, 1999,
shares totalling 9,109 and 17,042, 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.
Dividends
There were no dividends on common stock during the six months ended June 30,
1999 and 1998.
Page 15
<PAGE>
GOLDEN STATE BANCORP INC. AND SUBSIDIARIES
NOTES TO UNAUDITED CONSOLIDATED FINANCIAL STATEMENTS
(8) Executive and Stock Compensation
In connection with the Golden State Acquisition, the Bank is administering a
stock option plan 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 these stock option plans have expired as to the granting of additional
options. During the three and six months ended June 30, 1999, a total of 134,484
and 357,017 options, respectively, were exercised and 86,500 and 172,500
options, respectively, expired. At June 30, 1999, options to exercise an
equivalent of 1,464,270 shares remained outstanding under the 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. During the second quarter
of 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. 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 six months ended June 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.
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.
(9) Contingent Shares
During 1998, net tax benefits totalling $102.7 million were realized by
California Federal with respect to its gain from the Florida Branch Sale and the
receipt of federal income tax refunds in excess of the amount reflected on the
Company's consolidated balance sheets. Consistent with the terms of the Golden
State Merger agreement, a total of 5,687,996 shares of Golden State Common Stock
valued at $102.7 million became issuable to Mafco Holdings and Hunter's Glen as
contingent shares as a result of these benefits. On January 21, 1999, a total of
5,540,319 shares of Golden State Common Stock, valued at $100 million, were
issued (4,432,255 shares to 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 contingent shares are included,
to the extent appropriate, in the basic and diluted earnings per share
calculations.
In accordance with the Golden State Merger agreement, an additional 969,940
and 763,277 shares became issuable during the first and second quarters of 1999,
respectively, to a subsidiary of Mafco Holdings and Hunter's Glen as contingent
shares. 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 contingent shares are included in the calculation of
diluted earnings per share. See note 10.
Page 16
<PAGE>
GOLDEN STATE BANCORP INC. AND SUBSIDIARIES
NOTES TO UNAUDITED CONSOLIDATED FINANCIAL STATEMENTS
(10) 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>
Six Months Ended June 30, Three Months Ended June 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>
Net income $154,480 $154,480 $335,202 $335,202 $ 83,604 $ 83,604 $287,544 $287,544
======== ======== ======== ======== ========= ========= ======== ========
Weighted average common
shares outstanding 133,303 133,303 56,723 56,723 133,695 133,695 56,723 56,723
Contingently issuable shares 763 2,115 -- -- 147 1,881 -- --
-------- -------- -------- -------- --------- --------- -------- --------
Total weighted average
common shares outstanding(i) 134,066 135,418 56,723 56,723 133,842 135,576 56,723 56,723
Effect of dilutive securities:
Options and warrants(ii) -- 5,804 -- -- -- 6,000 -- --
-------- -------- -------- -------- --------- --------- -------- --------
Total 134,066 141,222 56,723 56,723 133,842 141,576 56,723 56,723
-------- -------- -------- -------- --------- --------- -------- --------
Earnings per common share $ 1.15 $ 1.09 $ 5.91 $ 5.91 $ 0.62 $ 0.59 $ 5.07 $ 5.07
======== ======== ======== ======== ========= ========= ======== ========
</TABLE>
(i) 1999 total basic weighted average shares outstanding include the effect of
5,540,319 contingent shares issued on January 21, 1999 and 147,677
contingent shares issuable to a subsidiary of Mafco Holdings and Hunter's
Glen for the 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 and 763,277 in the
second quarter estimated to be contingently issuable to a subsidiary of
Mafco Holdings and Hunter's Glen based on the anticipated use of pre-merger
net operating losses. See note 9.
(ii) Golden State's diluted shares outstanding are not affected by the LTW(TM)s
until they become exercisable because the amount of the proceeds from the
Glendale Goodwill Litigation and the number of shares of common stock to be
issued cannot be determined until the LTW(TM)s become exercisable.
(11) Newly Issued Accounting Pronouncements
In June 1998, the FASB issued SFAS No. 133, Accounting for Derivative
Instruments and Hedging Activities ("SFAS No. 133"). SFAS No. 133 establishes
standards for derivative instruments and for hedging activities, and requires
that an entity recognize all derivatives as either assets or liabilities in the
balance sheet and measure those instruments at fair value. Under SFAS No. 133,
an entity that elects to apply hedge accounting is required to establish at the
inception of the hedge the method it will use for assessing the effectiveness of
the hedging derivative and the measurement approach for determining the
ineffective aspect of the hedge.
SFAS No. 133 applies to all entities and amends SFAS No. 107, Disclosures
About Fair Values of Financial Instruments, to include in Statement 107 the
disclosure provisions about concentrations of credit risk from Statement 105.
SFAS No. 133 supersedes FASB Statements No. 80, Accounting for Futures
Contracts, No. 105, Disclosure of Information about Financial Instruments with
Off-Balance Sheet Risk and Financial Instruments with Concentrations of Credit
Risk, and No. 119, Disclosure about Derivative Financial Instruments and Fair
Value of Financial Instruments. SFAS No. 133 also nullifies or modifies the
consensuses reached in a number of issues addressed by the Emerging Issues Task
Force.
SFAS No. 133, 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 17
<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 six months ended June 30, 1999 of
$154.5 million, or $1.09 per diluted share, compared with net income of $335.2
million, or $5.91 per diluted share, for the corresponding period in 1998. Net
income for the six months ended June 30, 1999 includes a $16.3 million pre-tax
gain from the Servicing Sale and $3.2 million in minority interest expense
related to the redemption of the remaining $60.7 million of the Bank's 10 5/8%
Preferred Stock. Net income on a core basis, excluding these two items, totalled
$148.3 million, or $1.05 per diluted share for the six months ended June 30,
1999. Net income for the six months ended June 30, 1999 also includes $7.7
million in pre-tax merger and integration costs (including severance, conversion
and consolidation costs) incurred in connection with the Golden State
Acquisition. Net income for the six months ended June 30, 1998 includes a $250
million reduction in the valuation allowance established against the Company's
deferred tax asset.
Golden State reported net income for the three months ended June 30, 1999
of $83.6 million, or $0.59 per diluted share, compared with net income of $287.5
million, or $5.07 per diluted share, for the corresponding period in 1998. Net
income for the three months ended June 30, 1999 includes a $16.3 million pre-tax
gain from the Servicing Sale and $3.2 million in minority interest expense
related to the redemption of the remaining $60.7 million of the Bank's 10 5/8%
Preferred Stock. Net income on a core basis, excluding these two items, totalled
$77.4 million, or $0.55 per diluted share for the three months ended June 30,
1999. Net income for the three months ended June 30, 1999 also includes $1.7
million in pre-tax merger and integration costs (including severance, conversion
and
Page 18
<PAGE>
consolidation costs) incurred in connection with the Golden State Acquisition.
Net income for the three months ended June 30, 1998 includes a $250 million
reduction in the valuation allowance established against the Company's deferred
tax asset.
Financial Condition
During the six months ended June 30, 1999, consolidated total assets
increased $2.0 billion, to $56.8 billion from December 31, 1998, and total
liabilities increased from $52.7 billion to $54.8 billion.
During the six months ended June 30, 1999, stockholders' equity decreased
$48.5 million to $1.5 billion. The decrease in stockholders' equity is the net
result of a $161.5 million net unrealized loss on securities available for sale
and $48.0 million in purchases of treasury stock, partially offset by $154.5
million in net income for the period, $6.4 million from the exercise of stock
options and $.2 million in proceeds from the sale of treasury stock. 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 higher spreads on private label
collateralized mortgage obligations. This unrealized loss represents a decline
in the total mortgage-backed securities available for sale portfolio of less
than 2%.
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 $260 million at June 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 0.46% at June 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
mid-February 1999 and contingency plans were completed for all other material
service providers by June 30, 1999. The support plan for applications maintained
in-house will be 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 June 30, 1999.
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, $15.0
million has been incurred since the inception of the Year 2000 project through
June 30, 1999. Noninterest expense for the three and six months ended June 30,
1999 included approximately $2.3 million and $4.7 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, management estimates that
its current operating expenses have been 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.
Page 19
<PAGE>
RESULTS OF OPERATIONS
Six months ended June 30, 1999 versus six months ended June 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>
Six Months Ended June 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) $ 1,545 $ 47 6.05%
Mortgage-backed securities available for sale 13,476 423 6.29
Mortgage-backed securities held to maturity 2,555 96 7.51
Loans held for sale, net 2,069 68 6.54
Loans receivable, net 30,967 1,135 7.33
FHLB stock 1,082 28 5.25
------- ------
Total interest-earning assets 51,694 1,797 6.95
------
Noninterest-earning assets 4,101
-------
Total assets $55,795
=======
LIABILITIES, MINORITY INTEREST
AND STOCKHOLDERS' EQUITY
Interest-bearing liabilities:
Deposits $24,072 444 3.72
Securities sold under agreements to repurchase (3) 4,311 108 4.97
Borrowings (3 23,560 640 5.48
------- ------
Total interest-bearing liabilities 51,943 1,192 4.62
------
Noninterest-bearing liabilities 1,680
Minority interest 566
Stockholders' equity 1,606
-------
Total liabilities, minority interest
and stockholders' equity $55,795
=======
Net interest income $ 605
======
Interest rate spread 2.33%
====
Net interest margin 2.30%
====
Return on average assets 0.55%
====
Return on average equity 19.23%
=====
Average equity to average assets 2.88%
====
</TABLE>
Page 20
<PAGE>
<TABLE>
<CAPTION>
Six Months Ended June 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) $ 1,016 $ 31 6.18%
Mortgage-backed securities available for sale 5,716 178 6.25
Mortgage-backed securities held to maturity 1,236 47 7.67
Loans held for sale, net 1,641 58 7.10
Loans receivable, net 19,462 762 7.82
FHLB stock 494 15 5.95
------- ------
Total interest-earning assets 29,565 1,091 7.38
------
Noninterest-earning assets 2,729
-------
Total assets $32,294
=======
LIABILITIES, MINORITY INTEREST
AND STOCKHOLDERS' EQUITY
Interest-bearing liabilities:
Deposits $16,206 355 4.42
Securities sold under agreements to repurchase 2,028 57 5.59
Borrowings 11,491 369 6.48
------- ------
Total interest-bearing liabilities 29,725 781 5.30
------
Noninterest-bearing liabilities 1,086
Minority interest 993
Stockholders' equity 490
-------
Total liabilities, minority interest
and stockholders' equity $32,294
=======
Net interest income $ 310
======
Interest rate spread 2.08%
====
Net interest margin 2.05%
====
Return on average assets 2.08%
====
Return on average equity 136.75%
======
Average equity to average assets 1.52%
====
</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 21
<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>
Six Months Ended June 30, 1999 vs. 1998
Increase (Decrease) Due to
---------------------------------
Volume Rate Net
------ ---- ---
INTEREST INCOME: (in millions)
<S> <C> <C> <C>
Securities and interest-bearing deposits in banks $ 17 $ (1) $ 16
Mortgage-backed securities available for sale 244 1 245
Mortgage-backed securities held to maturity 50 (1) 49
Loans held for sale, net 15 (5) 10
Loans receivable, net 418 (45) 373
FHLB stock 15 (2) 13
----- ----- -----
Total 759 (53) 706
----- ----- -----
INTEREST EXPENSE:
Deposits 132 (43) 89
Securities sold under agreements to repurchase 56 (5) 51
Borrowings 318 (47) 271
----- ----- -----
Total 506 (95) 411
----- ----- -----
Change in net interest income $ 253 $ 42 $ 295
===== ===== =====
</TABLE>
The volume variances in total interest income and total interest
expense for the six months ended June 30, 1999 compared to the corresponding
period in 1998 are largely due to increased purchases of mortgage-backed
securities funded with FHLB advances, the additional volume related to the
Golden State Acquisition and the assumption of debt securities from the GS
Escrow Merger (the "GS Holdings Notes"), partially offset by $1.4 billion in
deposits sold in the Florida Branch Sale and borrowings repurchased as part of
the Refinancing Transactions. The positive total rate variance of $42 million is
primarily attributed to the lower interest rates paid on new borrowings
(including the Refinancing Transactions), the lower cost of funds on deposits
and the lower costing liabilities assumed in the Golden State Acquisition,
partially offset by prepayments of higher rate interest-earning assets and
repricing of variable rate loans.
Interest Income. Total interest income was $1.8 billion for the six months
ended June 30, 1999, an increase of $706 million from the six months ended June
30, 1998. Total interest-earning assets for the six months ended June 30, 1999
averaged $51.7 billion, compared to $29.6 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 six months ended June 30, 1999
decreased to 6.95% from 7.38% for the six months ended June 30, 1998, primarily
due to prepayments of higher rate loans which were replaced with lower yielding
originations and the repricing of variable rate loans.
Golden State earned $1.1 billion of interest income on loans receivable for
the six months ended June 30, 1999, an increase of $373 million from the six
months ended June 30, 1998. The average balance of loans receivable was $31.0
billion for the six months ended June 30, 1999, compared to $19.5 billion for
the same period in 1998. The weighted average rate on loans receivable decreased
to 7.33% for the six months ended June 30, 1999 from 7.82% for the six months
ended June 30, 1998, primarily due to declining market rates. The increase in
the average volume is primarily due to the addition of $14.6 billion in loans
acquired in the Golden State Acquisition.
Page 22
<PAGE>
Golden State earned $68 million of interest income on loans held for sale
for the six months ended June 30, 1999, an increase of $10 million from the six
months ended June 30, 1998. The average balance of loans held for sale was $2.1
billion for the six months ended June 30, 1999, an increase of $428 million from
the comparable period in 1998, primarily due to increased originations and
longer holding periods for jumbo loans during the six months ended June 30,
1999. The weighted average rate on loans held for sale decreased to 6.54% for
the six months ended June 30, 1999 from 7.10% for the six months ended June 30,
1998, primarily due to declining market rates.
Interest income on mortgage-backed securities available for sale was $423
million for the six months ended June 30, 1999, an increase of $245 million from
the six months ended June 30, 1998. The average portfolio balances increased
$7.8 billion, to $13.5 billion, for the six months ended June 30, 1999 compared
to the same period in 1998. The weighted average yield on these assets increased
from 6.25% for the six months ended June 30, 1998 to 6.29% for the six months
ended June 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.
Interest income on mortgage-backed securities held to maturity was $96
million for the six months ended June 30, 1999, an increase of $49 million from
the six months ended June 30, 1998. The average portfolio balance increased $1.3
billion, to $2.6 billion, for the six months ended June 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 the third quarter of 1998. The weighted average rates for the six
months ended June 30, 1999 and 1998 were 7.51% and 7.67%, respectively.
Interest income on securities and interest-bearing deposits in other banks
was $47 million for the six months ended June 30, 1999, an increase of $16
million from the six months ended June 30, 1998. The average portfolio balance
increased from $1.0 billion for the six months ended June 30, 1998 to $1.5
billion for the six months ended June 30, 1999. The decrease in the weighted
average rate from 6.18% for the six months ended June 30, 1998 to 6.05% for the
six months ended June 30, 1999 reflects the decline in market interest rates.
Dividends on FHLB stock were $28 million for the six months ended June 30,
1999, an increase of $13 million from the six months ended June 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 six months ended June
30, 1999 and 1998 was $1.1 billion and .5 billion, respectively. The weighted
average rate on FHLB stock decreased to 5.25% for the six months ended June 30,
1999 from 5.95% for the six months ended June 30, 1998, reflecting lower
dividends declared by the FHLB.
Interest Expense. Total interest expense was $1.2 billion for the six
months ended June 30, 1999, an increase of $411 million from the six months
ended June 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
$444 million for the six months ended June 30, 1999, an increase of $89 million
from the six months ended June 30, 1998. The average balance of customer
deposits outstanding increased from $16.2 billion for the six months ended June
30, 1998 to $24.1 billion for the six months ended June 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 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 3.72% for the six
months ended June 30, 1999 from 4.42% for the six months ended June 30, 1998,
primarily due to the higher average balances of lower rate custodial transaction
accounts in 1999 compared to 1998, the lower cost of funds on deposits assumed
in the Golden State Acquisition and the Nevada Purchase, lower market interest
rates and a change in the Bank's certificate of deposit pricing strategy.
Page 23
<PAGE>
Interest expense on securities sold under agreements to repurchase totalled
$108 million for the six months ended June 30, 1999, an increase of $51 million
from the six months ended June 30, 1998. The average balance of such borrowings
for the six months ended June 30, 1999 and 1998 was $4.3 billion and $2.0
billion, respectively; such increase is primarily attributed to the Golden State
Acquisition. The weighted average interest rate on these instruments decreased
to 4.97% for the six months ended June 30, 1999 from 5.59% for the six months
ended June 30, 1998, primarily due to a decrease in market rates on new
borrowings in 1999 compared to 1998.
