<PAGE>
UNITED STATES SECURITIES AND EXCHANGE COMMISSION
Washington, D.C. 20549
FORM 10-Q
(Mark one)
[X] QUARTERLY REPORT PURSUANT TO SECTION 13 OR 15(d) OF THE
SECURITIES EXCHANGE ACT OF 1934
For the quarterly period ended September 30, 2000
-------------------------------------------------
or
[ ] TRANSITION REPORT PURSUANT TO SECTION 13 OR 15(d) OF THE
SECURITIES EXCHANGE ACT OF 1934
For the transition period from N/A to N/A
---------------------- -----------------------
Commission File Number: 333-28037
--------------------------------------------------------
Golden State Bancorp Inc.
--------------------------------------------------------------------------------
(Exact name of registrant as specified in its charter)
Delaware 95-4642135
--------------------------------------- ----------------------------------------
(State or other jurisdiction of (I.R.S. Employer Identification No.)
incorporation or organization)
135 Main Street, San Francisco, CA 94105
-------------------------------------- -----------------------------------------
(Address of principal executive offices) (Zip Code)
415-904-1100
--------------------------------------------------------------------------------
(Registrant's telephone number, including area code)
N/A
--------------------------------------------------------------------------------
(Former name, former address and former fiscal year,
if changed since last report)
Indicate by check mark whether the registrant (1) has filed all reports
required to be filed by Section 13 or 15(d) of the Securities Exchange Act of
1934 during the preceding 12 months (or for such shorter period that the
registrant was required to file such reports), and (2) has been subject to such
filing requirements for the past 90 days. X Yes No
--- ---
The number of shares outstanding of registrant's $1.00 par value common
stock, as of the close of business on October 31, 2000: 134,238,004 shares.
Page 1
<PAGE>
GOLDEN STATE BANCORP INC.
THIRD QUARTER 2000 REPORT ON FORM 10-Q
TABLE OF CONTENTS
PART I. FINANCIAL INFORMATION PAGE
--------------------- ----
Item 1. Consolidated Financial Statements
Unaudited Consolidated Balance Sheets
September 30, 2000 and December 31, 1999......................3
Unaudited Consolidated Statements of Income
Nine Months Ended September 30, 2000 and 1999.................4
Unaudited Consolidated Statements of Income
Three Months Ended September 30, 2000 and 1999................5
Unaudited Consolidated Statements of Comprehensive Income
Nine Months Ended September 30, 2000 and 1999.................6
Unaudited Consolidated Statements of Comprehensive Income
Three Months Ended September 30, 2000 and 1999................7
Unaudited Consolidated Statements of Stockholders' Equity
Nine Months Ended September 30, 2000..........................8
Unaudited Consolidated Statements of Cash Flows
Nine Months Ended September 30, 2000 and 1999.................9
Notes to Unaudited Consolidated Financial Statements.........11
Item 2. Management's Discussion and Analysis of
Financial Condition and Results of Operations................23
Item 3. Quantitative and Qualitative Disclosures About Market Risk...49
PART II. OTHER INFORMATION
-----------------
Item 1. Legal Proceedings............................................50
Item 2. Changes in Securities........................................50
Item 3. Defaults Upon Senior Securities..............................50
Item 4. Submission of Matters to a Vote of Security Holders..........50
Item 5. Other Information............................................50
Item 6. Exhibits and Reports on Form 8-K.............................51
Signatures...............................................................52
Page 2
<PAGE>
GOLDEN STATE BANCORP INC. AND SUBSIDIARIES
Consolidated Balance Sheets
September 30, 2000 and December 31, 1999
(Unaudited)
(dollars in thousands, except per share data)
<TABLE>
<CAPTION>
September 30, December 31,
Assets 2000 1999
------ ------------- ------------
<S> <C> <C>
Cash and due from banks $ 583,097 $ 508,959
Interest-bearing deposits in other banks 108 5
Short-term investment securities 73,841 84,061
----------- -----------
Cash and cash equivalents 657,046 593,025
Securities available for sale, at fair value 631,957 1,075,766
Securities held to maturity 594,230 185,357
Mortgage-backed securities available for sale, at fair value 10,771,448 13,764,565
Mortgage-backed securities held to maturity 2,997,522 2,149,696
Loans held for sale, net 874,663 729,062
Loans receivable, net 39,047,992 33,953,461
Investment in Federal Home Loan Bank ("FHLB") System 1,338,801 1,167,144
Premises and equipment, net 315,572 324,582
Foreclosed real estate, net 23,089 45,091
Accrued interest receivable 352,089 321,596
Intangible assets (net of accumulated amortization of $230,745
at September 30, 2000 and $183,433 at December 31, 1999) 727,198 819,561
Mortgage servicing rights 1,515,806 1,272,393
Other assets 712,998 617,761
----------- -----------
Total assets $60,560,411 $57,019,060
=========== ===========
Liabilities, Minority Interest and Stockholders' Equity
-------------------------------------------------------
Deposits $23,200,165 $23,035,757
Securities sold under agreements to repurchase 5,338,055 5,481,747
Borrowings 28,365,117 25,668,626
Other liabilities 1,227,358 771,147
----------- -----------
Total liabilities 58,130,695 54,957,277
----------- -----------
Commitments and contingencies -- --
Minority interest 500,000 500,000
Stockholders' equity:
Common stock ($1.00 par value, 250,000,000 shares
authorized, 150,615,546 and 134,720,685 shares issued at
September 30, 2000 and December 31, 1999, respectively) 150,616 134,721
Issuable shares 132,107 204,681
Additional paid-in capital 1,541,936 1,378,735
Accumulated other comprehensive loss (202,250) (275,209)
Retained earnings (substantially restricted) 623,044 371,096
Treasury stock (16,383,058 shares and 12,478,097 shares at
September 30, 2000 and December 31, 1999, respectively) (315,737) (252,241)
----------- -----------
Total stockholders' equity 1,929,716 1,561,783
----------- -----------
Total liabilities, minority interest and stockholders' equity $60,560,411 $57,019,060
=========== ===========
</TABLE>
See accompanying notes to unaudited consolidated financial statements.
Page 3
<PAGE>
GOLDEN STATE BANCORP INC. AND SUBSIDIARIES
Consolidated Statements of Income
Nine Months Ended September 30, 2000 and 1999
(Unaudited)
(dollars in thousands, except per share data)
<TABLE>
<CAPTION>
Nine Months Ended September 30,
--------------------------------
2000 1999
---------- ----------
<S> <C> <C>
Interest income:
Loans receivable $2,085,599 $1,721,858
Mortgage-backed securities available for sale 625,205 645,539
Mortgage-backed securities held to maturity 149,265 137,810
Loans held for sale 46,405 95,958
Securities available for sale 44,426 57,513
Securities held to maturity 19,628 9,053
Interest-bearing deposits in other banks 4,582 3,851
Dividends on FHLB stock 70,305 43,143
---------- ----------
Total interest income 3,045,415 2,714,725
---------- ----------
Interest expense:
Deposits 679,138 667,387
Securities sold under agreements to repurchase 267,622 188,085
Borrowings 1,235,589 967,102
---------- ----------
Total interest expense 2,182,349 1,822,574
Net interest income 863,066 892,151
---------- ----------
Provision for loan losses -- 10,000
Net interest income after provision for loan losses 863,066 882,151
---------- ----------
Noninterest income:
Loan servicing fees, net 138,744 108,358
Customer banking fees and service charges 147,284 138,820
Gain on sale, settlement and transfer of loans, net 37,608 25,385
(Loss) gain on sale of assets, net (15,348) 18,296
Other income 22,927 24,135
---------- ----------
Total noninterest income 331,215 314,994
---------- ----------
Noninterest expense:
Compensation and employee benefits 324,750 300,489
Occupancy and equipment 119,661 110,224
Professional fees 28,739 39,894
Loan expense 21,145 29,249
Foreclosed real estate operations, net (4,047) (5,068)
Amortization of intangible assets 47,312 52,794
Merger and integration costs -- 7,747
Other expense 153,045 168,933
---------- ----------
Total noninterest expense 690,605 704,262
---------- ----------
Income before income taxes, minority interest and extraordinary items 503,676 492,883
Income tax expense 62,221 105,759
Minority interest: provision in lieu of income tax expense 161,688 122,684
Minority interest: other 21,580 28,338
---------- ----------
Income before extraordinary items 258,187 236,102
Extraordinary items - gain on early extinguishment of debt, net of applicable
taxes of $2,083 in 2000 3,014 --
---------- ----------
Net income $ 261,201 $ 236,102
========== ==========
Earnings per share:
Basic
Income before extraordinary items $1.87 $1.78
Extraordinary items 0.02 --
----- -----
Net income $1.89 $1.78
===== =====
Diluted
Income before extraordinary items $1.81 $1.67
Extraordinary items 0.02 --
----- -----
Net income $1.83 $1.67
===== =====
</TABLE>
See accompanying notes to unaudited consolidated financial statements.
Page 4
<PAGE>
GOLDEN STATE BANCORP INC. AND SUBSIDIARIES
Consolidated Statements of Income
Three Months Ended September 30, 2000 and 1999
(Unaudited)
(dollars in thousands, except per share data)
<TABLE>
<CAPTION>
Three Months Ended September 30,
----------------------------------
2000 1999
----------- ----------
<S> <C> <C>
Interest income:
Loans receivable $ 742,092 $587,080
Mortgage-backed securities available for sale 189,661 221,923
Mortgage-backed securities held to maturity 58,428 41,910
Loans held for sale 17,719 28,266
Securities available for sale 11,450 19,399
Securities held to maturity 10,147 2,750
Interest-bearing deposits in other banks 1,198 1,551
Dividends on FHLB stock 25,195 14,959
---------- --------
Total interest income 1,055,890 917,838
---------- --------
Interest expense:
Deposits 235,992 223,329
Securities sold under agreements to repurchase 94,888 80,475
Borrowings 439,364 326,942
---------- --------
Total interest expense 770,244 630,746
---------- --------
Net interest income 285,646 287,092
Provision for loan losses -- --
---------- --------
Net interest income after provision for loan losses 285,646 287,092
---------- --------
Noninterest income:
Loan servicing fees, net 48,152 38,068
Customer banking fees and service charges 48,560 47,453
Gain on sale, settlement and transfer of loans, net 10,546 4,932
Gain on sale of assets, net 688 3,187
Other income 6,651 8,834
---------- --------
Total noninterest income 114,597 102,474
---------- --------
Noninterest expense:
Compensation and employee benefits 108,367 97,831
Occupancy and equipment 42,746 38,528
Professional fees 10,536 12,625
Loan expense 7,142 7,109
Foreclosed real estate operations, net (669) (3,000)
Amortization of intangible assets 15,405 17,626
Other expense 47,430 51,463
---------- --------
Total noninterest expense 230,957 222,182
---------- --------
Income before income taxes and minority interest 169,286 167,384
Income tax expense (benefit) 73,976 (45,353)
Minority interest: provision in lieu of income tax expense -- 122,684
Minority interest: other 6,797 8,431
---------- --------
Net income $ 88,513 $ 81,622
========== ========
Earnings per share:
Basic $0.63 $0.63
Diluted 0.62 0.58
</TABLE>
See accompanying notes to unaudited consolidated financial statements.
Page 5
<PAGE>
GOLDEN STATE BANCORP INC. AND SUBSIDIARIES
Consolidated Statements of Comprehensive Income
Nine Months Ended September 30, 2000 and 1999
(Unaudited)
(in thousands)
<TABLE>
<CAPTION>
Nine Months Ended September 30,
--------------------------------
2000 1999
-------- ---------
<S> <C> <C>
Net income $261,201 $ 236,102
Other comprehensive income (loss), net of tax:
Unrealized holding gain (loss) on securities available for sale:
Unrealized holding gain (loss) arising during the period 59,292 (204,906)
Less: reclassification adjustment for loss (gain) included
in net income 10,859 (743)
-------- ---------
70,151 (205,649)
Amortization of market adjustment for securities
transferred from available for sale to held to maturity 2,808 --
-------- ---------
Other comprehensive income (loss) 72,959 (205,649)
-------- ---------
Comprehensive income $334,160 $ 30,453
======== =========
</TABLE>
See accompanying notes to unaudited consolidated financial statements.
Page 6
<PAGE>
GOLDEN STATE BANCORP INC. AND SUBSIDIARIES
Consolidated Statements of Comprehensive Income
Three Months Ended September 30, 2000 and 1999
(Unaudited)
(in thousands)
<TABLE>
<CAPTION>
Three Months Ended September 30,
---------------------------------
2000 1999
-------- ---------
<S> <C> <C>
Net income $ 88,513 $ 81,622
Other comprehensive income (loss), net of tax:
Unrealized holding gain (loss) on securities available for sale:
Unrealized holding gain (loss) arising during the period 79,028 (43,571)
Less: reclassification adjustment for loss (gain) included
in net income (231) (549)
-------- --------
78,797 (44,120)
Amortization of market adjustment for securities
transferred from available for sale to held to maturity 2,138 --
-------- --------
Other comprehensive income (loss) 80,935 (44,120)
-------- --------
Comprehensive income $169,448 $ 37,502
======== ========
</TABLE>
See accompanying notes to unaudited consolidated financial statements.
Page 7
<PAGE>
GOLDEN STATE BANCORP INC. AND SUBSIDIARIES
Consolidated Statement of Stockholders' Equity
Nine Months Ended September 30, 2000
(Unaudited)
(dollars in thousands)
<TABLE>
<CAPTION>
Accumulated Retained
Common Stock Additional Other Earnings
----------------------- Issuable Paid-in Comprehensive (Substantially
Shares Amount Shares Capital Loss Restricted)
----------- -------- -------- ---------- ------------- --------------
<S> <C> <C> <C> <C> <C> <C>
Balance at December 31, 1999 134,720,685 $134,721 $ 204,681 $1,378,735 $(275,209) $371,096
Net income -- -- -- -- -- 261,201
Change in net unrealized holding loss
on securities available for sale -- -- -- -- 70,151 --
Amortization of unrealized holding
loss on securities held to maturity -- -- -- -- 2,808 --
Adjustment to contribution receivable
from GSB Investments and
Hunter's Glen in respect of their
proportionate ownership of the
California Federal Goodwill
Litigation Asset -- -- -- -- -- 3,767
Issuable shares adjustment for
tax refund and related interest -- -- 39,455 (38,066) -- --
Issuable shares (pro-rata 2000 usage
of pre-merger NOLs) -- -- 126,283 -- -- --
Pro-rata adjustment to pre-merger tax
benefits recorded as goodwill -- -- -- (29,586) -- --
Distribution of issuable shares 4,882,904 4,883 (100,000) 95,117 -- --
Cancellation of restricted shares (2,025) (2) -- 2 -- --
Impact of restricted common stock 220,327 220 -- 2,522 -- --
Exercise of stock options and warrants 10,793,655 10,794 -- 118,905 -- --
Purchase of treasury stock -- -- -- -- -- --
Sale of common stock in treasury -- -- -- (94) -- --
Dividends on common stock -- -- -- -- -- (13,020)
Cash settlement resulting in the
extinguishment of issuable shares -- -- (138,312) 14,401 -- --
----------- -------- --------- ---------- --------- --------
Balance at September 30, 2000 150,615,546 $150,616 $ 132,107 $1,541,936 $(202,250) $623,044
=========== ======== ========= ========== ========= ========
(Continued)
See accompanying notes to unaudited consolidated financial statements.