Interest expense on borrowings totalled $640 million for the six months
ended June 30, 1999, an increase of $271 million from the six months ended June
30, 1998. The average balance outstanding for the six months ended June 30, 1999
and 1998 was $23.6 billion and $11.5 billion, respectively. The weighted average
interest rate on these instruments decreased to 5.48% for the six months ended
June 30, 1999 from 6.48% for the six months ended June 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 $605 million for the six
months ended June 30, 1999, an increase of $295 million from the six months
ended June 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 2.33% for the six months ended
June 30, 1999 from 2.08% for the six months ended June 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, gain on sales of loans and gain on sales
of assets, was $212.5 million for the six months ended June 30, 1999, an
increase of $42.3 million from the six months ended June 30, 1998.
Loan servicing fees, net of amortization of mortgage servicing rights, were
$70.3 million for the six months ended June 30, 1999, compared to $71.4 million
for the six months ended June 30, 1998. Although the single-family residential
loan servicing portfolio, excluding loans serviced for the Bank, increased from
$46.8 billion at June 30, 1998 to $69.2 billion at June 30, 1999, incremental
loan servicing fees were offset by amortization related to higher average MSR
(as defined herein) basis in the six months ended June 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 $91.4 million for the six months ended June 30,
1999 compared to $51.2 million for the six months ended June 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.
During the six months ended June 30, 1999, California Federal sold $5.8
billion in single-family mortgage loans originated for sale with servicing
rights retained as part of its ongoing mortgage banking operations compared to
$4.5 billion of such sales for the corresponding period in 1998. Gain on sale of
loans totalled $20.5 million for the six months ended June 30, 1999, a decrease
of $15.7 million from the six months ended June 30, 1998. The decrease includes
an $8.8 million adjustment recorded during the second quarter of 1999 to reflect
the lower of cost or market valuation on residential loans held for sale at June
30, 1999. In addition, gains attributed to early payoffs of commercial loans
with unamortized discounts were $6.8 million higher in 1998 compared to 1999.
Net gain on sale of assets totalled $15.1 million for the six months ended
June 30, 1999, an increase of $15.3 million from the six months ended June 30,
1998, primarily attributed to the Servicing Sale.
Page 24
<PAGE>
Other noninterest income was $15.3 million for the six months ended June
30, 1999 compared to $11.7 million for the six months ended June 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 $482.1 million for the
six months ended June 30, 1999, an increase of $179.4 million compared to the
six months ended June 30, 1998. The variance between the two periods is
primarily attributed to the Golden State Acquisition. Noninterest expense for
the six months ended June 30, 1999 included increases of $75.1 million in
compensation, $30.4 million in occupancy and equipment, $6.9 million in merger
and integration costs incurred in connection with the Golden State Acquisition,
$11.9 million in goodwill amortization attributed to the Golden State
Acquisition and the Nevada Purchase, and an additional $30.3 million in other
noninterest expense, all primarily as a result of the Golden State Acquisition.
Compensation and employee benefits expense was $202.7 million for the six
months ended June 30, 1999, an increase of $75.1 million from the six months
ended June 30, 1998. The increase is primarily attributed to an additional 2,582
employees at June 30, 1999 compared to June 30, 1998, mainly due to the Golden
State Acquisition.
Occupancy and equipment was $71.7 million and $41.3 million for the six
months ended June 30, 1999 and 1998, respectively. This increase reflects the
effects of the Golden State Acquisition as well as $4.8 million of adjustments
to previously established accruals for vacant facilities that are not expected
to be recurring.
Merger and integration costs were $7.7 million for the six months ended
June 30, 1999, representing transition expenses, which include severance,
conversion and consolidation costs incurred in connection with the Golden State
Acquisition. Management does not expect to incur any significant additional
merger and integration costs from this transaction.
Amortization of intangible assets was $35.2 million for the six months
ended June 30, 1999, an increase of $11.9 million from the six months ended June
30, 1998, primarily attributed to the goodwill recorded in connection with the
Golden State Acquisition and the Nevada Purchase.
Other noninterest expense was $80.8 million in 1999 compared to $50.5
million in 1998, primarily attributed to increased operations as a result of the
Golden State Acquisition. In addition, results for the six months ended June 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 six months ended June 30, 1999 and
1998, Golden State recorded income tax expense of $151.1 million and an income
tax benefit of $223.8 million, respectively. Golden State's effective Federal
tax rate was 39% and (157%) during the six months ended June 30, 1999 and 1998,
respectively, while its statutory Federal tax rate was 35% during both periods.
The difference between the effective and statutory rates was primarily the
result of nondeductible goodwill amortization for both periods, which was more
than offset by a $250 million reduction in the deferred tax asset valuation
allowance for the period ended June 30, 1998. Golden State's effective state tax
rate was 8% and 15% during the six months ended June 30, 1999 and 1998,
respectively.
Minority Interest. Minority interest for the six months ended June 30, 1999
includes $3.2 million in net premium paid in connection with the redemption of
the Bank's 105/8% Preferred Stock. Dividends on the Bank Preferred Stock that
has not been acquired by GS Holdings and the REIT Preferred Stock totalling $1.8
million and $22.8 million, respectively, were recorded during the six months
ended June 30, 1999. Minority interest relative to the REIT Preferred Stock is
reflected net of related income tax benefit of $9.6 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. Minority interest for the six months ended June 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.
During the six months ended June 30, 1998, minority interest includes
dividends on the Bank Preferred Stock, the FN Holdings Preferred Stock and the
REIT Preferred Stock of $26.5 million, $.6 million and $22.8 million,
Page 25
<PAGE>
respectively. Minority interest relative to the REIT Preferred Stock is
reflected net of related income tax benefit of $2.9 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 $.8 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.
Three months ended June 30, 1999 versus three months ended June 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 June 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) $ 1,646 $ 23 5.78%
Mortgage-backed securities available for sale 13,960 220 6.29
Mortgage-backed securities held to maturity 2,466 45 7.37
Loans held for sale, net 1,977 33 6.69
Loans receivable, net 31,211 568 7.27
FHLB stock 1,120 15 5.24
------- -------
Total interest-earning assets 52,380 904 6.90
-------
Noninterest-earning assets 3,968
-------
Total assets $56,348
=======
LIABILITIES, MINORITY INTEREST
AND STOCKHOLDERS' EQUITY
Interest-bearing liabilities:
Deposits $24,132 222 3.69
Securities sold under agreements to repurchase (3) 4,302 54 4.92
Borrowings (3) 24,238 331 5.48
------- -------
Total interest-bearing liabilities 52,672 607 4.62
-------
Noninterest-bearing liabilities 1,546
Minority interest 533
Stockholders' equity 1,597
-------
Total liabilities, minority interest
and stockholders' equity $56,348
=======
Net interest income $ 297
=======
Interest rate spread 2.28%
====
Net interest margin 2.25%
====
Return on average assets 0.59%
====
Return on average equity 20.94%
=====
Average equity to average assets 2.83%
====
</TABLE>
Page 26
<PAGE>
<TABLE>
<CAPTION>
Three Months Ended June 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) $ 1,079 $ 16 6.09%
Mortgage-backed securities available for sale 6,343 97 6.12
Mortgage-backed securities held to maturity 1,179 22 7.65
Loans held for sale, net 1,848 31 6.69
Loans receivable, net 19,131 377 7.87
FHLB stock 513 8 5.91
------- -------
Total interest-earning assets 30,093 551 7.32
-------
Noninterest-earning assets 3,244
-------
Total assets $33,337
=======
LIABILITIES, MINORITY INTEREST
AND STOCKHOLDERS' EQUITY
Interest-bearing liabilities:
Deposits $16,277 177 4.36
Securities sold under agreements to repurchase 2,192 30 5.51
Borrowings 11,867 191 6.46
------- ------
Total interest-bearing liabilities 30,336 398 5.27
------
Noninterest-bearing liabilities 1,464
Minority interest 987
Stockholders' equity 550
-------
Total liabilities, minority interest
and stockholder's equity $33,337
=======
Net interest income $ 153
=======
Interest rate spread 2.05%
====
Net interest margin 2.01%
====
Return on average assets 3.45%
====
Return on average equity 208.89%
======
Average equity to average assets 1.65%
====
</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 27
<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 June 30, 1999 vs. 1998
Increase (Decrease) Due to
-----------------------------------------
Volume Rate Net
------ ---- ---
INTEREST INCOME: (in millions)
<S> <C> <C> <C>
Securities and interest-bearing deposits in banks $ 8 $ (1) $ 7
Mortgage-backed securities available for sale 120 3 123
Mortgage-backed securities held to maturity 24 (1) 23
Loans held for sale, net 2 -- 2
Loans receivable, net 218 (27) 191
FHLB stock 8 (1) 7
---- ---- ----
Total 380 (27) 353
---- ---- ----
INTEREST EXPENSE:
Deposits 66 (21) 45
Securities sold under agreements to repurchase 27 (3) 24
Borrowings 164 (24) 140
---- ---- ----
Total 257 (48) 209
---- ---- ----
Change in net interest income $123 $ 21 $144
==== ==== ====
</TABLE>
The volume variances in total interest income and total interest
expense for the three months ended June 30, 1999 compared to the corresponding
period in 1998 are largely due to increased purchases of mortgage-backed
securities funded with FHLB advances, the additional volume related to the
Golden State Acquisition, 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 $21 million is
primarily attributed to lower interest rates paid on new borrowings (including
the Refinancing Transactions), the lower cost of funds on deposits and the lower
costing liabilities assumed in the Golden State Acquisition, partially offset by
the comparatively lower market rates on mortgage-backed securities purchased in
1999 and 1998, prepayments of higher rate interest-earning assets and repricing
of variable rate loans and mortgage-backed securities.
Interest Income. Total interest income was $904 million for the three
months ended June 30, 1999, an increase of $353 million from the three months
ended June 30, 1998. Total interest-earning assets for the three months ended
June 30, 1999 averaged $52.4 billion, compared to $30.1 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 June 30, 1999 decreased to 6.90% from 7.32% for the three months ended
June 30, 1998, primarily due to prepayments of higher rate loans which were
replaced with lower yielding originations and the repricing of variable rate
loans.
Golden State earned $568 million of interest income on loans receivable for
the three months ended June 30, 1999, an increase of $191 million from the three
months ended June 30, 1998. The average balance of loans receivable was $31.2
billion for the three months ended June 30, 1999, compared to $19.1 billion for
the same period in 1998. The weighted average rate on loans receivable decreased
to 7.27% for the three months ended June 30, 1999 from 7.87% for the three
months ended June 30, 1998, primarily due to declining market rates. The
increase in the average volume is primarily due to the addition of $14.6 billion
in loans acquired in the Golden State Acquisition.
Page 28
<PAGE>
Golden State earned $33 million of interest income on loans held for sale
for the three months ended June 30, 1999, an increase of $2 million from the
three months ended June 30, 1998. The average balance of loans held for sale was
$2.0 billion for the three months ended June 30, 1999, an increase of $129
million from the comparable period in 1998, primarily due to increased
originations and longer holding periods for jumbo loans during the three months
ended June 30, 1999. The weighted average rate on loans held for sale was 6.69%
for each of the three month periods ended June 30, 1999 and 1998.
Interest income on mortgage-backed securities available for sale was $220
million for the three months ended June 30, 1999, an increase of $123 million
from the three months ended June 30, 1998. The average portfolio balances
increased $7.6 billion, to $14.0 billion, for the three months ended June 30,
1999 compared to the same period in 1998. The weighted average yield on these
assets increased from 6.12% for the three months ended June 30, 1998 to 6.29%
for the three months ended June 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.
Interest income on mortgage-backed securities held to maturity was $45
million for the three months ended June 30, 1999, an increase of $23 million
from the three months ended June 30, 1998. The average portfolio balance
increased $1.3 billion, to $2.5 billion, for the three months ended June 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 the third quarter of 1998. The weighted
average rates for the three months ended June 30, 1999 and 1998 were 7.37% and
7.65%, respectively.
Interest income on securities and interest-bearing deposits in other banks
was $23 million for the three months ended June 30, 1999, an increase of $7
million from the three months ended June 30, 1998. The average portfolio balance
increased from $1.1 billion for the three months ended June 30, 1998 to $1.6
billion for the three months ended June 30, 1999. The decrease in the weighted
average rate from 6.09% for the three months ended June 30, 1998 to 5.78% for
the three months ended June 30, 1999 reflects the decline in market interest
rates.
Dividends on FHLB stock were $15 million for the three months ended June
30, 1999, an increase of $7 million from the three months ended June 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 June
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 three months ended June
30, 1999 from 5.91% for the three months ended June 30, 1998, reflecting lower
dividends declared by the FHLB.
Interest Expense. Total interest expense was $607 million for the three
months ended June 30, 1999, an increase of $209 million from the three months
ended June 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
$222 million for the three months ended June 30, 1999, an increase of $45
million from the three months ended June 30, 1998. The average balance of
customer deposits outstanding increased from $16.3 billion for the three months
ended June 30, 1998 to $24.1 billion for the three months ended June 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 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 June 30, 1999 from 4.36% for the three months ended June
30, 1998, primarily due to the higher average balances of lower rate custodial
transaction accounts in 1999 compared to 1998, the lower cost of funds on
deposits assumed in the Golden State Acquisition, lower market interest rates
and a change in the Bank's certificate of deposit pricing strategy.
Page 29
<PAGE>
Interest expense on securities sold under agreements to repurchase totalled
$54 million for the three months ended June 30, 1999, an increase of $24 million
from the three months ended June 30, 1998. The average balance of such
borrowings for the three months ended June 30, 1999 and 1998 was $4.3 billion
and $2.2 billion, respectively; such increase is primarily attributed to the
Golden State Acquisition. The weighted average interest rate on these
instruments decreased to 4.92% for the three months ended June 30, 1999 from
5.51% for the three months ended June 30, 1998, primarily due to a decrease in
market rates on new borrowings in 1999 compared to 1998.
Interest expense on borrowings totalled $331 million for the three months
ended June 30, 1999, an increase of $140 million from the three months ended
June 30, 1998. The average balance outstanding for the three months ended June
30, 1999 and 1998 was $24.2 billion and $11.9 billion, respectively. The
weighted average interest rate on these instruments decreased to 5.48% for the
three months ended June 30, 1999 from 6.46% for the three months ended June 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 $297 million for the three
months ended June 30, 1999, an increase of $144 million from the three months
ended June 30, 1998. The interest rate spread increased to 2.28% for the three
months ended June 30, 1999 from 2.05% for the three months ended June 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, gain on sales of loans and gain on sales
of assets, was $107.4 million for the three months ended June 30, 1999, an
increase of $20.0 million from the three months ended June 30, 1998.
Loan servicing fees, net of amortization of mortgage servicing rights, were
$34.3 million for the three months ended June 30, 1999, compared to $34.4
million for the three months ended June 30, 1998. Although the single-family
residential loan servicing portfolio, excluding loans serviced for the Bank,
increased from $46.8 billion at June 30, 1998 to $69.2 billion at June 30, 1999,
incremental loan servicing fees were offset by amortization related to higher
average MSR basis in the three months ended June 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 $46.6 million for the three months ended June
30, 1999 compared to $25.9 million for the three months ended June 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.
During the three months ended June 30, 1999, California Federal sold $2.6
billion in single-family mortgage loans originated for sale with servicing
rights retained as part of its ongoing mortgage banking operations compared to
$2.7 billion of such sales for the corresponding period in 1998. Gain on sale of
loans was $4.9 million for the three months ended June 30, 1999, a decrease of
$16.8 million from the three months ended June 30, 1998. The decrease includes
an $8.8 million adjustment recorded during the second quarter of 1999 to reflect
the lower of cost or market valuation on residential loans held for sale at June
30, 1999. In addition, gains attributed to early payoffs of commercial loans
with unamortized discounts were $4.0 million higher in 1998 compared to 1999.
Gain on sale of assets totalled $14.9 million for the three months ended
June 30, 1999, an increase of $14.7 million from the three months ended June 30,
1998, primarily attributed to the Servicing Sale.