</TABLE>
<PAGE>
GOLDEN STATE BANCORP INC. AND SUBSIDIARIES
Consolidated Statement of Stockholders' Equity
Nine Months Ended September 30, 2000
(Unaudited)
(dollars in thousands)
<TABLE>
<CAPTION>
Common Stock
in Treasury Total
------------------------- Stockholders'
Shares Amount Equity
----------- --------- -------------
<S> <C> <C> <C>
Balance at December 31, 1999 (12,478,097) $(252,241) $1,561,783
Net income -- -- 261,201
Change in net unrealized holding loss
on securities available for sale -- -- 70,151
Amortization of unrealized holding
loss on securities held to maturity -- -- 2,808
Adjustment to contribution receivable
from GSB Investments and
Hunter's Glen in respect of their
proportionate ownership of the
California Federal Goodwill
Litigation Asset -- -- 3,767
Issuable shares adjustment for
tax refund and related interest -- -- 1,389
Issuable shares (pro-rata 2000 usage
of pre-merger NOLs) -- -- 126,283
Pro-rata adjustment to pre-merger tax
benefits recorded as goodwill -- -- (29,586)
Distribution of issuable shares -- -- --
Cancellation of restricted shares -- -- --
Impact of restricted common stock -- -- 2,742
Exercise of stock options and warrants -- -- 129,699
Purchase of treasury stock (3,916,411) (63,724) (63,724)
Sale of common stock in treasury 11,450 228 134
Dividends on common stock -- -- (13,020)
Cash settlement resulting in the
extinguishment of issuable shares -- -- (123,911)
----------- --------- ----------
Balance at September 30, 2000 (16,383,058) $(315,737) $1,929,716
=========== ========= ==========
See accompanying notes to unaudited consolidated financial statements.
</TABLE>
Page 8
<PAGE>
GOLDEN STATE BANCORP INC. AND SUBSIDIARIES
Consolidated Statements of Cash Flows
Nine Months Ended September 30, 2000 and 1999
(Unaudited)
(in thousands)
<TABLE>
<CAPTION>
Nine Months Ended September 30,
--------------------------------
2000 1999
----------- -----------
<S> <C> <C>
Cash flows from operating activities:
Net income $ 261,201 $ 236,102
Adjustments to reconcile net income to net cash provided by
operating activities:
Amortization of intangible assets 47,312 52,794
(Accretion) amortization of purchase accounting premiums and
discounts, net (27) 8,902
Accretion of discount on borrowings 813 756
Amortization of mortgage servicing rights 149,037 157,782
Provision for loan losses -- 10,000
Loss (gain) on sale of assets, net 15,348 (18,296)
Gain on sale of branches, net -- (2,343)
Gain on sale of foreclosed real estate, net (7,591) (10,494)
Loss on sale, settlement and transfer of loans, net 52,213 147,013
Capitalization of originated mortgage servicing rights (89,821) (172,398)
Extraordinary items - gain on early extinguishment of debt, net (3,014) --
Depreciation and amortization of premises and equipment 41,351 29,925
Amortization of deferred debt issuance costs 5,511 5,456
FHLB stock dividends (70,305) (43,143)
Purchases and originations of loans held for sale (3,789,358) (7,217,334)
Net proceeds from the sale of loans held for sale 3,522,307 8,509,343
(Increase) decrease in other assets (31,236) 206,050
(Increase) decrease in accrued interest receivable (29,255) 2,040
Increase (decrease) in other liabilities 271,540 (49,713)
Amortization of deferred compensation expense-restricted common stock 1,500 238
Minority interest: provision in lieu of income taxes 161,688 --
Minority interest: other 21,580 28,338
----------- -----------
Net cash provided by operating activities $ 530,794 $ 1,881,018
----------- -----------
</TABLE>
(Continued)
See accompanying notes to unaudited consolidated financial statements.
Page 9
<PAGE>
GOLDEN STATE BANCORP INC. AND SUBSIDIARIES
Consolidated Statements of Cash Flows (continued)
Nine Months Ended September 30, 2000 and 1999
(Unaudited)
(in thousands)
<TABLE>
<CAPTION>
Nine Months Ended September 30,
----------------------------------
2000 1999
------------ ------------
<S> <C> <C>
Cash flows from investing activities:
Downey Acquisition $ (379,314) $ --
Nevada Purchase -- 458,943
Purchases of securities available for sale (33,388) (791,952)
Proceeds from maturities of securities available for sale 35,469 390,328
Purchases of securities held to maturity (2,849) (27,527)
Principal payments and proceeds from maturities of securities held to
maturity 41,747 64,855
Purchases of mortgage-backed securities available for sale (58,340) (4,140,171)
Principal payments on mortgage-backed securities available for sale 1,438,573 3,088,120
Proceeds from sales of mortgage-backed securities available for sale 666,924 193,732
Principal payments on mortgage-backed securities held to maturity 315,554 504,968
Proceeds from sales of loans 62,360 16,820
Net increase in loans receivable (3,671,238) (1,168,370)
Purchases of loans receivable (1,213,023) (1,218,415)
Purchases of FHLB stock, net (107,570) (98,517)
Purchases of premises and equipment (35,141) (79,832)
Proceeds from disposal of premises and equipment 2,990 47,002
Proceeds from sales of foreclosed real estate 63,947 114,938
Purchases of mortgage servicing rights (303,061) (289,922)
Proceeds from sales of mortgage servicing rights 765 30,616
------------ ------------
Net cash used in investing activities (3,175,595) (2,904,384)
------------ ------------
Cash flows from financing activities:
Branch sales -- (69,340)
Net increase (decrease) in deposits 165,605 (1,412,908)
Proceeds from additional borrowings 29,518,911 22,388,086
Principal payments on borrowings (26,779,900) (21,751,828)
Net (decrease) increase in securities sold under
agreements to repurchase (143,692) 1,725,530
Bank Preferred Stock Tender Offers -- (97,621)
Debt Tender Offers -- (253)
Dividends paid to minority stockholders, net of taxes (20,191) (24,153)
Exercise of stock options and warrants 129,699 7,880
Purchases of treasury stock (63,724) (168,290)
Sales of treasury stock 134 951
Dividends on common stock (13,020) --
Extinguishment of issuable shares (85,000) --
------------ ------------
Net cash provided by financing activities 2,708,822 598,054
------------ ------------
Net change in cash and cash equivalents 64,021 (425,312)
Cash and cash equivalents at beginning of period 593,025 967,950
------------ ------------
Cash and cash equivalents at end of period $ 657,046 $ 542,638
============ ============
</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 nine months ended September 30, 2000 are not necessarily indicative of
the results that may be expected for the entire fiscal year or any other interim
period. Certain amounts for the three and nine-month periods in the prior year
have been reclassified to conform to the current period's presentation.
The accompanying unaudited consolidated financial statements include the
accounts of Golden State Bancorp Inc. ("Golden State" or the "Company"), which
owns all of the common stock of Golden State Holdings Inc. ("GS Holdings,"
formerly First Nationwide Holdings Inc. ("FN Holdings")), which owns common and
preferred stock of California Federal Bank and its subsidiaries ("California
Federal" or "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 as the surviving entity after the consummation of the Glen Fed
Merger.
Minority interest represents amounts attributable to (a) the Preferred
Stock ("REIT Preferred Stock") of California Federal Preferred Capital
Corporation, a wholly owned subsidiary of the Bank, and (b) that portion of
stockholders' equity of Auto One Acceptance Corporation ("Auto One"), a
subsidiary of the Bank, attributable to 20% of its common stock. In 1999,
minority interest also included the Bank Preferred Stock that had not yet been
acquired by GS Holdings.
Golden State is a holding company whose only significant asset is its
indirect ownership of all of the common and preferred 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, 1999. All terms used
but not defined elsewhere herein have meanings ascribed to them in the Company's
Annual Report on Form 10-K.
(2) Acquisitions and Divestitures
-----------------------------
GOLDEN STATE ACQUISITION
On September 11, 1998, First Nationwide (Parent) Holdings Inc. ("Parent
Holdings") and Hunter's Glen/Ford Ltd. ("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,
(a) FN Holdings contributed all of its assets (including all of the common stock
of California Federal) to GS Holdings (the "FN Holdings Asset Transfer"), (b)
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 all of the common stock of
Glendale Federal, (c) 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 (d) 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."
Page 11
<PAGE>
GOLDEN STATE BANCORP INC. AND SUBSIDIARIES
Notes to Unaudited Consolidated Financial Statements
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 $7.7 million for the nine months ended September 30, 1999, including
severance for terminated California Federal employees, expenses for California
Federal branch closures, and conversion and consolidation costs, as well as
transition expenses for duplicate personnel, facilities and computer systems
during the integration period. No such expenses were incurred during the nine
months ended September 30, 2000.
During the third quarter of 1999, the Company recorded fair value and other
adjustments to reduce intangible assets in the Golden State Acquisition by $16.6
million, $18.1 million and $12.4 million related to (i) previously accrued
severance and contract termination costs (which had not been utilized upon
completion of the integration plan), (ii) a "true-up" adjustment of the deferred
tax asset and (iii) the purchase price, respectively.
OTHER ACQUISITIONS AND DIVESTITURES
On February 29, 2000, Auto One acquired Downey Auto Finance Corporation, a
subsidiary of Downey Savings and Loan Association, F.A., with prime auto loans
of approximately $370 million (the "Downey Acquisition"). Intangible assets of
$7.7 million were recorded in connection with this acquisition.
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) Reclassification of Securities
------------------------------
On April 30, 2000, the Company reclassified $1.1 billion and $497.9 million
carrying value of mortgage-backed securities and U.S. government and agency
securities, respectively, from securities available for sale to their respective
held-to-maturity portfolios. These assets primarily comprise securities which
are required as part of the Bank's regulatory liquidity portfolio. The Company
has both the positive intent and the ability to hold these securities to
maturity. The net unrealized loss related to these securities of $64.0 million,
which is included as a component of equity (accumulated other comprehensive
loss), is amortized to interest income over the remaining life of the securities
using the interest method. The effect of this amortization on interest income is
fully offset by the effect of amortization of the related discount recorded
against the respective assets at the time of transfer.
(4) Cash, Cash Equivalents, and Statements of Cash Flows
----------------------------------------------------
Cash paid for interest on deposits and other interest-bearing liabilities
during the nine months ended September 30, 2000 and 1999 was $2.2 billion and
$1.7 billion, respectively. Net cash (received) paid for income taxes during the
nine months ended September 30, 2000 and 1999 was $(5.0) million and $14.6
million, respectively.
Page 12
<PAGE>
During the nine months ended September 30, 2000, noncash activity consisted
of the reclassification of $1.1 billion and $497.9 million of mortgage-backed
securities and U.S. government and agency securities, respectively, from
securities available for sale to their respective held-to-maturity portfolios,
transfers of $113.2 million from loans receivable to mortgage-backed securities
upon the securitization of certain of the Bank's single-family loans, transfers
of $54.7 million from loans held for sale (at lower of cost or market) to loans
receivable, transfers of $41.1 million from loans receivable to foreclosed real
estate and $5.4 million of loans made to facilitate sales of real estate owned.
Noncash activity during the nine months ended September 30, 2000 also
included the following: (a) a $211.7 million reduction of the valuation
allowance of the Company's deferred tax asset representing pre-merger tax
benefits, of which $161.7 million was retained by the previous owners of FN
Holdings; (b) increases of $2.5 million and $220 thousand in additional paid-in
capital and common stock, respectively, for restricted common stock outstanding
under an employee incentive plan; (c) an adjustment to the contribution
receivable from GSB Investments and Hunter's Glen in respect of their
proportionate ownership of the California Federal Goodwill Litigation asset of
$3.8 million; (d) the distribution of $100 million in issuable shares; (e)
adjustments of $126.3 million and $29.6 million to issuable shares and
additional paid-in capital, respectively, related to pre-merger tax benefits
retained by the previous owners of FN Holdings; (f) an adjustment of $1.4
million to issuable shares, after taxes, for interest income on a tax refund
related to Old California Federal for periods prior to the Golden State
Acquisition and (g) a reduction of $53.3 million in issuable shares, offset by
increases of $38.9 million to other liabilities and $14.4 million to additional
paid-in capital related to the extinguishment of issuable shares.
During the nine months ended September 30, 1999, noncash activity consisted
of transfers of $227.1 million from loans receivable to mortgage-backed
securities upon the securitization of certain of the Bank's single-family loans,
transfers of $108.1 million from loans held for sale (at lower of cost or
market) to loans receivable, transfers of $81.0 million from loans receivable to
foreclosed real estate and $8.4 million of loans made to facilitate sales of
real estate owned.
Noncash activity during the nine months ended September 30, 1999 also
included (a) a reduction of $18.9 million in previously accrued severance and
contract termination costs, (b) an $18.1 million "true-up" adjustment of the
deferred tax asset and $12.4 million in purchase price adjustments related to
the Golden State Acquisition, (c) an increase of $181 thousand and $57 thousand
in additional paid-in capital and common stock, respectively, reflecting the
impact of 56,908 shares of restricted common stock issued during the period, (d)
an increase of $2.0 million in treasury stock reflecting the after-tax effect of
a reclassification by the Bank from other assets of the value associated with
Litigation Tracking Warrants ("LTWTMs") that have been withdrawn by holders and
(e) an increase of $15.5 million in retained earnings related to an adjustment
of the initial dividend of tax benefits due to First Gibraltar and Hunter's Glen
upon the Company's deconsolidation from its tax reporting group as a result of
the Golden State Acquisition.
(5) Redemption of FN Holdings Notes
-------------------------------
On May 15, 1999, GS Holdings redeemed the remaining $225 thousand aggregate
principal amount of the FN Holdings 12 1/4% Senior Notes for an aggregate
redemption price including accrued interest payable, of $252.6 thousand. The
premium paid in connection with such redemption was not material.
Page 13
<PAGE>
(6) Segment Reporting
-----------------
Since the Company derives a significant portion of its revenues from
interest income, and interest expense is the most significant expense, the
segments are reported below using net interest income. Because the Company also
evaluates performance based on noninterest income and noninterest expense goals,
these measures of segment profit and loss are also presented. The Company does
not allocate income taxes to the segments.
<TABLE>
<CAPTION>
Nine Months Ended September 30, Three Months Ended September 30,
-------------------------------------- -------------------------------------
Community Mortgage Community Mortgage
Banking Banking Total Banking Banking Total
------- ------- ----- ------- ------- -----
<S> <C> <C> <C> <C> <C> <C>
Net interest income: (1)
2000 $1,018,899 $(74,251) $944,648 $343,559 $(26,339) $317,220
1999 1,017,369 (40,562) 976,807 331,236 (16,710) 314,526
Noninterest income: (2)
2000 $ 179,336 $188,763 $368,099 $ 62,639 $ 64,345 $126,984
1999 187,088 164,678 351,766 67,405 46,701 114,106
Noninterest expense: (3)
2000 $ 573,402 $120,683 $694,085 $192,221 $ 39,896 $232,117
1999 575,401 132,341 707,742 182,449 40,893 223,342
</TABLE>
_____________
(1) Includes $81.6 million and $84.7 million for the nine months ended September
30, 2000 and 1999, respectively, in earnings credit provided to FNMC by the
Bank, primarily for custodial bank account balances generated by FNMC. Also
includes $192.8 million and $184.9 million for the nine months ended
September 30, 2000 and 1999, respectively, in interest income and expense on
intercompany loans.
Includes $31.6 million and $27.4 million for the three months ended
September 30, 2000 and 1999, respectively, in earnings credit provided to
FNMC by the Bank, primarily for custodial bank account balances generated by
FNMC. Also includes $70.5 million and $60.8 million for the three months
ended September 30, 2000 and 1999, respectively, in interest income and
expense on intercompany loans.
(2) Includes $36.9 million and $36.8 million for the nine months ended September
30, 2000 and 1999, respectively, in intercompany servicing fees. Includes
$12.4 million and $11.6 million for the three months ended September 30,
2000 and 1999, respectively, in intercompany servicing fees.
(3) Includes $3.5 million for each of the nine-month periods ended September 30,
2000 and 1999, in intercompany noninterest expense. Includes $1.2 million
for each of the three-month periods ended September 30, 2000 and 1999, in
intercompany noninterest expense.