Page 30
<PAGE>
Noninterest Expense. Total noninterest expense was $224.2 million for the
three months ended June 30, 1999, an increase of $66.8 million compared to the
three months ended June 30, 1998. The variance between the two periods is
primarily attributed to the Golden State Acquisition. Noninterest expense for
the three months ended June 30, 1999 included increases of $35.1 million in
compensation, $12.1 million in occupancy and equipment, $.8 million in merger
and integration costs incurred in connection with the Golden State Acquisition,
$5.9 million in goodwill amortization attributed to the Golden State Acquisition
and the Nevada Purchase, and an additional $6.7 million in other noninterest
expense, all primarily as a result of the Golden State Acquisition.
Compensation and employee benefits expense was $99.6 million for the three
months ended June 30, 1999, an increase of $35.1 million from the three months
ended June 30, 1998. The increase is primarily attributed to an additional 2,582
employees at June 30, 1999 compared to June 30, 1998, mainly due to the Golden
State Acquisition.
Occupancy and equipment was $31.9 million and $19.8 million for the three
months ended June 30, 1999 and 1998, respectively. This increase reflects the
effects of the Golden State Acquisition.
Merger and integration costs were $1.7 million for the three months ended
June 30, 1999, representing transition expenses, which include severance,
conversion and consolidation costs incurred in connection with the Golden State
Acquisition. Such costs are not expected to be incurred during the remainder of
1999.
Amortization of intangible assets was $18.0 million for the three months
ended June 30, 1999, an increase of $5.9 million from the three months ended
June 30, 1998, primarily attributed to the goodwill recorded in connection with
the Golden State Acquisition and the Nevada Purchase.
Other noninterest expense was $32.9 million in 1999 compared to $26.3
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 June 30, 1999 and
1998, Golden State recorded income tax expense of $80.8 million and an income
tax benefit of $237.7 million, respectively. Golden State's effective Federal
tax rate was 38% and (342)% during the three months ended June 30, 1999 and
1998, respectively, while its statutory Federal tax rate was 35% during both
periods. The difference between the effective and statutory rates was primarily
the result of nondeductible goodwill amortization for both periods, which was
more than offset by a $250 million reduction in the deferred tax asset valuation
allowance for the period ended June 30, 1998. Golden State's effective state tax
rate was 8% and 15% during the three months ended June 30, 1999 and 1998,
respectively.
Minority Interest. Minority interest for the three months ended June 30,
1999 includes $3.2 million in net premium paid in connection with the redemption
of the Bank's 10 5/8% Preferred Stock. Dividends on the Bank Preferred Stock
that has not been acquired by GS Holdings and the REIT Preferred Stock totalling
$.9 million and $11.4 million, respectively, were recorded during the three
months ended June 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.
During the three months ended June 30, 1998, minority interest includes
dividends on the Bank Preferred Stock and the REIT Preferred Stock of $13.2
million and $11.4 million, respectively. Minority interest relative to the REIT
Preferred Stock is reflected net of related income tax benefit of $1.5 million
which will inure to the Company as a result of the deductibility of such
dividends for income tax purposes. Minority interest also includes a $.5 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 31
<PAGE>
PROVISION FOR LOAN LOSSES
The adequacy of the allowance for loan losses is periodically evaluated by
management in order to maintain the allowance at a level that is sufficient to
absorb losses inherent in the loan portfolio. The allowance for loan losses is
increased by provisions for loan losses as well as by balances acquired through
acquisitions and is decreased by charge-offs (net of recoveries). The Company
charges current earnings with a provision for estimated credit losses on loans
receivable. The provision considers both specifically identified problem loans
as well as credit risks not specifically identified in the loan portfolio. 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 $20 million during the
six months ended June 30, 1999 and 1998, respectively, and $5 million and $10
million during the three months ended June 30, 1999 and 1998, respectively.
The decrease in the provision for loan losses during the six and three
month periods ended June 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.
Activity in the allowance for loan losses is as follows (in thousands):
<TABLE>
<CAPTION>
Six Months Ended June 30, Three Months Ended June 30,
------------------------- ---------------------------
1999 1998 1999 1998
---- ---- ---- ----
<S> <C> <C> <C> <C>
Balance - beginning of period $ 588,533 $ 418,674 $ 583,214 $ 419,130
Provision for loan losses 10,000 20,000 5,000 10,000
Charge-offs (21,483) (20,503) (11,179) (9,104)
Recoveries 1,989 2,494 1,334 639
Reclassification (670) -- -- --
--------- --------- --------- ---------
Balance - end of period $ 578,369 $ 420,665 $ 578,369 $ 420,665
========= ========= ========= =========
</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.
ASSET AND LIABILITY MANAGEMENT
Banks and savings associations are subject to interest rate risk to the
degree that their interest-bearing liabilities, consisting principally of
deposits, securities sold under agreements to repurchase and FHLB advances,
mature or reprice more or less frequently, or on a different basis, than their
interest-earning assets. A key element of the banking business is the monitoring
and management of liquidity risk and interest rate risk. The process of planning
and controlling asset and liability mixes, volumes and maturities to influence
the net interest spread is referred to as asset and liability management. The
objective of the Company's asset and liability management is to maximize its net
interest income over changing interest rate cycles within the constraints
imposed by prudent lending and investing practices, liquidity needs and capital
planning.
Golden State, through the Bank, actively pursues investment and funding
strategies intended to minimize the sensitivity of its earnings to interest rate
fluctuations. The Company measures the interest rate sensitivity of its balance
sheet through gap and duration analysis, as well as net interest income and
market value simulation, and, after taking into consideration both the
variability of rates and the maturities of various instruments, evaluates
strategies which may reduce the sensitivity of its earnings to interest rate and
market value fluctuations. An important decision is the selection of
interest-bearing liabilities and the generation of interest-earning assets which
best match relative to interest rate changes. In order to reduce interest rate
risk by increasing the percentage of interest sensitive assets, the Company has
continued its emphasis on the origination of adjustable rate mortgage ("ARM")
products for its portfolio. Where possible, the Company seeks to originate real
estate and other loans that reprice frequently and that on the whole adjust in
accordance with the repricing of its liabilities. At June 30, 1999,
approximately 76% of the Company's loan portfolio consisted of ARMs.
Page 32
<PAGE>
ARMs have, from time to time, been offered with low initial interest rates
as marketing inducements. In addition, most ARMs are subject to periodic
interest rate adjustment caps or floors. In a period of rising interest rates,
ARMs could reach a periodic adjustment cap while still at a rate below their
contractual margin over existing market rates. Since repricing liabilities are
typically not subject to such interest rate adjustment constraints, the
Company's net interest margin would most likely be negatively impacted in this
situation. Certain ARMs now offered by the Company have a fixed monthly payment
for a given period, with any changes as a result of market interest rates
reflected in the unpaid principal balance through negative amortization.
One of the most important sources of a financial institution's net income
is net interest income, which is the difference between the combined yield
earned on interest-earning assets and the combined rate paid on interest-bearing
liabilities. Net interest income is also dependent on the relative balances of
interest-earning assets and interest-bearing liabilities.
A traditional measure of interest rate risk within the savings industry is
the interest rate sensitivity gap, which is the sum of all interest-earning
assets minus the sum of all interest-bearing liabilities to be repriced within
the same period. A gap is considered positive when the amount of interest rate
sensitive assets exceed interest rate sensitive liabilities, while the opposite
results in a negative gap. During a period of rising interest rates, a negative
gap would tend to adversely affect net interest income, and a positive gap would
tend to result in an increase in net interest income, while the opposite would
tend to occur in a period of falling rates.
Page 33
<PAGE>
The following table sets forth the projected maturities based upon
contractual maturities as adjusted for projected prepayments and "repricing
mechanisms" (provisions for changes in the interest rates of assets and
liabilities). Prepayment rates are assumed in each period on substantially all
of the Company's loan portfolio based upon expected loan prepayments. Repricing
mechanisms on the Company's assets are subject to limitations such as caps on
the amount that interest rates and payments on its loans may adjust and,
accordingly, such assets may not respond in the same manner or to the same
extent to changes in interest rates as the Company's liabilities. In addition,
the interest rate sensitivity of the Company's assets and liabilities
illustrated in the table would vary substantially if different assumptions were
used or if actual experience differed from the assumptions set forth. The
Company's estimated interest rate sensitivity gap at June 30, 1999 is as
follows:
<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) $ 242 $ -- $ 85 $ -- $ 327
Securities available for sale (3) 1,164 -- -- -- 1,164
Mortgage-backed securities
available for sale (3) 13,912 -- -- -- 13,912
Mortgage-backed securities
held to maturity (1)(4) 2,364 23 12 -- 2,399
Loans held for sale, net (3)(5) 2,132 -- -- -- 2,132
Loans receivable, net (1)(6) 18,596 9,097 4,290 -- 31,983
Investment in FHLB 1,125 -- -- -- 1,125
-------- -------- -------- -------- --------
Total interest-earning assets 39,535 9,120 4,387 -- 53,042
Noninterest-earning assets -- -- -- 3,793 3,793
-------- -------- -------- -------- --------
$ 39,535 $ 9,120 $ 4,387 $ 3,793 $ 56,835
======== ======== ======== ======== ========
INTEREST-BEARING LIABILITIES:
Deposits (7) $ 21,377 $ 2,538 $ 6 $ -- $ 23,921
Securities sold under agreements to
repurchase (1) 5,347 -- -- -- 5,347
FHLB advances (1) 10,543 11,530 -- -- 22,073
Other borrowings (1) 51 1,207 899 -- 2,157
-------- -------- -------- -------- --------
Total interest-bearing liabilities 37,318 15,275 905 -- 53,498
Noninterest-bearing liabilities -- -- -- 1,271 1,271
Minority interest -- -- -- 533 533
Stockholders' equity -- -- -- 1,533 1,533
-------- -------- -------- -------- --------
$ 37,318 15,275 $ 905 $ 3,337 $ 56,835
======== ======== ======== ======== ========
Gap before interest rate swap agreements $ 2,217 $ (6,155) $ 3,482 $ (456)
Interest rate swap agreements (1,050) 1,050 -- --
-------- -------- -------- --------
Gap $ 1,167 $ (5,105) $ 3,482 $ (456)
======== ======== ======== ========
Cumulative gap $ 1,167 $ (3,938) $ (456) $ (456)
======== ======== ======== ========
Gap as a percentage of total assets 2.05% (8.98)% 6.13% (0.80)%
======== ======== ======== ========
Cumulative gap as a percentage of total assets 2.05% (6.93)% (0.80)% (0.80)%
======== ======== ======== ========
</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 June 30, 1999. The
actual maturity and rate sensitivity of these assets could vary
substantially if future prepayments differ from prepayment estimates.
Page 34
<PAGE>
(2) Consists of $253 million of securities held to maturity, $74 million of
short-term investment securities and less than $.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 $3 million.
(5) Excludes non-performing loans of $11 million.
(6) Excludes allowance for loan losses of $578 million and non-performing loans
of $176 million.
(7) Fixed rate deposits and deposits with a fixed pricing interval are
reflected as maturing in the year of contractual maturity or first
repricing date. Money market deposit accounts, demand deposit accounts and
passbook accounts are reflected as maturing within one year.
At June 30, 1999, interest-bearing liabilities of Golden State exceeded
interest-earning assets by $456 million. At December 31, 1998, interest-bearing
liabilities of Golden State exceeded interest-earning assets by approximately
$373 million.
The maturity/rate sensitivity analysis is a static view of the balance
sheet with assets and liabilities grouped into certain defined time periods, and
thus only partially depicts the dynamics of the Company's sensitivity to
interest rate changes. Being at a point in time, this analysis may not fully
describe the complexity of relationships between product features and pricing,
market rates and future management of the balance sheet mix. The Company
utilizes computer modeling, under various interest rate scenarios, to provide a
dynamic view of the effects of the changes in rates, spreads, and yield curve
shifts on net interest income.
The Company's risk management policies are established by the
Asset/Liability Management Committee ("ALCO") of the Bank. ALCO meets monthly to
formulate the Bank's investment and risk management strategies. The basic
responsibilities of ALCO include management of net interest income and market
value of portfolio equity to measure the stability of earnings, management of
liquidity to provide adequate funding, and the establishment of asset product
priorities by formulating performance evaluation criteria, risk evaluation
techniques and a system to standardize the analysis and reporting of
originations, competitive trends, profitability and risk. On a quarterly basis,
the Board of Directors of the Bank is apprised of ALCO strategies adopted and
their impact on operations, and, at least annually, the Board of Directors of
the Bank reviews the Bank's interest rate risk management policy statements.
LIQUIDITY
The major source of funding for Golden State on an unconsolidated basis is
distributions from its subsidiary, GS Holdings, which receives most of its
funding from distributions of the Bank's earnings and tax sharing payments. Net
income generated by the Bank is used to meet its cash flow needs, including
paying dividends on its preferred stock, and may be distributed, subject to
certain restrictions, to GS Holdings. In turn, GS Holdings uses distributions
received from the Bank primarily to meet debt service requirements, pay any
expenses it may incur, and make distributions to Golden State, subject to
certain restrictions. For more information on dividend restrictions for the Bank
and GS Holdings, refer to "Business - Dividend Policy of the Bank," "Business -
Regulation of the Bank" and note 28 of the "Notes to Consolidated Financial
Statements" in the Company's 1998 Form 10-K.
The Company anticipates that on a consolidated basis, cash and cash
equivalents on hand, the cash flow from assets as well as other sources of funds
will provide adequate liquidity for its operating, investing and financing needs
and the Bank's regulatory liquidity requirements for the foreseeable future. In
addition to cash and cash equivalents of $622.5 million at June 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 and the Bank Preferred Stock, or under
applicable federal thrift laws.
Page 35
<PAGE>
On a consolidated basis, a major source of the Company's funding is
expected to be the Bank's retail deposit branch network, which management
believes will be sufficient to meet its long-term liquidity needs. The ability
of the Company to retain and attract new deposits is dependent upon the variety
and effectiveness of its customer account products, customer service and
convenience, and rates paid to customers. The Company also obtains funds from
the repayment and maturities of loans and mortgage-backed securities, while
additional funds can be obtained from a variety of other sources including
customer and brokered deposits, loan sales, securities sold under agreements to
repurchase, FHLB advances, and other secured and unsecured borrowings. It is
anticipated that FHLB advances and securities sold under agreements to
repurchase will continue to be important sources of funding, and management
expects there to be adequate collateral for such funding requirements.
The consolidated Company's primary uses of funds are the origination or
purchase of loans, the purchase of mortgage-backed securities, the funding of
maturing certificates of deposit, demand deposit withdrawals and the repayment
of borrowings. Certificates of deposit scheduled to mature during the twelve
months ending June 30, 2000 aggregate $10.0 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 June 30, 1999, Golden State had FHLB advances, securities sold
under agreements to repurchase and other borrowings aggregating $15.9 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 six months ended June 30, 1999 were $17.5 billion in proceeds
from additional borrowings, $5.7 billion in proceeds from sales of loans held
for sale, $2.7 billion from principal payments on mortgage backed securities
available for sale and held to maturity, a $1.1 billion net increase in
securities sold under agreements to repurchase, $459 million from the Nevada
Purchase, and $356 million from maturities of securities available for sale and
held to maturity. The primary uses of funds were $15.6 billion in principal
payments on borrowings, $5.6 billion in purchases and originations of loans held
for sale, $4.3 billion in purchases of securities and mortgage-backed securities
available for sale, a net increase in loans receivable of $1.6 billion, and $1.2
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 six months ended June 30,
1999 and the year ended December 31, 1998.
PROBLEM AND POTENTIAL PROBLEM ASSETS
The Company considers a loan to be impaired when, based upon current
information and events, it is "probable" that it will be unable to collect all
amounts due (i.e., both principal and interest) according to the contractual
terms of the loan agreement. Any insignificant delay or insignificant shortfall
in amount of payments will not cause a loan to be considered impaired. In
determining impairment, the Company considers large non-homogeneous loans
including nonaccrual loans, troubled debt restructurings, and performing loans
that exhibit, among other characteristics, high LTV ratios, low debt-coverage
ratios or other indications that the borrowers are experiencing increased levels
of financial difficulty. In addition, loans collectively reviewed for impairment
by the Company include all 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.
Page 36
<PAGE>
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 June 30, 1999, the carrying value of loans that were considered to be
impaired totalled $119.1 million (of which $20.9 million were on non-performing
status). The average recorded investment in impaired loans during the six and
three month periods ended June 30, 1999 was approximately $140.3 million and
$135.9 million, respectively. For the six and three month periods ended June 30,
1999, Golden State recognized interest income on those impaired loans of $4.3
million and $1.4 million, respectively, which included $.3 million and less than
$.1 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.