Page 14
<PAGE>
The following reconciles the above table to the amounts shown on the
consolidated financial statements for the nine and three months ended September
30, 2000 and 1999 (in thousands):
<TABLE>
<CAPTION>
Nine Months Ended Three Months Ended
September 30, September 30,
-------------------------- -------------------------
2000 1999 2000 1999
-------- --------- -------- ---------
<S> <C> <C> <C> <C>
Net interest income:
Total net interest income for reportable segments $944,648 $976,807 $317,220 $314,526
Elimination of intersegment net interest income (81,582) (84,656) (31,574) (27,434)
-------- -------- -------- --------
Total $863,066 $892,151 $285,646 $287,092
======== ======== ======== ========
Noninterest income:
Total noninterest income for reportable segments $368,099 $351,766 $126,984 $114,106
Elimination of intersegment servicing fees (36,884) (36,772) (12,387) (11,632)
-------- -------- -------- --------
Total $331,215 $314,994 $114,597 $102,474
======== ======== ======== ========
Noninterest expense:
Total noninterest expense for reportable segments $694,085 $707,742 $232,117 $223,342
Elimination of intersegment expense (3,480) (3,480) (1,160) (1,160)
-------- -------- -------- --------
Total $690,605 $704,262 $230,957 $222,182
======== ======== ======== ========
</TABLE>
(7) Accrued Termination and Facilities Costs
----------------------------------------
In connection with the Golden State Acquisition, the Company recorded
liabilities resulting from (a) branch consolidations due to duplicate
facilities; (b) employee severance and termination benefits due to a planned
reduction in force; and (c) expenses incurred under a contractual obligation to
terminate services provided by outside service providers (principally relating
to data processing expenses). The merger and integration plan relative to the
Golden State Acquisition was in place on September 11, 1998. Certain of these
costs were included in the allocation of purchase price and others were
recognized in net income. The table below reflects a summary of the activity in
the liability for the costs related to such plan since December 31, 1999 (in
thousands):
<TABLE>
<CAPTION>
Branch Severance and Contract
Consolidations Termination Benefits Termination Total
-------------- -------------------- ----------- -----
<S> <C> <C> <C> <C>
Balance at December 31, 1999 $24,051 $12,770 $25 $36,846
Additional liabilities recorded 2,504 -- -- 2,504
Charges to liability account (9,419) (204) -- (9,623)
------- ------- --- -------
Balance at September 30, 2000 $17,136 $12,566 $25 $29,727
======= ======= === =======
</TABLE>
(8) Income Taxes
------------
During the nine months ended September 30, 2000, Golden State recorded a
net income tax expense of $62.2 million. Based on favorable resolutions of
federal income tax audits of Old California Federal and Glendale Federal, and
based on the current status of Mafco's, including the Company's, audits for the
years 1991 through 1995, management changed its judgment about the realizability
of the Company's deferred tax asset and reduced its valuation allowance by
$211.7 million during the nine-month period ended September 30, 2000. As a
result of reducing the valuation allowance, income tax expense was reduced by
$161.7 million and goodwill was reduced by $50.0 million. Because these tax
benefits accrue to the owners of the former FN Holdings under the Golden State
Merger agreement, minority interest: provision in lieu of income tax expense was
increased by $161.7 million, an amount equal to the reduction in income tax
expense. These adjustments had no impact on net income available to common
shareholders and no impact on the expected level of issuable shares.
Page 15
<PAGE>
Based upon the actual filing of the Mafco Group and Golden State 1998
consolidated federal income tax returns, tax benefits of $122.7 million were
recognized during the third quarter of 1999. The tax benefit is fully offset by
an increase in minority interest expense, since under the Golden State Merger
agreement, the tax benefits from any NOLs and other tax attributes of Parent
Holdings and its subsidiaries are retained by First Gibraltar and Hunter's Glen.
In addition, the Company recorded an adjustment of $15.5 million to reduce
the initial dividend of tax benefits to First Gibraltar and Hunter's Glen due to
its deconsolidation from the Mafco Group, which was recorded as an increase to
retained earnings during the third quarter of 1999.
(9) Minority Interest
On April 1, 1999, GS Holdings redeemed all of the remaining 607,299
outstanding shares of the Bank's 105/8% 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 on the Company's consolidated balance
sheet and resulted in a charge of $3.2 million to minority interest expense.
On September 1, 1999, GS Holdings redeemed all of the remaining 318,341
shares of the Bank's 11 1/2% Preferred Stock not already owned by it for $105.75
per share, for a total redemption price of $33.7 million. This transaction
reduced minority interest by $31.8 million on the Company's consolidated balance
sheet and resulted in a charge of $1.8 million to minority interest expense.
During the third quarter of 1999, minority interest expense of $122.7
million was recorded based upon changes to estimated pre-merger tax benefits
retained by Parent Holdings. This amount was fully offset by an income tax
benefit in the same period. See note 8.
(10) Stockholders' Equity
--------------------
COMMON STOCK
At September 30, 2000 and December 31, 1999, there were 134,232,488 and
122,242,588 shares, respectively, of Golden State Common Stock issued and
outstanding (net of treasury stock). Common stock outstanding included 246,756
and 56,908 restricted shares at September 30, 2000 and December 31, 1999,
respectively.
Pursuant to the Golden State Merger agreement, 4,882,904 shares of Golden
State common stock, valued at $100 million, were issued to GSB Investments and
Hunter's Glen on May 22, 2000. See "--Issuable Shares."
During the nine months ended September 30, 2000, stock options and warrants
totalling 10,793,655 were exercised. See note 11 and "--Warrants."
ISSUABLE SHARES
In accordance with the Golden State Merger Agreement, 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) as a result of net tax benefits 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.
Based upon the Company's 1999 taxable income as filed in its federal income
tax return, shares valued at $101.3 million (4,928,901 shares) were
contractually issuable during the year ended December 31, 1999 to GSB
Investments and Hunter's Glen. The number of shares was based on the use of
pre-merger net operating losses and other net deferred tax assets, based upon
actual taxable earnings and the average share price during the year. On May 22,
2000, the remaining 147,677 common shares from 1998, valued at $2.7 million, and
a portion of the 1999 contractually issuable shares of Golden State common stock
(4,735,227 shares), valued at $97.3 million, were issued
Page 16
<PAGE>
(in total, 3,906,323 shares to a subsidiary of Mafco Holdings and 976,581 shares
to Hunter's Glen) as a result of net tax benefits realized by California
Federal. The remaining shares allocable to GSB Investments, consisting of
154,939 shares valued at $3.2 million, were extinguished (as discussed below)
and 38,735 shares due to Hunter's Glen, valued at $0.8 million, are expected to
be issued at a future date.
During the fourth quarter of 1999 and the second quarter of 2000, the
Company recorded $4.5 million and $1.4 million, respectively, in issuable shares
related to interest receivable on a federal tax refund related to Old California
Federal for periods prior to the Golden State Acquisition. During the nine
months ended September 30, 2000, the Company also recorded $126.3 million of
issuable shares related to the Company's pro-rata usage in 2000 of pre-merger
tax benefits retained by the previous owners of FN Holdings. Consistent with the
Golden State Merger agreement, these amounts are payable to GSB Investments and
Hunter's Glen as issuable shares.
On August 22, 2000, the Company paid GSB Investments $85.0 million
resulting in the extinguishment of GSB Investments' right to receive $100.0
million of issuable shares calculated in accordance with the Golden State Merger
agreement. These issuable shares related to tax benefits retained by GSB
Investments for pre-merger net operating losses to be utilized in respect of
2000 by the Company. In addition, the Company agreed to pay $36.0 million to GSB
Investments in January 2001 in exchange for the extinguishment of GSB
Investments' right to receive $38.3 million of issuable shares calculated in
accordance with the Golden State Merger agreement. These issuable shares relate
to 1999 carryover benefits and the federal tax refund and interest received by
the Company in April, 2000. A discount of $1.1 million was recorded on this
liability and is being recognized in interest income ratably through January 16,
2001, using the interest method. Expenses totalling $4.0 million were
capitalized during the third quarter of 2000 in connection with this
transaction.
Issuable shares are included, as appropriate, in the calculation of basic
and diluted earnings per share. See note 13.
ADDITIONAL PAID-IN CAPITAL
During the nine months ended September 30, 2000, the Company recorded
reductions to additional paid-in capital of $38.1 million representing issuable
shares for interest on a tax refund and $29.6 million representing pro-rata
adjustments to pre-merger tax benefits retained by the previous owners of FN
Holdings. The tax benefits were originally recorded as an adjustment to goodwill
related to the Cal Fed Acquisition. See note 8. In addition, additional paid-in
capital increased by $18.4 million during the third quarter of 2000,
representing issuable shares extinguished in excess of consideration paid,
partially offset by $4.0 million in capitalized transaction expenses.
RETAINED EARNINGS
At September 11, 1998, in connection with the Golden State Acquisition,
certain assets were recorded representing the fair value of each of the Goodwill
Litigation Assets (as defined herein) that each of the former shareholder groups
(pre-merger Golden State and GSB Investments and Hunter's Glen) were
contributing to the merged entity. The Golden State Merger agreement contained a
mechanism for proportionately allocating these values between the two groups. At
September 11, 1998, the fair value of the Glendale Federal Goodwill Litigation
Asset (as defined herein) contributed by the former Golden State shareholders
was $56.9 million, and the fair value of the California Federal Goodwill
Litigation equalization adjustment due from GSB Investments and Hunter's Glen
was $41.2 million. The $41.2 million, recorded as a contribution receivable,
increased retained earnings during the year ended December 31, 1998 and
fluctuates based upon the market value of the LTWTMs. At December 31, 1999, the
equalization adjustment was written down to its fair value of $17.1 million.
Since the market value of the LTWTMs, which the Company uses to estimate the
fair value of the ultimate goodwill litigation award, increased to $1.21875 per
share at September 30, 2000 from $0.875 per share at December 31, 1999, the
inherent value of the amount to be contributed by GSB Investments and Hunter's
Glen also increased, to $20.9 million, resulting in an increase in retained
earnings and the contribution receivable of $3.8 million during the nine months
ended September 30, 2000.
Page 17
<PAGE>
TREASURY STOCK
At September 30, 2000, the Company had 16,383,058 shares of its common
stock in treasury at an aggregate cost of $19.27 per share.
During the nine months ended September 30, 2000, the Company repurchased
3,916,411 shares of common stock, at an aggregate purchase price of $63.7
million, or an average of $16.27 per share. Also during the nine months ended
September 30, 2000, 11,450 shares were issued out of treasury in connection with
options exercised by holders related to an acquisition by the former Golden
State prior to the Golden State Acquisition.
During the nine months ended September 30, 1999, 73,235 shares 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
On September 1, 2000, Golden State paid a dividend of $0.10 per common
share totalling $13.0 million, to stockholders of record as of July 31, 2000.
There were no dividends on common stock during the nine months ended September
30, 1999.
WARRANTS
During the nine months ended September 30, 2000, 10,753,859 Standby
Warrants were exercised at the purchase price of $12.00 per share and 14,294
expired. In conjunction with the exercise of the Standby Warrants, the holders
thereof were issued one share of GSB common stock and one LTW for each Standby
Warrant. As the Standby Warrants expired on August 21, 2000, there were no
outstanding Standby Warrants at September 30, 2000.
(11) Executive and Stock Compensation
--------------------------------
In connection with the Golden State Acquisition, the Bank is administering
stock option plans that provided for the granting of options of Golden State
Common Stock to employees and directors. Upon the consummation of the merger on
September 11, 1998, substantially all options outstanding became exercisable.
All pre-merger stock option plans have expired as to the granting of additional
options.
In the first quarter of 2000, the Company granted to its employees
non-qualified stock options equivalent to 1,333,850 shares of common stock at a
weighted average price of $13.99 per share under the Golden State Bancorp Inc.
Omnibus Stock Plan (the "Stock Plan"). In the second quarter of 2000, the
Company granted an additional 12,000 non-qualified stock options at a weighted
average price of $16.25 per share. In the third quarter of 2000, the Company
granted an additional 5,000 non-qualified options at a weighted average price of
$21.31 per share. 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 nine months ended September 30, 2000, 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.
During the three months ended September 30, 2000, 36,893 options were
exercised and 18,584 options were cancelled or expired under all plans. During
the nine months ended September 30, 2000, 51,200 options were exercised and
82,950 options were cancelled or expired under all plans. At September 30, 2000,
options to acquire an equivalent of 3,777,782 shares and 1,129,382 LTWTMs
remained outstanding under all plans.
During the three and nine months ended September 30, 1999, a total of
149,226 and 506,243 options, respectively, were exercised and 57,500 and 230,000
options, respectively, were cancelled or expired under all plans.
Page 18
<PAGE>
On January 24, 2000 and July 19, 1999, the Company awarded to certain of
its employees 220,327 and 56,908 shares, respectively, of restricted stock under
the Golden State Bancorp Inc. Executive Compensation Plan. The market value on
the dates of the awards were $14.00 and $22.38 per share, respectively. These
shares generally vest over two years in one-half increments on the anniversary
of the grant date, based upon the continued service of the employee. At
September 30, 2000, a total of 246,756 restricted shares was outstanding. The
compensation expense related to these awards is recognized on a straight line
basis over the vesting period for each tranche of the award with a corresponding
increase to additional paid-in capital. During the three and nine months ended
September 30, 2000, $0.4 million and $1.5 million, respectively, in compensation
expense was recognized related to such awards. During the three and nine months
ended September 30, 1999, $0.2 million in compensation expense was recognized
related to such awards. These restricted shares have full voting and dividend
rights and are included in common shares outstanding and in the calculation of
diluted earnings per share. See note 13.
(12) Extraordinary Items
-------------------
During the first quarter of 2000, the FHLB called and the Bank prepaid $200
million in FHLB advances, resulting in an extraordinary gain of $1.2 million,
net of income taxes of $0.8 million, on the early extinguishment of such
borrowings.
Also during the first quarter of 2000, the Bank repurchased $2.5 million
outstanding principal amount of the Convertible Subordinated Debentures due
2001, resulting in an extraordinary gain of $41 thousand, net of income taxes of
$30 thousand, on the early extinguishment of debt.
During the second quarter of 2000, the FHLB called and the Bank prepaid
$200 million in FHLB advances, resulting in an extraordinary gain of $1.8
million, net of income taxes of $1.2 million, on the early extinguishment of
such borrowings.
(13) Earnings per Share Information
------------------------------
Earnings per share of common stock is based on the weighted average number
of common and common equivalent shares outstanding, excluding common shares in
treasury, during the periods presented. Information used to calculate basic and
diluted earnings per share is as follows (in thousands, except per share data):
<TABLE>
<CAPTION>
Nine Months Ended September 30, Three Months Ended September 30,
---------------------------------------- ------------------------------------------
2000 1999 2000 1999
------------------ ------------------- ----------------- -------------------
Basic Diluted Basic Diluted Basic Diluted Basic Diluted
EPS EPS EPS EPS EPS EPS EPS EPS
--- --- --- --- --- --- --- ---
<S> <C> <C> <C> <C> <C> <C> <C> <C>
Income before extraordinary $258,187 $258,187 $236,102 $236,102 $ 88,513 $ 88,513 $ 81,622 $ 81,622
items
Extraordinary items 3,014 3,014 -- -- -- -- -- --
Net income $261,201 $261,201 $236,102 $236,102 $ 88,513 $ 88,513 $ 81,622 $ 81,622
Weighted average common
shares outstanding (a) 124,869 124,869 132,137 132,137 129,709 129,709 129,806 129,806
Issuable shares (b) 13,147 13,147 558 558 10,947 10,947 148 148
Total weighted average basic
common shares outstanding 138,016 138,016 132,695 132,695 140,656 140,656 129,954 129,954
Effect of dilutive securities:
Options and warrants (c) -- 2,755 -- 5,581 -- 2,251 -- 5,134
Issuable shares (d) -- 1,489 -- 2,749 -- -- -- 5,545
Restricted stock (a) -- 97 -- 2 -- 120 -- 6
Total weighted average diluted
common shares outstanding (b) 138,016 142,357 132,695 141,027 140,656 143,027 129,954 140,639
Income before extraordinary $ 1.87 $ 1.81 $ 1.78 $ 1.67 $ 0.63 $ 0.62 $ 0.63 $ 0.58
items
Extraordinary items 0.02 0.02 -- -- -- -- -- --
Earnings per common share $ 1.89 $ 1.83 $ 1.78 $ 1.67 $ 0.63 $ 0.62 $ 0.63 $ 0.58
</TABLE>
(Continued)
Page 19
<PAGE>
_____________
(a) 2000 and 1999 basic weighted average common shares outstanding exclude
the effect of 220,327 shares and the unvested portion of 56,908 shares,
respectively, of restricted stock that were awarded to employees of the
Company on January 24, 2000 and July 19, 1999, respectively. The effect
of all of these shares was included in diluted average shares outstanding.
See note 11.
(b) 2000 total basic and diluted weighted average common shares outstanding
include the effect, as appropriate, of: (i) 4,735,227 shares issued on
May 22, 2000 to GSB Investments and Hunter's Glen, (ii) 1,218,544 shares
issuable to Hunter's Glen, and (iii) 2,754,968 shares related to the
extinguishment of issuable shares in August 2000; all based on the use of
pre-merger tax benefits during 1999. See note 11; "-Issuable Shares" for
a discussion on extinguishment of issuable shares.
2000 and 1999 total basic and diluted weighted average common shares
outstanding include the effect of 5,540,319 shares issued on January 21,
1999 and 147,677 shares issued on May 22, 2000 to GSB Investments and
Hunter's Glen for net tax benefits realized by the Bank during 1998.
2000 total basic and diluted weighted average common shares outstanding
include the effect, as appropriate, of 517,180 shares estimated to be
issuable to Hunter's Glen and 1,169,276 shares related to the
extinguishment of issuable shares in August 2000; all related to a
Federal tax refund and related interest received in 1999 and 2000
associated with Old California Federal for periods prior to the Golden
State Acquisition.
(c) Golden State's weighted average diluted common shares outstanding are not
affected by the LTWTMs 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 LTWTMs
become exercisable.
(d) 2000 and 1999 total diluted weighted average shares outstanding include
the effect of 5,287,029 shares and 5,544,808 shares, respectively,
estimated to be issuable to GSB Investments and Hunter's Glen based on
the anticipated use of pre-merger tax benefits. See note 10.
(14) Newly Issued Accounting Pronouncements
--------------------------------------
ACCOUNTING FOR DERIVATIVE INSTRUMENTS AND HEDGING ACTIVITIES
In June 1998, the Financial Accounting Standards Board ("FASB") issued
Statement of Financial Accounting Standards No. 133, ACCOUNTING FOR DERIVATIVE
INSTRUMENTS AND HEDGING ACTIVITIES ("SFAS No. 133"). SFAS No. 133 was amended by
Statement of Financial Accounting Standards No. 137, ACCOUNTING FOR DERIVATIVE
INSTRUMENTS AND HEDGING ACTIVITIES-DEFERRAL OF THE EFFECTIVE DATE OF FASB
STATEMENT NO. 133 ("SFAS No. 137"). SFAS No. 137 mandates that SFAS No. 133
shall be effective for all fiscal quarters of all fiscal years beginning after
June 15, 2000. SFAS No. 133 requires that all derivative instruments be recorded
on the balance sheet at fair value. Changes in the fair value of derivatives are
recorded each period in current earnings or other comprehensive income,
depending on the type of hedge transaction.
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 portion of the hedge. Upon
implementation, hedging relationships must be designated anew and documented
pursuant to the provisions of this statement.
For fair value hedge transactions in which the Company is hedging changes
in the fair value of assets, liabilities or firm commitments, changes in the
fair value of the derivative instrument will generally be offset in the income
statement by changes in the hedged item's fair value. For cash flow hedge
transactions in which the Company is hedging the variability of cash flows
related to a variable-rate asset, liability, or a forecasted transaction,
changes in the fair value of the derivative instrument will be reported in other
comprehensive income. The gains and losses on derivative instruments that are
reported in other comprehensive income will be reclassified as earnings in the
periods in which earnings are impacted by the variability of the cash flows of
the hedged item. The ineffective portion of all hedges will be recognized in
current-period earnings.
The Company has identified various types of instruments which will qualify
as derivatives pursuant to SFAS No. 133. It is expected that the derivative
instruments (interest rate floors, principal only swaps and swaptions) used to
hedge the change in the fair value of the Company's mortgage servicing rights
will be reported as fair value hedges. The derivative instruments (interest rate
swaps) used to hedge the change in the cash flows of the Company's Federal Home
Loan Bank advances and reverse repurchase agreements will be reported as cash
flow hedges.
Page 20
<PAGE>
During their meeting of October 26 and 27, 2000, the FASB staff issued
guidance to the Derivatives Implementation Group ("DIG") of the FASB resolving
Issue 11-4, DEFINITION OF A DERIVATIVE: WHEN A LOAN COMMITMENT MEETS THE NET
SETTLEMENT CRITERIA. This guidance was issued for DIG review and clarifying
comments. This guidance will be posted to the FASB web site in November of 2000
and given a 35-day comment period. The FASB staff guidance indicated that
interest rate lock commitments, given to potential borrowers, met the net
settlement criteria described in paragraph 9 of SFAS No. 133 and would therefore
be considered a derivative instrument. At the end of the 35-day comment period,
the FASB staff guidance will become Level D GAAP. In their meeting of October 26
and 27, 2000, the DIG also reviewed Issue 12-4, FAIR VALUE HEDGES: HEDGING
MORTGAGE SERVICING RIGHT ASSETS USING PRESET HEDGE COVERAGE RATIOS. There was no
resolution to this issue at the meeting. The Company is currently assessing the
impact of both areas of potential guidance.
On June 15, 2000, the FASB issued Statement of Financial Accounting
Standards No. 138 ACCOUNTING FOR CERTAIN DERIVATIVE INSTRUMENTS AND CERTAIN
HEDGING ACTIVITIES, AN AMENDMENT OF FASB NO. 133 ("SFAS No. 138").
The Board amended SFAS No. 133 by:
(a) Expanding the normal purchases and normal sales exception,
(b) Permitting an entity to hedge to a designated benchmark interest rate
defined as either (i) the interest rate on direct Treasury obligations of
the U.S. government (Treasury rate), or (ii) the London Interbank Offered
Rate (LIBOR) swap rate,
(c) Permitting entities to hedge recognized foreign-currency-denominated assets
and liabilities for which a foreign currency transaction gain or loss is
recognized in earnings, and
(d) Permitting certain internal derivatives to qualify for hedge accounting in
the affiliate financial statements even though these internal derivatives
are offset on a net or aggregate basis, rather than individually, by third
party derivative contracts in another member of the consolidated financial
group.
In addition, certain decisions arising from the DIG process that required
specific amendments to SFAS No. 133 are incorporated in SFAS No. 138.
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.
One of the qualifying criteria for hedge accounting under SFAS No. 133 is
that the hedging relationship between the hedging instrument and the hedged item
must be highly effective in achieving the offset of changes in those fair values
or cash flows that are attributable to the hedged risk, both at the inception of
the hedge and on an ongoing basis. An assessment of this effectiveness is
required at least every three months and whenever financial statements or
earnings are reported by the Company.
The high-effectiveness requirement has been interpreted to mean that the
cumulative changes in the value of the hedging instrument since hedge inception
should be between 80% and 125% of the inverse cumulative change since hedge
inception in the fair value or cash flows of the hedged items.
Early 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.
Page 21
<PAGE>
SFAS No. 133, as amended, will significantly change the accounting
treatment of derivative instruments used by the Company. Depending on the
underlying risk management strategy, these accounting changes could affect
reported net income, assets, liabilities and stockholders' equity. As a result,
the Company may choose to reconsider its risk management strategies, since SFAS
No. 133 will not reflect the results of many of those strategies in the same
manner as current accounting practice. The Company continues to evaluate the
potential impact of implementing SFAS No. 133. An accurate assessment of the
Company's hedge effectiveness and hence, the net impact of adopting SFAS No.
133, will not be possible until the FASB, which is currently both interpreting
and amending SFAS No. 133 with regard to the measurement of hedge effectiveness,
concludes its deliberations, and until after the Company has fully implemented
hedging strategies in accordance with the FASB's amendments and interpretations.
ACCOUNTING FOR TRANSFERS AND SERVICING FINANCIAL ASSETS AND EXTINGUISHMENTS
OF LIABILITIES
On September 29, 2000, the FASB issued Statement of Financial Accounting
Standards No. 140, ACCOUNTING FOR TRANSFERS AND SERVICING OF FINANCIAL ASSETS
AND EXTINGUISHMENTS OF LIABILITIES ("SFAS No. 140"). SFAS No. 140 replaces SFAS
No. 125, which was issued in June of 1996. It revises the standards for
accounting for securitizations and other transfers of financial assets and
collateral and requires certain disclosures, but it carries over most of the
provisions of SFAS No. 125 without reconsideration. In general, SFAS No. 140 is
effective for transfers of financial assets occurring after March 31, 2001 and
for disclosures relating to securitization transactions and collateral for
fiscal years ending after December 15, 2000.
The implementation of SFAS No. 140 is not expected to materially impact the
Company's financial results.
(15) Subsequent Event
----------------
On October 23, 2000, Golden State declared a dividend of $0.10 per share on
its common stock, payable on December 1, 2000 to shareholders of record as of
November 3, 2000.
Page 22
<PAGE>
ITEM 2. MANAGEMENT'S DISCUSSION AND ANALYSIS OF FINANCIAL CONDITION AND RESULTS
OF OPERATIONS
The statements contained in this Quarterly 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: (a) changes in levels of market interest rates, (b)
changes in the California economy or California real estate values, (c) changes
in the level of mortgage loan prepayments, (d) changes in federal banking laws
and regulations, (e) actions by the Company's competitors, and (f) 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 operating retail branches that provide deposit products such as
demand, transaction and savings accounts, and investment products such as mutual
funds, annuities and insurance. In addition, it engages in mortgage banking
activities, including originating and purchasing 1-4 unit residential loans for
sale to various investors in the secondary market or for retention in its own
portfolio, and servicing loans for itself and others. To a lesser extent, the
Company originates and/or purchases commercial real estate, commercial and
consumer loans for investment. Revenues are derived primarily from interest
earned on loans, interest received on government and agency securities and
mortgage-backed securities, gains on sales of loans and other investments and
fees received in connection with loan servicing, securities brokerage and other
customer service transactions. Expenses primarily consist of interest on
customer deposit accounts, interest on short-term and long-term borrowings,
general and administrative expenses consisting of compensation and benefits,
data processing, occupancy and equipment, communications, deposit insurance
assessments, advertising and marketing, professional fees and other general and
administrative expenses.
NET INCOME
Golden State reported net income for the nine months ended September 30,
2000 of $261.2 million, or $1.83 per diluted share, compared with net income of
$236.1 million, or $1.67 per diluted share, for the corresponding period in
1999. Net income for the nine months ended September 30, 2000 includes gains on
the early extinguishment of debt, net of tax, of $3.0 million. Net income for
the nine months ended September 30, 1999 includes the following nonrecurring
items, net of tax: a $9.4 million gain from the 1999 Servicing Sale, $5.0
million in minority interest expense related to the redemption of the Bank
Preferred Stock and a $1.4 million gain from the sale of branches.
Golden State reported net income for the three months ended September 30,
2000 of $88.5 million, or $0.62 per diluted share, compared with net income of
$81.6 million, or $0.58 per diluted share, for the corresponding period in 1999.
Net income for the three months ended September 30, 1999 includes the following
nonrecurring items, net of tax: a $1.4 million gain from the sale of branches
and $1.8 million in minority interest expense related to the redemption of the
Bank's 11 1/2% Preferred Stock.
Page 23
<PAGE>
FINANCIAL CONDITION
During the nine months ended September 30, 2000, consolidated total assets
increased $3.5 billion, to $60.6 billion from December 31, 1999, and total
liabilities increased from $55.0 billion to $58.1 billion.
During the nine months ended September 30, 2000, stockholders' equity
increased $368 million to $1.9 billion. The increase in stockholders' equity is
principally the net result of $261.2 million in net income for the period,
$129.7 million from the exercise of warrants and stock options, $127.7 million
in adjustments to issuable shares, primarily related to a tax refund and
pre-merger tax benefits retained by the previous owners of FN Holdings and a
$70.2 million net unrealized gain, after tax, on securities available for sale,
partially offset by a $123.9 million extinguishment of issuable shares, $63.7
million in purchases of treasury stock, $29.6 million in adjustments to
additional paid-in capital related to pre-merger tax benefits recorded to
goodwill and $13.0 million of common stock dividends.
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 $134 million at September 30, 2000 compared
with $200 million at December 31, 1999. Total non-performing assets as a
percentage of the Bank's total assets decreased to 0.22% at September 30, 2000
from 0.35% at December 31, 1999.
Page 24
<PAGE>
RESULTS OF OPERATIONS
NINE MONTHS ENDED SEPTEMBER 30, 2000 VERSUS NINE MONTHS ENDED SEPTEMBER 30,
1999
The following table shows the Company's consolidated average balance
sheets, with the related interest income, interest expense and the average
interest rates for the periods presented. Average balances are calculated on a
daily basis.
<TABLE>
<CAPTION>
Nine Months Ended September 30, 2000
---------------------------------------
Average Average
Balance Interest Rate
------- -------- ----
(dollars in millions)
ASSETS
<S> <C> <C> <C>
Interest-earning assets (1):
Securities and interest-bearing deposits in banks (2) $ 1,429 $ 69 6.39%
Mortgage-backed securities available for sale 12,514 625 6.66
Mortgage-backed securities held to maturity 2,640 149 7.54
Loans held for sale, net 832 46 7.44
Loans receivable, net 37,397 2,086 7.44
FHLB stock 1,278 70 7.35
------- ------
Total interest-earning assets 56,090 3,045 7.24
------
Noninterest-earning assets 2,965
-------
Total assets $59,055
=======
LIABILITIES, MINORITY INTEREST
AND STOCKHOLDERS' EQUITY
Interest-bearing liabilities:
Deposits $23,044 679 3.94
Securities sold under agreements to repurchase (3) 5,551 268 6.34
Borrowings (3) 27,148 1,235 6.05
------- ------
Total interest-bearing liabilities 55,743 2,182 5.21
------
Noninterest-bearing liabilities 1,175
Minority interest 496
Stockholders' equity 1,641
-------
Total liabilities, minority interest
and stockholders' equity $59,055
=======
Net interest income $ 863
======
Interest rate spread 2.03%
=====
Net interest margin 2.07%
=====
Return on average assets 0.59%
=====
Return on average equity 21.23%
=====
Average equity to average assets 2.78%
=====
</TABLE>
Page 25
<PAGE>
<TABLE>
<CAPTION>
Nine Months Ended September 30, 1999
---------------------------------------
Average Average
Balance Interest Rate
------- -------- ----
(dollars in millions)
ASSETS
<S> <C> <C> <C>
Interest-earning assets (1):
Securities and interest-bearing deposits in banks (2) $ 1,571 $ 70 5.98%
Mortgage-backed securities available for sale 13,623 645 6.32
Mortgage-backed securities held to maturity 2,471 138 7.44
Loans held for sale, net 1,939 96 6.60
Loans receivable, net 31,427 1,722 7.31
FHLB stock 1,100 43 5.24
------- ------
Total interest-earning assets 52,131 2,714 6.94
------
Noninterest-earning assets 3,820
-------
Total assets $55,951
=======
LIABILITIES, MINORITY INTEREST
AND STOCKHOLDERS' EQUITY
Interest-bearing liabilities:
Deposits $24,052 667 3.71
Securities sold under agreements to repurchase (3) 4,826 188 5.14
Borrowings (3) 23,469 967 5.51
------- ------
Total interest-bearing liabilities 52,347 1,822 4.65
------
Noninterest-bearing liabilities 1,493
Minority interest 551
Stockholders' equity 1,560
-------
Total liabilities, minority interest
and stockholders' equity $55,951
=======
Net interest income $ 892
======
Interest rate spread 2.29%
=====
Net interest margin 2.27%
=====
Return on average assets 0.56%
=====
Return on average equity 20.19%
=====
Average equity to average assets 2.79%
=====
</TABLE>
__________
(1) Non-performing assets are included in the average balances for the periods
indicated.
(2) Includes securities held to maturity, securities available for sale,
interest-bearing deposits in other banks and short-term investment
securities.