<TABLE>
<CAPTION>
June 30, 1999
------------------------------------------------------
Non-performing Impaired Restructured
-------------- -------- ------------
(in millions)
<S> <C> <C> <C>
Real Estate:
1-4 unit residential $165 $ -- $ 3
5+ unit residential 8 39 8
Commercial and other 10 70 19
Land -- 1 --
Construction -- -- --
---- ---- ----
Total real estate 183 110 30
Non-real estate 7 9 --
---- ---- ----
Total loans 190 (a) $119 (b) $30
==== ===
Foreclosed real estate, net 68
Repossessed assets 2
----
Total non-performing assets $260
====
</TABLE>
<TABLE>
<CAPTION>
December 31, 1998
------------------------------------------------------
Non-performing Impaired Restructured
-------------- -------- ------------
(in millions)
Real Estate:
<S> <C> <C> <C>
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
======
(Continued)
</TABLE>
- ------------
Page 37
<PAGE>
(a) Includes loans securitized with recourse on non-performing status of $3.0
million and $6.0 million at June 30, 1999 and December 31, 1998,
respectively, and loans held for sale on non-performing status of $11.0
million and $17.0 million at June 30, 1999 and December 31, 1998,
respectively.
(b) Includes $20.9 million and $32.5 million of non-performing loans at June
30, 1999 and December 31, 1998, respectively. Also includes $15.2 million
and $16.4 million of loans classified as troubled debt restructurings at
June 30, 1999 and December 31, 1998, respectively
There were no accruing loans contractually past due 90 days or more at June
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 $260 million at
June 30, 1999, from $310 million at December 31, 1998. Non-performing assets as
a percentage of the Bank's total assets decreased to 0.46% at June 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 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 June 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 $ 21 $ 6 $ 27 11%
Northeast (1) 108 44 152 60
Other regions 54 18 72 29
---- --- ---- ---
Total $183 $68 $251 100%
==== === ==== ===
</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 June 30, 1999, the Company's largest non-performing asset was
approximately $6.1 million, and it had four non-performing assets over $2
million in size with balances averaging approximately $4.6 million. At June 30,
1999, the Company had 1,464 non-performing assets below $2 million in size,
including 1,367 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
Page 38
<PAGE>
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 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 June 30, 1999, the allowance for loan losses was $578 million,
consisting of a $378 million formula allowance, a $40 million specific allowance
and a $160 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
----- ----- ----- -----
Balance - June 30, 1999 $ 243 $ 278 $ 57 $ 578
===== ===== ===== =====
</TABLE>
The ratio of allowance for loan losses to non-performing loans at June 30,
1999 and December 31, 1998 was 304.8% and 256.8%, respectively.
Page 39
<PAGE>
MORTGAGE BANKING OPERATIONS
The Company, through the Bank's wholly owned mortgage bank subsidiary,
FNMC, has significantly expanded its mortgage banking operations. During the six
months ended June 30, 1999 and 1998, FNMC acquired mortgage-servicing rights on
loan portfolios of $9.3 billion and $3.6 billion, respectively, as a result of
bulk servicing acquisitions and flow purchases, and sold servicing rights during
the six months ended June 30, 1999 of $2.0 billion on approximately 49,000 loans
in the Servicing Sale. 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 subserviced for others and excluding loans
serviced for the Bank) totalled $69.2 billion at June 30, 1999, an increase of
$3.8 billion and $22.4 billion from December 31, 1998 and June 30, 1998,
respectively. During the six months ended June 30, 1999, the Bank, through FNMC,
originated $9.6 billion and sold (generally with servicing retained) $5.8
billion of 1-4 unit residential loans. Gross revenues from mortgage loan
servicing activities for the six months ended June 30, 1999 totalled $167.5
million, an increase of $42.5 million from the six months ended June 30, 1998.
Gross loan servicing fees for the six months ended June 30, 1999 were reduced by
$102.6 million of amortization of servicing rights to arrive at net loan
servicing fees of $64.9 million for FNMC.
A decline in long-term interest rates generally results in an acceleration
of mortgage loan prepayments. Higher than anticipated levels of prepayments
generally cause the accelerated amortization of mortgage servicing rights
("MSRs"), and generally will result in a reduction in the market value of MSRs
and in the Company's servicing fee income. To reduce the sensitivity of its
earnings to interest rate and market value fluctuations, the Company hedged the
change in value of its MSRs based on changes in interest rates ("MSR Hedge").
The Company owned several derivative instruments at June 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 $590.0 million, a strike
rate of 5.5%, mature in the year 2004 and had an estimated fair value of $7.4
million at June 30, 1999. Premiums paid to counterparties in exchange for cash
payments when the 10 year Constant Maturity Swap rate falls below the strike
rate are recorded as part of the MSR asset on the balance sheet. The swaption
contracts had notional amounts of $2.3 billion, strike rates between 5.3% and
5.9%, expire between August and November 2001 and had an estimated fair value of
$23.0 million at June 30, 1999. Premiums paid to counterparties in exchange for
the right to enter into an interest rate swap are recorded as part of the MSR
asset on the balance sheet. Principal only swap agreements had notional amounts
of $150.9 million and an estimated fair value of $(.6) million at June 30, 1999.
The prepayment-linked swaps had original notional amounts of $213.3 million and
an estimated fair value of $.4 million at June 30, 1999.
The following is a summary of activity in MSRs and the MSR Hedge for the
six months ended June 30, 1999 (in millions):
Total MSR
MSRs MSR Hedge Balance
---- --------- -------
Balance at December 31, 1998 $ 922 $ 22 $ 944
Additions - bulk purchases 149 -- 149
Originated servicing 109 -- 109
Additions - other purchases 62 -- 62
Premiums paid -- 8 8
Servicing Sale (17) -- (17)
Interest rate floor sales -- (7) (7)
Payments made to counterparties, net -- 9 9
Amortization (91) (14) (105)
------- ----- -------
Balance at June 30, 1999 $ 1,134 $ 18 $ 1,152
======= ===== =======
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 June 30, 1999 and December 31, 1998, no
allowance for impairment of the MSRs was necessary.
Page 40
<PAGE>
CAPITAL RESOURCES
OTS capital regulations require savings associations to satisfy three
minimum capital requirements: tangible capital, core (leverage) capital and
risk-based capital. In general, an association's tangible capital, which must be
at least 1.5% of adjusted total assets, is the sum of common stockholders'
equity (including retained earnings), noncumulative perpetual preferred stock
and minority interest in equity accounts of fully consolidated subsidiaries,
less disallowed intangibles. An association's ratio of core capital to adjusted
total assets (the "core capital" or "leverage capital" ratio) must be at least
4%. Core capital generally is the sum of tangible capital plus certain
qualifying intangibles. Under the risk-based capital requirement, a savings
association must have total capital (core capital plus supplementary capital)
equal to at least 8% of risk-weighted assets (which equals assets plus the
credit risk equivalent of certain off-balance sheet items, each multiplied by
the appropriate risk weight). Supplementary capital, which may not exceed 100%
of core capital for purposes of the risk-based requirement, includes, among
other things, certain permanent capital instruments such as qualifying
cumulative perpetual preferred stock, as well as some forms of term capital
instruments, such as qualifying subordinated debt. The capital requirements are
viewed as minimum standards by the OTS, and most associations are expected to
maintain capital levels well above the minimum. In addition, the OTS regulations
provide that minimum capital levels higher than those provided in the
regulations may be established by the OTS for individual savings associations,
depending upon their particular circumstances. These capital requirements are
applicable to the Bank but not to Golden State. The Bank is not subject to any
such individual regulatory capital requirement that is higher than the minimum.
Page 41
<PAGE>
At June 30, 1999, the Bank's regulatory capital levels exceeded the minimum
regulatory capital requirements, with tangible, core and risk-based capital
ratios of 5.18%, 5.18% and 11.63%, respectively. The following is a
reconciliation of the Bank's stockholders' equity to regulatory capital as of
June 30, 1999:
<TABLE>
<CAPTION>
Tangible Core Risk-based
Capital Capital Capital
------- ------- -------
(dollars in millions)
<S> <C> <C> <C>
Stockholders' equity of the Bank $ 3,619 $ 3,619 $ 3,619
Minority interest - REIT Preferred Stock 500 500 500
Unrealized holding loss on securities available for sale, net 156 156 156
Non-qualifying MSRs (115) (115) (115)
Non-allowable capital:
Intangible assets (939) (939) (939)
Goodwill Litigation Assets (160) (160) (160)
Investment in non-includable subsidiaries (58) (58) (58)
Excess deferred tax asset (124) (124) (124)
Supplemental capital:
Qualifying subordinated debentures -- -- 93
General loan loss allowance -- -- 356
Assets required to be deducted:
Land loans with more than 80% LTV ratio -- -- (22)
Equity in subsidiaries -- -- 9)
Low-level recourse deduction -- -- (12)
------- ------- -------
Regulatory capital of the Bank 2,879 2,879 3,285
Minimum regulatory capital requirement 834 2,225 2,260
------- ------- -------
Excess above minimum capital requirement $ 2,045 $ 654 $ 1,025
======= ======= =======
Regulatory capital of the Bank 5.18% 5.18% 11.63%
Minimum regulatory capital requirement 1.50 4.00 8.00
------- ------- -------
Excess above minimum capital requirement 3.68% 1.18% 3.63%
======= ======= =======
</TABLE>
The amount of adjusted total assets used for the tangible and leverage
capital ratios is $55.6 billion. Risk-weighted assets used for the risk-based
capital ratio amounted to $28.2 billion.
The Bank is also subject to the "prompt corrective action" standards
prescribed in the FDICIA and related OTS regulations, which, among other things,
define specific capital categories based on an association's capital ratios. The
capital categories, in declining order, are "well capitalized," "adequately
capitalized," "undercapitalized," "significantly undercapitalized," and
"critically undercapitalized." Associations categorized as "undercapitalized" or
worse are subject to certain restrictions, including the requirement to file a
capital plan with the OTS, prohibitions on the payment of dividends and
management fees, restrictions on executive compensation, and increased
supervisory monitoring, among other things. Other restrictions may be imposed on
the association either by the OTS or by the FDIC, including requirements to
raise additional capital, sell assets, or sell the entire association. Once an
association becomes "critically undercapitalized" it is generally placed in
receivership or conservatorship within 90 days.
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 June 30, 1999, California
Federal's capital levels were sufficient for it to be considered "well
capitalized," as presented below.
Risk-based
Leverage ----------------------
Capital Tier 1 Total Capital
------- ------ -------------
Regulatory capital of the Bank 5.18% 10.15% 11.63%
"Well capitalized" ratio 5.00 6.00 10.00
---- ----- -----
Excess above "well capitalized" ratio 0.18% 4.15% 1.63%
==== ===== =====
Page 42
<PAGE>
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 June 30, 1999, $124 million of
the net tax benefit was determined to be attributable to the amount of taxable
income that may be realized in periods beyond one year. Accordingly, such amount
has been excluded from the Bank's regulatory capital at June 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 43
<PAGE>
PART II - OTHER INFORMATION
ITEM 1. LEGAL PROCEEDINGS.
Goodwill Litigation Against the Government
On April 9, 1999, the Claims Court issued its decision in a claim 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 in a claim by the
Bank against the Government in the lawsuit, California Federal Bank v. United
States, Civil Action No. 92-138C (the "California Federal Litigation"), ruling
that the Government must compensate the Bank in the sum of $23.0 million. 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 mandated by the Financial
Institutions Reform, Recovery and Enforcement Act of 1989 ("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.
At the Annual Meeting of Stockholders held on May 17, 1999, the following
matters were submitted to a vote of security holders with the indicated number
of votes being cast for, against or withheld, and with the indicated number of
abstentions and broker non-votes:
1. To elect five members of the Board of Directors to hold office until the
2002 annual meeting of stockholders or until their successors are duly
elected and qualified.
Number of Votes
-------------------------
For Withheld
----------- --------
Bob Bullock * 121,077,666 947,773
John F. King 121,175,118 850,321
Gabrielle K. McDonald 121,084,319 941,120
B. M. Rankin, Jr 121,100,413 925,026
Robert Setrakian 121,099,867 925,572
* See Item 5 - Other Information.
Page 44
<PAGE>
2. To approve the Golden State Bancorp Inc. Omnibus Stock Plan which included
the authorization for issuance of up to 7,000,000 shares of common stock of
the Company.
For 86,244,268
Against 23,907,981
Abstain 332,828
Broker non-vote 11,540,362
3. To approve the Golden State Bancorp Inc. Executive Compensation Plan.
For 119,179,185
Against 2,592,463
Abstain 253,791
Broker non-vote 0
4. To ratify the appointment of KPMG LLP to serve as the Company's independent
auditors for the year ending December 31, 1999.
For 121,393,920
Against 529,858
Abstain 101,661
Broker non-vote 0
ITEM 5. OTHER INFORMATION.
The Honorable Bob Bullock, Director of the Company, died on June 18, 1999.
The Company anticipates that this position will be filled at a later date.
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
December 31, 1998).
3.2 By-laws of the Registrant, as amended. (Incorporated by reference
to Exhibit 3.3 to the Registrant's Annual Report on Form 10-K for
the year ended December 31, 1998).
10.1 Amendment to Employment Agreement dated as of May 1, 1999,
between California Federal Bank, A Federal Savings Bank, and
Christie S. Flanagan.
10.2 Golden State Bancorp Inc. Omnibus Stock Plan.
10.3 Golden State Bancorp Inc. Executive Compensation Plan.
27.1 Financial Data Schedule.
(b) Reports on Form 8-K:
None.
Page 45
<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)
August 10, 1999
Page 46
<PAGE>
Exhibit 10.1
Amendment to Employment Agreement
AMENDMENT TO EMPLOYMENT AGREEMENT (the "Amendment"), dated as of May 31,
1999, between California Federal Bank, A Federal Savings Bank, (the "Company")
successor by merger to First Nationwide Bank, A Federal Savings Bank, ("FNB")
and Christie S. Flanagan (the "Executive").
FNB and the Executive entered into an Employment Agreement dated as of
June 1, 1996 (the "Agreement"), which agreement was subsequently assumed by the
Company by operation of law in connection with the merger of FNB with and into
the Company on January 3, 1997.
The Company and the Executive do hereby wish to extend the term of the
Agreement on the terms and conditions set forth in this Amendment.
Accordingly, the Company and the Executive hereby agree as follows:
Agreements
1. Amendment. Paragraph 2.1 of the Agreement is amended in its entirety to
read as follows:
"2.1 The Term. The term of the Executive's employment under this
Agreement (the "Term") shall commence June 1, 1996 and shall end on
July 31, 1999."
2. No other Amendments. The balance of the provisions of the Agreements
are not altered by this Amendment and remain in full force and effect.
IN WITNESS WHEREOF, the parties have executed this Amendment to Employment
Agreement as of the date first above written.
CALIFORNIA FEDERAL BANK
A Federal Savings Bank
/s/ Gerald J. Ford
----------------------------
By: Gerald J. Ford
Chairman of the Board and
Chief Executive Officer
/s/ Christie S. Flanagan
----------------------------
Christie S. Flanagan
<PAGE>
EXHIBIT "A"
GOLDEN STATE BANCORP INC.
OMNIBUS STOCK PLAN
SECTION 1
BACKGROUND, PURPOSE AND DURATION
1.1 Effective Date. The Plan is effective as of March 16, 1999, subject
to approval by an affirmative vote of the holders of a majority of the Shares
which are present in person or by proxy and entitled to vote at the 1999 Annual
Meeting of Stockholders of the Company.
1.2 Purpose of the Plan. The Plan is intended to further the growth and
profitability of the Company by increasing incentives and encouraging Share
ownership on the part of (1) employees of the Company and its Affiliates, (2)
consultants who provide significant services to the Company and its Affiliates,
and (3) directors of the Company or any Subsidiary who are employees of neither
the Company nor any Affiliate. The Plan is intended to permit the grant of
Awards that qualify as performance-based compensation under section 162(m) of
the Code.
SECTION 2
DEFINITIONS
The following words and phrases shall have the following meanings unless a
different meaning is plainly required by the context:
2.1 "1934 Act" means the Securities Exchange Act of 1934, as amended.
Reference to a specific section of the 1934 Act or regulation thereunder shall
include such section or regulation, any valid regulation promulgated under such
section, and any comparable provision of any future legislation or regulation
amending, supplementing or superseding such section or regulation.
2.2 "Affiliate" means any corporation or any other entity (including,
but not limited to, partnerships and joint ventures) controlled by the Company.
2.3 "Award" means, individually or collectively, a grant under the Plan
of Non-qualified Stock Options, Incentive Stock Options, SARs or Restricted
Stock.
2.4 "Award Agreement" means the written agreement setting forth the
terms and provisions applicable to each Award granted under the Plan.
2.5 "Board" means the Board of Directors of the Company.
2.6 "Change of Control" means the occurrence of any of the following:
(a) The acquisition by any individual, entity or group (within
the meaning of Section 13(d)(3) or 14(d)(2) of the 1934 Act) (a
"Person") of beneficial ownership (within the meaning of Rule 13d-3
promulgated under the 1934 Act) of 20% or more of either (1) the
then-outstanding shares of common stock of the Company (the
"Outstanding Company Common Stock") or (2) the combined voting power of
the then-outstanding voting securities of the Company entitled to vote
generally in the election of directors (the "Outstanding Company Voting
Securities"); provided, however, that for purposes of this paragraph
(a) the following acquisitions shall not constitute, or be deemed to
cause, a Change of Control: (i) any increase in such percentage
ownership of a Person to 20% or more resulting solely from any
acquisition of shares directly from the Company or any acquisition of
shares by the Company, provided, however, that any subsequent
acquisitions of shares by such Person that would add, in the aggregate,
2% or more (measured as of the date of each such subsequent
1
<PAGE>
acquisition) to such Person's beneficial ownership of Outstanding
Company Common Stock or Outstanding Company Voting Securities shall be
deemed to constitute a Change of Control, (ii) any acquisition by any
employee benefit plan (or related trust) sponsored or maintained by the
Company or any corporation controlled by the Company; (iii) any
acquisition by Ronald O. Perelman, Gerald J. Ford or any entity
controlled by either or both of them; or (iv) any acquisition by any
corporation pursuant to a transaction which complies with clauses (1),
(2) and (3) of paragraph (c) below; or
(b) Individuals who, as of the Effective Date, constitute the
Board (the "Incumbent Board") cease for any reason to constitute at
least a majority of the Board; provided, however, that any individual
becoming a director subsequent to the date hereof whose election, or
nomination for election by the Company's stockholders, was approved by
a vote of at least a majority of the directors then comprising the
incumbent Board shall be considered as though such individual were a
member of the Incumbent Board, but excluding, for this purpose, any
such individual whose initial assumption of office occurs as a result
of an actual or threatened election contest with respect to the
election or removal of directors or other actual or threatened
solicitation of proxies or consents, by or on behalf of a Person other
than the Board; or
(c) Consummation of a reorganization, merger or consolidation
or sale or other disposition of all or substantially all of the assets
of the Company (a "Business Combination"), in each case, unless,
following such Business Combination, (1) all or substantially all of
the individuals and entities who were the beneficial owners,
respectively, of the then Outstanding Company Common Stock and
Outstanding Company Voting Securities, immediately prior to such
Business Combination beneficially own, directly or indirectly, more
than 50% of, respectively, the then-outstanding shares of common stock
and the combined voting power of the then-outstanding voting securities
entitled to vote generally in the election of directors, as the case
may be, of the corporation resulting from such Business Combination
(including, without limitation, a corporation which as a result of such
transaction owns the Company or all or substantially all of the
Company's assets either directly or through one or more subsidiaries)
in substantially the same proportions as their ownership, immediately
prior to such Business Combination, of the Outstanding Company Common
Stock and Outstanding Company Voting Securities, as the case may be,
(2) no Person (excluding any corporation resulting from such Business
Combination or any employee benefit plan (or related trust) of the
Company or of such corporation resulting from such Business
Combination) beneficially owns, directly or indirectly, 20% or more of,
respectively, the then-outstanding shares of common stock of the
corporation resulting from such Business Combination or the combined
voting power of the then-outstanding voting securities of such
corporation except to the extent that such ownership existed prior to
the Business Combination and (3) individuals who were on the Incumbent
Board continue to constitute at least a majority of the members of the
board of directors of the corporation resulting from the Business
Combination; provided however, that any individual becoming a director
subsequent to the date hereof whose election or nomination for election
by the Company's stockholders, was approved by a vote of at least a
majority of the directors then comprising the Incumbent Board shall be
considered as though such individual were a member of the Incumbent
Board, but excluding, for this purpose, any such individual whose
initial assumption of office occurs as a result of an actual or
threatened election contest with respect to the election or removal of
directors or other actual or threatened solicitation of proxies or
consents, by or on behalf of a Person other than the Board; or
Notwithstanding the foregoing, the occurrence of an event
described in the above paragraphs (a) through (c), inclusive, shall not
be deemed to constitute a change of control if, following the
occurrence of such event, Gerald J. Ford continues to serve as the
Chairman and Chief Executive Officer of the Company (in the case of a
Business Combination, of the surviving company in such Business
Combination). However, if a change of control does not occur solely
because of the operation of the preceding sentence, then a change of
control shall occur upon the subsequent death or permanent disability
of Gerald J. Ford.
(d) Approval by the stockholders of the Company of a complete
liquidation or dissolution of the Company.
2.7 "Code" means the Internal Revenue Code of 1986, as amended.
Reference to a specific section of the Code or regulation thereunder shall
include such section or regulation, any valid regulation promulgated thereunder,
and any
2
<PAGE>
comparable provision of any future legislation or regulation amending,
supplementing or superseding such section or regulation.
2.8 "Committee" means the committee appointed by the Board (pursuant to
Section 3.1) to administer the Plan.
2.9 "Company" means Golden State Bancorp Inc., a Delaware corporation,
or any successor thereto.
2.10 "Consultant" means any consultant, independent contractor, or
other person who provides significant services to the Company or its Affiliates,
but who is neither an Employee nor a Director.
2.11 "Director" means any individual who is a member of the Board or
the Board of Directors of any Subsidiary.
2.12 "Disability" means a permanent and total disability within the
meaning of section 22(e)(3) of the Code, provided that in the case of Awards
other than Incentive Stock Options, the Committee in its discretion may
determine whether a permanent and total disability exists in accordance with
uniform and non-discriminatory standards adopted by the Committee from time to
time.
2.13 "Earnings Per Share" means net income per diluted share as
reported in the Company's audited consolidated statement of income (as included
in the Company's Form 10-K filed pursuant to the 1934 Act) for the period being
measured, computed in accordance with Statement of Financial Accounting
Standards No. 128, "Earnings per Share."
2.14 "Efficiency Ratio" means the ratio of noninterest expense to the
sum of net interest income and noninterest income (excluding goodwill
amortization). Noninterest expense, net interest income and noninterest income
should each agree to such items as reported in the Company's audited
consolidated statement of income (as included in the Company's Form 10-K filed
pursuant to the 1934 Act) for the period being measured, except that the
Committee may, in its sole discretion, elect to exclude any or all of the
following non-recurring items:
(a) gains or losses on the disposition of discontinued operations
(b) the cumulative effects of changes in accounting principles
(c) the writedown of any asset
(d) charges for restructuring and rationalization programs.
2.15 "Employee" means any employee of the Company or of an Affiliate,
whether such employee is so employed at the time the Plan is adopted or becomes
so employed subsequent to the adoption of the Plan.
2.16 "Exercise Price" means the price at which a Share may be purchased
by a Participant pursuant to the exercise of an Option.
2.17 "Fair Market Value" means the last quoted per share selling price
for Shares on the relevant date on the consolidated tape for New York Stock
Exchange listed companies, or if there were no sales on such date, the
arithmetic mean of the highest and lowest quoted selling prices on the nearest
day before and the nearest day after the relevant date, as determined by the
Committee. Notwithstanding the preceding, for federal, state and local income
tax reporting purposes, fair market value shall be determined by the Committee
in accordance with uniform and nondiscriminatory standards adopted by it from
time to time.
2.18 "Fiscal Year" means the fiscal year of the Company.
2.19 "Grant Date" means, with respect to an Award, the date that the
Award was granted.
2.20 "Incentive Stock Option" means an Option to purchase Shares which
is designated as an Incentive Stock Option and is intended to meet the
requirements of section 422 of the Code.
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2.21 "Net Income" means net income as reported in the Company's audited
consolidated statement of income (as included in the Company's Form 10-K filed
pursuant to the 1934 Act) for the period being measured.
2.22 "Non-employee Director" means a Director who is an employee of
neither the Company nor of any Affiliate.
2.23 "Non-qualified Stock Option" means an option to purchase Shares
which is not intended to be an Incentive Stock Option.
2.24 "Option" means an Incentive Stock Option or a Non-qualified Stock
Option.
2.25 "Participant" means an Employee, Consultant, or Non-employee
Director who has an outstanding Award.
2.26 "Performance Goals" means the goal(s) (or combined goal(s))
determined by the Committee (in its discretion) to be applicable to a
Participant with respect to an Award. As determined by the Committee, the
Performance Goals applicable to an Award may provide for a targeted level or
levels of achievement using one or more of the following measures: (a) Pre-Tax
Net Income, (b) Net Income, (c) Efficiency Ratio, (d) Total Shareholder Return,
(e) Pre-Tax Return on Average Equity, (f) Return on Average Equity, (g) Return
on Assets, and (h) Earnings Per Share. The Performance Goals may differ from
Participant to Participant and from Award to Award. Prior to the Determination
Date, the Committee shall determine whether any significant element(s) shall be
included in or excluded from the calculation of any Performance Goal with
respect to any Participant. "Determination Date" means the latest possible date
that will not jeopardize an Award's qualification as performance-based
compensation under section 162(m) of the Code. Notwithstanding the previous
sentence, for Awards not intended to qualify as performance-based compensation,
"Determination Date" shall mean such date as the Committee may determine in its
discretion.
2.27 "Period of Restriction" means the period during which shares of
Restricted Stock are subject to forfeiture and/or restrictions on
transferability.
2.28 "Plan" means the Golden State Bancorp Inc. Omnibus Stock Plan, as
set forth in this instrument and as hereafter amended from time to time.
2.29 "Pre-Tax Net Income" means net income before taxes, minority
interest and extraordinary items as reported in the Company's audited
consolidated statement of income (as included in the Company's Form 10-K filed
pursuant to the 1934 Act) for the period being measured.
2.30 "Pre-Tax Return on Average Equity" means the ratio of net income
before taxes, minority interest and extraordinary items as reported in the
Company's audited consolidated statement of income (as included in the Company's
Form 10-K filed pursuant to the 1934 Act) for the period being measured, as a
percentage of average stockholders' equity for the period being measured, as
included in "Management's Discussion and Analysis of Financial Condition and
Results of Operations" in the Company's Form 10-K filed pursuant to the 1934
Act.
2.31 "Restricted Stock" means an Award granted to a Participant
pursuant to Section 7.
2.32 "Retirement" means, in the case of an Employee, a Termination of
Service after attaining at least age 55 and 10 Years of Service (as defined
under the California Federal Employees' Investment Plan, or any successor plan).
With respect to a Non-Employee Director, "Retirement" means a Termination of
Service on the Board or the Board of Directors of any Subsidiary after
completing at least eight years of continuous service on such Board. With
respect to a Consultant, no Termination of Service shall be deemed to be on
account of "Retirement."
2.33 "Return on Average Assets" means the ratio of net income as
reported in the Company's audited consolidated statement of income (as included
in the Company's Form 10-K filed pursuant to the 1934 Act) for the period being
measured, as a percentage of average assets for the period being measured, as
included in "Management's Discussion and Analysis of Financial Condition and
Results of Operations" in the Company's Form 10-K filed pursuant to the 1934
Act.
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2.34 "Return on Average Equity" means ratio of net income as reported
in the Company's audited consolidated statement of income (as included in the
Company's Form 10-K filed pursuant to the 1934 Act) for the period being
measured, as a percentage of average stockholders' equity for the period being
measured, as included in "Management's Discussion and Analysis of Financial
Condition and Results of Operations" in the Company's Form 10-K filed pursuant
to the 1934 Act.
2.35 "Rule 16b-3" means Rule 16b-3 promulgated under the 1934 Act, as
amended, and any future regulation amending, supplementing or superseding such
regulation.
2.36 "Shares" means shares of the Company's common stock, $1.00 par
value.
2.37 "Stock Appreciation Right" or "SAR" means an Award, granted alone,
in connection or in tandem with a related Option, that pursuant to Section 6 is
designated as a SAR.
2.38 "Subsidiary" means any corporation in an unbroken chain of
corporations beginning with the Company if each of the corporations other than
the last corporation in the unbroken chain then owns stock possessing fifty
percent (50%) or more of the total combined voting power of all classes of stock
in one of the other corporations in such chain.
2.39 "Termination of Service" means (a) in the case of an Employee, a
cessation of the employee-employer relationship between an Employee and the
Company or an Affiliate for any reason, including, but not by way of limitation,
a termination by resignation, discharge, death, Disability, Retirement, or the
disaffiliation of an Affiliate, but excluding any such termination where there
is a simultaneous reemployment by the Company or an Affiliate; (b) in the case
of a Consultant, a cessation of the service relationship between a Consultant
and the Company or an Affiliate for any reason, including, but not by way of
limitation, a termination by resignation, discharge, death, Disability, or the
disaffiliation of an Affiliate, but excluding any such termination where there
is a simultaneous re-engagement of the consultant by the Company or an
Affiliate; and (c) in the case of a Non-employee Director, a cessation of the
Non-employee Director's service on the Board or the Board of Directors of any
Subsidiary for any reason.
2.40 "Total Shareholder Return" means as to any Performance Period, the
total return (change in share price plus reinvestment of any dividends) of a
Share.
SECTION 3
ADMINISTRATION
3.1 The Committee. The Plan shall be administered by the Committee. The
Committee shall consist of not less than two (2) Directors. The members of the
Committee shall be appointed from time to time by, and serve at the pleasure of,
the Board. Each member of the Committee shall qualify as (a) a "non-employee
director" under Rule 16b-3, and (b) an "outside director" under section 162(m)
of the Code. If it is later determined that one or more members of the Committee
do not so qualify, actions taken by the Committee prior to such determination
shall be valid despite such failure to qualify.
3.2 Authority of the Committee. It shall be the duty of the Committee
to administer the Plan in accordance with the Plan's provisions. The Committee
shall have all powers and discretion necessary or appropriate to administer the
Plan and to control its operation, including, but not limited to, the power to
(a) determine which Employees and Consultants shall be granted Awards, (b)
prescribe the terms and conditions of the Awards (other than the Options granted
to Non-employee Directors pursuant to Section 8), (c) interpret the Plan and the
Awards, (d) adopt such procedures and subplans as are necessary or appropriate
to permit participation in the Plan by Employees, Consultants and Directors who
are foreign nationals or employed outside of the United States, (e) adopt rules
for the administration, interpretation and application of the Plan as are
consistent therewith, and (f) interpret, amend or revoke any such rules.
Notwithstanding any contrary provision of the Plan, the Committee may reduce the
amount payable under any Award (other than an Option) after the grant of such
Award.
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3.3 Delegation by the Committee. The Committee, in its sole discretion
and on such terms and conditions as it may provide, may delegate all or any part
of its authority and powers under the Plan to one or more directors and/or
officers of the Company; provided, however, that the Committee may delegate its
authority and powers only with respect to awards that are not intended to
qualify as performance-based compensation under section 162(m) of the Code.
3.4 Non-employee Directors. Notwithstanding any contrary provision of
this Section 3, the Board shall administer Section 8 of the Plan, and the
Committee shall exercise no discretion with respect to Section 8. In the Board's
administration of Section 8 and the Options and any Shares granted to
Non-employee Directors, the Board shall have all of the authority and discretion
otherwise granted to the Committee with respect to the administration of the
Plan.
3.5 Decisions Binding. All determinations and decisions made by the
Committee, the Board, and any delegate of the Committee pursuant to the
provisions of the Plan shall be final, conclusive, and binding on all persons,
and shall be given the maximum deference permitted by law.
SECTION 4
SHARES SUBJECT TO THE PLAN
4.1 Number of Shares. Subject to adjustment as provided in Section 4.3,
the total number of Shares available for grant under the Plan shall not exceed
7,000,000. Shares granted under the Plan may be either authorized but unissued
Shares or treasury Shares.
4.2 Lapsed Awards. If an Award terminates, expires, or lapses for any
reason, any Shares subject to such Award again shall be available to be the
subject of an Award.
4.3 Adjustments in Awards and Authorized Shares. In the event of any
merger, reorganization, consolidation, recapitalization, separation,
liquidation, stock dividend, split-up, Share combination, or other change in the
corporate structure of the Company affecting the Shares, the Committee may
adjust the number and class of Shares which may be delivered under the Plan, the
number, class, and price of Shares subject to outstanding Awards, and the
numerical limit of Section 5.1 in such manner as the Committee (in its sole
discretion) shall determine to be appropriate to prevent the dilution or
diminution of such Awards. In the case of Options granted to Non-employee
Directors pursuant to Section 8, the foregoing adjustments shall be made by the
Board, and any such adjustments also shall apply to the future grants provided
by Section 8. Notwithstanding the preceding, the number of Shares subject to any
Award always shall be a whole number.