(3) Interest and average rate include the impact of interest rate swaps.
Page 26
<PAGE>
The following table shows what portion of the changes in interest income
and interest expense were due to changes in rate and volume. For each category
of interest-earning assets and interest-bearing liabilities, information is
provided on changes attributable to volume (change in average outstanding
balance multiplied by the prior period's rate) and rate (change in average
interest rate multiplied by the prior period's volume). Changes attributable to
both volume and rate have been allocated proportionately.
<TABLE>
<CAPTION>
Nine Months Ended September 30, 2000 vs. 1999
Increase (Decrease) Due to
-------------------------------------------------
Volume Rate Net
------ ---- ---
INTEREST INCOME: (in millions)
<S> <C> <C> <C>
Securities and interest-bearing deposits in banks $ (6) $ 5 $ (1)
Mortgage-backed securities available for sale (59) 39 (20)
Mortgage-backed securities held to maturity 9 2 11
Loans held for sale, net (64) 14 (50)
Loans receivable, net 333 31 364
FHLB stock 8 19 27
---- ---- ----
Total 221 110 331
==== ==== ====
INTEREST EXPENSE:
Deposits (26) 38 12
Securities sold under agreements to repurchase 31 49 80
Borrowings 164 104 268
---- ---- ----
Total 169 191 360
---- ---- ----
Change in net interest income $ 52 $(81) $(29)
==== ==== ====
</TABLE>
The volume variances in total interest income and total interest expense
for the nine months ended September 30, 2000 compared to the corresponding
period in 1999 are largely due to increased loan volume, partially offset by an
increase in borrowings.
INTEREST INCOME. Total interest income was $3.0 billion for the nine months
ended September 30, 2000, an increase of $330.7 million from the nine months
ended September 30, 1999. Total interest-earning assets for the nine months
ended September 30, 2000 averaged $56.1 billion, compared to $52.1 billion for
the corresponding period in 1999, primarily as a result of increased loan
volume. The yield on total interest-earning assets during the nine months ended
September 30, 2000 increased to 7.24% from 6.94% for the nine months ended
September 30, 1999, primarily due to a higher percentage of loans to total
earning assets and the repricing of variable-rate earning assets.
Golden State earned $2.1 billion of interest income on loans receivable for
the nine months ended September 30, 2000, an increase of $363.7 million from the
nine months ended September 30, 1999. The average balance of loans receivable
was $37.4 billion for the nine months ended September 30, 2000, compared to
$31.4 billion for the same period in 1999. The weighted average rate on loans
receivable increased to 7.44% for the nine months ended September 30, 2000 from
7.31% for the nine months ended September 30, 1999. The increase in the average
balance reflects an increase in residential loan origination activity and new
auto loan production from the Downey Acquisition. The increase in the weighted
average rate reflects the repricing of variable-rate loans and an increase in
the prime rate on commercial banking loans, partially offset by lower rates on
new purchases of prime auto loans, including those purchased in the Downey
Acquisition.
Golden State earned $46.4 million of interest income on loans held for sale
for the nine months ended September 30, 2000, a decrease of $49.6 million from
the nine months ended September 30, 1999. The average balance of loans held for
sale was $832 million for the nine months ended September 30, 2000, a decrease
of $1.1 billion from the comparable period in 1999, primarily attributed to a
reduction in fixed-rate originations due to higher interest rates, coupled with
longer holding periods for loans held for sale during the nine months ended
September 30, 1999. The weighted average rate on loans held for sale increased
to 7.44% for the nine months ended
Page 27
<PAGE>
September 30, 2000 from 6.60% for the nine months ended September 30, 1999,
primarily due to higher market interest rates.
Interest income on mortgage-backed securities available for sale was $625.2
million for the nine months ended September 30, 2000, a decrease of $20.3
million from the nine months ended September 30, 1999. The average portfolio
balance decreased $1.1 billion, to $12.5 billion, for the nine months ended
September 30, 2000 compared to the same period in 1999. The weighted average
yield on these assets increased from 6.32% for the nine months ended September
30, 1999 to 6.66% for the nine months ended September 30, 2000. The decrease in
the volume and the increase in the weighted average yield is primarily due to
the reclassification of $1.1 billion in mortgage-backed securities to the
held-to-maturity portfolio, run-off of existing portfolios and the sale of
approximately $688 million in mortgage-backed securities during the second and
third quarters of 2000, partially offset by the impact of purchases during the
fourth quarter of 1999.
Interest income on mortgage-backed securities held to maturity was $149.3
million for the nine months ended September 30, 2000, an increase of $11.5
million from the nine months ended September 30, 1999. The average portfolio
balance increased $169 million, to $2.6 billion, for the nine months ended
September 30, 2000 compared to the same period in 1999, primarily attributed to
the reclassification of $1.1 billion in mortgage-backed securities from the
available-for-sale portfolio, partially offset by the run-off of existing
portfolios. The run-off in these securities was replaced with the origination
and purchase of whole loans instead of additional mortgage-backed securities.
The weighted average rates for the nine months ended September 30, 2000 and 1999
were 7.54% and 7.44%, respectively.
Interest income on securities and interest-bearing deposits in other banks
was $68.6 million for the nine months ended September 30, 2000, a decrease of
$1.8 million from the nine months ended September 30, 1999. The average
portfolio balance was $1.4 billion and $1.6 billion for the nine months ended
September 30, 2000 and 1999, respectively. The higher weighted average rate of
6.39% for the nine months ended September 30, 2000 compared to 5.98% for the
nine months ended September 30, 1999 reflects $2.4 million in interest income on
a federal income tax refund related to Old California Federal for periods prior
to the Golden State Acquisition for which there is no corresponding asset.
Dividends on FHLB stock were $70.3 million for the nine months ended
September 30, 2000, an increase of $27.2 million from the nine months ended
September 30, 1999. The average balance outstanding during the nine months ended
September 30, 2000 and 1999 was $1.3 billion and $1.1 billion, respectively. The
weighted average dividend on FHLB stock increased to 7.35% for the nine months
ended September 30, 2000 from 5.24% for the nine months ended September 30,
1999. The increase in the average balance and weighted average yield is 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 and an increase in the dividend rate
on FHLB stock.
INTEREST EXPENSE. Total interest expense was $2.2 billion for the nine
months ended September 30, 2000, an increase of $359.8 million from the nine
months ended September 30, 1999. The increase is primarily the result of
additional borrowings under FHLB advances and securities sold under agreements
to repurchase used to fund loans and offset the reduction in deposit balances.
Interest expense on deposits, including brokered deposits, was $679.1
million for the nine months ended September 30, 2000, an increase of $11.8
million from the nine months ended September 30, 1999. The average balance of
deposits outstanding decreased from $24.1 billion for the nine months ended
September 30, 1999 to $23.0 billion for the nine months ended September 30,
2000. The decrease in the average balance includes declines in the average
balance of certificates of deposit, money market and passbook savings, offset in
part by an increase in the average balance of customer checking accounts and
custodial accounts. These changes reflect the Company's focus during 2000 on
consumer checking account growth. The overall weighted average cost of deposits
increased to 3.94% for the nine months ended September 30, 2000 from 3.71% for
the nine months ended September 30, 1999, primarily due to rising market
interest rates.
Page 28
<PAGE>
Interest expense on securities sold under agreements to repurchase totalled
$267.6 million for the nine months ended September 30, 2000, an increase of
$79.5 million from the nine months ended September 30, 1999. The average balance
of such borrowings for the nine months ended September 30, 2000 and 1999 was
$5.6 billion and $4.8 billion, respectively. The increase is primarily
attributed to the funding of loans and the purchase of mortgage-backed
securities in the fourth quarter of 1999, as well as deposit run-off. The
weighted average interest rate on these instruments increased to 6.34% for the
nine months ended September 30, 2000 from 5.14% for the nine months ended
September 30, 1999, primarily due to an increase in market rates on new
borrowings in 2000 compared to 1999.
Interest expense on borrowings totalled $1.2 billion for the nine months
ended September 30, 2000, an increase of $268.5 million from the nine months
ended September 30, 1999. The average balance outstanding for the nine months
ended September 30, 2000 and 1999 was $27.1 billion and $23.5 billion,
respectively. The weighted average interest rate on these instruments increased
to 6.05% for the nine months ended September 30, 2000 from 5.51% for the nine
months ended September 30, 1999, primarily due to higher prevailing market rates
in 2000. The higher volume reflects the increase in FHLB advances used to fund
loans and the purchase of mortgage-backed securities in the fourth quarter of
1999.
NET INTEREST INCOME. Net interest income was $863.1 million for the nine
months ended September 30, 2000, a decrease of $29.1 million from the nine
months ended September 30, 1999. The interest rate spread declined to 2.03% for
the nine months ended September 30, 2000 from 2.29% for the nine months ended
September 30, 1999, primarily as a result of maturities and repayments of lower
rate interest-bearing liabilities being replaced with interest-bearing
liabilities having comparatively higher rates. The effect of higher rates on
liabilities was partially offset by higher yielding assets replenishing asset
run-off in a rising rate environment and the repricing of variable-rate assets.
NONINTEREST INCOME. Total noninterest income, consisting primarily of loan
servicing fees, customer banking fees and gains on sales of assets, was $331.2
million for the nine months ended September 30, 2000, representing an increase
of $16.2 million from the nine months ended September 30, 1999.
Loan servicing fees, net of amortization of mortgage servicing rights, were
$138.7 million for the nine months ended September 30, 2000, compared to $108.4
million for the nine months ended September 30, 1999. The single-family
residential loan servicing portfolio, excluding loans serviced for the Bank,
increased from $72.3 billion at September 30, 1999 to $83.0 billion at September
30, 2000. Incremental loan servicing fees were partially offset by amortization
of MSRs. MSR amortization for the nine months ended September 30, 2000 decreased
by $8.7 million from the nine months ended September 30, 1999 due to a reduction
in the estimated prepayment rate, partially offset by a higher MSR basis. Loan
servicing fees benefited from the slowdown in mortgage loan prepayments in 2000,
with an average prepayment rate on loans serviced for others of 8.5% during the
first nine months of 2000, compared to 19.3% in the comparable period in 1999.
Customer banking fees were $147.3 million for the nine months ended
September 30, 2000 compared to $138.8 million for the nine months ended
September 30, 1999. The increase is primarily attributed to increased emphasis
by management on transaction account growth and higher fee income on mutual
fund, annuity and other security sales through Cal Fed Investments.
Gain on sale, settlement and transfer of loans, net totalled $37.6 million
for the nine months ended September 30, 2000, an increase of $12.2 million from
the nine months ended September 30, 1999. During the second quarter of 2000, the
Company recorded a $14.5 million reduction in its recourse liability. This
liability is a life-of-asset accrual. Given the paydowns which have occurred on
the underlying loans and the improving credit and real estate market conditions
present, the Company determined that the liability balance exceeded its estimate
of the required accrual for the remaining life of the recourse assets by $14.5
million. Gains attributed to early payoffs and settlement of commercial loans
with unamortized discounts were $5.9 million lower in the nine months ended
September 30, 2000 compared to the same period in 1999. During the nine months
ended September 30, 2000, California Federal sold $3.7 billion in single-family
mortgage loans originated for sale with servicing rights retained as part of its
ongoing mortgage banking operations compared to $8.7 billion of such sales for
the corresponding period in 1999, while the gains on such sales increased $3.7
million between the two periods.
Page 29
<PAGE>
Net loss on sale of assets totalled $15.3 million for the nine months ended
September 30, 2000, compared to a net gain of $18.3 million for the nine months
ended September 30, 1999. The loss during 2000 is primarily attributed to an
$18.7 million loss from the sale of approximately $500 million of
mortgage-backed securities with an average yield of 6.64% during the second
quarter and a $0.9 million loss from the sale of $187.6 million of
mortgage-backed securities with an average yield of 6.59% during the third
quarter, partially offset by a $1.3 million gain from the sale of interest rate
swaps with a notional amount of $284.0 million in August 2000. It is expected
that these sales will benefit both the net interest margin and the Company's
interest rate sensitivity in future periods. The $18.3 million gain reported in
1999 primarily relates to the $16.3 million gain on the Servicing Sale.
Other noninterest income was $22.9 million for the nine months ended
September 30, 2000, a decrease of $1.2 million from the nine months ended
September 30, 1999, primarily attributed to the sale of the Eureka and Ukiah
branches in the third quarter of 1999.
NONINTEREST EXPENSE. Total noninterest expense was $690.6 million for the
nine months ended September 30, 2000, a decrease of $13.7 million compared to
the nine months ended September 30, 1999. The variance between the two periods
is primarily attributed to continued expense reduction efforts by the Company
and the completion of merger and integration efforts in the first half of 1999.
Noninterest expense for the nine months ended September 30, 2000 included
decreases of $15.9 million in other noninterest expense, $11.2 million in
professional fees, $8.1 million in loan expense, $7.7 million in specific merger
and integration costs incurred in 1999 in connection with the Golden State
Acquisition and $5.5 million in amortization of intangible assets. These
decreases were partially offset by increases of $24.3 million in compensation
expense and $9.4 million in occupancy and equipment expense.
Compensation and employee benefits expense was $324.8 million for the nine
months ended September 30, 2000, an increase of $24.3 million from the nine
months ended September 30, 1999. The increase is primarily attributed to normal
salary increases and higher employment levels in expanding lines of business,
including the impact of additional employees from the Downey Acquisition.
Occupancy and equipment expense was $119.7 million for the nine months
ended September 30, 2000, an increase of $9.4 million from the nine months ended
September 30, 1999, primarily attributed to increased depreciation expense
related to a change in the depreciable lives of personal computers.
Professional fees were $28.7 million for the nine months ended September
30, 2000, a decrease of $11.2 million from the nine months ended September 30,
1999, primarily due to legal and consulting fee expenses incurred in 1999
related to goodwill litigation and the Y2K project.
Loan expense was $21.1 million for the nine months ended September 30,
2000, a decrease of $8.1 million from the nine months ended September 30, 1999,
primarily due to a decrease in pass-through interest expense on loans attributed
to a decrease in payoffs during 2000. Repayment rates on loans serviced for
others averaged 12.2% during the first nine months of 2000, a significant
decline from the 23.5% average experienced during the same period of 1999.
Merger and integration costs were $7.7 million for the nine months ended
September 30, 1999, representing transition expenses, which include severance,
conversion and consolidation costs incurred in connection with the Golden State
Acquisition. Such costs were not incurred during the first nine months of 2000.
Amortization of intangible assets was $47.3 million for the nine months
ended September 30, 2000, a decrease of $5.5 million from the nine months ended
September 30, 1999, primarily attributed to a lower goodwill base due to a $50.0
million reduction in goodwill in the first quarter of 2000, resulting from a
reduction in the valuation allowance against the Company's deferred tax asset
(see "- Provision for Income Tax"), and a $38.2 million reduction in goodwill
resulting from an income tax refund received during the fourth quarter of 1999
related to Old California Federal. This decrease was partially offset by
amortization expense related to the $7.7 million and $50.7 million in goodwill
recorded in connection with the Downey Acquisition and the Nevada Purchase,
respectively.
Page 30
<PAGE>
Other noninterest expense was $153.0 million in 2000 compared to $168.9
million in 1999. The decline in operating expenses is primarily attributed to
management's continued expense reduction efforts.
PROVISION FOR INCOME TAX. During the nine months ended September 30, 2000,
Golden State recorded gross income tax expense of $223.9 million, which was
offset by a tax benefit of $161.7 million, for net income tax expense of $62.2
million. Based on favorable resolutions of federal income tax audits of Old
California Federal and Glendale Federal, and the current status of Mafco's,
including the Company's, audits for the years 1991 through 1995, management
changed its judgment about the realizability of the Company's deferred tax asset
and reduced its valuation allowance by $211.7 million during the nine-month
period ended September 30, 2000. As a result of reducing the valuation
allowance, income tax expense was reduced by $161.7 million and goodwill was
reduced by $50.0 million. Because these tax benefits accrue to the previous
owners of FN Holdings under the Golden State Merger agreement, minority
interest: provision in lieu of income tax expense was increased by $161.7
million, an amount equal to the reduction in income tax expense. These
adjustments had no impact on net income available to common shareholders.