SECTION 5
STOCK OPTIONS
5.1 Grant of Options. Subject to the terms and provisions of the Plan,
Options may be granted to Employees and Consultants at any time and from time to
time as determined by the Committee in its sole discretion. The Committee, in
its sole discretion, shall determine the number of Shares subject to each
Option, provided that during any Fiscal Year, no Participant shall be granted
Options covering more than 1,000,000 Shares. The Committee may grant Incentive
Stock Options, Non-qualified Stock Options, or a combination thereof.
5.2 Award Agreement. Each Option shall be evidenced by an Award
Agreement that shall specify the Exercise Price, the expiration date of the
Option, the number of Shares to which the Option pertains, any conditions to
exercise of the Option, and such other terms and conditions as the Committee, in
its discretion, shall determine. The Award Agreement shall specify whether the
Option is intended to be an Incentive Stock Option or a Non-qualified Stock
Option.
5.3 Exercise Price. Subject to the provisions of this Section 5.3, the
Exercise Price for each Option shall be determined by the Committee in its sole
discretion.
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5.3.1 Non-qualified Stock Options. In the case of a Non-qualified Stock
Option, the Exercise Price may be equal to, greater than or less than one
hundred percent (100%) of the Fair Market Value of a Share on the Grant Date, as
shall be determined by the Committee in its sole discretion.
5.3.2 Incentive Stock Options. In the case of an Incentive Stock
Option, the Exercise Price shall be not less than one hundred percent (100%) of
the Fair Market Value of a Share on the Grant Date; provided, however, that if
on the Grant Date, the Employee (together with persons whose stock ownership is
attributed to the Employee pursuant to section 424(d) of the Code) owns stock
possessing more than ten percent (10%) of the total combined voting power of all
classes of stock of the Company or any of its Subsidiaries, the Exercise Price
shall be not less than one hundred and ten percent (110%) of the Fair Market
Value of a Share on the Grant Date.
5.4 Expiration of Options.
5.4.1 Expiration Dates. Each Option shall terminate no later
than the first to occur of the following events:
(a) The expiration of ten (10) years from the Grant Date; or
(b) The expiration of ninety (90) days from the date of the
Participant's Termination of Service for a reason other than the
Participant's death, Disability or Retirement; or
(c) The expiration of one (1) year from the date of the
Participant's Termination of Service by reason of Disability; or
(d) The expiration of one (1) year from the date of the
Participant's Retirement (subject to Section 5.8.2 regarding Incentive
Stock Options); or
(e) The date for termination of the Option determined by the
Committee in its sole discretion and set forth in the written Award
Agreement.
5.4.2 Death of Participant. If a Participant who is an Employee or
Consultant dies prior to the expiration of his or her Options, his or her
Options shall be exercisable until (a) the expiration of one (1) year after the
date of death, or (b) until the date for termination of the Option determined by
the Committee in its sole discretion and set forth in the written Award
Agreement, whichever shall first occur.
5.4.3 Committee Discretion. Subject to the limits of Sections 5.4.1 and
5.4.2, the Committee, in its sole discretion, (a) shall provide in each Award
Agreement when each Option expires and becomes unexercisable, and (b) may, after
an Option is granted and before such Option expires, extend the maximum term of
the Option (subject to Section 5.8.4 regarding Incentive Stock Options).
5.5 Exercisability of Options. Options granted under the Plan shall be
exercisable at such times and be subject to such restrictions and conditions as
the Committee shall determine in its sole discretion. After an Option is
granted, the Committee, in its sole discretion, may accelerate the
exercisability of the Option.
5.5.1 Special Rule for Change of Control. Notwithstanding any contrary
provision of the Plan or any Award Agreement, immediately upon the occurrence of
a Change of Control that occurs prior to a Participant's Termination of Service,
the right to exercise each Option then outstanding shall accrue as to 100% of
the Shares then subject to such Option.
5.6 Payment. Options shall be exercised by the Participant's delivery
of a written notice of exercise to the Secretary of the Company (or its
designee), setting forth the number of Shares with respect to which the Option
is to be exercised, accompanied by full payment for the Shares.
Upon the exercise of any Option, the Exercise Price shall be payable to
the Company in full in cash or its equivalent (including, but not limited to, by
means of, a broker-assisted cashless exercise). The Committee, in its sole
discretion,
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also may permit exercise (a) by tendering previously acquired Shares having an
aggregate Fair Market Value at the time of exercise equal to the total Exercise
Price, or (b) by any other means which the Committee, in its sole discretion,
determines to both provide legal consideration for the Shares, and to be
consistent with the purposes of the Plan.
As soon as practicable after receipt of a written notification of
exercise and full payment for the Shares purchased, the Company shall deliver to
the Participant (or the Participant's designated broker), Share certificates
(which may be in book entry form) representing such Shares.
5.7 Restrictions on Share Transferability. The Committee may impose
such restrictions on any Shares acquired pursuant to the exercise of an Option
as it may deem advisable, including, but not limited to, restrictions related to
applicable Federal securities laws, the requirements of any national securities
exchange or system upon which Shares are then listed or traded, or any blue sky
or state securities laws.
5.8 Certain Additional Provisions for Incentive Stock Options.
5.8.1 Exercisability. To the extent the aggregate Fair Market
Value (determined on the Grant Date(s)) of the Shares with respect to
which Incentive Stock Options are exercisable for the first time by any
Employee during any calendar year (under all plans of the Company and
its Subsidiaries) exceed $100,000, the excess portion of such Incentive
Stock Options shall be deemed to be Non-qualified Stock Options. For
purposes of this Section 5.8.1, Incentive Stock Options shall be taken
into account in the order in which they were granted.
5.8.2 Termination of Service. If any portion of an Incentive
Stock Option is exercised more than three (3) months after the
Participant's Termination of Service for any reason other than
Disability or death (unless (a) the Participant dies during such
three-month period, and (b) the Award Agreement or the Committee
permits later exercise), the portion so exercised shall be deemed a
Non-qualified Stock Option.
5.8.3 Company and Subsidiaries Only. Incentive Stock Options
may be granted only to persons who are employees of the Company or a
Subsidiary on the Grant Date.
5.8.4 Expiration. No Incentive Stock Option may be exercised
after the expiration of ten (10) years from the Grant Date; provided,
however, that if the Option is granted to an Employee who, together
with persons whose stock ownership is attributed to the Employee
pursuant to section 424(d) of the Code, owns stock possessing more than
ten percent (10%) of the total combined voting power of all classes of
the stock of the Company or any of its Subsidiaries, the Option may not
be exercised after the expiration of five (5) years from the Grant
Date.
5.9 Grant of Reload Options. The Committee may provide in an Award
Agreement that a Participant who exercises all or part of an Option by payment
of the Exercise Price with already-owned Shares, shall be granted an additional
option (a "Reload Option") for a number of shares of stock equal to the number
of Shares tendered to exercise the previously granted Option plus, if the
Committee so determines, any Shares withheld or delivered in satisfaction of any
tax withholding requirements. As determined by the Committee, each Reload Option
shall (a) have a Grant Date which is the date as of which the previously granted
Option is exercised, and (b) be exercisable on the same terms and conditions as
the previously granted Option, except that the Exercise Price shall be
determined as of the Grant Date.
SECTION 6
STOCK APPRECIATION RIGHTS
6.1 Grant of SARs. Subject to the terms and conditions of the Plan,
SARs may be granted to Employees and Consultants at any time and from time to
time as shall be determined by the Committee, in its sole discretion. The
Committee shall have complete discretion to determine the number of SARs granted
to any Participant, provided that during any Fiscal Year, no Participant shall
be granted SARs covering more than 1,000,000 Shares.
6.2 Exercise Price and Other Terms. The Committee, subject to the
provisions of the Plan, shall have complete discretion to determine the terms
and conditions of SARs granted under the Plan. Without limiting the foregoing,
the
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exercise price of an SAR may be equal to, greater than or less than one hundred
(100%) of the Fair Market Value of a Share on the Grant Date, as shall be
determined by the Committee in its sole discretion.
6.2.1 Special Rule for Change of Control. Notwithstanding any
contrary provision of the Plan or any Award Agreement, immediately upon the
occurrence of a Change of Control that occurs prior to a Participant's
Termination of Service, the right to exercise each SAR then outstanding shall
accrue as to 100% of the Shares with respect to such SAR.
6.3 SAR Agreement. Each SAR grant shall be evidenced by an Award
Agreement that shall specify the exercise price, the term of the SAR, the
conditions of exercise, and such other terms and conditions as the Committee, in
its sole discretion, shall determine.
6.4 Expiration of SARs. A SAR granted under the Plan shall expire upon
the date determined by the Committee, in its sole discretion, and set forth in
the Award Agreement. Notwithstanding the foregoing, the rules of Section 5.4
also shall apply to SARs.
6.5 Payment of SAR Amount. Upon exercise of a SAR, a Participant shall
be entitled to receive payment from the Company in an amount determined by
multiplying:
(a) The difference between the Fair Market Value of a Share on
the date of exercise over the exercise price; times
(b) The number of Shares with respect to which the SAR is
exercised.
6.6 Payment Upon Exercise of SAR. At the discretion of the Committee,
payment for a SAR may be in cash, Shares or a combination thereof.
SECTION 7
RESTRICTED STOCK
7.1 Grant of Restricted Stock. Subject to the terms and provisions of
the Plan, the Committee, at any time and from time to time, may grant Shares of
Restricted Stock to Employees and Consultants in such amounts as the Committee,
in its sole discretion, shall determine. The Committee, in its sole discretion,
shall determine the number of Shares to be granted to each Participant, provided
that during any Fiscal Year, no Participant shall be granted more than 500,000
Shares of Restricted Stock.
7.2 Restricted Stock Agreement. Each Award of Restricted Stock shall be
evidenced by an Award Agreement that shall specify the Period of Restriction,
the number of Shares granted, any price to be paid for the Shares, and such
other terms and conditions as the Committee, in its sole discretion, shall
determine. Unless the Committee determines otherwise, Shares of Restricted Stock
shall be held by the Company as escrow agent until the end of the applicable
Period of Restriction and all restrictions on such Shares have lapsed.
7.3 Transferability. Shares of Restricted Stock may not be sold,
transferred, pledged, assigned, or otherwise alienated or hypothecated until the
end of the applicable Period of Restriction.
7.4 Other Restrictions. The Committee, in its sole discretion, may
impose such other restrictions on Shares of Restricted Stock as it may deem
advisable or appropriate, in accordance with this Section 7.4.
7.4.1 General Restrictions. The Committee may set restrictions
based upon the achievement of specific performance objectives (Company-wide,
business unit or individual), applicable federal or state securities laws, or
any other basis determined by the Committee in its discretion.
7.4.2 Section 162(m) Performance Restrictions. For purposes of
qualifying grants of Restricted Stock as "performance-based compensation" under
section 162(m) of the Code, the Committee, in its discretion, may set
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restrictions based upon the achievement of Performance Goals. The Performance
Goals shall be set by the Committee on or before the latest date permissible to
enable the Restricted Stock to qualify as "performance-based compensation" under
section 162(m) of the Code. In granting Restricted Stock which is intended to
qualify under section 162(m) of the Code, the Committee shall follow any
procedures determined by it from time to time to be necessary or appropriate to
ensure qualification of the Restricted Stock under section 162(m) of the Code
(e.g., in determining the Performance Goals).
7.4.3 Legend on Certificates. The Committee, in its discretion, may
legend the certificates representing Restricted Stock to give appropriate notice
of such restrictions. For example, the Committee may determine that some or all
certificates representing Shares of Restricted Stock shall bear the following
legend:
"The sale or other transfer of the shares of stock represented by this
certificate, whether voluntary, involuntary, or by operation of law, is
subject to certain restrictions on transfer as set forth in the Golden
State Bancorp Inc. Omnibus Stock Plan, and in a Restricted Stock
Agreement. A copy of the Plan and such Restricted Stock Agreement may
be obtained from the Secretary of Golden State Bancorp Inc."
7.4.4 Special Rule for Change of Control. Notwithstanding any
contrary provision of the Plan or of any Award Agreement, immediately upon the
occurrence of a Change of Control that occurs prior to a Participant's
Termination of Service, 100% of any outstanding Shares of Restricted Stock shall
be 100% vested in the Participant.
7.5 Removal of Restrictions. Shares of Restricted Stock covered by each
Restricted Stock grant made under the Plan shall be released from escrow as soon
as practicable after the last day of the Period of Restriction. The Committee,
in its discretion, may accelerate the time at which any restrictions shall
lapse, and remove any restrictions. After the restrictions have lapsed, the
Participant shall be entitled to have any legend or legends under Section 7.4
removed from his or her Share certificate, and the Shares shall be freely
transferable by the Participant.
7.6 Voting Rights. During the Period of Restriction, Participants
holding Shares of Restricted Stock granted hereunder may exercise full voting
rights with respect to those Shares, unless otherwise provided in the Award
Agreement.
7.7 Dividends and Other Distributions. During the Period of
Restriction, Participants holding Shares of Restricted Stock shall be entitled
to receive all dividends and other distributions paid with respect to such
Shares unless otherwise provided in the Award Agreement. If any such dividends
or distributions are paid in Shares, the Shares shall be subject to the same
restrictions on transferability and forfeitability as the Shares of Restricted
Stock with respect to which they were paid.
7.8 Return of Restricted Stock to Company. On the date set forth in the
Award Agreement, the Restricted Stock for which restrictions have not lapsed
shall revert to the Company and again shall become available for grant under the
Plan.
SECTION 8
NON-EMPLOYEE DIRECTORS
8.1 Granting of Options. Subject to the terms and provisions of the
Plan, Non-qualified Stock Options may be granted to Non-employee Directors at
any time and from time to time as determined by the Board in its sole
discretion.
8.2 Terms of Options.
8.2.1 Option Agreement. Each Option granted pursuant to this
Section 8 shall be evidenced by a written stock option agreement which
shall be executed by the Non-employee Director and the Company.
8.2.2 Exercise Price. The Exercise Price for the Shares
subject to each Option granted pursuant to this Section 8 may be equal
to, greater than or less than one hundred percent (100%) of the Fair
Market Value of such Shares on the Grant Date as shall be determined by
the Board in its sole discretion.
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8.2.3 Exercisability. Options granted pursuant to this Section 8 shall
be exercisable at such times and be subject to such restrictions and conditions
as the Board shall determine in its sole discretion. After an Option is granted,
the Board, in its sole discretion, may accelerate the exercisability of the
Option.
(a) Special Rule for Change of Control. Notwithstanding any
contrary provision of the Plan or any Award Agreement, immediately upon
the occurrence of a Change of Control that occurs prior to a
Participant's Termination of Service, the right to exercise each Option
then outstanding shall accrue as to 100% of the Shares then subject to
such Option.
8.2.4 Expiration of Options. Each Option shall terminate upon the first
to occur of the following events: (a) The expiration of ten (10) years from the
Grant Date; or
(b) The expiration of ninety (90) days from the date of the
Non-employee Director's Termination of Service for a reason other than
death, Disability or Retirement; or
(c) The expiration of one (1) year from the date of the
Non-employee Director's Termination of Service by reason of the
Non-Employee Director's Disability or Retirement; or
(d) The date for termination of the Option determined by the
Board in its sole discretion and set forth in the written Award
Agreement.
8.2.5 Death of Director. Notwithstanding Section 8.2.4, if a
Non-employee Director dies prior to the expiration of his or her Options in
accordance with Section 8.2.4, his or her Options shall terminate (a) one (1)
year after the date of his or her death, or (b) on the date for termination of
the Option determined by the Board in its sole discretion and set forth in the
written Award Agreement, whichever shall first occur.
8.2.6 Not Incentive Stock Options. Options granted pursuant to this
Section 8 shall not be designated as Incentive Stock Options.
8.3 Other Terms. All provisions of the Plan not inconsistent with this
Section 8 shall apply to Options granted to Non-employee Directors; provided,
however, that Section 5.2 (relating to the Committee's discretion to set the
terms and conditions of Options) shall be inapplicable with respect to
Non-employee Directors.
SECTION 9
MISCELLANEOUS
9.1 No Effect on Employment or Service. Nothing in the Plan shall interfere
with or limit in any way the right of the Company to terminate any Participant's
employment or service at any time, with or without cause. For purposes of the
Plan, transfer of employment of a Participant between the Company and any one of
its Affiliates (or between Affiliates) shall not be deemed a Termination of
Service. Employment with the Company and its Affiliates is on an at-will basis
only.