During the nine months ended September 30, 1999, Golden State recorded
gross income tax expense of $228.4 million, which was offset by a tax benefit of
$122.7 million, for a net income tax expense of $105.8 million. A provision in
lieu of income taxes was recorded for the $122.7 million of pre-merger tax
benefits, in the form of net operating losses and other items, which are
retained by the previous owners of FN Holdings. The benefit adjustment resulted
from the 1998 tax filings in the third quarter of 1999.
Golden State's effective gross federal tax rate was 38% during the nine
months ended September 30, 2000 and 1999, while its federal statutory tax rate
was 35% during both periods. The difference between the effective and statutory
rates was primarily the result of nondeductible goodwill amortization. Golden
State's effective state tax rate was 6% and 8% during the nine months ended
September 30, 2000 and 1999, respectively. The effective state tax rate declined
during 2000 as a result of changes in management's estimates of the expected
state tax liability of the Company.
MINORITY INTEREST. Minority interest expense for the nine months ended
September 30, 2000 includes a $161.7 million provision in lieu of income taxes,
representing pre-merger tax benefits retained by the previous owners of FN
Holdings related to the first quarter reduction of the valuation allowance on
the Bank's deferred tax asset (see note 8 of the Company's Notes to Unaudited
Consolidated Financial Statements). Minority interest expense for the nine
months ended September 30, 2000 also includes $1.4 million due to the previous
owners of FN Holdings, representing after-tax interest income on a tax refund
related to Old California Federal for periods prior to the Golden State
Acquisition. Dividends on the REIT Preferred Stock totalling $34.2 million were
also recorded during the nine months ended September 30, 2000. Minority interest
expense relative to the REIT Preferred Stock is reflected net of related income
tax benefit of $14.0 million, which will inure to the Company as a result of the
deductibility of such dividends for income tax purposes.
Minority interest for the nine months ended September 30, 1999 included a
$122.7 million provision in lieu of income taxes, representing pre-merger tax
benefits retained by the previous owners of FN Holdings and $5.0 million in net
premiums paid in connection with the redemption of the Bank Preferred Stock.
Minority interest expense also included dividends on the Bank Preferred Stock
that had not yet been acquired by GS Holdings and the REIT Preferred Stock
totalling $1.8 million and $34.2 million, respectively. Minority interest
expense relative to the REIT Preferred Stock is reflected net of related income
tax benefit of $14.4 million which will inure to the Company as a result of the
deductibility of such dividends for income tax purposes. Minority interest
expense for the nine months ended September 30, 1999 also included 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.
Page 31
<PAGE>
RESULTS OF OPERATIONS
THREE MONTHS ENDED SEPTEMBER 30, 2000 VERSUS THREE MONTHS ENDED SEPTEMBER
30, 1999
The following table shows the Company's consolidated average balance
sheets, with the related interest income, interest expense and the average
interest rates for the periods presented. Average balances are calculated on a
daily basis.
<TABLE>
<CAPTION>
Three Months Ended September 30, 2000
----------------------------------------
Average Average
Balance Interest Rate
------- -------- ----
(dollars in millions)
ASSETS
<S> <C> <C> <C>
Interest-earning assets (1):
Securities and interest-bearing deposits in banks (2) $ 1,429 $ 23 6.36%
Mortgage-backed securities available for sale 11,278 190 6.73
Mortgage-backed securities held to maturity 3,096 58 7.55
Loans held for sale, net 926 18 7.65
Loans receivable, net 39,084 742 7.59
FHLB stock 1,334 25 7.51
------- ------
Total interest-earning assets 57,147 1,056 7.39
------
Noninterest-earning assets 3,258
-------
Total assets $60,405
=======
LIABILITIES, MINORITY INTEREST
AND STOCKHOLDERS' EQUITY
Interest-bearing liabilities:
Deposits $23,307 236 4.03
Securities sold under agreements to repurchase (3) 5,444 95 6.83
Borrowings (3) 27,976 439 6.23
------- ------
Total interest-bearing liabilities 56,727 770 5.39
------
Noninterest-bearing liabilities 1,381
Minority interest 495
Stockholders' equity 1,802
-------
Total liabilities, minority interest
and stockholders' equity $60,405
=======
Net interest income $ 286
======
Interest rate spread 2.00%
=====
Net interest margin 2.04%
=====
Return on average assets 0.59%
=====
Return on average equity 19.65%
=====
Average equity to average assets 2.98%
=====
</TABLE>
Page 32
<PAGE>
<TABLE>
<CAPTION>
Three Months Ended September 30, 2000
----------------------------------------
Average Average
Balance Interest Rate
------- -------- ----
(dollars in millions)
ASSETS
<S> <C> <C> <C>
Interest-earning assets (1):
Securities and interest-bearing deposits in banks (2) $ 1,623 $ 24 5.84%
Mortgage-backed securities available for sale 13,918 222 6.38
Mortgage-backed securities held to maturity 2,303 42 7.28
Loans held for sale, net 1,635 28 6.91
Loans receivable, net 32,390 587 7.25
FHLB stock 1,137 15 5.22
------- ----
Total interest-earning assets 53,006 918 6.92
----
Noninterest-earning assets 3,310
-------
Total assets $56,316
=======
LIABILITIES, MINORITY INTEREST
AND STOCKHOLDERS' EQUITY
Interest-bearing liabilities:
Deposits $24,011 223 3.69
Securities sold under agreements to repurchase (3) 5,840 80 5.39
Borrowings (3) 23,292 328 5.57
------- ----
Total interest-bearing liabilities 53,143 631 4.71
----
Noninterest-bearing liabilities 1,205
Minority interest 518
Stockholders' equity 1,450
-------
Total liabilities, minority interest
and stockholders' equity $56,316
=======
Net interest income $287
====
Interest rate spread 2.21%
=====
Net interest margin 2.20%
=====
Return on average assets 0.58%
=====
Return on average equity 22.51%
=====
Average equity to average assets 2.58%
=====
</TABLE>
__________
(1) Non-performing assets are included in the average balances for the periods
indicated.
(2) Includes securities held to maturity, securities available for sale,
interest-bearing deposits in other banks and short-term investment
securities.
(3) Interest and average rate include the impact of interest rate swaps.
Page 33
<PAGE>
The following table shows what portion of the changes in interest income
and interest expense were due to changes in rate and volume. For each category
of interest-earning assets and interest-bearing liabilities, information is
provided on changes attributable to volume (change in average outstanding
balance multiplied by the prior period's rate) and rate (change in average
interest rate multiplied by the prior period's volume). Changes attributable to
both volume and rate have been allocated proportionately.
<TABLE>
<CAPTION>
Three Months Ended September 30, 2000 vs. 1999
Increase (Decrease) Due to
-------------------------------------------------
Volume Rate Net
------ ---- ---
INTEREST INCOME: (in millions)
<S> <C> <C> <C>
Securities and interest-bearing deposits in banks $ (3) $ 2 $ (1)
Mortgage-backed securities available for sale (45) 13 (32)
Mortgage-backed securities held to maturity 14 2 16
Loans held for sale, net (13) 3 (10)
Loans receivable, net 126 29 155
FHLB stock 3 7 10
---- ---- ----
Total 82 56 138
---- ---- ----
INTEREST EXPENSE:
Deposits (7) 20 13
Securities sold under agreements to repurchase (4) 19 15
Borrowings 70 41 111
---- ---- ----
Total 59 80 139
---- ---- ----
Change in net interest income $ 23 $(24) $ (1)
==== ==== ====
</TABLE>
The volume variances in total interest income and total interest expense
for the three months ended September 30, 2000 compared to the corresponding
period in 1999 are largely due to increased loan volume and purchases of
mortgage-backed securities in the fourth quarter of 1999, partially offset by an
increase in borrowings and the sale of mortgage-backed securities in 2000.
INTEREST INCOME. Total interest income was $1.1 billion for the three
months ended September 30, 2000, an increase of $138.1 million from the three
months ended September 30, 1999. Total interest-earning assets for the three
months ended September 30, 2000 averaged $57.1 billion, compared to $53.0
billion for the corresponding period in 1999, primarily as a result of increased
loan volume. The yield on total interest-earning assets during the three months
ended September 30, 2000 increased to 7.39% from 6.92% for the three months
ended September 30, 1999, primarily due to a higher percentage of loans to total
earning assets and the repricing of variable-rate earning assets.
Golden State earned $742.1 million of interest income on loans receivable
for the three months ended September 30, 2000, an increase of $155.0 million
from the three months ended September 30, 1999. The average balance of loans
receivable was $39.1 billion for the three months ended September 30, 2000,
compared to $32.4 billion for the same period in 1999. The weighted average rate
on loans receivable increased to 7.59% for the three months ended September 30,
2000 from 7.25% for the three months ended September 30, 1999. The increase in
the average balance reflects an increase in the residential loan origination
activity and new auto loan production from the Downey acquisition. The increase
in the weighted average rate reflects the repricing of variable-rate loans and
an increase in the prime rate on commercial banking loans, partially offset by
lower rates on new purchases of prime auto loans, including those purchased in
the Downey Acquisition.
Golden State earned $17.7 million of interest income on loans held for sale
for the three months ended September 30, 2000, a decrease of $10.5 million from
the three months ended September 30, 1999. The average balance of loans held for
sale was $926 million for the three months ended September 30, 2000, a decrease
of $709 million from the comparable period in 1999, primarily attributed to a
reduction in fixed-rate originations due to higher interest rates, coupled with
longer holding periods for loans held for sale during the three months ended
September 30, 1999. The weighted average rate on loans held for sale increased
to 7.65% for the three months
Page 34
<PAGE>
ended September 30, 2000 from 6.91% for the three months ended September 30,
1999, primarily due to higher market interest rates.
Interest income on mortgage-backed securities available for sale was $189.7
million for the three months ended September 30, 2000, a decrease of $32.3
million from the three months ended September 30, 1999. The average portfolio
balance decreased $2.6 billion, to $11.3 billion, for the three months ended
September 30, 2000 compared to the same period in 1999. The weighted average
yield on these assets increased from 6.38% for the three months ended September
30, 1999 to 6.73% for the three months ended September 30, 2000. The decrease in
the volume and the increase in the weighted average yield are primarily due to
the reclassification of $1.1 billion in mortgage-backed securities to the
held-to-maturity portfolio, run-off of existing portfolios and the sale of
approximately $688 million of mortgage-backed securities during the nine months
ended September 30, 2000, partially offset by the impact of purchases during the
fourth quarter of 1999.
Interest income on mortgage-backed securities held to maturity was $58.4
million for the three months ended September 30, 2000, an increase of $16.5
million from the three months ended September 30, 1999. The average portfolio
balance increased $793 million, to $3.1 billion, for the three months ended
September 30, 2000 compared to the same period in 1999, primarily attributed to
the reclassification of $1.1 billion in mortgage-backed securities from the
available-for-sale portfolio, partially offset by the run-off of existing
portfolios. The run-off in these securities was replaced with the origination
and purchase of whole loans instead of additional mortgage-backed securities.
The weighted average rates for the three months ended September 30, 2000 and
1999 were 7.55% and 7.28%, respectively.
Interest income on securities and interest-bearing deposits in other banks
was $22.8 million for the three months ended September 30, 2000, a decrease of
$0.9 million from the three months ended September 30, 1999. The average
portfolio balance was $1.4 billion and $1.6 billion for the three months ended
September 30, 2000 and 1999, respectively. The higher weighted average rate of
6.36% for the three months ended September 30, 2000 compared to 5.84% for the
three months ended September 30, 1999 reflects rising market interest rates.
Dividends on FHLB stock were $25.2 million for the three months ended
September 30, 2000, an increase of $10.2 million from the three months ended
September 30, 1999. The average balance outstanding during the three months
ended September 30, 2000 and 1999 was $1.3 billion and $1.1 billion,
respectively. The weighted average dividend on FHLB stock increased to 7.51% for
the three months ended September 30, 2000 from 5.22% for the three months ended
September 30, 1999. The increase in the average balance and weighted average
yield is 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 and an increase in the
dividend rate on FHLB stock.
INTEREST EXPENSE. Total interest expense was $770.2 million for the three
months ended September 30, 2000, an increase of $139.5 million from the three
months ended September 30, 1999. The increase is primarily the result of
additional borrowings under FHLB advances used to fund loans and offset the
reduction in deposit balances.
Interest expense on deposits, including brokered deposits, was $236.0
million for the three months ended September 30, 2000, an increase of $12.7
million from the three months ended September 30, 1999. The average balance of
deposits outstanding decreased from $24.0 billion for the three months ended
September 30, 1999 to $23.3 billion for the three months ended September 30,
2000. The decrease in the average balance includes declines in the average
balance of certificates of deposit, money market and passbook savings, offset in
part by an increase in the average balance of customer checking accounts and
custodial accounts. These changes reflect the Company's focus during 2000 on
consumer checking account growth. The overall weighted average cost of deposits
increased to 4.03% for the three months ended September 30, 2000 from 3.69% for
the three months ended September 30, 1999, primarily due to rising market
interest rates.
Interest expense on securities sold under agreements to repurchase totalled
$94.9 million for the three months ended September 30, 2000, an increase of
$14.4 million from the three months ended September 30, 1999. The average
balance of such borrowings for the three months ended September 30, 2000 and
1999 was $5.4 billion and $5.8 billion, respectively. The decrease is primarily
attributed to a decline in the purchase of mortgage-backed securities during the
three months ended September 30, 2000 compared to the same period in 1999. The
weighted
Page 35
<PAGE>
average interest rate on these instruments increased to 6.83% for the three
months ended September 30, 2000 from 5.39% for the three months ended September
30, 1999, primarily due to an increase in market rates on new borrowings in 2000
compared to 1999.
Interest expense on borrowings totalled $439.4 million for the three months
ended September 30, 2000, an increase of $112.4 million from the three months
ended September 30, 1999. The average balance outstanding for the three months
ended September 30, 2000 and 1999 was $28.0 billion and $23.3 billion,
respectively. The weighted average interest rate on these instruments increased
to 6.23% for the three months ended September 30, 2000 from 5.57% for the three
months ended September 30, 1999, primarily due to higher prevailing market rates
in 2000. The higher volume reflects the increase in FHLB advances used to fund
loans and the purchase of mortgage-backed securities in the fourth quarter of
1999.
NET INTEREST INCOME. Net interest income was $285.6 million for the three
months ended September 30, 2000, a decrease of $1.4 million from the three
months ended September 30, 1999. The interest rate spread declined to 2.00% for
the three months ended September 30, 2000 from 2.21% for the three months ended
September 30, 1999, primarily as a result of maturities and repayments of lower
rate interest-bearing liabilities being replaced with interest-bearing
liabilities having comparatively higher rates. The effect of higher rates on
liabilities was partially offset by higher yielding assets replenishing asset
run-off in a rising rate environment and the repricing of variable-rate assets.
NONINTEREST INCOME. Total noninterest income, consisting primarily of loan
servicing fees, customer banking fees and gains on sales of assets, was $114.6
million for the three months ended September 30, 2000, representing an increase
of $12.1 million from the three months ended September 30, 1999.
Loan servicing fees, net of amortization of mortgage servicing rights, were
$48.2 million for the three months ended September 30, 2000, compared to $38.1
million for the three months ended September 30, 1999. The single-family
residential loan servicing portfolio, excluding loans serviced for the Bank,
increased from $72.3 billion at September 30, 1999 to $83.0 billion at September
30, 2000. Incremental loan servicing fees were partially offset by amortization
of MSRs. MSR amortization for the quarter decreased by $1.0 million from the
three months ended September 30, 1999 due to a reduction in the estimated
prepayment rate, partially offset by a higher MSR basis. Loan servicing fees
benefited from the slowdown in mortgage loan prepayments in 2000, with an
average prepayment rate on loans serviced for others of 9.1% in the third
quarter of 2000, compared to 13.3% in the comparable period in 1999.