9.2 Participation. No Employee, Consultant or Non-Employee Director shall
have the right to be selected to receive an Award under this Plan, or, having
been so selected, to be selected to receive a future Award.
9.3 Indemnification. Each person who is or shall have been a member of the
Committee, or of the Board, shall be indemnified and held harmless by the
Company against and from (a) any loss, cost, liability, or expense that may be
imposed upon or reasonably incurred by him or her in connection with or
resulting from any claim, action, suit, or proceeding to which he or she may be
a party or in which he or she may be involved by reason of any action taken or
failure to act under the Plan or any Award Agreement, and (b) from any and all
amounts paid by him or her in settlement thereof, with the Company's approval,
or paid by him or her in satisfaction of any judgment in any such claim, action,
suit, or proceeding against him or her, provided he or she shall give the
Company an opportunity, at its own expense, to
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handle and defend the same before he or she undertakes to handle and defend it
on his or her own behalf. The foregoing right of indemnification shall not be
exclusive of any other rights of indemnification to which such persons may be
entitled under the Company's Certificate of Incorporation or Bylaws, by
contract, as a matter of law, or otherwise, or under any power that the Company
may have to indemnify them or hold them harmless.
9.4 Successors. All obligations of the Company under the Plan, with
respect to Awards granted hereunder, shall be binding on any successor to the
Company, whether the existence of such successor is the result of a direct or
indirect purchase, merger, consolidation or otherwise, of all or substantially
all of the business or assets of the Company.
9.5 Beneficiary Designations. If permitted by the Committee, a
Participant under the Plan may name a beneficiary or beneficiaries to whom any
vested but unpaid Award shall be paid in the event of the Participant's death.
Each such designation shall revoke all prior designations by the Participant and
shall be effective only if given in a form and manner acceptable to the
Committee. In the absence of any such designation, any vested benefits remaining
unpaid at the Participant's death shall be paid to the Participant's estate and,
subject to the terms of the Plan and of the applicable Award Agreement, any
unexercised vested Award may be exercised by the administrator or executor of
the Participant's estate.
9.6 Domestic Relations Order. If permitted by the Committee, and under
such procedures as the Committee may adopt from time to time, an Award may be
transferred to a Participant's spouse, former spouse or dependent pursuant to a
court-approved domestic relations order which relates to the provision of child
support, alimony payments or marital property rights.
9.7 Nontransferability of Awards. Unless otherwise determined by the
Committee, no Award granted under the Plan may be sold, transferred, pledged,
assigned, or otherwise alienated or hypothecated, other than by will, by the
laws of descent and distribution, or to the limited extent provided in Sections
9.5 and 9.6. All rights with respect to an Award granted to a Participant shall
be available during his or her lifetime only to the Participant.
9.8 No Rights as Stockholder. Except to the limited extent provided in
Sections 7.6 and 7.7, no Participant (nor any beneficiary) shall have any of the
rights or privileges of a stockholder of the Company with respect to any Shares
issuable pursuant to an Award (or exercise thereof), unless and until
certificates representing such Shares shall have been issued, recorded on the
records of the Company or its transfer agents or registrars, and delivered to
the Participant (or beneficiary).
9.9 Withholding Requirements. Prior to the delivery of any Shares or
cash pursuant to an Award (or exercise thereof), the Company shall have the
power and the right to deduct (including, but not limited to, deduction through
a broker-assisted cashless exercise) or withhold, or require a Participant to
remit to the Company, an amount sufficient to satisfy federal, state, local and
foreign taxes (including, but not limited to, the Participant's FICA and SDI
obligations) required to be withheld with respect to such Award (or exercise
thereof). Notwithstanding any contrary provision of the Plan, if a Participant
fails to remit to the Company such withholding amount within the time period
specified by the Committee (in its discretion), the Participant's Award may, in
the Committee's discretion, be forfeited and in such case the Participant shall
not receive any of the Shares subject to such Award.
9.10 Withholding Arrangements. The Committee, in its sole discretion
and pursuant to such procedures as it may specify from time to time, may permit
or require a Participant to satisfy all or part of the tax withholding
obligations in connection with an Award by (a) having the Company withhold
otherwise deliverable Shares, or (b) delivering to the Company already-owned
Shares having a Fair Market Value equal to the amount required to be withheld.
The amount of the withholding requirement shall be deemed to include any amount
which the Committee determines, not to exceed the amount determined by using the
maximum federal, state, local and foreign jurisdiction marginal income tax rates
applicable to the Participant with respect to the Award on the date that the
amount of tax to be withheld is to be determined. The Fair Market Value of the
Shares to be withheld or delivered shall be determined as of the date that the
taxes are required to be withheld.
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9.11 Deferrals. The Committee, in its sole discretion, may permit a
Participant to defer receipt of the payment of cash or the delivery of Shares
that would otherwise be delivered to a Participant under the Plan. Any such
deferral elections shall be subject to such rules and procedures as shall be
determined by the Committee in its sole discretion.
SECTION 10
AMENDMENT, TERMINATION AND DURATION
10.1 Amendment, Suspension or Termination. The Board, in its sole
discretion, may amend or terminate the Plan, or any part thereof, at any time
and for any reason. The amendment, suspension or termination of the Plan shall
not, without the consent of the Participant, alter or impair any rights or
obligations under any Award theretofore granted to such Participant. No Award
may be granted during any period of suspension or after termination of the Plan.
10.2 Duration of the Plan. The Plan shall commence on the date
specified herein, and subject to Section 10.1 (regarding the Board's right to
amend or terminate the Plan), shall remain in effect thereafter. However,
without further stockholder approval, no Incentive Stock Option may be granted
under the Plan after ten (10) years from the Effective Date.
SECTION 11
LEGAL CONSTRUCTION
11.1 Gender and Number. Except where otherwise indicated by the
context, any masculine term used herein also shall include the feminine; the
plural shall include the singular and the singular shall include the plural.
11.2 Severability. In the event any provision of the Plan shall be held
illegal or invalid for any reason, the illegality or invalidity shall not affect
the remaining parts of the Plan, and the Plan shall be construed and enforced as
if the illegal or invalid provision had not been included.
11.3 Requirements of Law. The granting of Awards and the issuance of
Shares under the Plan shall be subject to all applicable laws, rules and
regulations, and to such approvals by any governmental agencies or national
securities exchanges as may be required.
11.4 Governing Law. The Plan and all Award Agreements shall be
construed in accordance with and governed by the laws of the State of
California, but without regard to its conflict of law provisions.
11.5 Captions. Captions are provided herein for convenience only, and
shall not serve as a basis for interpretation or construction of the Plan.
EXECUTION
IN WITNESS WHEREOF, Golden State Bancorp Inc., by its duly authorized
officer, has executed the Plan on the date indicated below.
GOLDEN STATE BANCORP INC.
Dated: May 17, 1999
By /s/ Vanessa L. Washington
---------------------------
Name: Vanessa L. Washington
Title: Senior Vice President and Secretary
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EXHIBIT "B"
GOLDEN STATE BANCORP INC.
EXECUTIVE COMPENSATION PLAN
SECTION 1
BACKGROUND, PURPOSE AND DURATION
1.1 Effective Date. The Plan is effective as of March 16, 1999, subject
to approval by an affirmative vote of the holders of a majority of the Shares
which are present in person or by proxy and entitled to vote at the 1999 Annual
Meeting of Stockholders of the Company.
1.2 Purpose of the Plan. The Plan is intended to increase shareholder
value and the success of the Company by motivating key executives (1) to perform
to the best of their abilities, and (2) to achieve the Company's objectives. The
Plan's goals are to be achieved by providing such executives with incentive
awards based on the achievement of goals relating to the performance of the
Company. The Plan is intended to permit the grant of awards that qualify as
performance-based compensation under section 162(m) of the Code.
SECTION 2
DEFINITIONS
The following words and phrases shall have the following meanings
unless a different meaning is plainly required by the context:
2.1 "1934 Act" means the Securities Exchange Act of 1934, as amended.
Reference to a specific section of the 1934 Act or regulation thereunder shall
include such section or regulation, any valid regulation promulgated under such
section, and any comparable provision of any future legislation or regulation
amending, supplementing or superseding such section or regulation.
2.2 "Actual Award" means as to any Performance Period, the actual award
(if any) payable to a Participant for the Performance Period. Each Actual Award
is determined by the Payout Formula for the Performance Period, subject to the
Committee's authority under Section 3.5 to reduce the award otherwise determined
by the Payout Formula.
2.3 "Affiliate" means any corporation or other entity (including, but
not limited to, partnerships and joint ventures) controlled by the Company.
2.4 "Base Salary" means as to any Performance Period, the Participant's
annualized salary rate on the last day of the Performance Period. Such Base
Salary shall be before both (a) deductions for taxes or benefits, and (b)
deferrals of compensation pursuant to Company-sponsored plans.
2.5 "Board" means the Board of Directors of the Company.
2.6 "Change of Control" means the occurrence of any of the following:
(a) The acquisition by any individual, entity or group (within
the meaning of Section 13(d)(3) or 14(d)(2) of the 1934 Act) (a
"Person") of beneficial ownership (within the meaning of Rule 13d-3
promulgated under the 1934 Act) of 20% or more of either (1) the
then-outstanding shares of common stock of the Company (the
"Outstanding Company Common Stock") or (2) the combined voting power of
the then-outstanding voting securities of the Company entitled to vote
generally in the election of directors (the "Outstanding Company Voting
Securities"); provided, however, that for purposes of this paragraph
(a) the following acquisitions shall not constitute, or be deemed to
cause, a Change of Control: (i) any increase in such percentage
ownership of a Person to 20% or more resulting solely from any
acquisition of shares directly from the Company or any acquisition of
shares by the Company, provided, however, that any subsequent
acquisitions of shares by such
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Person that would add, in the aggregate, 2% or more (measured as of the
date of each such subsequent acquisition) to such Person's beneficial
ownership of Outstanding Company Common Stock or Outstanding Company
Voting Securities shall be deemed to constitute a Change of Control,
(ii) any acquisition by any employee benefit plan (or related trust)
sponsored or maintained by the Company or any corporation controlled by
the Company; (iii) any acquisition by Ronald O. Perelman, Gerald J.
Ford or any entity controlled by either or both of them; or (iv) any
acquisition by any corporation pursuant to a transaction which complies
with clauses (1), (2) and (3) of paragraph (c) below; or
(b) Individuals who, as of the date hereof, constitute the
Board (the "Incumbent Board") cease for any reason to constitute at
least a majority of the Board; provided, however, that any individual
becoming a director subsequent to the date hereof whose election, or
nomination for election by the Company's stockholders, was approved by
a vote of at least a majority of the directors then comprising the
Incumbent Board shall be considered as though such individual were a
member of the Incumbent Board, but excluding, for this purpose, any
such individual whose initial assumption of office occurs as a result
of an actual or threatened election contest with respect to the
election or removal of directors or other actual or threatened
solicitation of proxies or consents, by or on behalf of a Person other
than the Board; or
(c) Consummation of a reorganization, merger or consolidation
or sale or other disposition of all or substantially all of the assets
of the Company (a "Business Combination"), in each case, unless,
following such Business Combination, (1) all or substantially all of
the individuals and entities who were the beneficial owners,
respectively, of the then Outstanding Company Common Stock and
Outstanding Company Voting Securities, immediately prior to such
Business Combination beneficially own, directly or indirectly, more
than 50% of, respectively, the then-outstanding shares of common stock
and the combined voting power of the then-outstanding voting securities
entitled to vote generally in the election of directors, as the case
may be, of the corporation resulting from such Business Combination
(including, without limitation, a corporation which as a result of such
transaction owns the Company or all or substantially all of the
Company's assets either directly or through one or more subsidiaries)
in substantially the same proportions as their ownership, immediately
prior to such Business Combination, of the Outstanding Company Common
Stock and Outstanding Company Voting Securities, as the case may be,
(2) no Person (excluding any corporation resulting from such Business
Combination or any employee benefit plan (or related trust) of the
Company or of such corporation resulting from such Business
Combination) beneficially owns, directly or indirectly, 20% or more of,
respectively, the then-outstanding shares of common stock of the
corporation resulting from such Business Combination or the combined
voting power of the then-outstanding voting securities of such
corporation except to the extent that such ownership existed prior to
the Business Combination and (3) individuals who were on the Incumbent
Board continue to constitute at least a majority of the members of the
board of directors of the corporation resulting from the Business
Combination; provided however, that any individual becoming a director
subsequent to the date hereof whose election or nomination for election
by the Company's stockholders, was approved by a vote of at least a
majority of the directors then comprising the Incumbent Board shall be
considered as though such individual were a member of the Incumbent
Board, but excluding, for this purpose, any such individual whose
initial assumption of office occurs as a result of an actual or
threatened election contest with respect to the election or removal of
directors or other actual or threatened solicitation of proxies or
consents, by or on behalf of a Person other than the Board; or
Notwithstanding the foregoing, the occurrence of an event
described in the above paragraphs (a) through (c), inclusive, shall not
be deemed to constitute a change of control if, following the
occurrence of such event, Gerald J. Ford continues to serve as the
Chairman and Chief Executive Officer of the Company (in the case of a
Business Combination, of the surviving company in such Business
Combination). However, if a change of control does not occur solely
because of the operation of the preceding sentence, then a change of
control shall occur upon the subsequent death or permanent disability
of Gerald J. Ford.
(d) Approval by the stockholders of the Company of a complete
liquidation or dissolution of the Company.
2.7 "Code" means the Internal Revenue Code of 1986, as amended.
Reference to a specific section of the Code or regulation thereunder shall
include such section or regulation, any valid regulation promulgated thereunder,
and any
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comparable provision of any future legislation or regulation amending,
supplementing or superseding such section or regulation.
2.8 "Committee" means the committee appointed by the Board (pursuant to
Section 5.1) to administer the Plan.
2.9 "Company" means Golden State Bancorp Inc., a Delaware corporation,
or any successor thereto.
2.10 "Disability" means a permanent and total disability determined in
accordance with uniform and nondiscriminatory standards adopted by the Committee
from time to time.
2.11 "Earnings Per Share" means net income per diluted share as
reported in the Company's audited consolidated statement of income (as included
in the Company's Form 10-K filed pursuant to the 1934 Act) for the period being
measured, computed in accordance with Statement of Financial Accounting
Standards No. 128, "Earnings per Share."
2.12 "Efficiency Ratio" means the ratio of noninterest expense to the
sum of net interest income and noninterest income (excluding goodwill
amortization). Noninterest expense, net interest income and noninterest income
should each agree to such items as reported in the Company's audited
consolidated statement of income (as included in the Company's Form 10-K filed
pursuant to the 1934 Act) for the period being measured, except that the
Committee may, in its sole discretion, elect to exclude any or all of the
following non-recurring items:
(a) gains or losses on the disposition of discontinued
operations
(b) the cumulative effects of changes in accounting principles
(c) the writedown of any asset
(d) charges for restructuring and rationalization programs.
2.13 "Employee" means any employee of the Company or of an Affiliate,
whether such employee is so employed at the time the Plan is adopted or becomes
so employed subsequent to the adoption of the Plan.
2.14 "Fair Market Value" means the last quoted per share selling price
for Shares on the relevant date on the consolidated tape for New York Stock
Exchange listed companies, or if there were no sales on such date, the
arithmetic mean of the highest and lowest quoted selling prices on the nearest
day before and the nearest day after the relevant date, as determined by the
Committee. Notwithstanding the preceding, for federal, state and local income
tax reporting purposes, fair market value shall be determined by the Committee
in accordance with uniform and nondiscriminatory standards adopted by it from
time to time.
2.15 "Fiscal Year" means any fiscal year of the Company.
2.16 "Maximum Award" means as to any aggregate Actual Awards to any
Participant for any Performance Period, $5 million.
2.17 "Net Income" means net income as reported in the Company's audited
consolidated statement of income (as included in the Company's Form 10-K filed
pursuant to the 1934 Act) for the period being measured.
2.18 "Participant" means as to any Performance Period, an Employee who
has been selected by the Committee for participation in the Plan for that
Performance Period.
2.19 "Payout Formula" means as to any Performance Period, the formula
or payout matrix established by the Committee pursuant to Section 3.4 in order
to determine the Actual Awards (if any) to be paid to Participants. The formula
or matrix may differ from Participant to Participant.