Customer banking fees were $48.6 million for the three months ended
September 30, 2000 compared to $47.5 million for the three months ended
September 30, 1999. The increase is primarily attributed to increased emphasis
by management on transaction account growth and higher fee income on mutual
fund, annuity and other security sales through Cal Fed Investments.
Gain on sale, settlement and transfer of loans, net totalled $10.5 million
for the three months ended September 30, 2000, an increase of $5.6 million from
the three months ended September 30, 1999. During the three months ended
September 30, 2000, California Federal sold $1.4 billion in single-family
mortgage loans originated for sale with servicing rights retained as part of its
ongoing mortgage banking operations compared to $2.9 billion of such sales for
the corresponding period in 1999, while the gain on such sales increased $5.3
million between the two periods. Gains attributed to early payoffs and
settlement of commercial loans with unamortized discounts were $0.3 million
higher in the three months ended September 30, 2000 compared to the same period
in 1999.
Net gain on sale of assets totalled $0.7 million for the three months ended
September 30, 2000, compared to $3.2 million for the three months ended
September 30, 1999. The gain during 2000 is primarily attributed to a $1.3
million gain from the sale of interest rate swaps with a notional amount of
$284.0 million, partially offset by a $0.9 million loss from the sale of $187.6
million of mortgage-backed securities with an average yield of 6.59%. See "-
Nine Months Ended September 30, 2000 versus Nine Months Ended September 30, 1999
- Noninterest Income."
Page 36
<PAGE>
Other noninterest income was $6.7 million for the three months ended
September 30, 2000, a decrease of $2.2 million from the three months ended
September 30, 1999, primarily attributed to the sale of the Eureka and Ukiah
branches in the third quarter of 1999.
NONINTEREST EXPENSE. Total noninterest expense was $231.0 million for the
three months ended September 30, 2000, an increase of $8.8 million compared to
the three months ended September 30, 1999. The variance between the two periods
is primarily attributed to normal inflation rates and investments in expanding
lines of business. Noninterest expense for the three months ended September 30,
2000 included increases of $10.5 million in compensation expense, $4.2 million
in occupancy and equipment, and $2.3 million related to lower gains from
foreclosed real estate operations. These increases were partially offset by
decreases of $4.0 million in other noninterest expense, $2.2 million in
amortization of intangible assets and $2.1 million in professional fees.
Compensation and employee benefits expense was $108.4 million for the three
months ended September 30, 2000, an increase of $10.5 million from the three
months ended September 30, 1999. The increase is primarily attributed to normal
salary increases and higher employment levels in expanding lines of business,
including the impact of additional employees from the Downey Acquisition.
Occupancy and equipment expense was $42.7 million and $38.5 million for the
three months ended September 30, 2000 and 1999, respectively. This increase
reflects an increase in depreciation expense related to a change in the
depreciable lives of personal computers.
Professional fees were $10.5 million for the three months ended September
30, 2000, a decrease of $2.1 million from the three months ended September 30,
1999, primarily due to expenses incurred in 1999 attributed to the Y2K project
and goodwill litigation.
Amortization of intangible assets was $15.4 million for the three months
ended September 30, 2000, a decrease of $2.2 million from the three months ended
September 30, 1999, primarily attributed to a lower goodwill base due to a $50.0
million reduction in goodwill in the first quarter of 2000, resulting from a
reduction in the valuation allowance against the Company's deferred tax asset,
and a $38.2 million reduction resulting from an income tax refund received
during the fourth quarter of 1999 related to Old California Federal. These
decreases were partially offset by amortization expense related to the $7.7
million in goodwill recorded in connection with the Downey Acquisition.
Other noninterest expense was $47.4 million in 2000 compared to $51.5
million in 1999. The decline in operating expenses is primarily attributed to
management's continued expense reduction efforts.
PROVISION FOR INCOME TAX. During the three months ended September 30, 2000,
Golden State recorded income tax expense of $74.0 million. During the three
months ended September 30, 1999, Golden State recorded gross income tax expense
of $77.3 million, which was offset by a tax benefit of $122.7 million, for a net
income tax benefit $45.4 million. A provision in lieu of income taxes was
recorded for the $122.7 million of pre-merger tax benefits, in the form of net
operating losses and other items, which are retained by the previous owners of
FN Holdings. The benefit adjustment resulted from the 1998 tax filings in the
third quarter of 1999.
Golden State's effective gross federal tax rate was 38% during the three
months ended September 30, 2000 and 1999, while its federal statutory tax rate
was 35% during both periods. The difference between the effective and statutory
rates was primarily the result of nondeductible goodwill amortization. Golden
State's effective state tax rate was 6% and 8% during the three months ended
September 30, 2000 and 1999, respectively. The effective state tax rate declined
during 2000 as a result of changes in management's estimates of the expected
state tax liability of the Company.
MINORITY INTEREST. Minority interest expense for the three months ended
September 30, 2000 includes dividends on the REIT Preferred Stock totalling
$11.4 million. Minority interest expense relative to the REIT Preferred Stock is
reflected net of related income tax benefit of $4.6 million, which will inure to
the Company as a result of the deductibility of such dividends for income tax
purposes.
Page 37
<PAGE>
Minority interest for the three months ended September 30, 1999 included a
$122.7 million provision in lieu of income taxes, representing pre-merger tax
benefits retained by the previous owners of FN Holdings and $1.8 million in net
premiums paid in connection with the redemption of the Bank Preferred Stock.
Dividends on the REIT Preferred Stock totalling $11.4 million were also recorded
during the three months ended September 30, 1999. Minority interest expense
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.
PROVISION FOR LOAN LOSSES
The adequacy of the allowance for loan losses is periodically evaluated by
management to maintain the allowance at a level that is sufficient to absorb
expected loan losses. 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
no provision for loan losses during the nine months ended September 30, 2000.
The Company recorded provisions for loan losses of $10 million for the nine
months ended September 30, 1999; no provision for loan losses was recorded
during the third quarter of 1999.
The decrease in the provision for loan losses during the nine-month period
ended September 30, 2000 compared to the same period in 1999 reflects
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>
Nine Months Ended September 30, Three Months Ended September 30,
------------------------------- --------------------------------
2000 1999 2000 1999
---- ---- ---- ----
<S> <C> <C> <C> <C>
Balance - beginning of period $554,893 $588,533 $536,114 $578,369
Provision for loan losses -- 10,000 -- --
Charge-offs (27,251) (30,919) (6,954) (9,436)
Recoveries 2,432 3,839 914 1,850
Reclassification -- (670) -- --
-------- -------- -------- --------
Balance - end of period $530,074 $570,783 $530,074 $570,783
======== ======== ======== ========
</TABLE>
Although management believes that the allowance for loan losses is
adequate, it will continue to review its loan portfolio to determine the extent
to which any changes in economic conditions or loss experience may require
further provisions in the future.
PROBLEM AND POTENTIAL PROBLEM ASSETS
The Company considers a loan 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. 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.
Page 38
<PAGE>
The measurement of impairment may be based on (a) the present value of the
expected future cash flows of the impaired loan discounted at the loan's
original effective interest rate, (b) the observable market price of the
impaired loan, or (c) 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, less disposal costs. The amount, if
any, by which the recorded investment of the loan exceeds the measure of the
impaired loan's value is recognized by recording a valuation allowance. Large
groups of smaller balance homogeneous loans are collectively evaluated for
impairment.
Cash receipts on impaired loans not performing according to contractual
terms are generally used to reduce the carrying value of the loan, unless the
Company believes it will recover the remaining principal balance of the loan.
Impairment losses are included in the allowance for loan losses. Upon
disposition of an impaired loan, loss of principal, if any, is recorded through
a charge-off to the allowance for loan losses.
At September 30, 2000, loans that were considered to be impaired totalled
$101.4 million (of which $13.0 million were on nonaccrual status). The average
recorded investment in impaired loans during the nine and three-month periods
ended September 30, 2000 was approximately $96.5 million and $94.8 million,
respectively. For the nine and three-month periods ended September 30, 2000,
Golden State recognized interest income on those impaired loans of $6.5 million
and $2.3 million, respectively, which included $0.5 million and $0.2 million,
respectively, of interest income recognized using the cash basis method of
income recognition.
Page 39
<PAGE>
The following table presents 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 sub-prime auto
loans are reflected as non-performing, impaired or restructured using each
individual loan's contractual unpaid principal balance.
<TABLE>
<CAPTION>
September 30, 2000
--------------------------------------------------
Non-performing Impaired Restructured
-------------- -------- ------------
(in millions)
<S> <C> <C> <C>
Real Estate:
1-4 unit residential $ 83 $ 1 $ 1
5+ unit residential 3 27 --
Commercial and other 3 43 --
Land -- -- --
Construction -- -- --
---- ---- ---
Total real estate 89 71 1
Non-real estate 15 30 --
---- ---- ---
Total loans 104 (a) $101 (b) $ 1
==== ===
Foreclosed real estate, net 23
Repossessed assets 7
----
Total non-performing assets $134
====
</TABLE>
<TABLE>
<CAPTION>
December 31, 1999
--------------------------------------------------
Non-performing Impaired Restructured
-------------- -------- ------------
(in millions)
Real Estate:
<S> <C> <C> <C>
1-4 unit residential $126 $ -- $ 2
5+ unit residential 6 34 5
Commercial and other 8 67 18
Land -- 2 --
Construction -- -- --
---- ---- ---
Total real estate 140 103 25
Non-real estate 11 21 --
---- ---- ---
Total loans 151 (a) $124 (b) $25
==== ===
Foreclosed real estate, net 45
Repossessed assets 4
----
Total non-performing assets $200
====
</TABLE>
____________________
(a) Includes loans securitized with recourse on non-performing status of $2.0
million at December 31, 1999. There are no loans securitized with recourse
on non-performing status at September 30, 2000.
(b) Includes $12.4 million and $18.9 million of non-performing loans at
September 30, 2000 and December 31, 1999, respectively. Also includes
$13.3 million and $13.7 million of loans classified as troubled debt
restructurings at September 30, 2000 and December 31, 1999, respectively.
There were no accruing loans contractually past due 90 days or more at
September 30, 2000 or December 31, 1999.
The Company's non-performing assets, consisting of nonaccrual loans,
repossessed assets and foreclosed real estate, net, decreased to $134 million at
September 30, 2000, from $200 million at December 31, 1999. Non-performing
assets as a percentage of the Bank's total assets decreased to 0.22% at
September 30, 2000, from 0.35% at December 31, 1999.
Page 40
<PAGE>
The Company places 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 September 30, 2000:
<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 $56 $11 $ 67 60%
Northeast (1) 9 3 12 10
Other regions 24 9 33 30
--- --- ---- ---
Total $89 $23 $112 100%
=== === ==== ===
</TABLE>
_____________
(1) Consists of Connecticut, Massachusetts, New Hampshire, New Jersey, New
York, Pennsylvania, Rhode Island, Delaware, Maine, Vermont and Maryland.
(2) Net of purchase accounting adjustments.
At September 30, 2000, the Company had one non-performing asset over $2
million with a balance of $2.3 million. At September 30, 2000, the Company had
3,432 non-performing assets below $2 million in size, including 1,003
non-performing 1-4 unit residential assets.
An allowance is maintained to absorb losses inherent in the loan portfolio.
The adequacy of the allowance is periodically evaluated and is based on past
loan loss experience, known and inherent risks in the loan portfolio, adverse
situations that have occurred but are not yet known that may affect the
borrower's ability to repay, the estimated value of underlying collateral and
economic conditions. Management's methodology for assessing the adequacy of the
allowance includes the evaluation of the following three key elements: the
formula allowance, specific allowances for identified problem loans and the
unallocated allowance.
The formula allowance is determined by applying loss factors against all
non-impaired loans. Loss factors may be adjusted for significant factors that,
in management's judgment, affect the collectibility of the portfolio as of the
evaluation date. Loss factors are calculated based on migration models that
estimate the probability that loans will become delinquent and ultimately result
in foreclosure over a period of between one and 2.5 years, depending on the loan
type, 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. Specific allowances are established against individual
residential 1-4 mortgage loans, commercial loans and commercial real estate
loans for which management has performed analyses and concluded that, based on
current information and events, it is probable that the Bank will be unable to
collect all amounts due according to the contractual terms of the loan
agreement. Generally, management believes that collectibility is improbable if a
loan is severely delinquent or if it has been determined 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. In
other words, management estimates the fair value of
Page 41
<PAGE>
collateral, net of the cost of disposition of the collateral, and the fair value
is compared to the net book value of the loan. If the net book value exceeds
the fair value, a specific allowance is established in an amount equal to the
excess. Loans evaluated for specific allowance are excluded from the formula
allowance analysis so as not to double-count loss exposure.
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. Each factor is analyzed and
assigned a range of values. At this time, management has chosen an unallocated
allowance amount at the mid-point of the range for each factor.
At September 30, 2000, the allowance for loan losses was $530 million,
consisting of a $377 million formula allowance, a $23 million specific allowance
and a $130 million unallocated allowance.
Although the loan loss allowance has been allocated by type of loan for
internal valuation purposes, $507 million of the allowance is general in nature
and 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, 1999 $235 $276 $ 44 $555
Provision for loan losses -- (1) 1 --
Charge-offs (2) (4) (7) (13)
Recoveries -- -- 1 1
---- ---- ---- ----
Balance - March 31, 2000 233 271 39 543
Provision for loan losses -- (1) 1 --
Charge-offs (2) (2) (4) (8)
Recoveries -- -- 1 1
---- ---- ---- ----
Balance - June 30, 2000 231 268 37 536
Provision for loan losses -- (3) 3 --
Charge-offs (1) -- (6) (7)
Recoveries -- -- 1 1
Reclassifications -- (80) 80 --
---- ---- ---- ----
Balance - September 30, 2000 $230 $185 $115 $530
==== ==== ==== ====
</TABLE>
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.
Page 42
<PAGE>
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. After taking into consideration both the variability of
rates and the maturities of various instruments, it 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. At September 30, 2000,
approximately 77% of the Company's loan portfolio consisted of ARMs.
One of the most important sources of the Bank's net income is net interest
income, which is the difference between the combined yield earned on
interest-earning assets and the combined rate paid on interest-bearing
liabilities. Net interest income is also dependent on the relative balances of
interest-earning assets and interest-bearing liabilities.
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 significantly
below their contractual margin over existing market rates. Since repricing
liabilities are typically not subject to such interest rate adjustment
constraints, the Company's net interest margin would most likely be negatively
impacted in this situation. Certain ARMs 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.
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. During a period of falling
rates, the opposite would tend to occur.
Page 43
<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.
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 assets and liabilities illustrated in the
table would vary substantially if different assumptions were used or if actual
experience differed from the assumptions set forth. The Company's estimated
interest rate sensitivity gap at September 30, 2000 was 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:
Interest-bearing deposits in other banks
and short-term investment
securities (1) (2) $ 74 $ -- $ -- $ -- $ 74
Securities held to maturity (1) 67 153 374 -- 594
Securities available for sale (3) 632 -- -- -- 632
Mortgage-backed securities
available for sale (3) 10,771 -- -- -- 10,771
Mortgage-backed securities
held to maturity (1) (4) 1,960 392 644 -- 2,996
Loans held for sale, net (3) 875 -- -- -- 875
Loans receivable, net (1) (5) 21,279 13,444 4,745 -- 39,468
Investment in FHLB 1,339 -- -- -- 1,339
------- ------- ------ ------ -------
Total interest-earning assets 36,997 13,989 5,763 -- 56,749
Noninterest-earning assets -- -- -- 3,811 3,811
------- ------- ------ ------ -------
$36,997 $13,989 $5,763 $3,811 $60,560
======= ======= ====== ====== =======
INTEREST-BEARING LIABILITIES:
Deposits (6) $21,604 $ 1,589 $ 7 $ -- $23,200
Securities sold under agreements to
repurchase (1) 5,138 200 -- -- 5,338
FHLB advances (1) 13,422 12,698 -- -- 26,120
Other borrowings (1) 752 1,401 92 -- 2,245
------- ------- ------ ------ -------
Total interest-bearing liabilities 40,916 15,888 99 -- 56,903
Noninterest-bearing liabilities -- -- -- 1,227 1,227
Minority interest -- -- -- 500 500
Stockholders' equity -- -- -- 1,930 1,930
------- ------- ------ ------ -------
$40,916 $15,888 $ 99 $3,657 $60,560
======= ======= ====== ====== =======
Gap before interest rate swap agreements $(3,919) $(1,899) $5,664 $ (154)
Interest rate swap agreements 3,550 (2,800) (750) --
------- ------- ------ -------
Gap $ (369) $(4,699) $4,914 $ (154)
======= ======= ====== =======
Cumulative gap $ (369) $(5,068) $ (154) $ (154)
======= ======= ====== =======
Gap as a percentage of total assets (0.61)% (7.76)% 8.12% (0.25)%
===== ===== ==== =====
Cumulative gap as a percentage of total assets (0.61)% (8.37)% (0.25)% (0.25)%
===== ===== ===== =====
</TABLE>
(Continued)
Page 44
<PAGE>
_______________
(1) Based upon (a) contractual maturity, (b) instrument repricing date, if
applicable, and (c) projected repayments and prepayments of principal, if
applicable. Prepayments were estimated generally by using the prepayment
rates forecast by various large brokerage firms as of September 30, 2000.