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2.20 "Performance Goals" means the goal(s) (or combined goal(s))
determined by the Committee (in its discretion) to be applicable to a
Participant for a Target Award for a Performance Period. As determined by the
Committee, the Performance Goals for any Target Award applicable to a
Participant may provide for a targeted level or levels of achievement using one
or more of the following measures: (a) Pre-Tax Net Income, (b) Net Income, (c)
Efficiency Ratio, (d) Total Shareholder Return, (e) Pre-Tax Return on Average
Equity, (f) Return on Average Equity, (g) Return on Assets, and (h) Earnings Per
Share. The Performance Goals may differ from Participant to Participant and from
award to award. Prior to the Determination Date, the Committee shall determine
whether any significant element(s) shall be included in or excluded from the
calculation of any Performance Goal with respect to any Participants.
"Determination Date" means the latest possible date that will not jeopardize a
Target Award's qualification as performance-based compensation under section
162(m) of the Code.
2.21 "Performance Period" means any period not to exceed three
consecutive Fiscal Years or such other period as determined by the Committee in
its sole discretion.
2.22 "Plan" means the Golden State Bancorp Inc. Executive Compensation
Plan, as set forth in this instrument and as hereafter amended from time to
time.
2.23 "Pre-Tax Net Income" means net income before taxes, minority
interest and extraordinary items as reported in the Company's audited
consolidated statement of income (as included in the Company's Form 10-K filed
pursuant to the 1934 Act) for the period being measured.
2.24 "Pre-Tax Return on Average Equity" means the ratio of net income
before taxes, minority interest and extraordinary items as reported in the
Company's audited consolidated statement of income (as included in the Company's
Form 10-K filed pursuant to the 1934 Act) for the period being measured, as a
percentage of average stockholders' equity for the period being measured, as
included in "Management's Discussion and Analysis of Financial Condition and
Results of Operations" in the Company's Form 10-K filed pursuant to the 1934
Act.
2.25 "Retirement" means, with respect to any Participant, a Termination
of Service after attaining at least age 55 and 10 Years of Service (as defined
under the California Federal Employees' Investment Plan, or any successor plan).
2.26 "Return on Average Assets" means the ratio of net income as
reported in the Company's audited consolidated statement of income (as included
in the Company's Form 10-K filed pursuant to the 1934 Act) for the period being
measured, as a percentage of average assets for the period being measured, as
included in "Management's Discussion and Analysis of Financial Condition and
Results of Operations" in the Company's Form 10-K filed pursuant to the 1934
Act.
2.27 "Return on Average Equity" means the ratio of net income as
reported in the Company's audited consolidated statement of income (as included
in the Company's Form 10-K filed pursuant to the 1934 Act) for the period being
measured, as a percentage of average stockholders' equity for the period being
measured, as included in "Management's Discussion and Analysis of Financial
Condition and Results of Operations" in the Company's Form 10-K filed pursuant
to the 1934 Act.
2.28 "Shares" means shares of the Company's common stock, $1.00 par
value.
2.29 "Target Award" means the target award payable under the Plan to a
Participant for the Performance Period, expressed as a percentage of his or her
Base Salary, as determined by the Committee in accordance with Section 3.3.
2.30 "Termination of Service" means a cessation of the
employee-employer relationship between an Employee and the Company or an
Affiliate for any reason, including, but not by way of limitation, a termination
by resignation, discharge, death, Disability, Retirement, or the disaffiliation
of an Affiliate, but excluding any such termination where there is a
simultaneous reemployment by the Company or an Affiliate.
2.31 "Total Shareholder Return" means as to any Performance Period, the
total return (change in share price plus reinvestment of any dividends) of a
Share.
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SECTION 3
SELECTION OF PARTICIPANTS AND DETERMINATION OF AWARDS
3.1 Selection of Participants. The Committee, in its sole discretion,
shall select the Employees of the Company who shall be Participants for any
Performance Period. Participation in the Plan is in the sole discretion of the
Committee, and on a Performance Period by Performance Period basis. Accordingly,
an Employee who is a Participant for a given Performance Period in no way is
guaranteed or assured of being selected for participation in any other
Performance Period or Periods.
3.2 Determination of Performance Goals. The Committee, in its sole
discretion, shall establish the Performance Goals for each Participant for the
Performance Period. Such Performance Goals shall be set forth in writing.
3.3 Determination of Target Awards. The Committee, in its sole
discretion, shall establish a Target Award for each Participant. Each
Participant's Target Award shall be determined by the Committee in its sole
discretion, and each Target Award shall be set forth in writing.
3.4 Determination of Payout Formula or Formulae . On or prior to the
Determination Date, the Committee, in its sole discretion, shall establish a
Payout Formula or Formulae for purposes of determining the Actual Award (if any)
payable to each Participant. Each Payout Formula shall (a) be in writing, (b) be
based on a comparison of actual performance to the Performance Goals, (c)
provide for the payment of a Participant's Target Award if the Performance Goals
for the Performance Period are achieved, and (d) provide for an Actual Award
greater than or less than the Participant's Target Award, depending upon the
extent to which actual performance exceeds or falls below the Performance Goals.
Notwithstanding the preceding, no Participant's Actual Award under the Plan may
exceed his or her Maximum Award.
3.5 Determination of Actual Awards. After the end of each Performance
Period, the Committee shall certify in writing the extent to which the
Performance Goals applicable to each Participant for the Performance Period were
achieved or exceeded. The Actual Award for each Participant shall be determined
by applying the Payout Formula to the level of actual performance which has been
certified by the Committee. Notwithstanding any contrary provision of the Plan,
the Committee, in its sole discretion, may (a) eliminate or reduce the Actual
Award payable to any Participant below that which otherwise would be payable
under the Payout Formula, and (b) determine what Actual Award, if any, will be
paid in the event of a Termination of Service prior to the end of the
Performance Period.
3.6 Special Rule for Change of Control. Notwithstanding any contrary
provision of the Plan, immediately upon the occurrence of a Change of Control
that occurs prior to a Participant's Termination of Service, 100% of any Target
Award shall be deemed to be earned and shall be immediately payable to the
Participant.
SECTION 4
PAYMENT OF AWARDS
4.1 Right to Receive Payment. Each Actual Award that may become payable
under the Plan shall be paid solely from the general assets of the Company.
Nothing in this Plan shall be construed to create a trust or to establish or
evidence any Participant's claim of any right other than as an unsecured general
creditor with respect to any payment to which he or she may be entitled.
4.2 Timing of Payment. Payment of each Actual Award shall be made as
soon as practicable, but no later than 160 days after the end of the Performance
Period during which the Award was earned.
4.3 Form of Payment. Each Actual Award normally shall be paid in cash
(or its equivalent) in a single lump sum. However, the Committee, in its sole
discretion, may declare up to 50% of any Actual Award, payable in restricted
stock granted under the Company's Omnibus Stock Plan. The number of Shares of
restricted stock granted shall be determined by dividing the cash amount
foregone by the Fair Market Value of a Share on the date that the cash payment
otherwise would have been made.
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4.4 Payment in the Event of Death. If a Participant dies prior to the
payment of an Actual Award earned by him or her prior to death for a prior
Performance Period, the Award shall be paid to his or her estate.
SECTION 5
ADMINISTRATION
5.1 Committee is the Administrator. The Plan shall be administered by
the Committee. The Committee shall consist of not less than two (2) members of
the Board. The members of the Committee shall be appointed from time to time by,
and serve at the pleasure of, the Board. Each member of the Committee shall
qualify as an "outside director" under section 162(m) of the Code. If it is
later determined that one or more members of the Committee do not so qualify,
actions taken by the Committee prior to such determination shall be valid
despite such failure to qualify.
5.2 Committee Authority. It shall be the duty of the Committee to
administer the Plan in accordance with the Plan's provisions. The Committee
shall have all powers and discretion necessary or appropriate to administer the
Plan and to control its operation, including, but not limited to, the power to
(a) determine which Employees shall be granted awards, (b) prescribe the terms
and conditions of awards, (c) interpret the Plan and the awards, (d) adopt such
procedures and subplans as are necessary or appropriate to permit participation
in the Plan by Employees who are foreign nationals or employed outside of the
United States, (e) adopt rules for the administration, interpretation and
application of the Plan as are consistent therewith, and (f) interpret, amend or
revoke any such rules.
5.3 Decisions Binding. All determinations and decisions made by the
Committee, the Board, and any delegate of the Committee pursuant to the
provisions of the Plan shall be final, conclusive, and binding on all persons,
and shall be given the maximum deference permitted by law.
5.4 Delegation by the Committee. The Committee, in its sole discretion
and on such terms and conditions as it may provide, may delegate all or part of
its authority and powers under the Plan to one or more directors and/or officers
of the Company; provided, however, that the Committee may delegate its authority
and powers only with respect to awards that are not intended to qualify as
performance-based compensation under section 162(m) of the Code.
SECTION 6
GENERAL PROVISIONS
6.1 Tax Withholding. The Company shall withhold all applicable taxes
from any Actual Award, including any federal, state and local taxes (including,
but not limited to, the Participant's FICA and SDI obligations).
6.2 No Effect on Employment or Service. Nothing in the Plan shall
interfere with or limit in any way the right of the Company to terminate any
Participant's employment or service at any time, with or without cause. For
purposes of the Plan, transfer of employment of a Participant between the
Company and any one of its Affiliates (or between Affiliates) shall not be
deemed a Termination of Service. Employment with the Company and its Affiliates
is on an at-will basis only. The Company expressly reserves the right, which may
be exercised at any time and without regard to when during a Performance Period
such exercise occurs, to terminate any individual's employment with or without
cause, and to treat him or her without regard to the effect which such treatment
might have upon him or her as a Participant.
6.3 Participation. No Employee shall have the right to be selected to
receive an award under this Plan, or, having been so selected, to be selected to
receive a future award.
6.4 Indemnification. Each person who is or shall have been a member of
the Committee, or of the Board, shall be indemnified and held harmless by the
Company against and from (a) any loss, cost, liability, or expense that may be
imposed upon or reasonably incurred by him or her in connection with or
resulting from any claim, action, suit, or proceeding to which he or she may be
a party or in which he or she may be involved by reason of any action taken or
failure to act under the Plan or any award, and (b) from any and all amounts
paid by him or her in settlement thereof, with the Company's approval, or paid
by him or her in satisfaction of any judgment in any such claim, action, suit,
or
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proceeding against him or her, provided he or she shall give the Company an
opportunity, at its own expense, to handle and defend the same before he or she
undertakes to handle and defend it on his or her own behalf. The foregoing right
of indemnification shall not be exclusive of any other rights of indemnification
to which such persons may be entitled under the Company's Certificate of
Incorporation or Bylaws, by contract, as a matter of law, or otherwise, or under
any power that the Company may have to indemnify them or hold them harmless.
6.5 Successors. All obligations of the Company under the Plan, with
respect to awards granted hereunder, shall be binding on any successor to the
Company, whether the existence of such successor is the result of a direct or
indirect purchase, merger, consolidation, or otherwise, of all or substantially
all of the business or assets of the Company.
6.6 Beneficiary Designations. If permitted by the Committee, a
Participant under the Plan may name a beneficiary or beneficiaries to whom any
vested but unpaid award shall be paid in the event of the Participant's death.
Each such designation shall revoke all prior designations by the Participant and
shall be effective only if given in a form and manner acceptable to the
Committee. In the absence of any such designation, any vested benefits remaining
unpaid at the Participant's death shall be paid to the Participant's estate.
6.7 Nontransferability of Awards. No award granted under the Plan may
be sold, transferred, pledged, assigned, or otherwise alienated or hypothecated,
other than by will, by the laws of descent and distribution, or to the limited
extent provided in Section 6.6. All rights with respect to an award granted to a
Participant shall be available during his or her lifetime only to the
Participant.
6.8 Deferrals. The Committee, in its sole discretion, may permit a
Participant to defer receipt of the payment of cash that would otherwise be
delivered to a Participant under the Plan. Any such deferral elections shall be
subject to such rules and procedures as shall be determined by the Committee in
its sole discretion.
SECTION 7
AMENDMENT, TERMINATION AND DURATION
7.1 Amendment, Suspension or Termination. The Board, in its sole
discretion, may amend or terminate the Plan, or any part thereof, at any time
and for any reason. The amendment, suspension or termination of the Plan shall
not, without the consent of the Participant, alter or impair any rights or
obligations under any Target Award theretofore granted to such Participant. No
award may be granted during any period of suspension or after termination of the
Plan.
7.2 Duration of the Plan. The Plan shall commence on the date specified
herein, and subject to Section 7.1 (regarding the Board's right to amend or
terminate the Plan), shall remain in effect thereafter.
SECTION 8
LEGAL CONSTRUCTION
8.1 Gender and Number. Except where otherwise indicated by the context,
any masculine term used herein also shall include the feminine; the plural shall
include the singular and the singular shall include the plural.
8.2 Severability. In the event any provision of the Plan shall be held
illegal or invalid for any reason, the illegality or invalidity shall not affect
the remaining parts of the Plan, and the Plan shall be construed and enforced as
if the illegal or invalid provision had not been included.
8.3 Requirements of Law. The granting of awards under the Plan shall be
subject to all applicable laws, rules and regulations, and to such approvals by
any governmental agencies or national securities exchanges as may be required.
8.4 Governing Law. The Plan and all awards shall be construed in
accordance with and governed by the laws of the State of California, but without
regard to its conflict of law provisions.
7
<PAGE>
8.5 Captions. Captions are provided herein for convenience only, and
shall not serve as a basis for interpretation or construction of the Plan.
EXECUTION
IN WITNESS WHEREOF, Golden State Bancorp Inc., by its duly authorized
officer, has executed the Plan on the date indicated below.
GOLDEN STATE BANCORP INC.
Dated: May 17, 1999
By: /s/ Vanessa L. Washington
----------------------------
Name: Vanessa L. Washington
Title: Senior Vice President and Secretary
8
<TABLE> <S> <C>
<PAGE>
<ARTICLE> 9
<LEGEND>
This schedule contains summary financial information extracted from the
consolidated balance sheets and statements of income found on pages 3 and 4 of
the Company's unaudited financial statements for the six months ended June 30,
1999.
</LEGEND>
<RESTATED>
<CIK> 0001019508
<NAME> GOLDEN STATE BANCORP INC.
<MULTIPLIER> 1,000
<CURRENCY> US$
<S> <C>
<PERIOD-TYPE> 6-MOS
<FISCAL-YEAR-END> DEC-31-1999
<PERIOD-START> JAN-01-1999
<PERIOD-END> JUN-30-1999
<EXCHANGE-RATE> 1
<CASH> 548,519
<INT-BEARING-DEPOSITS> 23
<FED-FUNDS-SOLD> 0
<TRADING-ASSETS> 0
<INVESTMENTS-HELD-FOR-SALE> 15,076,025
<INVESTMENTS-CARRYING> 2,655,297
<INVESTMENTS-MARKET> 2,685,827
<LOANS> 33,723,697<F1>
<ALLOWANCE> 578,369
<TOTAL-ASSETS> 56,835,305
<DEPOSITS> 23,920,689
<SHORT-TERM> 15,941,164
<LIABILITIES-OTHER> 1,271,557
<LONG-TERM> 13,635,888
0
0
<COMMON> 134,571
<OTHER-SE> 1,398,687
<TOTAL-LIABILITIES-AND-EQUITY> 56,835,305
<INTEREST-LOAN> 1,202,470
<INTEREST-INVEST> 594,417
<INTEREST-OTHER> 0
<INTEREST-TOTAL> 1,796,887
<INTEREST-DEPOSIT> 444,058
<INTEREST-EXPENSE> 1,191,828
<INTEREST-INCOME-NET> 605,059
<LOAN-LOSSES> 10,000
<SECURITIES-GAINS> 335
<EXPENSE-OTHER> 482,080
<INCOME-PRETAX> 325,499
<INCOME-PRE-EXTRAORDINARY> 154,480
<EXTRAORDINARY> 0
<CHANGES> 0
<NET-INCOME> 154,480
<EPS-BASIC> 1.15
<EPS-DILUTED> 1.09
<YIELD-ACTUAL> 6.95
<LOANS-NON> 189,775
<LOANS-PAST> 0
<LOANS-TROUBLED> 29,838
<LOANS-PROBLEM> 86,048
<ALLOWANCE-OPEN> 588,533
<CHARGE-OFFS> 21,483
<RECOVERIES> 1,989
<ALLOWANCE-CLOSE> 578,369
<ALLOWANCE-DOMESTIC> 39,709
<ALLOWANCE-FOREIGN> 0
<ALLOWANCE-UNALLOCATED> 538,660
<FN>
<F1>Loans includes Loans held for sale of $2,143,127 and Allowance for loan losses
of $578,369.
</FN>
</TABLE>