The actual maturity and rate sensitivity of these assets could vary
substantially if future prepayments differ from prepayment estimates.
(2) Consists of $74 million of short-term investment securities and less than
$0.1 million of interest-bearing deposits in other banks.
(3) As securities and mortgage-backed securities available for sale and loans
held for sale may be sold within one year, they are considered to be
maturing within one year.
(4) Excludes underlying non-performing loans of $1 million.
(5) Excludes allowance for loan losses of $530 million and non-performing loans
of $102 million, net of $8 million related to specific allowances.
(6) Fixed rate deposits and deposits with fixed pricing intervals are reflected
as maturing in the year of contractual maturity or first repricing date.
Money market deposit accounts, demand deposit accounts and passbook
accounts are reflected as maturing within one year.
At September 30, 2000, Golden State's cumulative gap totalled $(154)
million. At December 31, 1999, Golden State's cumulative gap totalled ($688)
million.
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. However, the
maturity/rate sensitivity analysis is a static view of the balance sheet with
assets and liabilities grouped into certain defined time periods, and only
partially depicts the dynamics of the Company's sensitivity to interest rate
changes. Therefore, 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'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 standard measure of liquidity in the savings industry is the ratio of
cash and short-term U.S. Government securities and other specified securities to
deposits and borrowings due within one year. The OTS established a minimum
liquidity requirement for the Bank of 4.00%. California Federal has been in
compliance with the liquidity regulations during the nine months ended September
30, 2000 and the year ended December 31, 1999.
The major source of funding for Golden State on an unconsolidated basis is
distributions from its subsidiary, GS Holdings, which receives substantially all
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 owned by GS Holdings, 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 - Regulation and
Supervision" and note 25 of the "Notes to Consolidated Financial Statements" in
the Company's 1999 Form 10-K.
Page 45
<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.
Interest on the GS Holdings Notes approximates $142.5 million per year.
Although GS Holdings expects that distributions and tax sharing payments from
the Bank will be sufficient to make required interest and principal payments,
there can be no assurance that earnings from the Bank will be sufficient to make
such distributions to GS Holdings. In addition, there can be no assurance that
such distributions will be permitted by the terms of any debt instruments of GS
Holdings' subsidiaries then in effect, by the terms of any class of preferred
stock issued by the Bank or its subsidiaries, including the REIT Preferred
Stock, or under applicable federal thrift laws.
The Company anticipates that cash and cash equivalents on hand, the cash
flows 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 $657.0 million at September 30, 2000, the Company
has substantial additional borrowing capacity with the FHLB and other sources.
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, the repayment of
borrowings and dividends to common shareholders. Certificates of deposit
scheduled to mature during the twelve months ending September 30, 2001 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 September 30, 2000, Golden State
had FHLB advances, securities sold under agreements to repurchase and other
borrowings aggregating $19.3 billion maturing or repricing within twelve months.
The Company may elect to pay off such debt or to replace such borrowings with
additional FHLB advances, securities sold under agreements to repurchase or
other borrowings at prevailing rates.
As presented in the accompanying unaudited consolidated statements of cash
flows, the sources of liquidity vary between periods. The primary sources of
funds during the nine months ended September 30, 2000 were $29.5 billion in
proceeds from additional borrowings, $3.5 billion in proceeds from sales of
loans held for sale, $1.8 billion in principal payments on mortgage-backed
securities available for sale and held to maturity, and $667 million in proceeds
from sales of mortgage-backed securities available for sale. The primary uses of
funds were $26.8 billion in principal payments on borrowings, a $3.7 billion net
increase in loans receivable, $3.8 billion in purchases and originations of
loans held for sale, $1.2 billion in purchases of loans receivable and $379.3
million for the Downey Acquisition.
MORTGAGE BANKING OPERATIONS
During the nine months ended September 30, 2000 and 1999, the Company,
through the Bank's wholly owned mortgage bank subsidiary, FNMC, acquired
mortgage-servicing rights on loan portfolios of $13.5 billion and $12.9 billion,
respectively. The 1-4 unit residential loans serviced for others (including
loans sub-serviced for others and excluding loans serviced for the Bank)
totalled $83.0 billion at September 30, 2000, an increase of $10.1 billion and
$10.7 billion from December 31, 1999 and September 30, 1999, respectively.
During the nine months ended September 30, 2000 and 1999, the Bank, through
FNMC, originated $10.3 billion and $12.9 billion, respectively, and sold
(generally with servicing retained) $3.7 billion and $8.7 billion, respectively,
of 1-4 unit residential loans. Gross revenues from mortgage loan servicing
activities for the nine months ended September 30, 2000 totalled $234.0 million,
an increase of $28.0 million from the nine months ended September 30, 1999.
Gross loan servicing fees for the nine months ended September 30, 2000 were
reduced by $146.8 million of amortization of servicing rights to arrive at net
loan servicing fees of $87.2 million.
Page 46
<PAGE>
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 September 30, 2000
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 and principal only swaps. The estimated fair
value of all derivatives used to hedge prepayment risk was $50.8 million at
September 30, 2000. The interest rate floor contracts had a notional amount of
$1.5 billion, strike rates between 5.70% and 7.13%, mature in the years 2002 and
2003, and had an estimated fair value of $24.4 million at September 30, 2000.
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 a notional amount
of $1.4 billion, strike rates between 6.50% and 7.88%, expire in the years 2002
and 2003, and had an estimated fair value of $34.7 million at September 30,
2000. 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 $195.5 million and an
estimated fair value of $(8.3) million at September 30, 2000.
The following is a summary of activity in MSRs (including non-residential
MSRs) and the MSR Hedge for the nine months ended September 30, 2000 (in
millions):
<TABLE>
<CAPTION>
Total MSR
MSRs MSR Hedge Balance
---- --------- -------
<S> <C> <C> <C>
Balance at December 31, 1999 $1,232 $ 40 $1,272
Additions - purchases 288 -- 288
Originated servicing 90 -- 90
Swaption sales (5) (13) (18)
Servicing Sale/Transfer (1) -- (1)
Floor sales (4) (7) (11)
Premiums paid -- 42 42
Payments made to counterparties, net 3 -- 3
Amortization (138) (11) (149)
------ ---- ------
Balance at September 30, 2000 $1,465 $ 51 $1,516
====== ==== ======
</TABLE>
Capitalized MSRs are amortized in proportion to, and over the period of,
estimated net servicing income. SFAS No. 125 requires enterprises to measure the
impairment of MSRs based on the difference between the carrying amount of the
MSRs and their current fair value. At September 30, 2000 and December 31, 1999,
no allowance for impairment of the MSRs was necessary.
CAPITAL RESOURCES
OTS capital regulations require savings associations to satisfy three
minimum capital requirements: tangible capital, core (leverage) capital, and
risk-based capital.
TANGIBLE CAPITAL. Tangible capital 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. Tangible capital must be at least 1.5% of adjusted
total assets.
CORE CAPITAL. Core capital generally is the sum of tangible capital plus
certain other qualifying intangibles. Under the leverage requirement, a savings
association is required to maintain core capital equal to a minimum of 4% of
adjusted total assets.
Page 47
<PAGE>
RISK-BASED CAPITAL. Risk-based capital equals the sum of core capital plus
supplementary capital. Risk-based capital must be at least 8% of risk-weighted
assets.
RISK-WEIGHTED ASSETS. Risk-weighted assets equal assets plus the credit
risk equivalent of certain off-balance sheet items, multiplied by the
appropriate risk weight.
SUPPLEMENTARY CAPITAL. Supplementary capital includes 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. Supplementary capital may not exceed 100% of core capital for purposes of
the risk-based requirement.
MINIMUM REQUIREMENTS. These capital requirements discussed above 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
circumstances. These capital requirements are currently applicable to the Bank
but not to Golden State. The Bank is not subject to any such individual
regulatory capital requirement that is higher than the minimum.
At September 30, 2000, the Bank's regulatory capital levels exceeded the
minimum regulatory capital requirements, with tangible, core and risk-based
capital ratios of 6.25%, 6.25% and 13.20%, respectively. The following is a
reconciliation of the Bank's stockholder's equity to regulatory capital as of
September 30, 2000:
<TABLE>
<CAPTION>
Tangible Core Risk-based
Capital Capital Capital
------- ------- -------
(dollars in millions)
<S> <C> <C> <C>
Stockholder's equity of the Bank $4,001 $4,001 $4,001
Minority interest - REIT Preferred Stock 500 500 500
Unrealized holding loss on securities, net 202 202 202
Non-allowable capital:
Intangible assets (727) (727) (727)
Goodwill Litigation Assets (159) (159) (159)
Investment in non-includable subsidiaries (63) (63) (63)
Excess deferred tax asset (10) (10) (10)
Supplemental capital:
Qualifying subordinated debentures -- -- 93
General loan loss allowance -- -- 401
Assets required to be deducted:
Land loans with more than 80% LTV ratio -- -- (5)
Equity in subsidiaries -- -- (6)
Low-level recourse deduction -- -- (10)
------ ------ ------
Regulatory capital of the Bank 3,744 3,744 4,217
Minimum regulatory capital requirement 898 2,397 2,556
------ ------ ------
Excess above minimum capital requirement $2,846 $1,347 $1,661
====== ====== ======
Regulatory capital of the Bank 6.25% 6.25% 13.20%
Minimum regulatory capital requirement 1.50 4.00 8.00
---- ---- -----
Excess above minimum capital requirement 4.75% 2.25% 5.20%
==== ==== =====
</TABLE>
The amount of adjusted total assets used for the tangible and leverage
capital ratios is $59.9 billion. Risk-weighted assets used for the risk-based
capital ratio amounted to $31.9 billion.
Page 48
<PAGE>
The Bank is also subject to the "prompt corrective action" standards
prescribed in 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." Under the regulation, the ratio of total capital
to risk-weighted assets, core capital to risk-weighted assets and the leverage
capital ratio are used to determine an association's capital classification. The
Bank met the capital requirements of a "well capitalized" institution under the
FDICIA prompt corrective action standards as of September 30, 2000. The Bank is
not presently subject to any enforcement action or other regulatory proceeding
with respect to the prompt corrective action regulation.
At September 30, 2000, the Bank's capital levels were sufficient for it to
be considered "well capitalized," as presented below.
<TABLE>
<CAPTION>
Risk-based
Leverage ---------------------------
Capital Tier 1 Total Capital
------- ------ -------------
<S> <C> <C> <C>
Regulatory capital of the Bank 6.25% 11.69% 13.20%
"Well capitalized" ratio 5.00 6.00 10.00
---- ----- -----
Excess above "well capitalized" ratio 1.25% 5.69% 3.20%
==== ===== =====
</TABLE>
OTS capital regulations allow a savings association to include a net
deferred tax asset in regulatory capital, subject to certain limitations. To the
extent that the realization of a deferred tax asset depends on a savings
association's future taxable income, such deferred tax asset is limited for
regulatory capital purposes to the lesser of the amount that can be realized
within one year or 10 percent of core capital. At September 30, 2000, $10
million of the net tax benefit was determined to be attributable to the amount
of taxable income that may be realized in periods beyond one year. Accordingly,
such amount has been excluded from the Bank's regulatory capital at September
30, 2000.
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, 1999.
Page 49
<PAGE>
PART II - OTHER INFORMATION
ITEM 1. LEGAL PROCEEDINGS.
GOODWILL LITIGATION AGAINST THE GOVERNMENT
On April 9, 1999, the Claims Court issued its decision on a claim by the
Bank against the United States Government (the "Government") in the lawsuit,
GLENDALE FEDERAL BANK, FEDERAL SAVINGS BANK V. UNITED STATES, Civil Action No.
90-772-C (the "Glendale Goodwill Litigation"), ruling that the Government must
compensate the Bank in the sum of $908.9 million. This decision was appealed by
the Government and the Bank. After all appellate briefs were filed by both the
Government and the Bank, oral argument on the appeal took place in conjunction
with the argument in the California Federal Goodwill Litigation (as defined
herein) on July 7, 2000.
On April 16, 1999, the Claims Court issued its decision on a claim by the
Bank against the Government in the lawsuit, CALIFORNIA FEDERAL BANK V. UNITED
STATES, Civil Action No. 92-138C (the "California Federal Goodwill Litigation"),
ruling that the Government must compensate the Bank in the sum of $23.0 million.
The summary judgment liability decision by the first Claims Court Judge has been
appealed by the Government and the damage award by the second Claims Court Judge
has been appealed by the Bank. After all appellate briefs were filed, oral
argument in the Federal Circuit Court of Appeals took place in conjunction with
the appellate argument in the Glendale Goodwill Litigation on July 7, 2000.
In each of the Glendale Goodwill Litigation and the California Federal
Goodwill Litigation, it is alleged, among other things, that the United States
breached certain contractual commitments regarding the computation of its
regulatory capital for which each of Glendale Federal and California Federal
seek damages and restitution. The claims arose from changes made by the
Financial Institutions Reform, Recovery and Enforcement Act of 1989 and its
implementing regulations ("FIRREA") with respect to the rules for computing
regulatory capital.
OTHER LITIGATION
In addition to the matters described above, Golden State and its
subsidiaries are involved in other legal proceedings on claims incidental to the
normal conduct of their business. Although it is impossible to predict the
outcome of any outstanding legal proceedings, management believes that such
legal proceedings and claims, individually or in the aggregate, will not have a
material effect on Golden State, GS Holdings, or the Bank.
ITEM 2. CHANGES IN SECURITIES.
None.
ITEM 3. DEFAULTS UPON SENIOR SECURITIES.
None.
ITEM 4. SUBMISSION OF MATTERS TO A VOTE OF SECURITY HOLDERS.
None.
ITEM 5. OTHER INFORMATION.
None.
Page 50
<PAGE>
ITEM 6. EXHIBITS AND REPORTS ON FORM 8-K.
(a) Exhibits:
3.1 Certificate of Incorporation of the Registrant, as amended.
(Incorporated by reference to Exhibits 3.1 and 3.2 to the
Registrant's Annual Report on Form 10-K for the year ended June
30, 1998.)
3.2 By-laws of the Registrant, as amended. (Incorporated by reference
to Exhibit 3.2 of the Registrant's Quarterly Report on Form 10-Q
for the quarter ended September 30, 1999.)
27.1 Financial Data Schedule.
(b) Reports on Form 8-K:
None.
Page 51
<PAGE>
SIGNATURES
Pursuant to the requirements of the Securities Exchange Act of 1934, the
Registrant has duly caused this report to be signed on its behalf by the
undersigned thereunto duly authorized.
Golden State Bancorp Inc.
/s/ Richard H. Terzian
--------------------------------------------
By: Richard H. Terzian
Executive Vice President
and Chief Financial Officer
(Principal Financial Officer)
/s/ Renee Nichols Tucei
----------------------------------------
By: Renee Nichols Tucei
Executive Vice President and Controller
(Principal Accounting Officer)
November 8, 2000
Page 52
